Transportation Industry: Hold Harmless, Defense, and Indemnity Clauses in Transportation Contracts By: Jim Mahoney Tel: (602)264-2088 Email Mr. Mahoney Website: www.astrigh.com

Indemnity -- the oldest and most widely used method of shifting risk from one party to another -- is commonly employed today under the terms of a written shipping agreement, among others, of course. Indeed, all insurance agreements, dating back to ancient Roman traders, are based upon the theory of indemnification, i.e., "If you pay me a percent of X now, I promise to pay you X if the agreed upon loss occurs."

Hold harmless, defense, indemnity clauses in transportation contracts

Enforceable indemnity clauses have been the most dependable method for shippers to avoid responsibility for their own negligence and transfer that responsibility to motor carriers. Since motor carrier deregulation, and particularly more so in the last decade, shippers have gone a bit beyond the pale in drafting language that shifts almost all responsibility to the motor carrier.

However, with the urging of American Trucking Associations and its state affiliates, a majority of state legislatures have passed bills outlawing certain types of indemnity in transportation agreements. Many of these laws have yet to be tested in court, however. But there are gaps in anti-indemnity protection.

Indemnity clauses in transportation contracts have become burdensome to motor carriers and a safety issue for the public. While insurance coverage uses broad-based principles and spreads risk among many insureds, indemnity clauses are targeted devices, and most often the weaker party hopes its capital investments are not lost in the fulfillment of the contract.

As to safety, indemnity terms have encouraged carelessness in premises owners' responsibility to persons and property, or to cargo in transit because of improper loading, rigging and unloading.

But using contractual risk transfer is more than just avoiding moral responsibility. Motor carriers have no authority or control over others' premises. Hazards cannot be addressed. Unbalanced loads put together by others -- and I've seen some loads that appeared to have been loaded by drunken bears -- are a risk to the public.

Further, using strong indemnity language is more than just the least expensive and most certain method of avoiding risk: It's a method of obtaining free "insurance" that relieves the shipper of premium, legal fees and administrative costs.

Indemnity clauses shift hidden risks to motor carriers and their insurers and prevent motor carriers and brokers from properly pricing freight charges. Carriers can't predict who will sue them if they are indemnifying others for premises liability claims that occur just because their trucks and personnel happen to be on site and only minimally involved in an incident. Insurers are asked to underwrite transport risks but rarely know anything about the agreements the carriers might sign and what risks the contracts involve. Such uncertainty in freight rates forces exposure to unknown and unanticipated risks and can result in paying for losses arising from an indemnity agreement that may persist for years in higher insurance premiums.

Types of indemnity agreements include:

• Broad form - the transporter assumes an unqualified obligation to defend and hold harmless the shipper along with the shipper's agents, customers -- even lumpers -- for all risk and liability associated with the performance or for breach of contract regardless of who may be negligent or at fault.
• Intermediate form - the transporter assumes all risk and liability as above, except it does not assume risk as may be caused by the sole negligence of the shipper.
• Limited form - the transporter and shipper assume apportioned risk and liability, to the extent of each one's fault.

Indemnity clauses usually contain defense language requiring the motor carrier to incur the costs and exposures of defending all claims, regardless of the limitations above -- and claims and lawsuits can extend for years through verdict and appeal. As time passes while defending the claim, it gets more difficult to hand it back to the shipper. Defense costs often exceed the value of the claim itself, and your insurer is in business for profit, so expediency in paying off a claim rather than fighting will show up in truckers' premiums.

Most transportation contracts are drawn in their entirety by shippers, beneficial cargo owners and third-party logistics companies (a/k/a freight brokers) and the latest versions are using language and strategies to circumvent the new anti-indemnity statutes. A seemingly innocuous technique is to require additional insured status for the shipper.

Insured losses are paid to or on behalf of an "insured," and almost any entity can be added as an additional insured in these policies -- often under expanding additional insured endorsements.

Additional insured status, which most states' anti-indemnity laws do not address in attempting to void risk transfer, offers shippers coverage for even the most onerous type of risk shifting, for the shipper's "sole negligence," if the contract demands it.

Additional insured status provides shippers a direct right to a legal defense paid by the motor carrier or its insurer. Additional insured status provides a safe harbor to shippers against subrogation by the motor carrier's insurer. Additional insured status can expand the shipper's coverage to include claims for false arrest, malicious prosecution, slander, invasion of privacy, if the insurance clause of the contract is crafted that way. Certain language can provide coverage to shippers that they may not be able to buy themselves, or that would be prohibitively expensive. Motor carriers may even unwittingly commit to supplying coverage for environmental remediation on un-owned premises. And, of course, your agreement to indemnify for "losses resulting from breach of contract" is not necessarily covered at all by insurance. If you are self-insured to some limit, neither anti-indemnity statutes nor insurance policies may protect you.

Although motor carriers feel they are at a disadvantage in negotiating contracts -- the "sign it, or walk away" syndrome -- careful review and word crafting can avoid these pitfalls. At least be aware that signing up for possible indemnity is a risk that can be mitigated if properly addressed before signing.