The Hammer Clause in a Malpractice Insurance Policy
An agent told me that my Attorney Malpractice Insurance policy has a ‘Hammer Clause’. I looked in my policy and could not find it. What is a ‘Hammer Clause’?
There is no malpractice insurance policy that actually states or defines a ‘Hammer Clause’. It is insurance slang term for forcing you to settle a claim.
Sounds like a bad thing. How does a ‘Hammer Clause’ work?
A good professional errors and omissions insurance policy gives the right to the professional to not settle a claim even if the insurer wants to. As a professional you may not want to settle because you feel that you did nothing wrong and it will damage your reputation or you want your day in court to be vindicated. You also do not want a ‘claim’ settled when you did nothing wrong because it will end up on your loss history costing you more for insurance premiums in the future. But we do not live in a perfect world.
The reality is that an experienced insurer claims department and/or experience malpractice defense attorney should have handle hundreds of malpractice cases. Many of the cases were very similar to your own. Given the facts of the case, the assigned attorney should be able to estimate chances of winning, the cost to defend the claim, and the ultimate indemnity payment. If a case goes to trial the defense costs alone could exceed the costs of settling the claim. And there are no guarantees once a case goes to trial as to the final outcome. And as far as the malpractice insurer and potential insurers are concerned given a $500,000 defense bill with no indemnity payment versus a $25,000 settlement, guess which insured will get the better insurance rate. Sorry to say for most insurers it not a question of who’s right, but how much it costs.
If the case is not settled before trial, be prepared for depositions, producing documents, and a large amount of your personal time assisting in the defense of the claim.
Given these facts, most professionals want claims settled quickly. But say you don’t want to go along with the insurer claims department or malpractice attorney recommendation. It is your right as a professional to refuse to settle. Now what happens?
The Hammer Clause:
The malpractice 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. In essence the insurer can put the ‘Hammer’ to you if you do not settle when they recommend.
This is a sample of what is commonly referred to as a ‘Hammer Clause’ from a Valiant Lawyers Professional Liability policy form:
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 from Professional Solutions policy that does not contain a “Hammer Clause”.
“Section II. DEFENSE AND SETTLEMENT
3. 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.”
Given this it is better to not have then to have a ‘Hammer Clause’. Reality is that in most cases, you want to get on with life and follow the insurer’s recommendation anyway. So the practical impact rarely comes into play.