I am told my Attorney Malpractice Insurance Policy has a ‘Hammer Clause’—What is a ‘Hammer Clause’?
There is no attorney malpractice policy that actually states or defines the term for ‘Hammer Clause’. The ‘Hammer Clause’ is insurance slang for an Insuring Agreements or a Defense & Settlement Section that forces the insured to settle a claim.
So how does a Hammer Clause work?
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 could be paid if the insured had taken the insurer’s recommendation. In other words, if an insured does not accept the deal, then the insured is on the hook for any additional costs. In essence the insurer can put the ‘Hammer’ down if you do not settle when the insurer recommends.
This is a sample of what is commonly referred to as a ‘Hammer Clause’ from a Valiant Attorney Malpractice 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 Attorney Malpractice 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.”
It is better to not have then to have a ‘Hammer Clause’. Reality is that in most cases, you will want to get on with life and follow the insurer’s recommendation anyway. So the practical impact usually does not come into play very often.