The Hammer Clause: Understanding Insurance Policies' "Get Tough" Provision

A hammer clause is a provision in an insurance policy that stipulates what happens when the insured party does not consent to settle a claim as recommended by the insurer. In other words, it gives the insurer the power to compel the insured to settle a claim. This is also known as a consent to settle clause or a “settlement cap provision. Hammer clauses are typically found in professional liability policies, such as Directors and Officers Liability (D&O), Employment Practices Liability (EPLI), and Errors and Omissions (E&O) policies. They can vary in their wording and structure, but the main purpose is to limit the insurer's obligation to pay additional costs incurred by the insured party after a settlement offer has been proposed.

Hammer clauses are also known as 'cooperation clauses' or 'consent to settle' clauses

A hammer clause is a provision in an insurance policy that allows the insurer to compel the insured to settle a claim. It is also known as a cooperation clause, settlement cap provision, or consent to settle provision. This clause empowers the insurer to force the insured to settle, much like how a hammer is used against a nail.

Hammer clauses are typically found in professional liability policies, including Directors and Officers Liability (D&O), Employment Practices Liability (EPLI), and Errors and Omissions (E&O) policies. The clause usually appears under the heading "Consent to Settle".

The purpose of a hammer clause is to protect both the insurance company and the insured by encouraging the settlement of claims in a financially prudent manner. The clause comes into effect when the insured does not consent to settle a claim as recommended by the insurer. In such cases, the hammer clause stipulates that the insured may be responsible for any defence and settlement costs incurred beyond the initial settlement offer.

The specific wording of hammer clauses can vary, but they generally include the insurer's right and duty to defend any claim, even if the allegations are groundless, false, or fraudulent. The clause also typically requires the insurer to obtain the insured's consent before settling a claim, which should not be unreasonably withheld.

There are two main types of hammer clauses: hard and soft. A hard hammer clause allows the insurer to cap its payout at a certain dollar amount, after which the insured is responsible for all subsequent legal expenses and judgements. On the other hand, a soft hammer clause, also known as a coinsurance hammer clause, involves sharing the risk of not accepting a settlement between the insurer and the insured.

In conclusion, hammer clauses, also known as cooperation or consent to settle clauses, are important provisions in insurance policies that aim to protect both the insurer and the insured by encouraging financially prudent settlements. They give insurers the power to compel the insured to settle claims, but the specific implications can vary depending on the type of hammer clause and its specific wording.

They are found in policies such as Directors and Officers Liability (D&O), Employment Practices Liability (EPLI), and Professional Liability

A hammer clause is an insurance policy provision that allows the insurer to compel the insured to settle a claim. It is also known as a settlement cap provision or consent to settle provision. This clause gets its name from the power given to the insurer to force the insured to settle, much like how a hammer is used against a nail.

Hammer clauses are commonly found in Directors and Officers Liability (D&O) policies. D&O insurance provides coverage for directors and officers of a company in the event they are sued for actual or alleged wrongful acts in managing a company. A hammer clause in a D&O policy allows the insurer to force the insured to settle a claim, thereby limiting the insurer's financial exposure. This can be particularly important in cases where the insured is facing multiple lawsuits or claims, as settling one case can help to reduce the overall financial burden on the insurer.

Hammer clauses are also found in Employment Practices Liability Insurance (EPLI) policies. EPLI provides coverage for employers in the event they are sued by employees for wrongful termination, discrimination, harassment, or other employment-related issues. A hammer clause in an EPLI policy can help to reduce the financial burden on the insurer by compelling the insured to settle a claim. This can be especially important in cases involving multiple plaintiffs or class-action lawsuits, where settling early can help to reduce the overall cost of the claim.

Additionally, hammer clauses are commonly found in Professional Liability policies, also known as Errors and Omissions (E&O) insurance. Professional Liability insurance provides coverage for professionals such as lawyers, doctors, and architects in the event they are sued for negligence, malpractice, or other errors in their professional capacity. A hammer clause in a Professional Liability policy allows the insurer to limit their financial exposure by compelling the insured to settle a claim. This can be particularly important in cases involving high-value claims or multiple plaintiffs, as settling early can help to reduce the overall cost of the claim.

Overall, the hammer clause is an important tool for insurers to manage their financial exposure and ensure fair and timely settlements for all parties involved.

