Protect your small business from risky Hold Harmless Clauses

What is a Hold Harmless Clause?

A Hold Harmless Clause is a provision in a contract where one party agrees to indemnify and assume responsibility for liability arising from certain situations, even if the other party is at fault. They can be especially risky for small businesses dealing with larger entities that demand these clauses.

For example, if your small business accepts a contract with a larger company and signs a contract with an HHC, you could be responsible for damages caused by the larger company’s negligence, leaving you to bear the financial burden.

Key risks of Hold Harmless Clauses

Unfair transfer of liability

Small businesses often sign contracts with larger companies that contain these HHCs without fully understanding the implications. These clauses unfairly shift the liability onto the smaller business, even if the larger company is responsible for an accident or incident. This can result in your small business paying for damages that were not your fault, especially if you don’t have appropriate business insurance coverage.

Limited negotiation power

Larger companies often present contracts on a “take it or leave it” basis, leaving smaller businesses with little room to negotiate. While the cost of fighting these unfair clauses in court may be prohibitive for many small businesses, it’s essential to identify these risks before signing. Work with an insurance broker to ensure that you have adequate coverage for any remaining exposures.

Case study: The costly consequences of ignoring a hold harmless clause

A small business signed a contract with a large mining company that included a HHC. Under this clause, the small business assumed all liability for incidents that occurred on site, even though they were not at fault.

Unfortunately, a subcontractor (SC) working for the small business was injured due to the negligence of the mine. However, the small business had disclosed to their insurer during renewal that they did not accept contracts containing HHCs. Because of this, their insurer declined the claim. The small business was left uninsured and had to bear the costs of $140,000, plus legal fees.

This case highlights the significant risks that HHCs can impose on small businesses. While these contracts may seem unfair, smaller companies often lack the financial resources to challenge them or are afraid to refuse these terms, fearing they’ll lose the business opportunity. However, negotiating contract terms before signing and ensuring your insurance covers these risks is crucial.

What can you do to protect your small business?

Identify Hold Harmless Clauses early

Before signing any contract, carefully review for HHCs that could expose your business to unnecessary risk. Don’t rush into agreements, especially with larger companies, without thoroughly understanding these clauses.

Negotiate contract terms

Once you identify an HHC, consider seeking legal advice and negotiating with the other party. While this can be challenging, particularly when dealing with larger businesses, it is crucial to explain the risks and potential costs to both parties. In many cases, you may be able to reduce or eliminate these clauses to protect your business better.

Seek legal advice

Given the complexities and potential liabilities associated with Hold Harmless Clauses, it is highly recommended that you seek legal advice before signing any agreements. A lawyer can help you understand the implications of such clauses and guide you in negotiating terms to safeguard your interests. This is particularly crucial as every Public Liability policy includes a standard Hold Harmless exclusion, which could leave your business exposed to uninsured risks. Legal advice ensures you are making informed decisions about the contracts you enter into, protecting your business from unforeseen liabilities.

Work with your insurance broker

After reviewing the contract, consult your insurance broker to ensure that your small business insurance policy covers any contractual exposures. If your insurer doesn’t provide coverage for Hold Harmless Clauses, ask about potential riders or additional policies that can fill the gap. If coverage is not available or is too costly, it’s essential to make an informed decision about whether to proceed with the contract.

Be aware of insurance limitations

Small business insurance policies may not automatically cover liabilities arising from Hold Harmless Clauses, especially if they bypass traditional notions of fault. Make sure that your broker fully understands the risks your business is taking on and arranges appropriate coverage where possible.

Hold Harmless Clauses present significant risks to small businesses, particularly when dealing with larger companies. Identifying them early in the contract process allows you to negotiate better terms and work with your insurance broker to ensure you’re covered for any remaining liabilities. If insurance cover is not available or too expensive, you need to make a fully informed decision about the risks you’re accepting.

Before entering any contracts, ensure you’re fully aware of the risks involved. If you’re uncertain about how the terms may impact your insurance, contact us today for expert advice and guidance.

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