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Hold Harmless Clauses: Why a Plaintiff Should Just Say NO!
By Robert J. Neuberger & John M. Coletti | Pozzi Wilson Atchison

PLAINTIFFS DO NOT WANT (AND SHOULD NOT BE FORCED) TO INCREASE THEIR OWN LIABILITY, WHICH IS EXACTLY WHAT A HOLD HARMLESS CLAUSE DOES.

Ninety-seven percent of all civil actions settle. Defendants and their liability carriers frequently demand a hold harmless clause in the settlement documents. Personal injury and wrongful death plaintiffs should reject such clauses because they are not necessary to adequately protect the defendant, and they impose unreasonable and unnecessary obligations on a settling plaintiff. A lawyer who allows his client to agree to an indemnity or hold harmless clause may become personally liable to the client for any increased obligations incurred. The appropriate solution for both parties is to enter into a covenant, or promise to pay medical providers and insurers who have subrogation rights in exchange for a fair amount of consideration.

A hold harmless agreement (or indemnification clause) imposes a greater obligation than a simple promise to pay a debt (e.g., unpaid medical bills or liens in a personal injury case). By articulating a specific promise, liability is limited to that obligation alone. In contrast, an indemnification or hold harmless clause allows the adverse party to recover the underlying obligation plus associated fees and costs, including attorney fees. A promise to pay is distinguishable from an indemnification clause in that a promise to pay does not give a right to collect for anything beyond the scope of the promise and the intention of the promisor.

An example of a hold harmless agreement is as follows: "The undersigned plaintiff, and her attorneys, agree to satisfy any and all liens and subrogation claims relating to my claims for injury or damages and to indemnify and hold harmless the parties above released from any claim liability, costs, or attorney fees arising from any liens or subrogation claims."

An example of a promise to pay or covenant is as follows: "The undersigned plaintiff further agrees to satisfy any and all liens and subrogation claims for medical bills and expenses relating to may claims for injury or damages. Specifically, I promise to pay any unpaid medical expenses, to satisfy the Medicare lien, and to reimburse all sums owed to my health insurer, Acme Mutual Insurance."

A promise is a covenant, which when given for consideration forms a contract. The obligation of the covenantee to the covenantor is limited to the damages available upon breach of contract. That is, paying the amount of the debt.

Black"s Law Dictionary (4th Ed.) defines a promise as: "A declaration, verbal or written, made by one person to another for a good and valuable consideration, in the nature of a covenant by which the promisor binds himself to do or forbear some act, and gives to the promisee a legal right to demand and enforce fulfillment."

The amount of damages for breach of a promise to pay a clearly articulated debt is the amount that compensates the promisee for the promisor's failure to pay. Yamaha Store of Bend, Inc. v. Yamaha Motor Corp., 310 Or 333,344 (1990). Oregon follows the common law "American rule" that prohibits awarding the prevailing party attorney fees unless expressly authorized by contract or statute. Hardwick v. Dravo Equipment Company, 279 Or 619, 628 (1977); Brookshire v. Johnson, 274 Or 19 (1976).

In determining whether the promise to pay a particular debt is within the scope of the agreement, the court will examine the terms and language of the promise for ambiguity. Whether language in a contract is ambiguous is a question of law, and if language is ambiguous, then its interpretation is a question of fact. Biomass One, L. P. v. S-P Construction, 120 Or App 194, 200 (1993). (1) In determining whether a contract is ambiguous, the court is limited to the "four corners of the document." Edwards v. Times Mirror Co., 102 Or App 440, 445 (1990). (2) If the intention of the parties can be ascertained, the court will construe the agreement so that it is enforceable. Delmar Crawford, Inc. v. Russel Oil Co., Inc., 106 Or App 524, 528 (1991).

For an action on a debt at common law, the plaintiff must plead and prove that: "1) a third party made a claim against him; 2) he reasonable incurred costs in defending or satisfying the claim; and 3) as between the plaintiff and the defendant, the costs ought to be borne by the latter." State Dept. of Trans. v. Scott, 59 Or App 25, 29 (1982).

At common law, "there is no requirement that the indemnitee prove that he was actually liable to the indemnitor." Martin v. Cahill, 90 Or App 332, 336 (1988).

Express indemnification agreements are contracts which "expose the indemnitor to liability through the conduct of others over which he has little or no control." Union Oil Co. of Calif. v. Lull, 220 Or 412, 426 (1960). That is precisely the evil of "hold harmless" clauses in personal injury releases; the client has little or no control over lienholders who may try to sue your settling defendant, whether justified or not. That lawsuit will result in exposure to plaintiff for paying the settling defendant's costs and attorney fees incurred in defending it. (4)

The danger of such liability demonstrates why plaintiffs should not consent to hold harmless clauses in settlement agreements. The parties are looking to reach a settlement whereby plaintiff's right to sue is given up in exchange for defendant's payment of a specified sum. Plaintiffs do not want (and should not be forced) to increase their own liability, which is exactly what a hold harmless clause does. A hold harmless agreement or indemnity clause allows the defendant to collect from the plaintiff both the underlying obligation and the cost of defending the obligation. By limiting the contract obligations to payments only within the scope of the clearly articulated covenant, those terms alone are enforceable.

Another danger lurks in hold harmless clauses. As frequently drafted, these agreements require that the plaintiff hold a defendant harmless from "any and all claims arising" from the incident in question. This language could require the settling plaintiff to reimburse the defendant and its liability insurer for any amounts that the insurer paid to settle claims of third parties. If the plaintiff was one of three people injured in a motor vehicle accident, the hold harmless language could require the settling plaintiff to reimburse the liability carrier for the sums it paid to settle the claims of the other two injured parties because those claims are "claims arising" from the incident at issue.

