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Indemnification Clauses

September 16, 2009

There is a growing trend for physician employment contracts to contain language requiring the physician to indemnify a hospital or contract management group for any losses related to the physician’s employment. Such indemnification agreements can often be against a physician’s legal interests.

According to Black’s Legal Dictionary, indemnification is a legal term meaning that one party to a business relationship agrees to reimburse the other party for any losses or damages. See an alternate definition of indemnification on Wikipedia here. In one sense, insurance policies are a form of indemnification – an insurance company agrees to pay for any losses that may be sustained by its policyholders when the policyholders pay an insurance premium. Indemnification clauses are often combined with “hold harmless” clauses where one party to a contract agrees to assume liability for certain transactions or situations, releasing the other party from any responsibility for damages or other liability.

One example of an indemnification clause contained in a physician employment contract could require that the physician, either as an employee or as an independent contractor, “indemnify, hold harmless, and defend” the hospital and/or contract management group from “any and all loss, damage, cost, and expense” the hospital or contract management group may suffer that is “in any way related to the physician’s performance or failure to perform the services, responsibilities, and duties the physician has agreed to perform in the contract.”

The purpose of the indemnification clause is obviously to protect the interests of the contracting entity, which often becomes an additional target of plaintiff’s attorneys when a physician is sued. In theory, such agreements make good business sense for the contracting entity: If a physician commits an intentional act, such as physical assault, sexual assault, or sexual harassment, the contracting entity is afforded protection from financial loss. For example, if a physician becomes upset and punches a patient in the mouth, an indemnification clause would likely require that the physician reimburse the hospital or contract management group for all costs incurred for defending any claims brought by the patient.

Conversely, broadly worded indemnification clauses such as the example provided above unnecessarily put the physician at significant financial risk. Consider all the situations that could be “in any way related to the physician’s performance or failure to perform” patient care services. For example, a physician who assists a security guard in restraining a combative head-injured patient might be required to reimburse the contracting entity for all expenses if the contracting entity is later named as a defendant in a legal action brought by the patient. Actions against a hospital or contract management group for an EMTALA violation could end up being solely the physician’s responsibility. The broad wording in the above example could also make the physician financially responsible if the hospital or contract management group was named as a party in a medical malpractice suit since a malpractice claim necessarily involves a physician’s failure to perform duties in accordance with the standard of care. Finally, indemnification clauses may even invalidate portions of a physician’s malpractice insurance coverage. Intentional acts, such as assault or sexual harassment, are probably not covered under a medical malpractice insurance policy. In addition, liabilities relating to indemnity clauses and hold harmless clauses may also be excluded from malpractice insurance coverage because such claims are considered “contractual” in nature. A physician who agrees to a broadly worded indemnification clause may give an insurer a means to deny coverage for alleged malpractice.

Physicians should strive to have indemnification clauses deleted from employment contracts. If a contracting entity is unwilling to delete an indemnification clause, there are several ways indemnification clauses can be narrowed to limit their applicability. For example, an indemnification clause could be limited to apply only in those instances in which the physician acts with “willful malfeasance” or acts in “bad faith.” While all of these terms are subject to interpretation, such limitations would likely relieve the physician at least some of the liability for performing acts related to patient care, but would still provide protection to the contracting entity if the physician acts maliciously. Indemnification clauses can also be limited to apply only in those situations in which the hospital or contract management group acts in “good faith.” For example, with a “good faith” limitation in place, the physician would not be required to indemnify a contracting entity that submits fraudulent bills to third party payors in the physician’s name. Finally, if a contracting entity insists upon indemnification clauses, a physician could require that, in exchange for indemnification, the contracting entity agrees to fully cooperate with the physician in defending any claims, and agrees to provide the physician with complete control of the defense of any claims, including the ability to settle any claim or dispute on behalf of the physician or the contracting entity.

Interestingly, the same hospitals and contract management groups that insist upon being indemnified seldom provide physicians with reciprocal indemnification. Should a contracting entity fail to maintain malpractice insurance on a physician’s behalf or submit fraudulent bills to third party payers in a physician’s name, the physician could suffer significant financial losses defending such claims. If a contracting entity demands indemnification from a physician, it should be willing to provide indemnification to the physician as well.

Red flags should go up when the words “indemnify” or “hold harmless” are contained in an employment contract. Physicians should consider indemnification clauses in employment contracts as “deal breakers.” Unless indemnification clauses are eliminated, I recommend that my clients strongly consider searching for other employment opportunities.

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3 Comments leave one →
  1. Debbie permalink
    May 21, 2011 7:47 pm

    Thank you for such a great article. I recently had a contract reviewed. It had an indemnification clause placed by the potential employer’s attorney who drew the contract up. I was told this is “standard” in an employment contract, yet this is the first time I had ever encountered one. It’s 2011, and the same rings – my attorney and medical liability carrier both said to have it stricken. Unfortunately, the employer did not agree, so the deal fell through. I totally agree with Dr Sullivan – indemnification clause = deal breaker!!!

  2. February 7, 2013 10:51 am

    I am going through a contract with a hold harmless clause. I, too, am going to pass on their offer. Your article is so germane.

    • February 16, 2013 1:26 pm

      Thanks. If more physicians refused to sign such contracts, the terms would change.
      Good luck in your future job searches.

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