Indemnifica*on in Healthcare Contracts: Concepts, Coverage and Clauses

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1 Indemnifica*on in Healthcare Contracts: Concepts, Coverage and Clauses W. Darrell Armer Dallas Bar Associa*on Health Law Sec*on November 16, 2016 Belo Mansion 2014 Gray Reed & McGraw, P.C. The information contained herein is subject to change without notice

2 Introduction Commonplace in healthcare contracts General Idea: Shift risk between two parties to a contract Provisions can be simple or complex, but in either case, are loaded Client often considers these clauses the province of their attorney and may not even read the clause Financial obligation not fully understood by client Strike it or make it mutual

3 Concepts Indemnity Contracts: agreements in a lease, business acquisition agreement, construction contract, information technology outsourcing, clinical practicum and research agreements, service agreements or other commercial agreements that shift the risk of future loss from one party to another Not an Insurance Policy: although the Indemnitor essentially insures the Indemnitee against a specific loss, an indemnification is not an insurance policy since the arrangement is between two parties to a contract and represents their agreement to allocate loss with respect to the specific contractual relationship

4 Concepts Hold Harmless and Indemnification (Synonyms?) Types of Indemnification Common Law Essentially abolished in Texas except where defendant s liability is purely vicarious Examples: employer/employee, agent/principal Statutory Statutes both define and limit scope of indemnity Products Liability Indemnity Statute can apply in healthcare context Contractual

5 Concepts Contractual Indemnification Types of Losses Second Party Third Party Three Degrees of Risk Shifting Broad Form (full indemnification regardless of fault) Intermediate Form (full indemnification so long as any fault rests with the Indemnitor) Limited Form (indemnification, but only to the extent of the Indemnitor s own fault in contributing to the loss)

6 Concepts Contractual Indemnification Enforceability Generally enforced unless the indemnification clause would violate (i) the constitution, or (ii) public policy Fair Notice Doctrine o Adopted in the Dresser case ( clear and unequivocal test deemed too vague and susceptible to abuse) o Two elements must be met: Express Negligence Doctrine If seeking to indemnify the Indemnitee from the consequences of its own negligence, then that intent must be expressed in specific terms and stated within the four corners of the contract (per the Ethyl case) Not Sufficient:... agrees to indemnify... except for the indemnifying party s gross negligence or willful or wanton misconduct Conspicuous Test

7 Concepts Contractual Indemnification Enforceability Conspicuous Test UCC s definition: A term so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed. A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size is conspicuous Examples (Conspicuous): All terms of contract appeared on one page and the indemnity clause was not hidden under an unrelated heading or surrounding by unrelated terms The indemnity appeared on the second page but a notice printed in large red type stated that the agreement included terms on the reverse side

8 Concepts Contractual Indemnification Enforceability Conspicuous Test Examples (NOT Conspicuous): The indemnity was hidden on the reverse side of a two-page sales order under a paragraph titled Warranty and surrounded by completely unrelated terms The indemnity was in a small, light type on the back of a rental form and was surrounded by unrelated terms The indemnity was in the same size and type of font as the rest of the contract and bore no descriptive heading. The indemnity was on the back of a work order in a series of numbered paragraphs without heading or any type of contrasting type

9 Coverage To access insurance coverage for the risk assumed through the indemnification, you need to review insurance policy Two Methods to Access Coverage Insured-Contract Coverage Additional Insured Endorsement Insured-Contract Coverage Exclusion (no coverage) Exception to the Exclusion (except for insured-contracts ) Definition of Insured-Contract (contract pertaining to the insured s business under which the insured assumes the tort liability of another party to pay for bodily injury or property damage of a third party)

10 Coverage Additional Insured Endorsement Creates insurance policy between Indemnitee and insurer Coverage limited to claims that arise from the Indemnitor s operations or premises Insurance contracts, as opposed to indemnification contracts, are construed liberally by the courts

11 Basic Elements Clauses The promise to indemnify: Vendor agrees to indemnify and hold harmless the Hospital ; The risks being indemnified: from or against all claims, demands, liabilities, damages, etc. (perhaps including costs and attorneys fees) ; The scope or extent of the risks indemnified: arising out of Vendor s operations and performance under the contract for [cleaning services, equipment, software, etc.] and/or up to $1,000,000 ; and The express statement of intent to indemnify the other s negligence: including the sole [or concurrent] negligence of the Hospital.

