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 these clauses, however, are inappropriate for CPA services or way too broad, even to the point of shifting all liability to the CPA firm.

Indemnification and hold-harmless clauses dictate the degree of liability of each party and the extent to which each party takes on or shifts risk. Some courts have found that “hold harmless” is the same as indemnification, while others have found the duty to hold harmless is actually broader than indemnification, requiring liability protection.

More than a few CPAs are being pressured by their clients to take on an indemnitor role and agree to add such language in engagement letters, nondisclosure agreements, business associate agreements under the Health Insurance Portability and Accountability Act, and other agreements between CPAs and their clients.

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

Who is asking you to indemnify them?

Most often it would be your client asking you to indemnify them, but sometimes it will be a third party.

Why are you being asked to indemnify?

Determining the answer to this question may provide you with information that will suggest an alternative to indemnification 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 a third party for exposures directly related to the client’s obligations to you. For example, any request for indemnity for a client’s failure to accurately and timely inform you of information necessary to complete your work accurately and on time is not appropriate. On the other hand, a request for indemnity on exposures unrelated to your professional services is less risky. For example, you may be asked 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.). Large corporations, municipalities, and other governmental entities often make such requests.

Is the indemnity request limited?

A broad blanket indemnification is almost never appropriate. Unless specifically limited, an indemnification does not require you to be negligent 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 little additional exposure to you.

What insurance issues need to be considered?

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 or your insurance company. Another 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 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, your risk increases and the reward is limited.

If you are still considering an indemnity request after asking these questions, consult your legal adviser. Never decide this issue on your own. Here is more 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. She can be reached at sholl@camico.com.

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