From Underwriting: Liability Risks of Indemnification Clauses

Published on:

By: Susan F. Halman, Esq. from Selvin, Wraith, Halman LLP in Oakland, CA

An indemnification clause in a professional service agreement (“PSA”) can create onerous and uninsured financial exposures when it requires the physician to assume liability for risks outside of their control. Before signing a PSA that contains an indemnification clause, it is important to understand the breadth of the parties’ respective indemnity obligations, and the extent to which you will be assuming a duty to defend and indemnify third parties for liability exposures that are not insured by your MIEC policy.

An indemnification clause operates to allocate legal risks between the parties to the PSA. For example, a risk-transferring indemnification clause in a PSA may state:

“Physician shall defend, indemnify and hold harmless the Medical Center from any and all liability claims, losses, damages, expenses, costs, and attorney’s fees which Medical Center may incur, suffer, or sustain or be threatened with arising in whole or in part from or related to Physician’s professional services, medical conduct, medical acts or omissions, including specific directions given by Physician to non-physician personnel, or performance or failure to perform any service set out in this Agreement, or in any manner related to Physician’s performance at the Medical Center.”

Under this type of indemnification clause, the physician may be held liable to defend and indemnify the Medical Center for all of the Medical Center’s liability exposure for a claimant’s damages – even that portion of the damages that are not arising directly from the physician’s own professional services. This contractual obligation can place a tremendous financial burden upon the physician. In addition, some states interpret an indemnification clause that contains a duty to defend as requiring the physician to begin defending immediately upon receiving the Medical Center’s tender of a claim merely alleging the physician’s liability for the claimant’s injury, rather than to reimburse the Medical Center for its attorneys’ fees and costs after the physician’s liability for the claimant’s injury is proven.

Recently, MIEC has seen an increase in cross-claims for contractual indemnity filed against its physician policyholders by co-defendants – e.g., a medical center or a medical equipment manufacturer – to enforce the co-defendant’s indemnity rights under contractual indemnification clauses. In these cross-claims, the co-defendant seeks to hold the physician liable to pay the co-defendant’s attorneys’ fees and costs incurred in defending against the claim, as well as to indemnify the co-defendant for all sums it pays in settlement or in satisfaction of an adverse judgment.

MIEC believes physicians should be responsible for their own negligence, but should not assume financial responsibility for the negligence of third parties. Accordingly, the MIEC policy does not provide coverage for your liability for damages or for your defense fees or costs incurred in connection with a claim which seeks to hold you liable because of your written or oral agreement to hold harmless, indemnify, or otherwise assume another’s obligation or liability, if liability or the amount of damage sought or imposed upon you is greater than that which would exist in the absence of such an agreement. Policyholders who enter into a PSA containing an indemnification clause must understand that they may be assuming personal obligations beyond the scope of the MIEC policy’s insurance coverage.

MIEC also does not offer “additional insured” coverage to a third party on your MIEC policy. By executing a PSA that includes an indemnification clause in favor of a third party, you have accepted responsibility for a liability exposure that is not insured by the MIEC policy.

Whenever an indemnification clause is included in a contract, MIEC recommends that physicians attempt to have it removed entirely. If this is not possible, it may be replaced by a simple clause which requires each party to maintain liability insurance for its own negligent acts and to provide evidence of insurance on request.

We recommend that you review your PSAs to determine whether they contain an indemnification clause and, if so, the scope of liability you have assumed under the agreements. If you have questions about whether the indemnification clause in your PSA may present an uninsured exposure to you, please contact your MIEC Underwriter or Claims Representative.

Our thanks to Susan F. Halman, Esq. from Selvin, Wraith, Halman LLP in Oakland, CA, a law firm specializing in all aspects of insurance coverage law and related fields of practice, for this informative article.