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The old adage of “don’t sign anything you don’t understand” can be difficult advice to follow when contracts have confusing language such as “to indemnify, hold harmless and defend.” Understanding what this language means will help you decide if the contract is something you want to sign.
To agree to indemnify another party means you are agreeing to compensate that party for the losses and damages outlined in the contract. For example, let’s say a farmer rents equipment from a rental company and signs an agreement in which he agrees to the following “farmer agrees to indemnify, hold harmless and defend the rental company, its employees and agents from and against any claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from the use of the rental of equipment whether caused in whole or in part by the rental company, anyone directly or indirectly employed by them or anyone for whose acts they may be liable.”
In this example, a week later, the farmer manages to injure himself and a third party while using the equipment. The injured third party then files a lawsuit against the rental company and damages are awarded to the injured party. The indemnification clause (“farmer agrees to indemnify . . .”) of the rental agreement is meant to allow the rental company to turn around and seek indemnification or a repayment of the damages paid to the third party from the farmer. To decide whether an indemnification provision is overly broad, you should consider the person(s) covered by the indemnification, the extent of the activities covered by the indemnification and whether or not the indemnification is limited to available insurance coverage.
In some cases, like in the example above, attorney’s fees are also included in the losses and damages covered by an indemnification clause. In Maryland, unless an award of attorney’s fees is expressly included in a contract or authorized by law, it is difficult to recover attorney’s fees in court. Parties should not; therefore, assume that legal expenses related to a legal claim are covered by a general indemnification clause unless it is specifically included in the contract.
When you agree to hold another party harmless (“farmer agrees to . . . hold harmless. . . “) it means you are agreeing that the party is not liable for certain losses or damages outlined to the contract. Using the example above, the hold harmless language in the rental agreement is meant to prevent the farmer from successfully bringing a lawsuit against the rental company for damages related to the use of the rental equipment. The language of the hold harmless clause will dictate the scope of the liability protection.
An agreement to defend another party (“farmer agrees to . . . defend the rental company . . .”) is triggered when a claim is filed and a legal defense is required. The party who has agreed to the duty to defend will have an obligation to pay an attorney to defend the other party. In the example above, it means when the injured party brought the claim against the rental company the farmer had the legal obligation to pay a lawyer to defend the rental company. The duty to defend is often described as broader than the duty to indemnify, because it can result in financial consequences, regardless of the success of a claim. In many instances, the parties involved in a dispute prefer to control their own defense; therefore, both parties to an agreement should carefully consider whether they want a duty to defend in a contract.
In addition to understanding and considering the duties to indemnify, hold harmless, and defend, parties to a contract will want to contemplate whether there are financial resources, be it from insurance or otherwise, to carry out the contractual obligations. If you are unsure if your existing insurance coverage will cover contractual obligations, be sure to have that conversation with your insurance carrier prior to execution of the contract. Further, it is also always a good idea to have your attorney review contracts prior to execution.