Hammer Clause: What it Means; How it Works; Example

Introduction

When it comes to insurance policies, there are often complex clauses and terms that can be confusing for policyholders. One such clause is the “hammer clause,” which can have significant implications for individuals and businesses alike. In this article, we will explore what the hammer clause means, how it works, and provide examples to help you better understand its impact on insurance claims.

What is the Hammer Clause?

The hammer clause, also known as the “cooperation clause” or “consent to settle clause,” is a provision commonly found in liability insurance policies. It gives the insurance company the right to force the insured party to settle a claim, even if the insured party believes they have a valid defense or wants to pursue litigation.

Under the hammer clause, if the insured party refuses to settle a claim within the policy limits and the insurance company believes that a reasonable settlement offer has been made, the insurance company's liability for any subsequent judgment or settlement may be limited to the amount of the initial settlement offer. This means that if the insured party decides to proceed with litigation and the outcome is less favorable than the initial settlement offer, they may be responsible for paying the difference.

How Does the Hammer Clause Work?

Let's take a closer look at how the hammer clause works in practice:

1. Claim is filed: The insured party receives a claim from a third party, such as a customer or a contractor, alleging damages or injuries caused by the insured party's actions.
2. Insurance company investigates: The insurance company investigates the claim and determines whether it is covered under the policy.
3. Settlement offer: If the insurance company believes that a reasonable settlement offer can resolve the claim, they will make a settlement offer to the third party.
4. Insured party's decision: The insured party has the option to accept or reject the settlement offer. If they reject the offer and decide to proceed with litigation, the hammer clause may come into play.
5. Triggering the hammer clause: If the insurance company believes that a reasonable settlement offer has been made and the insured party refuses to settle, they can invoke the hammer clause.
6. Insurance company's limited liability: If the insured party proceeds with litigation and the outcome is less favorable than the initial settlement offer, the insurance company's liability may be limited to the amount of the initial offer.

It's important to note that the hammer clause typically applies to claims within the policy limits. If the claim exceeds the policy limits, the insured party may have more flexibility in deciding whether to settle or proceed with litigation.

Example of the Hammer Clause

To illustrate how the hammer clause works, let's consider a hypothetical example:

John owns a small construction company and has a liability insurance policy with a coverage limit of $1 million. One day, a worker on John's construction site is injured due to a safety oversight. The injured worker files a claim against John's company, seeking $2 million in damages.

The insurance company investigates the claim and determines that John's company is liable for the worker's injuries. They make a settlement offer of $1 million to the injured worker, which is within the policy limits. However, John believes that the claim is exaggerated and decides to reject the settlement offer, opting to go to court.

In court, the jury finds John's company liable for the worker's injuries but awards damages of only $800,000. Since the outcome is less favorable than the initial settlement offer, the hammer clause is triggered. As a result, the insurance company's liability is limited to the initial offer of $1 million, and John's company is responsible for paying the remaining $200,000.

Implications and Considerations

The hammer clause can have significant implications for insured parties. Here are some key considerations:

• Loss of control: By invoking the hammer clause, the insurance company takes control of the decision-making process and can force the insured party to settle.
• Financial risk: If the insured party decides to proceed with litigation and the outcome is less favorable than the initial settlement offer, they may be responsible for paying the difference.
• Impact on reputation: Settling a claim may be seen as an admission of guilt, potentially damaging the insured party's reputation.
• Legal costs: Litigation can be costly, and the insured party may need to bear the expenses of legal representation.

It's crucial for insured parties to carefully review their insurance policies and understand the implications of the hammer clause. Consulting with an insurance professional or legal advisor can provide valuable insights and help navigate the complexities of insurance claims.

Summary

The hammer clause is a provision commonly found in liability insurance policies that gives the insurance company the right to force the insured party to settle a claim, even if they want to pursue litigation. By invoking the hammer clause, the insurance company's liability may be limited to the initial settlement offer if the insured party proceeds with litigation and the outcome is less favorable. Insured parties should carefully consider the implications of the hammer clause and seek professional advice when dealing with insurance claims. Understanding the hammer clause can help individuals and businesses make informed decisions and protect their interests in the face of potential claims.

Frequently Asked Question about Hammer Clause

1. What is a Hammer Clause?

A Hammer Clause, also known as a Blackmail Clause or Consent to Settle Clause, is a provision in an insurance policy that gives the insurer the right to settle a claim for a specified amount. If the insured party doesn't agree with the settlement, they can choose to go to court, but they will be responsible for any additional costs beyond the settlement amount.

2. How does a Hammer Clause work?

In the event of a legal dispute, the insurer will negotiate a settlement and inform the insured party. If the insured doesn't accept the proposed settlement, they can choose to proceed with litigation. However, if the court outcome exceeds the initial settlement amount, the insured will bear the additional costs. The insurer's maximum liability is capped at the initial settlement amount plus defense costs incurred up to that point.

3. When is a Hammer Clause typically used?

A Hammer Clause is often found in liability insurance policies, such as errors & omissions (E&O) and directors & officers (D&O) insurance policies. It is particularly common in professional liability insurance where claims are frequently settled out of court.

4. What are some potential benefits of having a Hammer Clause?

The primary benefit of a Hammer Clause from the insurer's perspective is cost control. It allows them to limit their financial risk by capping their liability to the agreed settlement amount. From the insured's perspective, a Hammer Clause may lead to quicker resolution of disputes and prevent protracted litigation.

5. What are some potential drawbacks of a Hammer Clause?

The main disadvantage for insured parties is that they may feel pressured into accepting a settlement they're not happy with for fear of incurring additional costs if they lose in court. It also reduces their control over how claims are resolved, as the insurer has the final say on settlement decisions.

6. Can the terms of a Hammer Clause be negotiated?

Yes, in some cases, the terms of a Hammer Clause can be negotiated. For example, the insured may be able to negotiate a “soft” hammer clause, where they would be responsible for only a portion of the costs (e.g., 50%) if they reject a settlement and lose in court. However, this is subject to the insurer's approval and may result in higher premiums.