Contract Review Series: Indemnification

3 minute read

3 minute read

Indemnification is a term that is often seen in contracts such as car loans. If a person co-signs on a car loan and the primary debtor defaults, the co-signor will step in and pay the loan. It basically means that a person will assume whatever liability arises by virtue of something they did or did not do. Indemnification clauses attempt to shield the employer from financial harm.

What does indemnification look like for physicians?

Many contracts will include language such as the following:

“The Physician hereby indemnifies and holds harmless the Employer and its directors, officers, employees and agents from and against any claim, loss, damage, cost, expense (including reasonable attorneys’ fees) or liability arising out of or related to the performance or nonperformance by the Physician of any services to be performed or provided by the Physician under this Agreement.”


“The Physician hereby agrees to indemnify and hold harmless the Group, its officers, directors, employees and agents against all liability, obligations, claims, loss and expensive arising out of any liability accruing to Group as a result of the Income Guaranty Agreement executed between the parties and Martin Memorial Health System.”

In the first paragraph, the contract clause requires that if a patient sues both the physician and employer because of an act or omission on the part of the physician, the employer wants the physician to agree to pay any of the employer’s damages for liability.

The second paragraph describes an income guarantee agreement between the physician, the hiring practice or group, and a local hospital. The local hospital is offering the physician a guaranteed level of income in exchange for the physician to remain in practicing in the community for a specified amount of time.

In this contract the physician agrees that if the group terminates the contract and a loan is owed to the hospital as a result of the hospital’s guaranteed income, the physician will repay that loan to the hospital and leave the group without any liability.

What sometimes happens is that a physician doesn’t understand the nuances of indemnification and a physician assumes responsibility for the loan that serves as his or her salary and also assumes the responsibility to repay that loan even if the group terminates that physician before the loan has been satisfied.

Indemnification clauses are not advised for physicians because the execution of such a hold harmless clause may result in the physician assuming liabilities of the employer that may not be insured. Physicians are encouraged to consult an attorney before agreeing to this sort of contract term.

Legal example

For example, in Baptist Health Medical Center v. Smith (8th Cir. 2007), the U.S. Court of Appeals for the Eighth Circuit ruled that a physician group practice in Arkansas was not required to indemnify a recruited physician for the costs of repaying a recruitment loan made by an Arkansas hospital.

In this case, Baptist Health Medical Center granted a loan to the physician as part of an agreement that the physician would provide services to both the hospital and a group (Central Arkansas Vascular Surgery, or CAVS) and would practice in the area for six years.

The group had a separate employment agreement with the physician within which the president of the group stated that the physician would not be responsible for repaying the loan to the hospital. The exact language in the contract addendum was:

“You will be an employee of Central Arkansas Vascular Surgery[…]. Your responsibility to Central Arkansas Vascular Surgery is the professional practice of vascular surgery. You will not be responsible for repayment of any loan to Baptist Health Center in any form in fashion.”

The physician left the area without fulfilling the full amount of time in the loan forgiveness period. The hospital sued the physician to get back the money loaned to him, and the physician in turn filed a complaint against CAVS arguing that the president’s letter agreed to indemnify the physician from the loan repayment asked for by the hospital.

The district court ruled that the hospital was owed repayment, but that CAVS would have to repay the hospital as the president’s letter protected the physician. The president of the group appealed, and the appeals court sided with the group.

It found that the line in the physician’s contract regarding loan repayment was not an unmistakable promise to pay the physician’s loan from the hospital, and thus the physician and not the group owed the hospital $154,000.

The physician lost the case (and $154,000) because the group’s contract language was not legally “unmistakable” enough. The best case for the physician would have been to have had a lawyer review the contract to make sure that its language had no loopholes that would result in the physician not being protected.