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Indemnification: Questions to Ask Before Signing an Agreement

By Suzanne M. Holl, CPA

CPA firms are experiencing an uptick in clients trying to embed indemnification and hold harmless clauses in various agreements. Many of the clauses are inappropriate for CPA services or overly broad, even to the point of shifting all liability to the CPA firms.

Indemnification and hold harmless clauses dictate the degree of liability of each party and the extent that each party takes on or shifts risk. Certain courts have found that “hold harmless” is not distinct and is the same as indemnification, while others have found the duty to hold harmless is broader than indemnification and requires protection against liability.

CPAs are being pressured more by their clients to take on the “indemnitor role” and to agree to such language in engagement letters, nondisclosure agreements (NDAs), business associate agreements under the Health Insurance Portability and Accountability Act (HIPAA), and other agreements that may be executed between CPAs and their clients.

It’s important that before you contractually bind the firm to an arrangement of this significance, take the time to understand all the implications of the legalese in the agreement. Make sure you are comfortable with the agreement and the expectations that will fall on the firm – and ask the following questions before agreeing to any indemnification and hold harmless clauses:

Indemnification Hierarchy of Risk:

  • Who is asking you to indemnify them? Most often you will be asked by your clients to indemnify them. Sometimes a third party may ask.
  • Why are you being asked to indemnify? Determining the answer may provide information in order to suggest an alternative that is acceptable to all parties.
  • What exposure is the subject of the indemnification request? It is almost never appropriate to agree to indemnify your client or third party for exposures directly related to the client’s obligations to you. For example, any request that provides indemnity for your client’s failure to accurately and timely inform you of information necessary to complete your work is very risky and not appropriate. On the other hand, client requests for indemnity for exposures unrelated to your professional services is far less risky. For example, clients may ask for indemnity for risks arising as a result of your personnel being in the client’s offices (e.g., slip and fall, damage to property, etc.). We often see large corporations, municipalities and other governmental entities making such requests.
  • Is the indemnity request limited? A broad blanket indemnification, again, is almost never appropriate. Remember, unless specifically limited, an indemnification does not require you to be negligent in order to trigger your duty to indemnify. On the other hand, indemnification agreements limited to exposures in which you are judicially found negligent, and the sole cause of the loss, create very little additional exposure to you.
  • What insurance issues need to be considered? By far the most important insurance issue to consider is the impact of your acceptance of indemnification on your professional liability insurance. Before you agree to any indemnification, check with an attorney in your jurisdiction or your insurance company. The other insurance issue to consider is the extent to which you can protect against the indemnity risk through other insurance. For example, many business owner policies (BOPs) address the premises risk exposure from your personnel being in the client’s offices. If you cannot insure against the risk created by the indemnification, you must consider fee/exposure leverage. Assess the size of the indemnity risk versus your fees. If the indemnification exposure is much greater than your fees, risk increases, and the reward is limited.

If you are still considering the indemnity request after asking these questions, consult your legal adviser. Never decide on your own (here are more Risk Management Tips to consider before agreeing to any indemnification and hold harmless clauses). Indemnification law varies by state, so this risk discussion does not address every possible issue or solution on a per-state basis.

Suzanne M. Holl, CPA, is senior vice president of loss prevention services with CAMICO (www.camico.com). With almost 30 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide CAMICO’s policyholders with information on a wide variety of loss prevention and accounting issues.

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