Indemnify, Defend and Hold Harmless: The Importance of Fine Print
Nonprofit executives and managers sign a whole host of contractual documents. Purchase orders, consulting agreements, event-related contracts, cause marketing arrangements, sponsorship engagements, confidentiality commitments, donation documents, and the list goes on and on.
Few of those signers would say that they always pondered each and every provision of the document before affixing a John-or-Jane Hancock. This is especially true where the contract is providing funds to the charity.
Signing without reading is something many of us do. Oddly, we tend to do it more on the really important contracts in our lives. Who reads the mortgage documents before making a 30-year payment commitment? Buying that car? Let’s sign that abundant paperwork, stuff it in an envelope and take the new wheels on the road.
This posting is meant to encourage a little prudence, a small amount of reading and a dose of patience before signing contracts. The fine print can be significant. For instance, special care is warranted if your charity agrees to do one or more of the following for “the other side”: indemnify, defend and/or hold harmless. Those commitments usually need a bit of special consideration.
“Indemnify, Defend and Hold Harmless”
Some folks, even experienced litigators, believe that the above phrase is a triple-redundancy. Three words/phrases, all meaning the same thing, sort of like “coffee, java, cuppa joe.” With all due respect, we do not agree. We encourage contract-signers in charities to view the indemnity phrase with a healthy suspicion.
One thing is for certain. “Indemnify,” “defend” and “hold harmless” are all intended to affix (and sometimes transfer) liability to one of two contracting parties. In other words, they are risk-assigning devices. Tucked away as the terms often are, in the fine print at the end of an exhaustingly long agreement, the incentive to gloss over them is almost overwhelming. Doing so is a mistake. Each of the three has the potential to become a hand grenade later on in the life of the agreement. We will now be looking at each term from the point of view of a charity. To establish a framework for the analysis, let’s use a simple hypothetical.
A Hypothetical: Indemnify, Defend and Hold Harmless
ABC Charity is running its annual meeting at Hotel. ABC seeks sponsorships from companies, offering them booths, acknowledgement opportunities, etc. Thirty-Second National Bank elects to become a sponsor and asks ABC to agree to the following provision:
“ABC will indemnify, defend and hold harmless Bank against any and all claims made against Bank that arise from its participation in, or sponsorship of, ABC’s event.”
ABC agrees to the requested language. At the event, an attendee, Vinnie Voltage, is electrocuted when a defective “close door” button in an elevator delivers a powerful shock. Vinnie loses the use of his right arm and has permanent scarring on his index finger. He is also forced to give up his career as a concert pianist. He sues everyone, including Hotel, ABC and Bank. Although neither ABC nor Bank had the slightest participation in the elevator fiasco, Bank waves the contract at ABC, effectively informing the charity that Vinnie Voltage is the charity’s problem, not the Bank’s.
Suddenly, ABC starts focusing on the indemnity language and gets a rude awakening.
A common meaning of “indemnify” is to reimburse for losses, like an insurance company does. When ABC agrees to indemnify Bank, it is taking on a role that it would not otherwise have had. In a sense, ABC is supplementing, and maybe even replacing, Bank’s insurer. If Bank reaches a quick settlement to get out of Voltage’s lawsuit, does ABC want to be responsible for financing that settlement? Is that fair? Is ABC any more responsible for the injury than Bank?
While an obligation to indemnify (i.e., to make a payment) is usually triggered only by the entry of an adverse judgment or the finalization of a settlement, the “defense” obligation kicks in much earlier. (Remember the tried-but-true insurance adage that “the obligation to defend is broader than the obligation to indemnify,” showing that the two are separate.) In the case posed, ABC could have the responsibility to provide a defense (i.e., to pay a lawyer) for Bank! While this resolution offends common sense, it is supported by the contract language.
On many interpretations, this phrase means “to step into the shoes of.” In our example, this could give Bank the opportunity to exit the entire controversy and leave everything in the hands of ABC. A Pontius Pilate hand-washing moment, if there ever was one! That certainly seems to be a steep price for ABC to pay for the privilege of receiving a sponsorship. Again, Bank would have the contract language on its side.
But What About ABC’s Insurance?
Some may believe that the extra risk assumed by indemnity clauses will be covered by the indemnitor’s existing insurance policies. Not so. When ABC bought its coverage, the carrier agreed to insure ABC against specified risks. It most assuredly did not agree to extend coverage to third parties for whom ABC later volunteered to act as an insurer. Even the most neighborly insurance company (not even one that calls itself a “Good Neighbor”) is not going to pay a dime on this one. Nor should it.
Think of it like this: suppose, as a Good Samaritan, you agree to absorb the risk for your friend, who is driving his own car without insurance. He has a major accident, incurring significant liability. Should your car insurance – which has no relationship to your friend – be expected to finance your well-intentioned but (in hindsight) foolish generosity?
So What’s The Answer?
Every contracting situation is unique, but a related posting will offer some practical tips to protect a charity against “fine print” surprises. Some of the tips may be unorthodox and surprising, but our staff has deep experience in nonprofit contract entanglements and is prepared to offer that guidance. Contact us today at (401) 331-6300.