12 Clauses Examples (Narrowly Drawn Clause) Physician agrees to indemnify Hospital for judicially determined liability (or when settlement occurs with Physician s approval) of third party claims against Hospital arising from claims solely alleging the acts or omissions of Physician in performing her duties pursuant to this Agreement In this example... Physician is only indemnifying for claims for which Physician s negligence is alleged and only if such claims are actually adjudicated and settled with Physician s consent Physician has not assumed any costs of defense

13 Clauses Examples (Broadly Drawn Clause) Physician agrees to indemnify Managed Care Plan and contracting Payors (the Indemnified Parties ) from all liability, loss, damage, or expense, including court costs and attorney s fees (or upon the option of the Indemnified Party, Physician shall provide a defense to the Indemnified Party), which result from the alleged or actual negligence or intentional acts of Physician in performance of this Agreement including losses solely due to the acts or omissions of the Indemnified Party In this example... Physician has assumed all costs of defense and other costs Physician has agreed to indemnify the Managed Care Plan and any entities with which the Managed Care Plan contracts for any of their own negligence in the provision of services to patients

14 Clauses Examples (Payor Agreements) Each party agrees to indemnify, defend and hold harmless [the promise ] the other, its agents and employees from and against any and all liability or expense, including defense costs and legal fees [the risks ], incurred in connection with third party claims [ third party loss ] for damages of any nature, including but not limited to bodily injury, death, personal injury, property damage, or other damages arising from the performance of or failure to perform, its obligations under this Agreement [the scope ], unless it is determined that the liability was the direct consequence of negligence or willful misconduct on the part of the other party [the express statement ], its agents or employees Each party agrees to indemnify, defend and hold harmless the other, its agents and employees from and against any and all liability or expense, including defense costs and legal fees, incurred in connection with third party claims for damages of any nature, including but not limited to bodily injury, death, personal injury, property damage, or other damages arising from the performance of or failure to perform, its obligations under this Agreement, to the extent that they are not solely attributable to the actions or failures of the other party, its agents or employees

15 Clauses Examples (Recruitment Agreements) Indemnification by Physician. Physician shall indemnify and hold harmless Hospital, its Affiliates, and their respective directors, officers, employees or agents, from and against any and all claims, causes of action, liabilities, losses, damages, penalties, assessments, judgments, awards or costs, including reasonable attorneys fees and costs (including the reasonable costs of Hospital s in-house counsel), arising out of, resulting from, or relating to (i) the breach of this Agreement by Physician, (ii) the negligent acts or omissions of Physician or any employee or agent of Physician, or (iii) wages, salaries, employee benefits, income taxes, FICA, FUTA, SDI and all other payroll, employment or other taxes, withholdings and charges payable by Hospital or any of its Affiliates to, or on behalf of, Physician or any other personnel employed or contracted by Physician. Indemnification by Group. Group shall indemnify and hold harmless Hospital, its Affiliates, and their respective directors, officers, employees or agents, from and against any and all claims, causes of action, liabilities, losses, damages, penalties, assessments, judgments, awards or costs, including reasonable attorneys fees and costs (including the reasonable costs of Hospital s in-house counsel), arising out of, resulting from, or relating to (i) the breach of this Agreement by Group, (ii) the negligent acts or omissions of Group or any employee or agent of Group, or (iii) wages, salaries, employee benefits, income taxes, FICA, FUTA, SDI and all other payroll, employment or other taxes, withholdings and charges payable by Hospital or any of its Affiliates to, or on behalf of, Group or any other personnel employed or contracted by Group. Indemnification by Hospital. Hospital shall indemnify and hold harmless Physician and Group from and against any and all claims, causes of action, liabilities, losses, damages, penalties, assessments, judgments, awards or costs, including reasonable attorneys fees and costs, arising out of, resulting from, or relating to (i) the breach of this Agreement by Hospital, or (ii) the negligent acts or omissions of Hospital or any employees or agent of Hospital in the performance of Hospital s obligations under this Agreement.

