Before signing a contract with indemnification or hold harmless provisions , it is extremely important to carefully read the relevant clauses .
that if a mistake is made resulting in damage to someone else , the party that made the mistake should be held responsible to “ make it right .” What “ making it right ” looks like , of course , will depend on the facts and circumstances of a particular situation .
How this translates to the CPA / client relationship can be troublesome , given that some of the indemnity and hold harmless clauses are written to be extremely broad , and there may be many components to the underlying facts and circumstances relevant to the assessment of determining actual “ fault .” For example , did the in the section below titled : Is the indemnity request limited ?)
Is the indemnity request limited ? Many of the indemnity and / or hold harmless clauses embedded in CPA / client agreements attempt to shift all liability from the entity to the CPA firm and have broad language that extends the CPA firm ’ s responsibilities beyond the professional services being performed . Such agreements / contracts , like NDAs , may be boilerplate agreements that clients use for all third-party service providers . As such , they may contain legal conditions and to consider is the impact of your acceptance of indemnification and hold harmless provisions on your professional liability insurance or your cyber policy in the case of data breach – related provisions . Before you agree to any such terms , check with CAMICO or your cyber insurance company .
Also important to consider is the extent to which you can protect against indemnity risk through other insurance . For example , many business owner policies ( BOPs ) address the premise ’ s risk exposure from your personnel being in the client ’ s offices . If you cannot insure against the risk created by the
Before signing a contract with indemnification or hold harmless provisions , it is extremely important to carefully read the relevant clauses .
CPA solely contribute to the alleged cause of the damage as a result of their negligence , or did the client or one of its representatives contribute , in whole or in part , to the underlying cause ?
Certain courts have found that hold harmless is not distinct and is the same as indemnification , while others have found the duty to hold harmless is broader than indemnification as it also requires protection against liability . Therefore , before signing a contract with indemnification or hold harmless provisions , it is extremely important to carefully read the relevant clauses . Identifying , understanding and modifying unreasonable indemnification and / or hold harmless terms will help to avoid costly liability claims .
What exposure is the subject of the indemnification request ? It is almost never appropriate to agree to indemnify or hold harmless your client or a third party for exposures directly related to the client ’ s obligations . Any request that provides indemnity for your client ’ s failure to accurately and timely inform you of information necessary to complete your work is very risky and inappropriate . On the other hand , if the provision is properly worded such that the exposure is appropriately limited given the nature and scope of the professional services provided by the firm , that would be considered less risky . ( See the example caveats that are inappropriate with ; respect to the professional services being provided by the accounting firm .
However , if the indemnification clause is mutual in nature , like the example below , in which both parties accept responsibility as outlined under the terms of the engagement and agree to indemnify any claims judicially determined to have arisen solely from the gross negligence , misrepresentation or willful misconduct of the party , the provision is much more appropriate for the nature and scope of the CPA / client relationship .
Firm and Client acknowledge and agree that each party maintains responsibility for the work performed , and responsibilities as outlined , under the terms of this Agreement . By the signatures below , each party agrees to indemnify the other party as specified herein : ( i ) < Firm > agrees to indemnify Client for any claims judicially determined to have arisen solely from the gross negligence or willful misconduct of Firm , and ( ii ) Client agrees to indemnify Firm for any claims judicially determined to have arisen solely from the gross negligence , misrepresentation , or willful misconduct of Client .
What insurance issues should be considered ? The most important insurance issue indemnification , then consider fee / exposure leverage . Assess the size of the indemnity risk versus your fees . If the indemnification exposure is much greater than your fees , risk increases , and reward is limited .
Would these clauses impair independence ? Under ET Sect . 1228.020 of the AICPA ’ s Code of Conduct , a firm is prohibited from indemnifying an attest client for damages , losses , or costs arising from lawsuits , claims or settlements that relate to an attest client ’ s acts . Doing so would impair the firm ’ s independence .
Would these clauses be an act discreditable ? Certain governmental bodies , commissions and regulatory agencies ( e . g ., federal banking regulators , state insurance commissions and the SEC ) prohibit entities subject to their regulation ( regulated entity ) from including certain types of indemnification and limitation of liability provisions in agreements for the performance of audit or other attest services that are required by such regulators and provide that the existence of such provisions disqualifies a member from rendering such services to these entities . As such , ET Sect . 1400.060 of the AICPA ’ s Code of Conduct states it would be an act discreditable to the profession to
12 CALIFORNIA CPA JANUARY / FEBRUARY 2025 www . calcpa . org