Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses. Sarah E. Swank, Esquire Ober Kaler Washington, DC

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JANUARY 2013 EXECUTIVE SUMMARY TEACHING HOSPITALS AND ACADEMIC MEDICAL CENTERS PRACTICE GROUP Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses Sarah E.

1 JANUARY 2013 EXECUTIVE SUMMARY TEACHING HOSPITALS AND ACADEMIC MEDICAL CENTERS PRACTICE GROUP Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses Sarah E. Swank, Esquire Ober Kaler Washington, DC Emily K. Weber, Esquire Temple University Health System Inc. Philadelphia, PA We often get the all too familiar question from our clients, What is the hold up on that contract? When the answer is the indemnification, defense, or hold harmless provision, the authors have found a lack of resources for clients who often struggle to understand the significance and distinction among these complex concepts. This article aims to arm attorneys and their clients with an easy-to-understand guide of these seemingly standard clauses. Attorneys are encouraged to share this article with their clients. It is also suggested that you check with your attorney when reviewing these clauses, as factors including the type of agreement and insurance requirements can change the analysis of these arrangements. To help illustrate these concepts, the authors placed them in the context of an academic medical center (AMC) contracting with an industry research sponsor (Sponsor) to perform a clinical trial at AMC with AMC s patients (Subject). This Executive Summary provides a summary of what the term means, its importance to the client, and some pointers in the scope and use of the provision. For purposes of this article, the authors examine the following sample contract provision in the clinical trial agreement between AMC and Sponsor: Sponsor agrees to indemnify, defend, and hold harmless AMC and its trustees, officers, directors, employees and agents, including Principal Investigator ( Indemnitees ) from and against any loss, expense, liability, damage, claim (including reasonable attorneys 1

2 fees) ( Claim ) made or brought on behalf of a Subject for personal injury, including death, that arises out of the study drug, a protocol required procedure, or Sponsor s negligence or willful misconduct and omission. Indemnification Meaning- An indemnification clause obligates a party (or both parties) to compensate the other party for losses or damages set out in the provision. This compensation is separate and apart from other contractual obligations and damages. For example, indemnification occurs when a third party, such as the Subject of the clinical trial, sues AMC, and AMC seeks indemnification from the Sponsor to pay for the loss incurred by AMC defending the lawsuit. Another way to think about indemnification is that, in the example above, Sponsor is reimbursing AMC for AMC s loss. Indemnification typically occurs after an adjudicator determines whether the AMC is liable for a Claim. For example, if the study drug harms a Subject and the Subject sues AMC, AMC may seek reimbursement for court costs and attorneys fees to prepare for and defend the lawsuit only after a court determines that the harm to the Subject was due to the Sponsor s negligence. Importance- Case law in certain states may permit a party to seek a court order for indemnification. Generally, the courts look to the contract between the parties to determine indemnification obligations. Certain insurance policies require indemnification clauses be included in agreements and, depending on the level of risk of the agreement, may be a key term of the agreement. For example, state-funded AMCs may choose to limit indemnification to the extent of insurance limitations. Drafting Points- Areas of concern when reviewing or drafting an indemnification clause are the specific 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 Sponsor only pays for AMC s losses in very specific circumstances; but it can also be written broadly so that Sponsor indemnifies AMC for 2

3 anything resulting out of an event or even resulting from the agreement. In this case, the Sponsor must indemnify (or pay) for the loss, expense, liability, damage, or claim. Additional items to include are governmental or regulatory fines and court cost as well as reasonable attorneys fees. Depending on the type of claim, attorneys fees can be the most expensive part of the indemnification obligations of a party. The example above includes a broad scope of institutions and people required to be indemnified. The persons that will be indemnified are not only the AMC but also its trustees, officers, directors, employees and agents, including Principal Investigator. In certain circumstances, the Principal Investigator may not be an employee and instead could be a separate party to the agreement that could provide indemnification to AMC. Often, AMCs and institutions will request that a party indemnify not only AMC and AMC s employees, but also AMC s affiliates and the affiliates employees. The scope of who will be indemnifying and indemnified should be set out in the provision along with what will be indemnified. Often both intentional and negligent acts as well as omission are included in indemnification provisions. The failure to act can create liability just a readily as an act itself. Clauses may also include the higher standard of gross negligence rather than negligence. Consider whether you are concerned about the indemnifying party s potential for causing you liability before taking on this higher level of negligence. In addition, consider if the same standard applies to your party as the other party. The indemnification is set by how the agreement is drafted. For example, it can arise out of the performance of the agreement, a breach of the agreement, or a specific event depending on how the clause is drafted. 3

4 Hold Harmless Meaning- A hold harmless provision means that an organization is not liable for certain damages under an Agreement. This clause effectively bars the party responsible for indemnification from bringing suit against the party being indemnified. Importance- Certain courts and scholars find that hold harmless is not distinct and is the same as indemnification. While others find the duty to hold harmless also requires protection against liability. It is important to check state law based on the type of agreement entered into by the parties. Drafting Points- Generally, it is advisable to include both indemnification and hold harmless language because of the variety of definitions of hold harmless. Ensure that if you include only hold harmless language, to have the correct party held harmless for the correct scope. In the sample clause, Sponsor is required to hold harmless the AMC for its negligence or intentional acts and omissions.. In certain circumstances, parties include a responsibility clause rather than indemnification or hold harmless clause. Responsibility clauses may be less protective than indemnification clauses so consult state law and your attorney for information on the risks and benefits of this language. For example, state-funded AMCs may want to agree to responsibility clauses given potential restrictions related to state immunity laws. Defense Meaning- A defense clause creates or requires the duty to defend the other party to an agreement in certain circumstances including preparing for and defending a lawsuit. The party with a duty to defend will control the defense. This obligation is triggered as soon as there is a claim rather than after a judgment is entered or loss has been proven, like an indemnification clause. The duty to indemnify is independent from the duty to defend. 4

5 Importance- The duty to defend should be carefully considered because of the significant amount of time, effort, and resources that can go into preparing for trial. Defense generally means that the defending party, Sponsor, will actually hire its own attorneys to go to court for the party defended in this case, AMC. Some entities, especially those that are self-insured, prefer to control their own defense and should try to negotiate defense language out of the provision. Drafting Points- If your client wants to engage his or her own counsel for the litigation and control its defense, then consider avoiding defense language. At the same time, separately consider the use of indemnification and hold harmless language. Details related to the selection of counsel and control over settlement discussions could also be included in defense clauses. Good Drafting Upfront, Avoids Downstream Risk Indemnification, hold harmless, and defense clauses dictate the degree of liability of each party and the extent that you take on or shift risk. Certain organizations may not be in a position or want to take on these responsibilities examples include nonprofit organizations, those with deep pockets, or risky duties under the agreement. When reviewing this language, consider the worse possible scenario under the agreement and determine the level of risk. It is best to engage counsel early in the negotiation to ensure the contract is drafted to meet your needs. 5

6 Clarifying the Confusing World of Indemnification, Hold Harmless, and Defense Clauses 2013 is published by the American Health Lawyers Association. All rights reserved. No part of this publication may be reproduced in any form except by prior written permission from the publisher. Printed in the United States of America. Any views or advice offered in this publication are those of its authors and should not be construed as the position of the American Health Lawyers Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a declaration of the American Bar Association 6

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