16 Clauses Examples (Recruitment Agreements) Physician shall indemnify and hold harmless Hospital and its affiliates, and their trustees, directors, officers, agents, servants, and employees from and against any and all claims, demands, suits, causes of actions, judgments, liabilities, damages, losses, expenses, costs, and attorney s fees, arising from or attributable to any and all acts, omissions, negligence, or gross negligence of Physician

17 Clauses Examples (Services Agreement) Each party to this Agreement agrees to indemnify and hold harmless the other party, its officers, directors, independent contractors, and agents from and against any and all costs (including reasonable attorney s fees and expenses), claims, losses, liabilities, obligations, suits, damages, and causes of action suffered or incurred, arising out of or in connection with the injury or death of any person which is claimed to be the result of any negligent acts, errors or omissions, breach of contract, strict liability or other wrongful conduct arising out of the subject matter of this Agreement by the indemnifying party, its officers, directors, independent contractors and agents Both parties mutually agree to indemnify and hold each other harmless from and against all liability, losses, damages, claims, causes of action, cost or expenses (including reasonable attorneys fees), which directly or indirectly arise from the performance or non-performance of the services required by the indemnifying party, its agents, servants, representatives and/or employees pursuant to this Agreement

18 Clauses Business Associate Agreements Business Associate shall indemnify, defend and hold harmless Covered Entity and its directors, officers, subcontractors, employees, affiliates, agents, and representatives from and against any and all third party liabilities, costs, claims, suits, actions, proceedings, demands, losses and liabilities of any kind (including court costs, expenses and attorneys fees) brought by a third party, arising from or relating to the acts or omissions of Business Associate or any of its directors, officers, subcontractors, employees, affiliates, agents, and representatives in connection with the Business Associate s performance under this Agreement or the Service Agreement, without regard to any limitation or exclusion of damages provision otherwise set forth in the Agreement If the Business Associate is the indemnifying party, Business Associate in addition to any of the costs, damages or expenses set forth above, shall pay the cost of any credit monitoring services and other expenses related to breach notifications of patients incurred by Covered Entity as a result of the acts or omissions of Business Associate and its employees, contractors and agents

19 Clauses Example (Equipment Leases) Lessee shall indemnify, defend and advance defense costs for Lessor against, and hold Lessor harmless from, any and all claims, actions, suits, proceedings, costs, expenses, damages, and liabilities, including attorney s fees, arising out of, connected with, or resulting from the Equipment or the use of the Equipment, including without limitation, the manufacture, selection, delivery, leasing, renting, control, possession, use, operation, maintenance or return of the Equipment, and all claims and actions of its employees or any other persons or entities irrespective of whether such claims or actions are based upon contract, tort, negligence, strict liability or otherwise

20 Clauses Specific carve-outs can be used to scale back indemnification obligation Examples:... except if Hospital contributed to such loss in any manner such as providing direction to or supervising such employees or agents of Contractor, then Contractor will not indemnify Hospital for any loss associated with Hospital s acts or omissions or the acts or omissions of Hospital s employees or agents... ; provided, however, if any independent negligence is alleged on the part of Hospital, including negligence on the part of Hospital, its employees or agents in the delivery of patient care, or in selecting or supervising physician, Physician shall not indemnify Hospital for any loss associated with such allegations

21 Conclusions Despite their inclusion in so many types of healthcare contracts, indemnification provisions are not boilerplate The liability assumed through an indemnification provision is often underappreciated by clients, which poses additional risks to the clients as well as the attorneys Careful examination and negotiation of the indemnification provisions can avoid unintended consequences

22 Takeaways Choice of law matters Narrow the risk assumed to (i) the real risk to the Indemnitee, and (ii) risks for which the Indemnitor has insurance coverage Use specific carve-outs to scale back overreaching clauses To help satisfy the Express Negligence Doctrine, use the term negligence in the indemnification clause If the Indemnitor is to cover the costs of defense, then specifically state the intent in the indemnification clause (defend and indemnify) Consider seeking an additional insured endorsement from the Indemnitor s insurer that specifically names the Indemnitee, rather than having to rely solely upon the underlying agreement meeting the definition of an insured-contract