Indemnity provisions are used to shift risk from one party to another. The intent of an indemnification provision in an agreement is to impose on one party the responsibility to pay the liability, damages, costs, expenses, and attorney fees for the other party to the agreement, under the circumstances set forth in the agreement. An indemnification clause obligates one party to compensate the other party for losses or damages. This compensation is separate and apart from other contractual obligations and damages.
Indemnification obligations can be triggered by third party actions even when neither party to the contract is at fault. For example, consider an employment contract with an indemnification provision for allegations of sexual harassment. Someone sues both the employee and the employer alleging that the employee engaged in sexual harassment. The allegation is unfounded and the complaint ultimately goes nowhere. A contractual indemnification provision could still require that the employee pay the employer’s costs, expenses and attorney fees to defend the claim. Or, the allegation could be unfounded, but the employer pays the accuser for the nuisance value of the claim to make it go away. A contractual indemnification provision could still require that the employee pay the employer’s costs, expenses and attorney fees.
Mutual indemnification provisions are generally far from equal. Consider the persons being indemnified, as well as the conditions under which indemnification will arise and scope of the indemnification. Indemnification can be written narrowly so that a party only pays for losses in very specific circumstances, or very broadly so that one party indemnifies the other party and that party’s trustees, officers, directors, employees and agents, for anything resulting out of an event or resulting from the agreement. Broad indemnification provisions may require a party to pay for the loss, expense, liability, damage, or claim of not only the other party, but a whole host of others, such as trustees, officers, directors, employees, agents and affiliated entities, related in some manner to the party. One doctor or a group of doctors agreeing to indemnify a hospital and its trustees, officers, directors, employees, agents and affiliated entities is not equal to a hospital agreeing to indemnify a single doctor or group practice.
Many insurance companies will not cover contractual indemnification obligations in a standard coverage agreement. Consequently, the cost of indemnification could be an out of pocket expense for the physician or the practice. If you are considering a contract with an indemnification provision, make sure to talk to your insurance carrier about coverage.
Contractual indemnification is complicated. Most physicians, and unfortunately a number of attorneys, do not fully understand the implications of signing a contract with an indemnification provision. Contractual indemnification provisions are found in all different types of contracts. Review your contracts carefully, look for contractual indemnification obligations and then talk to your lawyer. Think Danger, Will Robinson.
Patricia S. Hofstra represents a broad range of healthcare clients, helping them with day-to-day legal issues, including corporate matters, mergers, transactions and regulatory compliance.
This article was originally posted on the KZA blog on September 12, 2018.