Reggie Says: The Hammer Clause is a provision found in most professional liability insurance policies. A typical Hammer Clause contains two elements:
1. It requires the Insurer to gain consent from the Insured prior to settling a claim.
2. Without the Insured’s consent, it limits the Insurer’s responsibility for the amount of a plaintiff approved settlement, plus defense costs starting the date that the insured removed consent.
Ho ho ho! I’m Hammer Claus, and I’m here to tell you when you need to STOP YOUR LAWSUIT AND SETTLE!
Yes, Hammer Claus is that beloved icon, the patron insurance-saint of dispute resolution… sort of. But instead of naughty and nice, Hammer Claus makes a list of who needs to settle their lawsuit, and who needs to press on. This is a little known, commonly misunderstood clause that exists in many D&O and EPLI insurance policies and bedtime stories, especially around trial time. Never heard of Hammer Claus? Don’t understand his hammery ways? Well then, by all means, read on!
In an insurance policy, the hammer clause explains what will happen when the carrier thinks it’s time for the insured to settle the lawsuit, but the insured isn’t satisfied and wants to press on. Imagine, for instance, that Marv is suing his community association board because they won’t allow him to use white concrete in his driveway. The association, on the other hand, just paid to pave Marv’s driveway, and doesn’t want him to be the only one with off-white. (Association boards like stuff to look the same. It’s kind of their thing.) So Marv sues them for paving his driveway and denying his request, and Marv’s lawyer and the community association lawyers go head to head. The lawyers for both side find a compromise, wherein Marv can re-do his driveway, but he’ll have to pay to do it.
This is a cost-effective solution, and Marv can get what he wants without costing the association any money. So the board’s carrier appointed legal team says “Board, you should really take this deal and settle the case. You’re going to have a terrible time seeming reasonable in front of a judge, and it won’t be worth the money we’ll spend going to trial..” But the board is like “NO! White driveways are awful, and we don’t like it, and we don’t like Marv, and we’re right, and he’s wrong, and we’re going to fight him to the end!”
This is where Hammer Claus drops in. Hammer Claus says, “Okay. You can press on with this dispute. But the insurance carrier is only going to pay x percent of your fight from here forward.” Sometimes that percent is 0, sometimes it’s a 50/50 split of the costs after settlement has been recommended. That’s all described in the policy’s hammer clause.
So what have we learned today, Hammer Claus? “We’ve learned that insureds should check their policy’s hammer clause before they refuse to settle, because they may not have as much help from their carrier.”