October 2, 2011

Hold Harmless, Indemnification, and Waiver of Subrogation: What am I signing?

April 2005

A routine aspect of today’s aviation business is being asked to sign various agreements for services you use, such as: Ground Handling, Hangaring, Fueling, Maintenance, Purchasing, Financing and Chartering. In most of these agreements you will likely find at least one of the following clauses: a Hold Harmless, an Indemnification, or a Waiver of Subrogation Clause. In an effort to control escalating insurance costs and high claim awards, providers may ask you to sign an agreement before they will furnish services or charge you a higher price if you do not sign. It is important that you understand what these agreements are and the consequences you may incur by putting your name on the line.

In a Hold Harmless clause, the aircraft owner/operator agrees to hold the service provider harmless (free of liability) from claims arising out of the provider’s handling or service of your aircraft or business. This means that by signing the document, you are taking away your (and usually your insurance company’s) ability to collect, sue or make claim against the service provider for losses that may occur as stipulated by the clause. In the following paragraphs there are several methods and wordings commonly used to shift the risk from the provider to you.

There are a few agreements out there that stipulate that you will hold the service provider harmless for any and all (direct and consequential) losses or claims that may occur as a result of their providing the services. These agreements are broad in scope and should not be signed. If read literally, the service provider could deliberately cause a loss and be held harmless.

Some contracts may stipulate that you will hold the service provider harmless from all losses unless that loss was caused by the service provider’s gross negligence and that this gross negligence was the sole cause of the loss.

The definition of “negligence” is: “failure to exercise the degree of care expected of a person of ordinary prudence in like circumstances in protecting others from a foreseeable and unreasonable risk of harm in a particular situation. However, the definition of “gross negligence” is dramatically different: “negligence that is marked by conduct that presents an unreasonably high degree of risk to others and by a failure to exercise even the slightest care in protecting them from it and that is sometimes associated with conscious and willful indifference to their rights.”

Notice the differences in the level of care and risk between the two definitions. In order for gross negligence to apply, the service provider would have to be operating with complete disregard to safety or care in the service they are providing. Negligence by itself is a more reasonable approach with the care “expected” of a like service provider. If gross negligence has to be argued to a judge or jury, this higher standard may be difficult to prove.

The other word of interest in that clause is “sole.” If you have a loss with one of these clauses in place and were able to prove gross negligence or even negligence for that matter, you would still have to prove that this negligence was the sole or only cause of the loss.

Other agreements may specify that you will hold the service provider harmless from any and all consequential losses. Some agreements will name examples of these consequential losses —loss of use and diminution of value (Loss of Value) for example. In many situations a loss will require the aircraft operator to charter or rent another aircraft. The direct loss (physical damage) by the service provider has led to the loss of use of your aircraft. Typically, without a hold harmless agreement in place, the service provider (and their insurance company) would be liable for the actual additional costs you would incur in obtaining replacement transportation. Additionally, an aircraft with a damage history likely will not bring the same price when sold as a similar aircraft with no damage history. If this were the case, you would have a diminution of value loss.

If you agree to hold a service provider “harmless” from “consequential” losses, then these losses will be at your own expense. The hull insurance policy is intended to cover physical damage to the aircraft, so your policy will not cover your first-party consequential losses. In holding the service provider harmless from these consequential losses, you have agreed to self-insure these losses without any right of recovery.

Another clause you will see in some contracts will ask you to indemnify — to protect against damage, loss or injury or to make compensation to for damage, loss or injury — the service provider.
So if the contract calls for you to indemnify the service provider, it is specifying that you “insure” the service provider. Unless this is approved by your insurance company, indemnifying the service provider will be in conflict with your insurance contract.

If you sign a contract or agreement holding a service provider harmless, you may impede the insurance company’s ability to properly adjust a claim. Most insurance policies state that you (the insured) can not do anything to prevent or hinder the company from adjusting, defending or settling a claim. To do so would result in a violation of the policy, which could lead to a claim denial. This is made even more prominent with a “Waiver of Subrogation” clause.

Subrogation is a doctrine holding that when an insurance company pays an insured’s claim of loss due to another’s actions, the insurer succeeds to the insured’s rights to recover for those loses (as the right to sue for damages). So if you waive the right to subrogate, you have likely waived your insurance company’s right to subrogate for a loss they pay on your behalf. As mentioned earlier, this is most likely in violation of your insurance policy and could void your coverage.

These are some of the more common wordings you will find in the agreements in aviation today. There are other similar stipulations on risks that you can hold a service provider harmless. There are FBO’s in Colorado resort towns that ask you to hold them harmless from losses of nature, snow removal and de-icing, etc. You can see that there are any number of possible wordings and clauses you may run into while operating your aircraft. The real question is: what to do in the event that you are called on to sign an agreement?

It is always a best practice to contact your attorney and insurance agent about any agreements you may be asked to sign. It is better to be safe than sorry concerning your insurance coverage. Contracts can be approved by your insurance company removing any doubt. Do your best to find out in advance if an airport, FBO or other service provider you intend to use has agreements for their services. Due to time constraints and quickly changing plans, there will likely be situations when this is not possible, so you are going to have to look for key words such as “hold harmless,” “indemnify” and “waive your rights of subrogation.” If you find this wording, you need to determine if you should sign the agreement, cross out and initial what you don’t like or wait until you can to get your attorney and /or insurance company’s approval.

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