Hammer clause

The hammer clause is a policy provision that caps or shares the insurer's obligation when the insured turns down a settlement the claimant has accepted and the insurer has recommended. The standard wording fits in a few lines. If the insured refuses to consent to a settlement that the claimant is willing to accept and that the insurer recommends, the insurer's liability is limited to the amount of that settlement. Defense costs incurred up to the date of refusal are added on top. The clause settles a conflict that the wording itself creates. D&O (directors and officers), E&O (errors and omissions) and professional liability policies give the insured a right of consent over any settlement. The insured can use that right in ways that cost the insurer: the director who fears a deal will look like an admission, the professional who wants to defend his reputation at trial. Under the hard version, everything after the refusal, a heavier judgment and appeal costs included, stays with the insured. The soft version shares the excess: the insurer keeps paying a share of later loss and costs, often 50% or 70% depending on the wording, and the insured carries the rest. The market talks of a 50/50 or 70/30 hammer, the first figure usually being the insurer's share. The mechanism assumes formal conditions that wordings spell out: a firm offer from the claimant, a written recommendation from the insurer, a deadline to respond. The clause carries a risk for the insurer too. In the United States, a recommendation to settle made while the insurer disputes cover on other grounds opens a debate on its good faith. The case law on bad faith refusal to settle then weighs on how it wields the hammer.