We are required to sign many documents everyday. Some are minor items like signing for a package from UPS or FedEx, but signing certain types of documents can put you and your growing investment property portfolio at risk.
By Rick Abell
Many agreements contain a Hold Harmless Provision. This provision is used to shift risk from one party (person or company) to another and can be beneficial or harmful depending on how they are worded and used.
What is a Hold Harmless Agreement/Provision?
A “hold harmless” or “liability waiver” provision in a contract is an agreement between the parties where one or both agree not to hold the other responsible for any loss, damage or legal liability that may arise under the agreement. In other words, the two parties cannot sue each other for any damage suffered due to the negligence of the other party.
For example, construction contracts typically require the contractor to indemnify the owner with respect to the owner’s liability to members of the public who are injured or whose property is damaged during the course of the contractor’s operations. There are a number of types of hold harmless clauses, differentiated by the extent of the liabilities they transfer:
- Limited Form – Where Party A holds Party B harmless for suits arising out of Party A’s sole negligence. Party B is thus protected when it is held vicariously responsible for the actions of Party A.
- Intermediate Form – Where Party A holds Party B harmless for suits alleging sole negligence of Party A or negligence of both parties.
- Broad Form – Where Party A holds Party B harmless for suits against Party B based on the sole negligence of A, joint negligence of A and B, or the sole negligence of B. Broad Form hold harmless agreements are unenforceable in a number of states.
When are Hold Harmless Agreements/Provisions commonly used?
While you will see a number of instances when Hold Harmless Provisions/Agreements are used in real estate investing, two common examples are:
• Within a lease contract – The landlord will want to be released from potential liability for any injury or damage that occurs while the property is rented. It is recommended that the agreement includes a requirement of the renter to obtain and maintain Renters Insurance Coverage. Remember: your landlord policy covers damage to the structure of the house, not your renters’ contents.
• During the renovation process – it is possible to have several subcontractors providing services on your investment property. These contractors may require a Hold Harmless Agreement, designed to preempt any legal action that is a direct result of work done at the property.
What kind of problems can arise out of signing a Hold Harmless Agreement?
We spoke with Sara Nobles at Affinity Loss Management Services. Sara and her team help walk clients through the process of identifying covered and non-covered losses, collect pertinent information and then pass that information on to carrier-appointed adjusters to make final claims decisions.
Sara indicated that she had recently seen a loss reported on a covered property for damages due to the negligence of a contractor. In this case the cause of loss was specifically excluded under the property owner’s primary coverage, causing the owner to look to the contractor’s coverage to make him whole.
However, since the property owner signed a Hold Harmless Agreement with the contractor, there may be no indemnification for the property owner. This means the property owner is left with a property damaged by the contractor and will have to pay out of his own pocket to repair the damages.
This is an expensive lesson that could have been avoided.
Not all Hold Harmless Agreements/Provisions are bad…
If well written and applicable to the damages being claimed, Hold Harmless Agreements can protect you (the investor) from frivolous legal action and nuisance claims. If used in a rental agreement with a requirement for the tenant to carry Renters Insurance, injury or property damage to a third party on the premises due to causes outside of negligence or liability of the property owner may further protect you from a third party claim.
How about some good advice?
You should review all contracts carefully and be wary of the language in an agreement with any trades-person completing work on your property. Any damages, either bodily injury or property damage that occur as a direct result of workmanship are not something for which you want to be held ultimately responsible.
Seeking the advice of an attorney who is familiar with required or barred language is critical, as the legality of the content of a Hold Harmless Agreement can vary from state to state.
Having a notary or witness to any agreement for all parties is good practice. This will eliminate any claim that either party was coerced into signing. Coercion may nullify the agreement if taken to court.