Dental and Medical Counsel Blog

What is Indemnification and How Does It Apply to Healthcare Practices?

October 14, 2021

Dentists, Optometrists, Physicians, Veterinarians, and others in the healthcare field frequently execute contracts when they join or form a practice group as well as when they enter into employment agreements. Those contracts often include an indemnification clause. Given the impact an indemnification clause could have on you in the future, it is always best to have an experienced attorney review the entire contract prior to signing it. In the meantime, it is imperative that you have a general understanding of what an indemnification clause is and how it may impact you personally and professionally.

What Is an Indemnification Clause?

Also commonly referred to as a “hold harmless” clause, an indemnification clause creates a contractual agreement in which one party to a business relationship agrees to reimburse the other party for any losses or damages. In the context of a healthcare practice, an indemnification clause typically includes language that holds the doctors or other healthcare professionals legally liable in the event of a lawsuit in which both the practice and the individual are named as defendants. Because an indemnification clause could result in personal liability for a healthcare provider it is imperative to understand how an indemnification clause will impact any contract you sign.

How Are Indemnification Clauses Used in the Healthcare Industry?

An indemnification clause may be found in a variety of settings within the healthcare industry. Common examples of situations in which you may encounter one of these clauses include:

  • Practice vs Personal Liability. Professionals in the healthcare field often form partnerships or other legal entities that allow them to create a practice group without forming employee-employer relationships. The result is a significant amount of autonomy for the practitioners. In theory, it makes sense for the umbrella entity (hospital, practice group, clinic) to protect itself from intentional or grossly negligent acts committed by a practitioner that could lead to a malpractice lawsuit. For example, if a physician commits a sexual assault on a patient, the practice itself has a vested interest in avoiding legal liability for the obviously intentional acts of the practitioner. An indemnification clause might be found in the partnership or employment agreement that provides for such indemnification.
  • Asset Purchase Agreement. An asset purchase agreement might also include an indemnification provision. Typically, indemnification is used in this context to allow the seller and purchaser to indemnify each other for losses arising from the purchase agreement. For example, if XYZ Dental Practice plans to purchase ABC Dental Group, the asset purchase agreement may include a clause requiring ABC Dental Group to provide indemnification for losses that arise post-closing if XYZ Dental Practice will be dissolving and liquidating as part of the purchase agreement.
  • Partnership Agreement. Healthcare practitioners often form professional partnerships.  A partnership agreement often has an indemnification clause that is intended to protect the individual partners from personal liability for losses, damages, expenses, or costs incurred when acting on behalf of the partnership or in furtherance of the interests of the partnership.
  • Employment Agreement. Healthcare professionals may enter into an employment contract with a hospital, practice group, or other legal entity from time to time. That employment contract may include indemnification for the employee and/or employer that is unrelated to malpractice liability. For example, if you are a dentist contracting to provide limited services to an existing practice group you do not want to find yourself liable for debts or losses incurred by that practice group that are completely unrelated to the services you provide. An indemnification clause can make it clear that you are not legally responsible for those debts or losses. Conversely, that same agreement might require you to indemnify the employer for losses or damages arising from the performance of your services.

The Problem with Indemnification Clauses

A well-written and narrowly tailored indemnification clause can provide essential protection for healthcare providers.  Unfortunately, many indemnification clauses are not so narrowly tailored. Instead, they typically include language that provides broad protection from liability for the contracting entity.  For instance, as a healthcare professional you might be obligated to indemnify against “any and all loss, damage, cost, and expense that is in any way related to the performance or failure to perform the services, responsibilities, and duties agreed to in the contract.” Not only would that language expose you to extremely broad liability, but it may also require you to cover the costs associated with defending a lawsuit, including attorney fees.

The problem is that almost anything could be included in language as broad as “any way related.” By way of illustration, imagine that you are working as a physician in the emergency room of a hospital. If you intervene in an altercation between a combative patient and a security guard, and the patient later sues the hospital for injuries, you could be required to indemnify the hospital because it was “related to” your performance as a physician. You could personally end up being liable for the damages and costs related to the lawsuit even though you were trying to prevent further injuries to patients and staff.

Likewise, in an employment agreement between a veterinarian and an emergency animal hospital, a veterinarian might be required to provide indemnification for legal issues unrelated to malpractice, including violations of state/federal regulations, tax-related problems, and employee lawsuits that arise while you are employed there.

Making matters worse is the fact that any personal liability insurance you have may not cover you if there is an existing indemnification clause. Insurance policies commonly include a provision that excludes any liability that an insured has assumed as part of a contract or agreement. As such, your insurance provider may be off the hook, leaving you personally liable.

Mutual Indemnification Clauses

To make the existence of an indemnification clause appear less alarming to a practitioner the contract will often include mutual indemnification clauses. These make it appear as though both parties to the contract are agreeing to indemnify the other party. Legally, a mutual indemnification clause does have that effect; however, in practical terms, the protection offered to the parties is not usually equal. For instance, when an injured party files a negligence lawsuit, primary negligence is almost always alleged against the individual healthcare professional with only vicarious negligence alleged against a practice, hospital, or other umbrella entity. It is rare for a lawsuit to be framed the other way around, with the entity named as the prime target and an individual as vicariously negligent. Therefore, the practical nature of negligence lawsuits makes the concept of mutual indemnification somewhat of an illusion.

By the same token, mutual indemnification clauses in other contracts, including asset protection, partnership, and employment agreements, can be more one-sided than they appear at first glance. In an asset purchase agreement, for example, you may find a mutual indemnification clause that purports to hold both the seller and purchaser harmless for losses or damages that occur after the asset transfer is complete. In practice, that mutual indemnification may be less meaningful if the seller dissolves after the sale because the purchaser is the party depending on the value and profits earned in the ongoing business. As such, the purchaser may have much more to lose.

Protecting Your Interests When an Indemnification Clause Is Included in a Contract

Including an indemnification clause in a healthcare practice contract is not altogether unreasonable; however, when asked to sign a contract that includes one of these clauses it is crucial that you understand under what conditions and to what extent you could be held personally or professionally liable for losses, damages, or costs before agreeing to sign the contract.

Look for language that contains the terms “indemnity,” “hold harmless,” or anything similar. Keep in mind that an indemnity clause does not have to include the terms “indemnity” or “hold harmless” to shift indemnification to you. Sometimes, simply identifying an indemnity clause can be challenging because of the creative language used when drafting the contract.

Do not be lulled into signing the contract by the appearance of mutual indemnification clauses. Remember, in the real world the contracting entity benefits from mutual indemnification far more often than you do.

Review your personal insurance policies to determine if you are covered. If your policy does include an exclusion for indemnification, consider adding additional coverage if available. If additional coverage is not available, be aware that entering into a contract with an indemnification clause opens you up to personal liability for which you have no insurance coverage.

Given the potential liability you could be exposed to by agreeing to execute a contract that includes an indemnification clause, always have an experienced attorney review the underlying contract before agreeing to the terms.

If you need help reviewing an agreement or have questions regarding indemnification, contact Dental & Medical Counsel to schedule a complimentary consultation with healthcare attorney Ali Oromchian.

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