The Importance of Understanding Indemnification and Defense Clauses in Vendor Contracts

Vendor partnerships are vital to hospital operations. But without the right clauses, they can expose you to unnecessary risk. Learn how to review and negotiate stronger agreements that safeguard your facility.

Hospitals partner with countless vendors such as medical device supplies, food service, IT contractors, maintenance or environmental service providers, installers and more. This broad network can become a broad potential exposure to liability, especially when a vendor’s work or product contributes to a patient, visitor, or employee injury.

To protect themselves, hospitals should pay careful attention to the indemnification and defense clause language in every vendor agreement, regardless of the price value of the contract. Even a small dollar value contract can leave the hospital exposed if an accident occurs. These clauses determine who pays legal costs, defends the lawsuit, and who ultimately bears financial responsibility if a claim arises.

Healthcare systems are complex environments with strict patient safety obligations. Even when a vendor is responsible for a hazard such as equipment, the hospital is often the first entity sued. Strong indemnification and defense language helps to ensure that the party responsible for the risk carries the financial burden, reducing litigation expenses and protecting the hospital's resources.

3 Key Contract Clauses to Understand

In healthcare, every vendor relationship introduces potential risks, from maintaining medical equipment to contractor injuries on hospital grounds. Vendor contracts are one of the most overlooked sources of exposure in hospital operations, yet they are often the first line of defense against costly claims. A single weak clause can result in hundreds of thousands of dollars in legal expenses or settlements.

Effective contract risk management ensures that liability is allocated appropriately, helping healthcare facilities maintain compliance, financial stability, and patient safety.

1. Duty to Defend

First off, what is a defense clause in vendor contracts? The duty to defend requires the vendor to pay legal fees and hire defense counsel if a claim or lawsuit arises related to the vendor’s work product. The duty to defend is typically triggered as soon as the claim is filed before liability is determined.

Generally, the defense costs in medical and premises liability litigation can be significant. Without this provision, the hospital may have to fund the legal expenses even if the vendor is ultimately at fault.

Example: A hospital contracts with a biomedical vendor to service infusion pumps. A patient is injured due to a malfunctioning pump, and both the vendor and the hospital are named in the lawsuit. Without a duty to defend clause, the hospital must hire its own counsel and pay legal fees—even if the vendor’s product caused the harm.

2. Indemnification or Hold Harmless

What is an indemnification clause? Generally, indemnification requires that one party, in this scenario, the vendor, to financially protect or reimburse the hospital for losses, settlements, and judgments arising from the vendor’s actions.

There are three main types of indemnification clauses that are frequently discussed in a contract: Broad indemnification where the vendor assumes liability for all losses, even if the hospital is partially at fault; intermediate indemnification where the vendor covers losses to the extent that it caused the negligence; and limited indemnification where the vendor only indemnifies for losses caused solely by their negligence.

At a minimum, healthcare systems should aim for intermediate indemnification to ensure shared responsibility when both parties may contribute to a claim.

3. Additional Insured

An additional insured clause requires the vendor to list the hospital as an additional insured on their liability policies. It provides the hospital with direct access to the insurance coverage for defense and settlement.

Example: If a slip-and-fall occurs in an area managed by an environmental services contractor, an additional insured clause allows the hospital to access the vendor’s liability coverage for the defense rather than relying on its own policy.

Best Practices for Contract Review

Thorough contract review is essential to ensure hospitals are not unintentionally assuming unnecessary liability when working with third-party vendors. Even small contracts—such as for laundry services or minor repairs—can create significant exposure if indemnification, defense, or insurance provisions are missing or unclear.

When reviewing vendor agreements, consider the following best practices:

Always Review Duty to Defend Language Carefully: The duty to defend provision determines which party will be responsible for hiring legal counsel and covering litigation costs in the event of a claim. Ensure this obligation clearly requires the vendor to defend the hospital if the claim arises from the vendor’s actions, products, or services.

Review Vendor Limits & Certificates of Required Insurance Annually: Hospitals should request updated certificates of insurance from vendors every year. These certificates should confirm that coverage meets or exceeds the minimum liability limits outlined in the contract or that the hospital is listed as an additional insured.

Avoid Contracts Without Defense or Indemnity Obligations: If a vendor refuses to include indemnification or duty to defend clauses, that should raise a red flag. Contracts that omit these protections shift liability back to the hospital, even when the vendor’s negligence is the root cause of an incident.

