Key Takeaways
- Limits insurer payout if insured rejects settlement.
- Caps insurer costs at settlement plus pre-refusal defense.
- Hard vs soft hammer clauses affect insured risk share.
What is Hammer Clause: Definition, Function, and Real-World Example?
A hammer clause is a policy provision primarily found in professional liability and directors and officers (D&O) insurance that limits the insurer’s financial obligation if you refuse a recommended settlement. It caps the insurer's payout at the settlement amount plus defense costs incurred before refusal, leaving any excess judgment or further expenses to you.
This clause encourages insured parties to accept reasonable settlements and prevents prolonged litigation at the insurer’s expense, balancing your right to consent to settlements with cost control for insurers.
Key Characteristics
Hammer clauses have distinct features that impact how claims and settlements are managed.
- Settlement Control: You must approve settlements; refusal triggers financial limits on insurer payout.
- Cost Sharing: Some clauses, like the soft hammer, share post-refusal costs between insurer and insured.
- Policy Types: Common in claims-made policies such as professional liability, less so in general liability.
- Defense Costs: Insurer covers defense costs up to refusal date; after that, costs may be your responsibility.
- Indemnity Impact: The clause affects the indemnity obligations of the insurer, limiting coverage upon refusal.
How It Works
When your insurer proposes a settlement deemed reasonable, you can accept or reject it. If you refuse, the hammer clause activates, capping the insurer’s payment at the settlement amount plus defense costs incurred before refusal.
Any additional defense expenses or judgments exceeding the settlement are your responsibility. Variations like the soft hammer clause allow insurers to share these excess costs, offering more favorable terms to you while still encouraging settlement acceptance.
Examples and Use Cases
Hammer clauses are particularly relevant in industries with high liability risks, such as healthcare and aviation.
- Healthcare: A doctor facing a malpractice suit may refuse a settlement to protect reputation, triggering a hard hammer clause where the insurer pays only up to refusal date costs plus the settlement offer.
- Airlines: Companies like Delta and American Airlines often have policies with hammer clauses to manage expensive litigation risks while balancing defense costs.
- Business Credit: Managing credit with options like those in best business credit cards can help companies prepare financially for potential liabilities and settlements.
Important Considerations
Understanding the specific terms of your hammer clause is critical, as it affects your financial exposure when refusing settlements. Negotiating softer versions or exclusions during policy purchase can mitigate risk.
Reviewing your policy and comparing coverage options, including joint and several liability implications, ensures you maintain control while managing potential costs effectively.
Final Words
A hammer clause caps your insurer’s liability if you reject a reasonable settlement, shifting financial risk to you for any excess judgment or defense costs. Review your policy carefully and consult a professional to understand how this clause could impact your settlement decisions.
Frequently Asked Questions
A hammer clause is a provision in certain insurance policies that limits the insurer's financial responsibility if the insured refuses a recommended settlement. It encourages accepting reasonable settlements by capping the insurer's payout at the settlement amount plus defense costs incurred before refusal.
The hammer clause balances the insurer's duty to defend with the insured's right to consent to settlements. If the insured rejects a reasonable settlement recommended by the insurer, the insurer limits its payment to the settlement amount plus defense costs incurred up to that point, leaving further costs to the insured.
There are two main types: the hard (full) hammer clause, where the insured bears all costs beyond the refused settlement and pre-refusal defense costs; and the soft (coinsurance) hammer clause, where insurer and insured share excess costs proportionally, such as 80/20 or 70/30 splits.
Insurers use hammer clauses to control costs and prevent insured parties from rejecting reasonable settlements and prolonging litigation. This limits the insurer's financial exposure and encourages timely resolution of claims.
In a malpractice case, if a doctor refuses a $100,000 settlement recommended by the insurer, under a hard hammer clause the insurer pays the settlement plus defense costs incurred before refusal, but the doctor covers any further costs or judgments. Under a soft hammer, the insurer and doctor share the excess costs based on a pre-agreed split.
Hammer clauses typically appear in professional liability (E&O), directors and officers (D&O), and employment practices liability insurance policies. They are less common in general liability policies where the insurer usually controls settlements.
If the insured accepts the insurer's recommended settlement, the insurer covers the settlement amount and all defense costs, and the hammer clause does not activate. The insured avoids the risk of paying excess judgments or additional costs.
