A hammer clause is an insurance policy clause that enables the insurer to compel the insured to settle a claim. This clause is sometimes also known as a blackmail clause, settlement cap provision, or consent to settlement provision. Essentially, it gives the insurer the authority—much like how a hammer influences a nail—to enforce a settlement on the insured.
How a Hammer Clause Works
Hammer clauses empower the insurer to mandate that the insured settle a claim by instituting a cap on the indemnification amount they are willing to provide. This cap is typically equivalent to what the insurer believes the settlement is worth. Should the insured decline the settlement proposed, they might be responsible for the costs of their own defense.
- Key Points:
- A hammer clause is an insurance policy term that allows the insurer to force the insured to settle a claim.
- Alternate names include the blackmail clause, settlement cap provision, and consent to settlement provision.
- Specific legal wording is associated with a hammer clause.
Insurance companies indemnify policyholders against risks outlined in their purchased policies. When a claim arises, the insurer’s responsibility includes aiding in settling the loss. However, disputes can occur when the insurer and the insured have differing opinions on the settlement value.
Balancing Costs and Settlements
Insurers are inclined to minimize settlement costs, which include legal fees and costs for claims adjusters—expenses that can escalate significantly if the claim process is prolonged. A hammer clause offers the insurer leverage to settle a lawsuit quickly.
On the other hand, the insured party usually aims to lower their own out-of-pocket settlement expenses. Since the insured party doesn’t bear the brunt of legal fees, they might lack motivation to settle quickly, especially if dissatisfied with the settlement amount proposed by the insurer.
Sample Hammer Clause Wording
Typically, a hammer clause might be worded as follows:
“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 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 to resolve any differences to such settlement.”
Example of the Hammer Clause in Action
Consider a scenario where a manufacturer faces a lawsuit due to injuries that consumers sustained from using its product. The manufacturer’s liability policy binds the insurer to defend the manufacturer in court. Recognizing that a drawn-out defense could be expensive, the insurer might decide that the best course of action is to offer a speedy settlement to the consumers lodging the lawsuit.
However, the manufacturer might resist agreeing to the settlement as it involves paying out-of-pocket costs. In this case, the hammer clause could be invoked by the insurer to force the manufacturer to accept the settlement proposal.
Related Terms: indemnification, settlement period, legal fees, claims adjuster.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a "Hammer Clause" primarily used for in insurance policies?
- [x] Limiting the insurer's liability in settlement decisions
- [ ] Providing additional coverage for policyholders
- [ ] Specifying premiums and deductibles
- [ ] Outlining the policy requirements for claims processing
## In the context of a Hammer Clause, what happens if the insured refuses to settle a claim?
- [x] The insurer’s contribution to the settlement is limited to the amount it was willing to settle for initially.
- [ ] The insurer will continue to support the insured in court, covering all expenses
- [ ] The insured must immediately settle for the amount offered by the insurer
- [ ] The insurer cancels the policy without payout
## Which of the following best describes the limitation imposed by a Hammer Clause?
- [ ] No legal actions can be taken after the initial settlement offer
- [x] The insurer's financial responsibility is capped to a previously recommended amount
- [ ] All future claims are automatically denied
- [ ] The policyholder gets higher premiums until the claim is resolved
## What typically motivates an insured party to agree to a settlement under a Hammer Clause?
- [ ] The potential to prolong the litigation process
- [ ] Financial incentives for higher coverage
- [x] To avoid personal liability beyond the offered settlement
- [ ] Requirements for policy renewal
## How does a Hammer Clause impact the relationship between an insurer and the policyholder?
- [x] It might create tension if settlement terms are disagreed upon
- [ ] It ensures the insurer has full control over all settlements
- [ ] It allows the policyholder more leverage over settlement decisions
- [ ] It has no significant impact on their relationship
## What occurs if the insured decides to continue litigation against the insurer's advice under a Hammer Clause?
- [ ] The insurer increases the coverage amount
- [ ] The policy is terminated immediately
- [x] The insured may be responsible for any amount above the insurer’s recommended settlement
- [ ] The insured can choose any lawyer they prefer, paid for by the insurer
## What type of insurance policies usually include a Hammer Clause?
- [ ] Homeowner’s insurance policies
- [ ] Health insurance policies
- [x] Professional liability insurance policies
- [ ] Automobile insurance policies
## Hammer Clauses are designed to primarily benefit which party?
- [ ] The insured party
- [ ] The legal representatives involved
- [x] The insurer
- [ ] The courts
## Which of the following scenarios creates a financial risk for an insured under a Hammer Clause?
- [x] Refusal of an insurer’s settlement offer and continuing litigation
- [ ] Agreeing to an initial settlement offer
- [ ] Negotiating a higher settlement with the help of the insurer
- [ ] Accepting the insurer's choice of defense attorney
## What is likely the most significant consequence if the policyholder disregards a Hammer Clause?
- [ ] Lower premiums in future policy renewals
- [x] Being responsible for costs beyond the insurer’s initial settlement offer
- [ ] Complete policy termination without any option for settlement
- [ ] Full support from insurer regardless of costs in litigation
