Lawyers Professional Liability Insurance Hammer Clause
Your policy does not have a definition for “The Hammer Clause.” The Hammer Clause is slang for forcing a settlement in the Defense, Indemnification, and Cooperation section of your policy.
As with other professional errors and omissions policies, lawyers professional liability insurance policies commonly gives the insured the right to tell the insurer whether to settle the claim or not. As a professional you may not want to settle because you feel that you did nothing wrong, or it may damage your reputation. Also, settling a claim when you did nothing wrong ends up on your loss history and could cost you more for insurance premiums in the future.
The insurer looks at the claim from a dollar and cent perspective estimating the cost to resolve the claim. Given the facts, claims counsel estimates the chance of winning, the cost of defending, and the ultimate indemnity payment. If a case goes to trial, the defense costs alone can exceed the settlement claim cost. There is no guaranteed at trial. Ultimately, as far as the malpractice insurer is concerned, given a choice between a $500,000 defense bill with no indemnity payment versus a $25,000 settlement, guess which option the insurer picks? Sorry to say for insurers it not a question of who is right and who is wrong, but the cost.
If a case goes to trial, be prepared for depositions, producing documents, and a large amount of your personal time assisting in the claim’s defense.
Given these facts, most professionals want claims settled quickly. But say you don’t want to go along with the insurer’s claims department or the malpractice attorney recommendation. It is your right according to your policy as a professional to refuse to settle. Now what happens?
The Hammer Clause:
The lawyers professional liability insurance policy Insuring Agreements or Defense & Settlement sections state that even though the insurer will not settle a claim without the insured’s consent, the insurer’s exposure to the loss is limited to the amount that would have been paid if the insured had taken the insurer’s recommendation. In other words, if an insured does not accept the insurer’s recommendation, then the insured is liable for any additional costs over the settlement cost case recommendation. The insurer can put the ‘Hammer’ to you if you do not settle when they recommend.
This is a sample of a typical “Hammer Clause” from an lawyers professional liability policy form:
SETTLEMENT
The Company shall have the right to negotiate a settlement or compromise of a claim as it deems appropriate but shall not commit to settlement of a claim without the written consent of the Named Insured. If the Named Insured refuses to consent to a settlement or compromise recommended by the Company and acceptable to the claimant, then the Company’s Limits of Liability under this Policy shall be reduced to the amount for which the claim could have been compromised or settled, plus all claim expenses incurred up to the time the Company makes its recommendation, which amount shall not exceed the remainder of the Limits of Liability specified in Section III. A
This is a sample Lawyers Professional Liability policy that does not contain a “Hammer Clause”:
DEFENSE AND SETTLEMENT
We will not settle a Claim without the Insured’s written, faxed, or emailed consent. Your consent shall not be required to make a settlement or payment after a judgment has been entered against you.
The reality is that normally, the insurance companies’ interest and your interests align. Since insurers normally look at losses 5 years back, including indemnity costs vindication could mean getting non-renewed and ending up in surplus-lines where the premiums can easily double.
More than one frustrated insured has been non-renewed because of defense costs. Even without an indemnity payment, an insurer may pay over $500,000 or more in defense costs for a claim. This vindicated insured can end up with a surplus-lines insurer with higher premiums, even though not at fault. Vindication can be expensive.
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
