The Hammer Clause

 

Called by some insurance companies “The Cooperation Clause,” the hammer clause in a professional liability policy is something you should be aware of.  The hammer clause is a provision included in many policies that gives the insurance company more control in a claim than you may be comfortable with.
It is best described by example:

Let’s say you are sued for negligent design services and the amount of the claim is $500,000 and let’s say that it is a frivolous claim against you

Now let’s say that after generating $50,000 of legal fees to defend yourself you receive an offer to settle from the plaintiff for $200,000.  You want to reject this offer because you didn’t do anything wrong and it feels like extortion to you.

If your policy does not have a hammer clause, then your insurer must respect your right not to settle.  If, however, your policy includes a hammer clause, the insurer would be within its rights to cap its liability in this matter for $250,000 (the $50,000 in legal fees generated so far plus the $200,000 settlement offer).

If you continue to fight the matter, and incur another $10,000 in legal fees before losing a $400,000 judgment you would be on the hook for $210,000 ($60,000 in legal fees plus $400,000 judgment -$250,000 insurer liability maximum).  This would have been a huge gamble for you to have taken and lost.

Let’s say you continue to fight the matter but the outcome was different.  Let’s say you incurred another $10,000 in legal fees before being dismissed from the matter.  In this case the insurance company could not be happier.  While they were prepared to spend $250,000, they will end up spending only $60,000 in legal fees while you took all the risk.  Talk about adding salt to the wound!

Happily, not all insurance companies include a hammer clause in their policies.  For instance we have never seen a hammer clause in the CNA/Schinnerer policies or in the St. Paul Travelers policies.  However, we have seen hammer clauses in some of the policies offered by these insurers:

XL/DP
ACE American Insurance Company
Zurich North America
Beazley Insurance Company
Everest National
Houston Casualty Company/RAMCO
Lexington Insurance Company
New Hampshire Insurance Company

A Sample “Hammer Clause”

I. DEFENSE AND SETTLEMENT

A. If the Insured refuses to consent to a settlement or compromise recommended by the Insurer and elects to contest or continue to contest a Claim, the Insurer’s liability shall not exceed the amount for which the Insured would have been liable for Loss if the Claim had been so settled when and as recommended, and the Insurer shall have the right to withdraw from the further defense of the Claim by tendering control of the defense thereof to the Named Insured.  The operation of this subsection shall be subject to the Limits of Liability and Retention provisions of this Policy.