What Church Treasurers Should Know About Indemnification

Consider requiring an indemnification agreement as a condition to use of your property.

Berry v. Orleans Parish School Board, So.2d (La. App. 2001)

Background. Churches often allow outside groups to use their property. Common examples are a scout troop, exercise class, or community organization. Some churches require outside groups to sign an “indemnification agreement” as a condition to using church property. An indemnification agreement is an agreement in which one party agrees to pay any damages that may be assessed against another party in a lawsuit.

To illustrate, assume that a church allows a scout troop to use its property one evening each week. On average, 20 boys, ages 8 to 15, attend the weekly meetings, along with their adult scout leaders. The church required the scout troop to sign an indemnification agreement in which the troop agreed to indemnify the church against any damages awarded to a scout injured while participating in a scouting activity on church property. A scout is sexually molested by an adult scout leader during one of the weekly meetings and the scout troop and church are both sued by the victim’s parents. The indemnification agreement, if it is legally enforceable, will compel the scout troop to pay for any damages that the court assesses against the church. It may also require the scout troop to pay for the church’s attorney fees.

A recent case. The principle of indemnification is illustrated by a recent case. A school entered into a contract with a bus company for the transportation of students. A bus driver sexually molested two young girls while transporting them from school to their homes. The victims’ parents sued the bus company and the school. They claimed that the school was liable for the driver’s acts on the basis of negligent supervision of children, negligent hiring of the driver, and negligent failure to protect children from criminal acts of the driver. The parents insisted that the victims were “in the custody of the school” when they were being transported to or from school by the bus company.

The school claimed that the bus company had signed an indemnification agreement in which it agreed to indemnify the school against any liability or damages, and therefore any damages assessed against the school had to be paid by the bus company. The indemnification agreement stated,

To the fullest extent permitted by the law, the [bus company] shall indemnify, hold harmless and defend the school, its employees and agents from and against all claims, demands, suits, damages, judgment of sums of money, losses and expenses, including but not limited to attorney’s fees and costs arising out of the performance of any of the services to be performed pursuant to the terms of this Agreement, provided that any such claims (i) are attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property including the loss of use resulting therefrom; and, (ii) are caused in whole or in part by any act or omission of the bus company … regardless of whether or not they are caused in part by a party indemnified hereunder.

The school argued that all of the acts that caused the victims’ injuries were caused by the driver employed by the bus company, and therefore the indemnification agreement clearly required the bus company to defend and indemnify the school against all claims made by the victims and their parents.

The bus company claimed that the indemnification agreement did not apply because the victims and their parents alleged that the school was independently responsible for the victims’ injuries, apart from the driver’s acts, on the basis of its own negligence in failing to properly supervise children in its “custody.”

The court concluded that the indemnification agreement was broad enough to protect the school even though the victims and their parents were alleging that the school itself was partly responsible for the victims’ injuries. It pointed out that the agreement (quoted above) stated that the bus company would indemnify the school against all claims “regardless of whether or not they are caused in part by a party indemnified hereunder.”

Key point. The court cautioned that the indemnification agreement would not have been enforceable had the school been solely responsible for the victims’ injuries. But, this was not the case.

Relevance to church treasurers. What is the significance of this case to church treasurers? Consider the following points:

1. If your church allows outside groups to use your property, or contracts with any “service provider” (such as a bus company, food service provider, contractor, etc.), you should consider adding an indemnification provision to any agreement that you sign with the other party. If no agreement or contract is signed, then consider having a separate “stand alone” indemnification agreement drafted and signed.

In some cases, the other party will not be willing to sign an agreement with an indemnification provision, or sign a separate indemnification agreement. If so, then your church must evaluate the importance of indemnification. In cases involving the use of church property by an outside group, many churches will make an indemnification agreement a condition to the use of their property, whichoften is provided at no cost or at a nominal fee that is only intended to recover the church’s actual costs (such as janitorial services and utilities). When the church is offering its facilities to an outside group under such circumstances, it is offering a significant benefit at little if any cost. It should expect to be indemnified for damages it is assessed as a result of injuries occurring while the outside group is using its property. This is so even though an injured victim may allege that the church itself was partly responsible for his or her injuries as a result of its “control” of its property while being used by the outside group (a common allegation).

2. An indemnification agreement should include not only money damages assessed against the church, but also legal fees in the defense of a lawsuit. After all, why should the church have to pay legal fees for defending itself as a result of injuries occurring while its property is being used by an outside group?

3. As this case demonstrates, it is important for an indemnification agreement to apply even in cases in which the church is accused of partial responsibility for an injury as a result of its own negligence. Indemnification agreements can be drafted broadly enough to cover such situations, and doing so is very important because persons who are injured while participating in the activities of an outside group that is using church property often allege that the church was partly responsible for their injuries on the basis of negligence.

4. Even if you require an outside group or service provider to sign an indemnification agreement, you should check with your church insurance agent to be sure that your policy covers injuries that may occur. This becomes very important in the event that the indemnification agreement is defective or unenforceable.

Key point. Many churches do not allow outside groups to use their property unless the church is named as an “insured” in the outside group’s liability insurance policy in an amount that is acceptable to the church (and such coverage is verified in writing).

5. Of course, you should have an attorney assist you in drafting an appropriate indemnification clause or agreement.

This article first appeared in Church Treasurer Alert, November 2002.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.
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