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Understanding the Hammer Clause
And, its Impact on your Professional Liability Policy
The Hammer Clause (aka cooperation clause or consent to settle clause) is a provision found in most professional liability insurance policies. A typical Hammer Clause contains two elements:
1. It requires the Insurer to obtain the consent of the Insured prior to settling a claim.
2. In the absence of the Insured's consent, it limits the Insurer's liability to the amount of a plaintiff approved settlement, plus defense costs to the date of the withheld consent.
The Hammer Clause is a fiscally sound principal which is intended to protect the insured and the insurance company through the settlement of a claim in the most financially reasonable manner. The settlement of a claim can be a complex process, during which your attorney will provide significant guidance relevant to the merits of the claim including:
- Likelihood of a prolonged defense
- Legal recommendation of in-house and appointed counsel
- Time and expenses of the insured
- Historic defense of similar claims
- Reasonableness of plaintiff attorney
- Reasonableness of settlement amount
In our extensive experience, we have never seen a claims scenario where an insurance carrier enacted the Hammer Clause. Not only is the process done in extensive consultation with the insured, but the insurer faces significant legal ramifications in the event of a "bad faith" claim by a pro-insured legal system.
Sometimes there are significant distinctions between insurance policies written for the same group of professionals; however the hammer clause does not rise to that level. Insurance brokers who utilize this provision as a relevant benefit/deficit of a modern professional liability policy are either misleading their clients, or they are utilizing it to distract from more material provisions/conditions within the policy such as coverage for: punitive damages, criminal activity, or legal liability of client data.
Differences in Hammer Clauses
Every policy contains differences; you must read and understand the full policy including all endorsements to determine coverage, coverage gaps, and policy intent. As an insurance agent we strongly advocate against policy wording that is vague and is open to ambiguous policy interpretations.
In our experience, almost all professional liability policies have some level of consent to settle / hammer clause. However, the wording and intent does vary between policies. An insurance contract is a legal document and clear, concise wording is always in your best interest.
Sample Hammer Clauses in Accountants Professional Liability Insurance Policies
Continental Casualty Insurance Company - CNA
CNA - G-127136-A Ed. 1108 B.
We have the right and duty to defend any claim seeking damages, even if any of the allegations of the claim are groundless, false or fraudulent. We will investigate any such claim as we deem appropriate. We will not settle any Claim without your written consent, which shall not be unreasonably withheld. You and we agree to consult with each other, and, if you are a member, with the American Institute of Certified Public Accountants, to resolve any differences to such settlement.
In our opinion, this language is vague and raises concerns. The phrase, "which shall not be unreasonably withheld" is a difficult legal position to interpret. In addition, the clause provides the ambiguous agreement to "consult with each other", but only offers to resolve differences if you are an AICPA member.
Greenwich Insurance Company - CPAGold
XLAPOL 01 (10/10)
We will not settle any Claim without your written consent. If we recommend a settlement to you that is acceptable to the claimant and you do not agree to the settlement, our liability is limited to the total of the amount of Damages for which the Claim could have been settled plus the amount of Defense Expenses incurred up to the time we made the settlement recommendation.
This concise policy wording specifies that a settlement must be "acceptable to the claimant" and outlines the limitation of damages and defense expenses in the scenario where consent is withheld.
PL-1000-A (rev. 08/05)
The Company will not settle any Claim without the Named Insured's written consent. If the Named Insured withholds its consent to any settlement recommended by the Company and elects to contest a Claim or continue the legal proceedings, then the Company's liability for that Claim will not exceed: (1) the amount of the recommended settlement plus Claim Expenses incurred up to the date the Named Insured withheld its consent, or (2) the remaining Limit of Liability, whichever is less.
This policy wording raises concern as it references "any settlement recommended by the Company." In our interpretation, this binds the insured to a settlement amount without consideration of the plaintiff's agreement to said settlement.
This information is for illustrative purposes only. It is not intended for the purpose of providing specific legal, accounting, or other professional advice. Only the policy form and endorsements themselves can provide actual coverage wording and conditions. Policy wording may be subject to change.