Consult Legal Counsel to Review Liability Language: Legal teams and risk management partners, such as LHA Trust Funds, can help evaluate legal contract language to ensure it aligns with the organization’s insurance policies and risk tolerance. These reviews often identify hidden gaps or ambiguous terms that could expose the hospital to avoidable liability.

Additional Considerations for Stronger Agreements

Subrogation waivers and a plan for notification of claims along with what will be required between the vendor and facility can be crucial components of these contracts. These clauses will address seeking reimbursement after a claim is paid and lay a foundation for how notification of losses are to be shared between the parties.

It should lay out how quickly events are to be reported, the information that is to be documented and shared along with cooperation obligations throughout any resulting litigation.

Beyond indemnification and defense clauses, hospitals should consider additional contract provisions that enhance clarity and cooperation:

• Waivers of Subrogation: Prevent parties from seeking reimbursement from the hospital after paying a vendor’s claim.
• Notification of Claims: Define how quickly and through what channels both parties must report an incident.
• Claims Cooperation: Clarify responsibilities for document sharing, witness statements, and litigation participation.
• Insurance Requirements: Specify minimum coverage limits for general liability, professional liability, and responsibility to carry workers’ compensation.

These provisions not only reduce disputes after an incident but also demonstrate due diligence and sound governance.

Understanding Statutory Employer Protection

Hospitals rely on a wide range of third-party vendors to keep operations running. From environmental services and security to biomedical maintenance, food service or construction, outsourcing is unavoidable. Every vendor relationship introduces risk, particularly when an injured worker tries to bypass workers' compensation and pursue a tort claim against the hospital.

One of the strongest defenses available in these outsourced situations is statutory employer protection. Whether that protection holds up often comes down to contract language, operational control and how closely the vendor’s work is tied to the hospital’s core functions.

Under workers’ compensation statutes, a hospital may qualify as a statutory employer when it contracts out work that is considered part of its trade, business or occupation. If statutory employer status applies, workers’ compensation becomes the exclusive remedy for the injured worker, barring tort claims against the hospital. Courts have shown they do not only look at the contract or disclaimers, but they also examine the relationship.

Best Practices to Consider for Preserving Statutory Employer Protection

Statutory employer protection is not automatic, but it is built through thoughtful contracting and collaboration. By clearly defining vendor roles, allocating responsibility appropriately, and aligning contracts with real-time practices, hospitals can significantly reduce tort exposure while maintaining the flexibility to rely on third-party vendors.

In a world where claims and litigation are almost inevitable, the following inclusions can make the difference between a workers’ compensation claim or a costly tort liability claim:

A Clearly Defined Scope of the Work

One of the most important contract considerations is how the vendor’s scope of work is described. The agreement should clearly define the services being performed and, where appropriate, tie those services to the hospital’s ongoing operations.

Allocated Compliance and Safety Responsibility

Contracts should require vendors to comply with all applicable safety regulations, training requirements and workers’ compensation laws. At the same time, hospitals should retain the right to enforce safety standards that are necessary for patient care and regulatory compliance.

The goal is balance: not too much control that the relationship looks like direct employment, but also not completely distancing themselves from safety oversight. Contracts should require vendors to do the following:

• Maintain their own safety programs and employee training
• Carry workers’ compensation insurance that meets statutory requirements
• Indemnification of the hospital for injuries arising from the vendor’s failure to follow safety requirements

These inclusions reinforce the vendor’s role as the direct employer, while supporting the hospital’s statutory employer position if a claim is made. Some contracts can inadvertently weaken this defense by overemphasizing independent contractor language. While it is important to clarify that the vendor is responsible for its employees, contracts should avoid language suggesting the work is completely unrelated to hospital operations if that is not accurate.

The Role of Risk Managers and Legal Counsel

Risk managers play a vital role in protecting their facilities from contract-related liability. By collaborating closely with legal counsel, insurance carriers, and safety teams, they can ensure that contract terms align with organizational risk tolerance and coverage levels.

Risk Managers Should:

• Maintain a central database of vendor contracts and renewal dates.
• Require proof of insurance before work begins.
• Engage in contract review before renewal or scope changes.
• Consult with LHA Trust Funds for guidance on indemnification best practices.

By understanding how these provisions work and negotiating stronger contract language, hospitals can safeguard themselves from unnecessary liability, preserve resources, and focus on delivering safe patient care.

Need Help Reviewing Vendor Contracts?

LHA Trust Funds provides contract review support and resources to help healthcare organizations identify and mitigate vendor-related risks.