Dear Alex:
Our business was recently presented with a contract that required the other party to indemnify, defend, and hold us harmless from their acts of gross negligence.
Our attorney suggested we change this requirement to apply to all acts of negligence, not just “gross negligence.”
They seem almost the same, so why is this such a big deal?
Allocations of liability are some of the most highly negotiated provisions of a contract. Common points of contention are the risks of liability from a party’s negligence or gross negligence.
When you are asked to sign a contract in which the other party says that they will “indemnify, defend, and hold harmless,” that means they are promising to protect you from the costs of certain events that might occur.
They are promising to pay for your out-of-pocket losses that arise if the subject event occurs (indemnify), they will pay for your attorneys’ fees or provide you with an attorney to defend your position against lawsuit if the subject event occurs (defend), and they will not sue you or seek reimbursement from you if they are required to pay damages to someone else when the subject event occurs (hold harmless).
Frequently, all three of these protections come as a package in the indemnification section of the contract, but not always.
The negligence or gross negligence of a party are often the subject events that trigger the other party’s promise to indemnify, defend, and hold harmless.
Negligence and gross negligence sound very similar, but they are actually very different things. Negligence is the failure to exercise reasonable care, which is by nature accidental and inadvertent.
Gross negligence, however, results when the person exercises so little care in their actions that it could be presumed that the person was indifferent to the consequences.
For example, if you operate a bungee jumping company, it would be negligent if you forgot to inspect the condition of the cord before someone used it to jump.
If a person was injured because the cord was frayed and broke, damages from that injury might be the result of your negligent failure to inspect and discover the inadequate condition of the cord.
On the other hand, if you remembered to examine the bungee cord, you discovered that the cord was badly damaged but you still allowed a person to jump on the damaged cord, their subsequent injury could be the result of your gross negligence. In that situation, you knew of the risk and acted with indifference to the likelihood of injury.
As you can imagine, events of negligence, or “ordinary negligence,” are more common than gross negligence.
Losses from ordinary negligence are more likely to occur than losses from gross negligence. In your case, your attorney wants you to be protected as broadly as possible, so she wants you to be protected against ordinary negligence.
At the same time, the other party, who is offering the protection, does not want to expose themselves to too many risks, so they only want to offer protection against acts of gross negligence and reduce their potential financial exposure.
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