During a recent lecture on medical employment contracts, a resident posed the following question regarding mutual indemnification in a medical employment contract:
I recently signed a moonlighting contract at a rural hospital containing a “mutual indemnification” agreement. Is that just as bad [as a unilateral indemnification agreement], or would it protect me from unnecessary cost the hospital can potentially impose on me due to the mutuality?
The language in the contract stated as follows:
Indemnification. Physician shall hold [Contract Management Group (CMG)], Hospital, or any of its employees harmless from and against and will indemnify CMG, Hospital, or any of its employees for any and all claims, liabilities, controversies, actions, or causes of action arising out of the negligent acts or omissions of Physician to the extent the same is not covered by the coverage under the insurance provided by Health-Systems Self-Insurance program. CMG shall hold Physician harmless from and against and will indemnify Physician for any and all claims, liabilities, controversies, actions, or causes of action arising out of the negligent acts or omissions of CMG, Hospital or any of its employees to the extent the same is not covered under the insurance provided by Health-Systems Self-Insurance program.
Before looking at the pros and cons of a mutual indemnification agreement, it may help to have a quick review.
What Does “Indemnification” Mean?
According to the Merriam Webster dictionary, indemnity means “security against hurt, loss, or damage” or “exemption from incurred penalties or liabilities.” In contract law, indemnification is a contractual agreement to compensate another party for ALL damages or losses that the party incurs. The scope of indemnification clauses can be broad (for example, applying to “all acts”) or very narrow (applying to only “intentional criminal acts”). However, indemnification clauses may require a party to pay for substantial expenses including monetary losses, court costs, attorney fees, legal judgments, lost profits, and any other “losses” a party may allege.
Insurance amounts to an indemnity contract. For example, with medical malpractice insurance, the insurer agrees to pay for a physician’s legal defense, expert witnesses, legal fees, judgments, and sometimes even the costs of temporarily closing a practice to be present at depositions or a trial. However, unlike indemnity clauses in employment contracts, the indemnity provided by insurance companies (that have tens of millions of dollars in reserves) has exceptions and limitations. An indemnification provision in a malpractice insurance policy will often deny coverage for a physician who engages in fraud or gross negligence. A malpractice insurance policy also limits how much it will pay. An average policy will not pay for more than $1 million in damages per incident. Contrast these limitations with an employment contract indemnification provision that has no exceptions and no limits on how much an employee might be forced to pay. Employers could technically engage in fraud or misrepresentation with regard to an incident and may still have standing to enforce an indemnity clause. When physicians or any employees agree to contractual indemnification, they’re in effect agreeing to provide the other party to the contract with more coverage than an insurance company would provide. An indemnity agreement in any employment contract should be an absolute deal-breaker.
What is Mutual Indemnification in Employment Contracts?
Mutual indemnification (also known as “mutual indemnity,” “reciprocal indemnification,” or “reciprocal indemnity”) means that both parties to a contract agree to indemnify each other for the scope of actions are contained in the indemnity agreement.
Let’s look at the language of the mutual indemnification clause presented above.
The first paragraph requires the physician to indemnify not just the contract management group but also the hospital and its employees for any negligent acts or omissions that are not covered under the group’s insurance policy. Consider the following points.
- First, suppose that there is a judgment for $5 million in a medical malpractice case involving the physician. The jury apportions the award $1 million against the physician and $4 million against the hospital. Under normal circumstances, the malpractice coverage of $1 million per incident would cover the physician’s liabilities. However, because of the indemnity provision in the contract, the physician may now be forced to pay the $4 million judgment against the hospital as well because that amount “is not covered by the coverage under the insurance provided” as stated in the agreement.
- Next, notice how the indemnity clause isn’t limited to the physician’s medical practice. If the physician gives a nurse “negligent” advice, the nurse passes that advice to a patient, and a patient sues the hospital, the physician could be liable for all damages. If the physician “negligently” fails to include a Review of Systems in a patient’s chart and the chart is downcoded, the physician agrees to indemnify the hospital and/or group for damages. If the physician “negligently” fails to use proper PPE (even if the hospital fails to provide proper PPE) and a patient allegedly gets COVID and spreads it to their family then sues the hospital, the physician may be liable. If the physician “negligently” shares a picture of a nurse appearing intoxicated at a party and the nurse gets fired because of it, the physician could incur liability.
This is the danger of indemnity. Think about any possible bad outcome from any “claims, liabilities, controversies, actions, or causes of action” that could occur with the hospital, group, or employees. If any of those parties can allege that the bad outcome is due to the physician’s “negligence,” the person signing the contract is agreeing to pay for ALL of the related damages/costs out of his or her own pocket. There is no such thing as “indemnification insurance coverage.” Insurance companies are smarter than to agree to such risks.
In this case, the group provided the physician with reciprocal indemnification. Consider the following points.
- Contract language often limits reciprocal indemnification to “duties under the agreement.” Note the limitation that groups put on their potential liability here. Groups/employers have few duties under most employment contracts (other than to pay the providers), so despite the appearance of being fair, the groups aren’t incurring much additional liability. In the language above, the reciprocal indemnification provided by the group is more broad. The group is indemnifying the physician for any negligent acts of the group/hospital/employees – unless those acts are covered by insurance.
