Property and Casualty Insurance Practice Exam

What does a hold harmless agreement do?

1. Transfers all risk to the insurance company

2. Assigns liability of a situation to one party

3. Eliminates the need for insurance coverage

4. Guarantees coverage for all types of loss

The correct answer is: Assigns liability of a situation to one party

A hold harmless agreement is a contractual provision in which one party agrees to assume the liability for certain actions or occurrences, effectively assigning that liability to one particular party. This means that if a claim arises from those actions, the agreeing party cannot seek compensation from the other party involved in the agreement. The essence of such agreements is to protect one party from legal claims or damages that might arise due to the actions or negligence of the other party. These agreements are commonly used in construction contracts, rentals, and services where one party wants to limit their exposure to liability. In contrast, the other options do not accurately reflect the nature of a hold harmless agreement. For instance, it does not transfer risk to an insurance company nor does it eliminate the need for insurance coverage. Insurance policies typically remain in place to provide a safety net, especially in cases where liabilities exceed agreed limits. Furthermore, such agreements do not guarantee coverage for all types of losses, as there are specific exclusions in most insurance policies that would still apply.