| Understanding the "hammer clause" |
| Written by Aaron Adam | |
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Because of the big awards that can result from liability lawsuits, many insurers try to settle these cases, regardless of whether the insured is actually responsible for the claim being asserted by the plaintiff. It's simply a matter of money. Often, a settlement can be reached that is much less than what the plaintiff has claimed in the suit, and the end of the suit means the end of expensive legal fees that the insurer is required to pick up. Insureds may not always want to follow their insurer's inclination to settle, however. In many professional businesses, a settlement can be read as an admission of wrongdoing or incompetence by the defendant, and could adversely impact the defendant's reputation and business brand. A company that loses face by making a settlement could see an adverse impact on its relationship with customers or suppliers and other businesses vital to its success. Insurers recognize the possible reluctance of insureds to settle these type of cases, but also are very much aware of the potential of a drawn out case with a big judgment to severely impact its bottom line. To compel their insureds cooperation with reasonable settlement offers, many insurers include a "hammer clause" within their commercial general liability and other liability policies. Hammer clauses act to compel insureds to comply with an insurer's decision to settle a case rather than fight it out in court. In general, there are two types of hammer clauses, "full" hammer clauses and "modified" hammer clauses. A full hammer clause basically informs the insured that if the insured goes against the insurer's recommendation to settle, the insured will be responsible for any judgment won by the plaintiff plus legal fees that go beyond the settlement offer and legal fees up until the settlement offer. Some full hammer clauses even go as far as to hold that if an insured bucks a settlement recommendation from the insurer and loses the case, the insured will be on the hook for the entire settlement and legal fees cost. A modified hammer punishes recalcitrant insureds less severely than the full hammer. In a modified hammer clause, the insurer will agree to pay a certain percentage over the settlement amount if the insured decides to disregard the insurer's settlement recommendation. The percentage varies from policy to policy, but is usually either 50 or 70 percent. Obviously, because a policy with a modified hammer clause presents more risk to the insured than one with a full hammer clause, premiums for modified hammer policies are likely to be more expensive. How it worksFor example, let's suppose that you're a design company and you're hit with a $1 million negligence suit. The claim is bogus, but you get an offer to settle for $300,000. You want to fight it in court because you know the claim is no good, but your insurer wants you to settle the case.If your policy does not have a hammer clause, you have a right not to settle and your insurer must respect that right. However, if your policy has a hammer clause, your insurer has the right to cap your benefits at the settlement amount plus your legal fees up to the time the settlement is made, let's say $50,000 for the sake of argument. If you buck your insurer and proceed to court and lose, you'll be on the hook for the judgment amount against you minus the settlement amount and the legal fees you had generated up to the settlement offer. Let's say the judgment is for $750,000 and you generated an additional $10,000 in legal fees. Under the policy's hammer clause, you would be liable to pay $410,000. Who's got 'em?Not all insurers include hammer policies, but many do. Here's a list compiled by industry experts of major insurers who do and do not include hammer clauses in their policies:Hammer clause:
No hammer clause:
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