Indemnification in Medical Contracts

There is a growing trend for physicians’ medical employment contracts to contain indemnification clauses (also called “indemnity clauses” or “indemnity agreements”). Indemnification agreements are almost always against a physician’s legal interests, create an uninsurable risk, and could be financially disastrous.

The Effects of Indemnification Clauses in Medical Contracts

According to Black’s Legal Dictionary, indemnification is a contractual agreement in which one party to a business relationship agrees to reimburse the other party for any losses or damages. This is an alternate definition of indemnification on Wikipedia. An insurance contract is one form of indemnity where an insurance company agrees to pay for losses related to covered events sustained by its policyholders when the policyholders pay a yearly insurance premium. In business contracts, indemnification clauses are often combined with “hold harmless provisions” where one party to a contract agrees to assume liability for certain transactions or situations, releasing the other party from any responsibility for damages or other liability.

An example of an indemnification provision contained in a physician’s medical contract might require that the physician, either as an employee or as an independent contractor, “indemnify, hold harmless, and defend” the hospital and/or contract management group from “any and all loss, damage, cost, and expense” the hospital or contract management group may suffer that is “in any way related to the physician’s performance or failure to perform the services, responsibilities, and duties the physician has agreed to perform in the contract.”

The purpose of an indemnity clause is obviously to protect the interests of the contracting entity, which often becomes an additional target of plaintiff’s attorneys when a physician is sued. In theory, such agreements make good business sense: If individual physicians commit an intentional act, such as physical assault, sexual assault, or sexual harassment against a patient, public policy would argue against the owners of the company having an obligation to pay damages to the injured party for the physician’s actions. Under those circumstances, a narrowly tailored indemnification contract clause might state that if a physician engaged in willful misconduct by intentionally assaulting a patient, the physician would have to indemnify the hospital or contract management group and pay compensation for damages, litigation costs, and attorneys fees associated with defending any claims for bodily injury brought by the patient.

Unfortunately, the obligations of indemnity in medical employment contract are seldom so narrow. Expansive indemnity clauses such as the example provided above unnecessarily put a health care provider at significant professional and financial risk. Using the above language, consider all the situations that could be “in any way related to the physician’s performance or failure to perform” patient care services. For example, a physician who assists a security guard in restraining a combative head-injured patient might be required to reimburse the contracting entity for all expenses if the contracting entity is later named as a defendant in a lawsuit for “unlawful restraint” brought by the patient. Even worse, an allegation of unlawful restraint – even though taken to protect a patient’s safety – may be considered an intentional act that would require indemnification even if the scope of indemnity was narrowed to willful misconduct as in the example provided above.

Actions against a hospital or contracting company for an EMTALA violation or HIPAA violation could end up being solely the physician’s financial responsibility. A broad scope of indemnity could make a physician personally responsible for all potential losses if a group loses a hospital contract or if a hospital or contract management group is named as a party in a medical malpractice suit due to a physician’s actions. All of these examples could be related in some way to the physician’s duties under a medical contract.

Medical contract indemnification provisions also often require that physicians pay for defense cost claims, meaning a physician would personally be responsible for paying litigation costs and attorney fees associated with defending the hospital even if the physician met the standard of care and a lawsuit resulted in no liability on behalf of either party.

Finally, indemnification clauses could invalidate portions of a physician’s malpractice insurance coverage. Medical malpractice insurance provides coverage for medical care provide by the medical providers. To illustrate the point, a medical malpractice insurance policy would not cover tornado damage to a physician’s house because damages to a homestead are not a covered event under a professional liability policy. Liability relating to indemnity clauses and hold harmless clauses may similarly be excluded from medical malpractice insurance coverage because agreeing to obligations of indemnity and defense costs are considered “contractual” in nature and are not covered events. A physician who agrees to a broadly worded indemnification clause may give a malpractice insurer the means to deny coverage for alleged malpractice.

For example, the picture below contains some questions from a medical malpractice insurance application. If a medical malpractice insurer wants to know whether you have ever “signed a contractual agreement where you agreed to indemnify others,” you can be relatively sure that signing such agreements will have an adverse affect on your insurance premiums – or that doing so may even cause the insurer to refuse to issue a policy. Keep in mind that if you check “No” and you have signed an indemnification agreement, the insurer may have cause to deny medical malpractice insurance coverage if a claim is filed against you.

What if Hospitals or Staffing Companies Refuse to Delete Indemnification Clauses From A Contract?

Indemnification agreements should not be contained in physician employment contracts. There are many physician contracts that don’t contain indemnification clauses. If a hospital or group refuses to delete an indemnification clause from its agreement, find another position with more reasonable contract provisions. If a contracting entity is unwilling to delete an indemnification clause and the physician must sign the contract, there are a couple of ways indemnification clauses may be mitigated.

1. Limiting Applicability of Indemnification Clauses. An indemnification clause could be limited to apply only in those instances in which the physician acts with “willful malfeasance” or acts in “bad faith.” While all such terms are subject to interpretation, limitations on applicability of indemnification would likely relieve the physician at least some of the liability for performing acts related to patient care, but would still provide protection to the contracting entity if the physician acts maliciously. Indemnification clauses can also be limited to apply only in those situations in which the hospital or contract management group acts in good faith. For example, with a “good faith” limitation in place, a physician would not be required to indemnify a contracting entity that submits an inappropriate third-party claim to insurers for the physician’s services.
2. Demanding Reciprocal Indemnification. The same hospitals and contract management groups that insist upon being indemnified almost always demand one-way indemnification and seldom provide physicians with reciprocal indemnification. If a hospital or group demands contractual indemnification, the physician should demand reciprocal indemnification, meaning that the hospital or group would have to indemnify the physician for any of the hospital or group’s acts. While mutual indemnification language doesn’t make a contract “safe,” it does create an atmosphere of “mutually assured destruction” should either party try to enforce indemnification. In other words, if a hospital makes a claim for indemnification against a physician for negligence, with a mutual indemnification clause, the physician could file a legal action for indemnity against the hospital alleging that the hospital was negligent by maintaining inadequate staffing or by hiring inappropriate support staff which caused the damages the hospital alleged. Similarly if a hospital or group fails to maintain malpractice insurance on a physician’s behalf, or submits fraudulent bills to third party payers in a physician’s name, the physician could suffer significant financial losses defending such claims and the hospital or group should be responsible to the physician for those losses. If a contracting entity demands indemnification from a physician, it should be willing to provide indemnification to the physician as well.

Indemnification Takeaways

Red flags should go up when any form of indemnification or hold harmless clause is included in any employment contract language. Physicians should consider indemnification clauses in employment contracts as “deal breakers.” Unless indemnification clauses are eliminated, I recommend that my clients strongly consider searching for another employment relationship.

Looking for additional information on physician employment contracts? See the Contracts section of this blog or check out some of the other articles I have written about contract terms:

Need help with your contract? Write me or give me a call. I’ve got plenty of experience and I’d be happy to try to help you.