- Contract management groups are business entities. Unlike a personal guarantee where the indemnification attaches to the physician, a group can dissolve or go bankrupt and effectively disappear. If that happens, there isn’t a party against whom the physician/employee can seek indemnification. Once the creditors are paid, if there is nothing left of the group’s assets, the physician/employee is out of luck. Of course, the same thing applies to group if tries to enforce indemnification against a physician who and goes bankrupt, but in that case, the stakes for the physician are quite a bit higher. The physician would probably have to liquidate assets as part of bankruptcy – if a court even approves the bankruptcy. Alternatively, the physician might have to liquidate assets and be subject to pay garnishment if a court doesn’t approve bankruptcy.
- If an employee wanted to enforce any demands for indemnification under the contract, the employee would have to hire an attorney. If successful, the employee would technically get the attorney’s fees back – eventually – but the employee would initially have to pay tens of thousands of dollars out of his or her own pocket to file and pursue the claim. If the employee couldn’t prove what was necessary to enforce the indemnification provision, then the employee would get nothing AND would be out the cost of the attorney’s fees.
Legal Cases Involving Mutual Indemnification in Medical Employment Contracts
Does mutual indemnification provide you with protection? Perhaps a little. But consider what would happen with respect to enforcement. If one party wanted to enforce indemnification for negligence, the other party would argue “NO. THEY’RE the ones who are negligent. They should indemnify ME!” Then both sides go back and forth filing legal briefs pointing fingers at each other and arguing how the other party’s negligence was responsible for whatever damages occurred. Suppose the indemnification involved a medical malpractice case. The plaintiff attorneys would just sit back and smile as each defendant argues how negligent the other party was – while helping the plaintiff attorney prove his case against both parties. Below is one such case I summarized in an indemnification article I wrote for the American College of Emergency Physicians.
In Freeman v. Mercy Medical Center, 2008 NY Slip Op 31337(U), a patient sued a county medical center after alleging that her pregnancy was mismanaged by an obstetrical resident, causing premature delivery at 23 weeks gestational age and resulting in profound brain damage to her child. The obstetrical resident managing the patient was employed by the County but was supervised by Medical Center attending physicians. Alleging that the attending physicians were ultimately responsible for the care rendered to the patient, both the resident and the County sought indemnification under the mutual indemnification clause in the contract between the County and the Medical Center. The Medical Center also sought indemnification under the mutual indemnification clause and hired expert witnesses to testify that the resident provided substandard care, that the resident withheld relevant information about the plaintiff from the attending physicians, and that the resident was practicing independently within the clinic. All of these allegations, including the names of the physicians, were made part of legal documents and were incorporated into an appellate opinion that will be forever memorialized in legal databases.
Also consider the case of Community College of Baltimore County v. Patient First Corp., 444 Md. 452, 120 A.3d 124 (Md. App. 2015). In this case the Community College of Baltimore County (CCBC) entered into a contract with a medical facility (Patient First Corp) containing a mutual indemnification agreement. CCBC trained phlebotomy students and Patient First allowed the students to gain experience by drawing blood on patients in its medical facility. During her training, one of the CCBC students accidentally nicked herself with a needle and then used the same needle to draw blood on a 6 year old patient. After the incident was disclosed, the student was tested for infectious diseases and found to have Hepatitis C. Subsequent testing showed that the child did not seroconvert. Nevertheless, the child’s family sued for $15 million. CCBC denied that it was obligated to provide indemnification for its student. Eventually Patient First hired attorneys and mediated the lawsuit. Patient First paid $10,000 toward a settlement amount of $50,000 (insurance paid the rest) and spent $78,937 in attorney’s fees. Patient First then sued CCBC for breach of contract because it failed to indemnify the Patient First. CCBC alleged that Patient First was negligent for failing to properly supervise the student when she was drawing the blood.
After a two-day trial, the court ruled that CCBC was required to indemnify Patient First for the settlement and attorney’s fees paid in mediation. CCBC appealed. The appellate court issued a long and thorough opinion discussing the basis for indemnification and how it applied to the language in the contracts. While a complete review of the court’s opinion is outside the scope of this general information article, there are several important points in the appellate court’s opinion:
- The law already recognizes a right to indemnification without a contract. Common law indemnification allows an innocent party to sue a negligent party for damages that the innocent party had to pay to a third party for the negligent party’s actions. In other words if a patient sued a staffing company for a physician’s negligence, the staffing company could sue the physician for any damages under common law indemnification. The catch is that the party seeking indemnification must be innocent. Common law doesn’t allow parties to sue others for their own negligence.
- While CCBC alleged negligence for failing to properly supervise, there was no contract language requiring Patient First to supervise the student and neither party provided testimony about the “standard of care” for supervising a student under such circumstances. This fact made it difficult for CCBC to allege that Patient First was “negligent” when there was only an unsubstantiated allegation of negligent supervision.
- The legal fees to enforce the indemnification agreement in the contract totaled *far* more than the amount of money Patient First paid to settle the case. This is the danger with trying to enforce indemnification clauses. In many cases, especially with smaller damages, the attorneys are the only ones who come out ahead.
Conclusion
So is mutual indemnification “safe”? Hardly. Is it better than unilateral indemnification? Probably from the standpoint that both parties will hopefully think twice before enforcing it – but it still may end up in a “mutual assured destruction” scenario should a third party file a claim against either party to the contract.
The best indemnification clause is a deleted indemnification clause. You are not an insurance company. Don’t agree to indemnification.
For more information on indemnification in medical contracts, see the following articles or see the Indemnification section of this blog