To Indemnify or Not to Indemnify? That Is the Question!

by Wilson Elser

We are taught early on that we are each responsible for our own actions. If we make a mistake that results in damages to someone else, we have to pay for those damages. That is the basic concept of indemnification, and the law enforces it.

In many circumstances, a party to a contract wants to make sure that the other party agrees to indemnify them in the event of a claim or suit. Often, a service provider is required to supply insurance for the benefit of the service purchaser by adding the buyer to its policy. It has become more and more common for form contracts required by appraisal management companies (AMCs) to contain an indemnification or “hold harmless” clause. A professional service provider must take care in reviewing these contracts, understand them and be prepared to reject the business opportunity if it cannot negotiate the terms.

The clauses are common in construction contracts, but I have fielded questions on them from real estate appraisers since the rise of AMCs in the past six years. The AMCs regularly require appraisers to sign contracts as a prerequisite to providing assignments. They invariably contain a one-sided indemnification clause seeking to protect the AMC from claims arising from an appraisal.

In most cases, the indemnification clauses are relatively benign and merely restate the common law of indemnification, i.e., if an appraiser is negligent and the negligent performance of services causes damage to the AMC, the appraiser is liable to pay back the AMC for any costs or expenses incurred, including legal costs incurred if the AMC is named in a lawsuit arising from the work of the appraiser.

These sometimes dense clauses, often written in perfect “legalese,” must be closely examined when a service provider is presented with a contract form, because indemnification provisions sometimes go beyond the basic concept of fairness. The clauses might require the appraiser to indemnify the AMC for the negligent acts of the AMC. Based on the indemnification clause of the contract, the AMC could contend that the appraiser must pay its costs and legal fees if a lawsuit or claim arises.

Most appraisers recognize that indemnification clauses might have an effect on their errors and omissions insurance policies, many of which contain exclusions for liability assumed under a contract. There is, however, usually a “savings clause” associated with these exclusions. Coverage is provided if the liability would have attached even in the absence of the indemnification provision. As noted, the basic concept is that we are responsible for our own negligent acts. A claim for indemnification based on the acts of the professional would apparently fall within the exception to the exclusion. A claim for indemnification for the acts of the AMC, however, arguably would fall within the exclusion. The insurer will take the position that it insures the acts of the appraiser and not the acts of the AMC. Certainly, the enforceability of the clause could become an issue in determining coverage and in any litigation in which both the AMC and the appraiser are sued.

The fact is, I don’t order appraisers not to sign these contracts. Most appraisers tell me that they depend on business from AMCs and that they must sign the contracts to stay in business. I can only explain to them the provisions and the risks they face. If they decide to sign the contracts, many tell me that they will “cherry pick” assignments from the AMC and only accept assignments where they are confident that they are familiar with the area and the market. They will not accept assignments that they believe pose some risk or require substantial adjustments.

My advice to appraisers and other professionals asked to sign contracts with indemnification agreements provided by AMCs or any purchasers of their services is to be aware of the indemnification agreements and to review them and their insurance policy exclusions. If they are unfair or onerous, the professionals should attempt to negotiate the terms.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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