Defendants argue that without hold harmless agreements defendants remain liable for outstanding bills and liens. The statutes regarding liens already adequately protect defendants and their insurers. In most instances, the plaintiff's lawyer, not the defendant , is liable for payment of the lien if he or she disburses the monies without satisfying the lien. (5)

ORS 87.555 and 87.607 give hospitals, physicians, and ambulance companies statutory liens. Liens for hospital and physician services must be perfected by service upon the patient and the liability insurer within fifteen (15) days after the discharge of the patient form the hospital. Until such time as the lien has been perfected and notice of lien has been served by registered or certified mail upon the defendant, the defendant is not liable for the lien. ORS 87.580 makes plaintiff's counsel liable for payment of the lien if he or she disburses settlement or judgement monies without first satisfying the liens. ORS 87.613 and 87.627 contain similar provisions relating to the perfection and subsequent enforcement of ambulance service liens.

Pursuant to ORS 742.536, if a motor vehicle insurer furnishes personal injury protection benefits to its insured, the insurer possesses a statutory lien upon monies obtained by their insureds against responsible parties. The PIP insurer's lien receives significant statutory protection in that the insured is required to hold "in trust for the benefit of the insurer all rights or recovery, and may do nothing to prejudice such rights. "(6)

Most insurance polices and defined benefit plans contain provisions giving the insurer, trust or plan administrator a right to be reimbursed and impose an obligation upon the insured or beneficiary to reimburse the insurer, trust, or plan. These contracted provisions do not impose any obligations upon the adverse parties or their insurers.

Worker's compensation carriers have a statutory lien upon damages recovered in a third party action. (7) Under Oregon's Workers' Compensation Act, the carrier's lien is "preferred to all claims except the cost of recovering such damages." (8) Upon receiving a demand by the worker's compensation carrier, the injured worker must pursue a claim against the third party who caused his or her injury, or the worker is deemed to have assigned the cause of action to the carrier. (9) If the worker elects to pursue his or her own cause of action against the third party, any compromise or settlement of their claim against the third party without the written approval of the workers' compensation carrier is void.

When a recipient of Medicaid pursues an action against the responsible part, the Adult and Family Services Division acquires a lien in any monies received in pursuit of the action. (10) Before pursuing any action against the responsible parties, plaintiff must first notify the Adult and Family Services Division of his or her intent to pursue the action pursuant to ORS 426.530. Upon receiving notice of the injured parties' intent to pursue the action, the Adult and Family Services Division must perfect its lien according to the provisions of ORS 416.550. Once the Adult and Family Services Division perfects its lien, plaintiff's counsel will be liable to the state of Oregon if he or she disburses any of the settlement or judgment monies without first satisfying the Adult and Family Services Division's lien.

CONCLUSION

Hold harmless agreements are unnecessary to protect defendants against outstanding bills and liens because significant statutory protections exist. Defendants generally are not liable for lines until the lien is perfected by service upon the parties or defendant's insurer. Plaintiffs, on the other hand, remain personally liable for all liens until they satisfy or pay the liens. Defendants are reasonably protected against outstanding bills and liens without the use of hold harmless agreements.

In a typical settlement, defendant promises or covenants to pay a specified dollar amount. In exchange, plaintiff promises to release he or her claims and dismiss any lawsuit. The defendant gives no guarantees as to the plaintiff's actual injuries or damages, or future consequences of plaintiff's injuries. The defendant does not agree to indemnify the plaintiff from any bills that may arise in the future, or past bills that may not surface until later. Nor does defendant agree to hold plaintiff harmless from any future consequences of his or her injuries. By demanding a hold harmless clause, the defendant asks for greater protection than it is willing to provide to the plaintiff.

The parties are properly protected by the proper use of covenants. Personal injury and wrongful death plaintiffs should not agree to hold harmless or indemnification clauses.

  1. See also Mann v. Wetter, 100 Or App 184 (1990) (construing a pre-injury release or waive of liability (hold harmless agreement) between a student and diving school). The court offered the following rules of law: "As a general rule, the construction of a contract is a question of law for the court. The exception to that rule is that, if the language in a contract is ambiguous, evidence may be admitted as to the intent of the parties, and the determination of the parties' intent then is a question of fact. However, whether the language of a contract is ambiguous is a question of law for the court. A contract provision is ambiguous if it is capable of more than one sensible and reasonable interpretation; it is unambiguous if its meaning is clear enough to preclude doubt by a reasonable person." (Citations committed) Mann, supra at 188.
  2. But see Roadway v. Arrow Light Truck Parts, 96 Or App 232, 236 (1989) which states that "(a) contract with unambiguous terms is generally construed according to the plain meaning of those terms. However, extrinsic evidence may be used to show that there are latent ambiguities."
  3. See also PGE v. Const. Consult. Assoc. 57 Or App 116 (1982).
  4. See generally C.I.T. Group/Equipment Financing, Inc. v. Young, 99 Or App 270, 272 (1989) which states that "attorney fees are not recoverable except as permitted by statute or contract."
    The court further noted: Fees incurred in precious litigation are only recoverable under a specific legal theory, such as breach of a contract that provides for attorney fees or when a tortious act make litigation necessary, either of which requires a party to act to protect his interest by brings or defending an action against a third party. Id. at 272.
  5. See e.g., ORS 87.555 et seq. (medical services lien); ORS 87.603 et seq. (ambulance services lien).
  6. See ORS 742.538(2) and (3).
  7. See ORS 656.580(2).
  8. Ibid.
  9. ORS 656.582(2).
  10. ORS 656.587.

Reprinted by permission of the Oregon State Bar Litigation Journal. This article was originally published in THE LITIGATION JOURNAL, March 1996.

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