Question of the Week: Hold Harmless Agreements

Question: 

What is a "hold harmless agreement," and why is another financial institution requesting one before returning funds involved in a fraudulent transaction?

Answer: 

A "hold harmless agreement" is a written indemnity agreement used when one financial institution asks another financial institution to voluntarily return funds connected to an allegedly fraudulent or unauthorized transaction. In this situation, the requesting institution asks the receiving institution to return funds that may have already been deposited into a member's account. The "hold harmless agreement" is intended to protect the receiving institution if it returns the funds and is later challenged by its member or another party.

A "hold harmless agreement" does not, by itself, prove fraud occurred. It also does not carry the force of a court order. Instead, it is a risk-shifting document. The institution requesting the return typically represents that the transaction was fraudulent or unauthorized and agrees to indemnify the receiving institution for any losses, claims, costs, or disputes that may arise from returning the funds.

Credit unions should remember they are not automatically required to return funds simply because another financial institution requests them. Before doing so, the credit union should review the payment type, the applicable return or network rules, whether the funds remain available, the account agreement, and whether the member has asserted a claim to the funds. For checks, the analysis may include Uniform Commercial Code return deadlines, warranty claims, or other remedies available under check law. For ACH, wire, card, or other electronic payments, different network rules or legal requirements may apply.

These requests are often handled cooperatively between financial institutions to help recover funds for fraud victims. However, each request should be evaluated on a case-by-case basis. A credit union is not required to sign another institution's "hold harmless agreement" simply because it was provided. In many cases, the safer approach is to require the requesting institution to sign the credit union's own hold harmless or indemnity agreement before funds are returned.

Before returning funds, the credit union should confirm the transaction details, obtain the request in writing, determine whether the funds remain available, review any applicable return or reversal rights, and ensure the indemnity agreement is broad enough to protect the credit union from member claims, chargebacks, attorney fees, and other losses related to the return of the funds.