Hammer clauses vary in their approach, with traditional or 'full hammer' clauses limiting the insurer's claim payment

A hammer clause is a provision in an insurance policy that allows the insurer to compel the insured to settle a claim. It gets its name from the power it gives the insurer to force the insured to settle, much like how a hammer is used against a nail. Hammer clauses are also known as settlement cap provisions, consent to settle provisions, or blackmail clauses.

Hammer clauses vary in their approach, with some being more traditional or full hammer clauses, and others being softer or modified. A traditional or full hammer clause allows the insurer to limit its claim payment to the amount of the rejected settlement offer plus defence costs incurred up to that point. This means that if the insured does not agree to a settlement, they may be responsible for any additional defence and settlement costs going forward. This type of clause gives the insurer significant leverage in negotiations and can help them manage their costs effectively.

On the other hand, a soft or modified hammer clause takes a different approach. Under this type of clause, the insurer and the insured share the costs incurred after the initial settlement offer on a percentage basis. For example, in an 80/20 soft hammer clause, the insurer would pay 80% of the costs, while the insured would be responsible for the remaining 20%. This approach provides more flexibility and allows the insured to have some input into the settlement process.

The specific wording of hammer clauses can vary, but they are typically found in the defence and settlement section of professional liability policies. It is important for businesses to carefully review their insurance policies and understand the implications of any hammer clauses to ensure they have adequate protection in the event of a claim.

Soft or 'modified hammer' clauses allow the insurer and insured to share costs after the insurer would have settled

A hammer clause is an insurance policy provision that allows the insurer to compel the insured to settle a claim. It gets its name from the power given to the insurer to force the insured to settle, much like how a hammer is used against a nail.

A soft hammer clause, also known as a coinsurance hammer clause, allows the insured to share the costs with the insurer after the insurer would have settled. This type of clause typically defines the respective obligations of the insurer and the insured on a percentage basis. Common soft hammer clause splits include 80/20, 50/50, and 100/0. In an 80/20 split, the insurer pays 80% of the costs, while the insured pays 20%. This is the most common arrangement. A 50/50 split is less common but still standard. A 100/0 split means the insurer still needs the insured's consent to settle, and if the insured chooses not to settle, they are not responsible for any of the costs.

The hammer clause is often found in professional liability policies, including Directors and Officers Liability (D&O), Employment Practices Liability (EPLI), and Errors and Omissions (E&O) policies. It is typically located in the "Consent to Settle" or "Defense and Settlement" section of the policy.

The hammer clause comes into effect when the insured does not consent to settle a claim as recommended by the insurer. It allows the insurer to limit its liability to the amount of the rejected settlement offer plus defence costs during that time. The clause helps to reduce the amount of indemnity and defence costs that an insured could potentially incur if they refuse to consent to a settlement amount recommended by the insurer.

By including a soft hammer clause in their policy, businesses can gain more control over the direction and handling of their claims. It allows them to refuse a settlement that may tarnish their reputation or encourage others to make similar claims while sharing the financial burden of continued litigation with the insurer.

Coinsurance hammer clauses are a type of risk-sharing agreement between the insurer and insured

A hammer clause is a provision in an insurance policy that allows the insurance company to compel the insured to settle a claim. It is also referred to as a "cooperation clause", "settlement cap provision", or "consent to settle provision". A hammer clause is typically invoked when the insured does not consent to settle a claim as recommended by the insurer.

Coinsurance hammer clauses are a type of risk-sharing agreement between the insurer and the insured. They are an alternative to the standard hammer clause found in professional, directors and officers (D&O), and errors and omissions (E&O) policy forms. This type of clause provides for a sharing of defence and indemnity costs between the insured and the insurer after the insured refuses to consent to a settlement proposed by the insurer.

The most common sharing percentage is 50/50, but it can sometimes be higher, such as 70/30 or 80/20. In an 80/20 coinsurance hammer clause, for example, the insurer takes on 80% of the liability and defence costs after the settlement offer, while the insured is responsible for the remaining 20% of the costs. This arrangement reduces the amount of indemnity and defence costs that an insured could potentially incur if they refuse to consent to a settlement amount recommended by an insurer.

Coinsurance hammer clauses give the insured more flexibility and control over the outcome of claims against them. Without such a clause, the insured would be at the mercy of the insurer's desire to settle. With a coinsurance hammer clause in place, the insured can choose to accept the settlement or take on the financial risk of fighting the lawsuit.

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