Risk Management

Hold Harmless Clauses May Increase Physician’s Liability

By Ross E. Stromberg, Esq., and Ann K. Bowman, Esq.

[Digest, Spring, 1993]

Given the complexities of today’s health services market, ophthalmologists need to understand the extent of the liability they assume upon entering into contracts with governmental agencies, hospitals, nursing homes, health plans and other third parties. Physician contracts with these third party providers and payers often contain hold harmless, exculpatory, or indemnification clauses. These clauses attempt to shift responsibility for economic harm or liability from one party to another. Sometimes such contract provisions are one-sided, where only one party indemnifies the other; in other cases, the contract provides cross or mutual indemnification where both parties indemnify each other.

Hold harmless clauses can drastically increase an ophthalmologist’s potential professional liability by making it possible for either party to the contract to recover the damages against the other in actions which otherwise could not be sustained.

Significantly, the liability created by these clauses is not covered by a physician’s standard liability policy and coverage can only be purchased at a much higher rate, if at all. An insurer must be able with some degree of certainty to compute the risks it may incur from a particular clause so it can control the cost of defending claims. Since it is often difficult to calculate the inherent risk in such clauses, insurers generally will not insure a physician’s hold harmless liability.

Ironically, where each party has its own liability insurance and no hold harmless clause has been agreed to, standard insurance policies will cover most situations that arise involving their insured. Where both parties have insurance and a hold harmless clause is potentially in effect, however, the ultimate result is “the ridiculous situation of the parties adding to their insurance costs merely to get the same protection they would have had from their usual insurance had there been no liability or hold harmless clause in the contract.”¹

Spotting the Clauses

Hold harmless clauses take a variety of forms. Some clauses only require the physician/indemnitor to indemnify the third party/indemnitee for claims resulting from the physician’s own negligence. Other clauses attempt to require the physician to indemnify the third party/indemnitee for claims arising from that provider’s negligence or harmful act.

Typical hold harmless clauses may be constructed as follows: “Physician will indemnify and hold us harmless from loss, damage or cost (including reasonable attorneys’ fees) arising from all of Physician’s willful, wrongful or alleged wrongful acts or omissions under this contract.” Or, “Physician shall indemnify and hold us harmless from any and all liability, loss, damage, claim or expenses of any kind and of whatever nature, including all costs and attorney fees, arising out of the performance of this Contract and for which Physician is solely responsible.”

A clause need not actually contain the words “hold harmless” or indemnify.” Clauses containing language such as “to assume all risks of [certain accidents]” and “this is a release from [certain claims]” also have generated liability.²

Liability is Potentially Vast

Where a clause is written broadly, and no limiting terms have been introduced into the contract, an ophthalmologist consenting to an agreement with a third party opens the door to a host of claims, including those for personal injuries, libel and slander, copyright infringement, contract defaults, employee claims, tax liabilities, the direct and indirect expense of the other provider in doing business, and indirect and consequential damages including interest and loss of profits. An ophthalmologist’s personal assets are put at risk as a result of hold harmless and other indemnity provisions because the physician’s professional liability policy usually does not cover such actions.

Defending a claim by the other party to an agreement containing a hold harmless clause or other indemnification provision can be expensive, regardless of whether the physician is trying to prove the provision is unenforceable or that it should be construed differently from the meaning alleged by the third party. Moreover, an ophthalmologist has no guarantee that litigation will be successful as there is law supporting both sides of the issue.

Review All Contracts for Hold Harmless Clauses

Ophthalmologists should, with the assistance of an attorney or insurance expert, conduct an immediate and careful review of any and all contracts to see if they contain indemnification provisions. In addition, physicians should ask an attorney to prepare a standard clause to replace all overreaching indemnification provisions to which the provider is a party. Discrimination and precision in choosing words is essential to achieving protection from far-reaching liability provisions.

If you are currently in an agreement containing a hold harmless clause, don’t panic. Indemnity or hold harmless provisions in contracts are interpreted according to the general rules governing the formation, validity and construction of all contracts. Thus, these provisions are to be fairly and reasonably construed to ascertain each party’s intention and purpose in entering the contract.

In most cases, ophthalmologists will find their insurance policies do not cover the unlimited liabilities that can be assumed by the physician under a contract containing a hold harmless clause. Hold harmless clauses and similar indemnification provisions have been recognized as efforts to duplicate and supplement the protection traditionally afforded by insurance policies. What most insured parties may not realize is that these clauses effectively require their insurance companies to assume the larger and unknown risks of other health care providers, including hospitals and HMOs. Insurance companies know that such entities generally are equipped to insure themselves or to purchase separate coverage for their liabilities, and conclude that it makes poor economic sense to widen their exposure when coverage is readily and appropriately available elsewhere.

Eliminate or Modify Clause

Because this article merely summarizes the law in this area and does not purport to offer legal advice, ophthalmologists should seek an attorney’s assistance in reviewing contracts and in preparing, if necessary, a proposed standard clause or other language to help reduce the risk of exposure.

Often, the ophthalmologist is in an unequal bargaining position with respect to the other provider, particularly when the physician is requesting use of the provider’s facilities or seeking to join a provider network (as where a physician contracts with a hospital or an HMO). Where possible, however, the physician should try to convince the other party to permit a reasonable and equitable clause to replace the far-reaching provisions in some hold harmless clauses. Modifying key phrases in the indemnification provisions is essential to limiting liability. Clause language that is broad and general creates the most difficulties because it offers the most room for adverse interpretation; careful detailing is the way to go.

If some form of indemnification clause must remain in the contract, the following rules and suggestions for modifying the clause may minimize physician liability:

Use Restrictive, Specific Language

• If possible, limit the application of the clause only to the physician’s own negligence.
• Insist that the other entity indemnify for its negligence in return because each party is best able to control its own risks.
• If a clause includes a provision for liability for willful acts or omissions by the physician, modify the clause to include only wrongful acts or omissions so that rightful acts or omissions do not burden the physician.

Obtain Other Insurance Policies

• Require both parties to the contract to obtain and maintain separate, appropriate insurance policies, and to show evidence of such coverage prior to the contract being signed.
• In cases of a mutual hold harmless clause, each party should attempt to obtain insurance naming both parties and protecting each from claims of bodily injury, death or property damage arising from the activities of the physician or other party, or their respective agents, servants or employees, associated with the contract.

Notes:

1. Potamkin L, Plotka NL. Indemnification against tort liability-the “Hold Harmless” clause-its interpretation and effect upon insurance. 92 U Pa L Rev 347. 1944:365-69.
2. Beecher NB, Richardson CH. The harm in hold harmless clauses. 19 Colo Law 1081. 1990.