Indemnification, Duty to Defend, & Hold Harmless

Often lumped together and buried in the small print of business and construction contracts, indemnification, duty to defend and hold harmless provisions are often accepted without much examination or fanfare.  However, these three distinct provisions can have major consequences.  An examination of each illustrates why it may not always be “best-practice” to accept these provisions without objection or scrutiny.

Indemnification.  An indemnification provision, in short, shifts the liability of one party to another.  Said differently, where Party A agrees to indemnify Party B, Party A agrees to be responsible for the liability or loss incurred by Party B in connection with the transaction.  When examining an indemnification provision in a contract, it is important to examine: who is being indemnified (does it include employees, representatives, and affiliates or is it limited to the party him\herself?) and the limitations on indemnification (is there a monetary cap of the indemnification, is the indemnification the exclusive remedy of the party, or is there any baseline threshold before the indemnification obligation is triggered?).

Duty to Defend.  The contractual provision known as “duty to defend” is simply that:  where one party agrees to provide a defense and pay the legal expense associated with the defense.  Perhaps the most commonplace example of duty to defend can be found in the insurance arena.  By way of example, an insurance carrier/insurer would have the duty to defend its policyholder/insured against a claim by a third party.  A similar scenario arises in the construction context: a contractor may have a duty to defend an owner against claims by a subcontractor (i.e. a lien).  In that scenario, the contractor would be agreeing to provide the owner’s defense against the subcontractor’s lien, likely including the costs of attorneys’ fees.  It should be noted that exercising a duty to defend provision can create a situation where the defending party and the party being defended are at odds or disagree with the counsel retained, the litigation strategy being utilized, or potential terms of settlement.

Hold Harmless.  A hold harmless provision is a contractual term designed to protect a party against the actual loss as well as risk of loss.  In other words, Party A agrees not to hold Party B responsible or sue Party B for damages Party A might suffer.

It is often said that hold harmless and indemnification overlap, being that both provisions serve to absolve a party from responsibility for damage or liability.  However, a hold harmless provision may cast a wider net than an indemnification provision, in that an indemnification is generally limited to the reimbursement of damages (read: losses) while hold harmless provisions seems to provide coverage against not just loss, but also risk of loss (read: being sued for loss).

Indemnification, duty to defend, and hold harmless provisions have become increasingly prevalent in North Carolina business contracts.  As such, these provisions should be vetted on a case-by-case basis, being mindful of their potentially significant impact on a contractual relationship.  The attorneys of Hannah Sheridan Loughridge & Cochran are well versed in negotiating these contractual provisions, and litigating them when necessary.  If we can be of assistance to you or your business, please contact our office.

– Cody R. Loughridge