What is a Hammer Clause?
A hammer clause, also referred to as a blackmail clause, settlement cap provision, or consent to settlement provision, is a critical element found in insurance policies. This clause allows the insurance provider to enforce the insured party to settle a claim. The term “hammer clause” symbolizes the insurer’s authority to compel the insured to settle, likened to a hammer driving a nail into place.
How a Hammer Clause Works
Hammer clauses empower insurers to dictate settlement terms by capping the indemnification amount offered. This cap typically aligns with the insurer’s perceived value of the settlement. If the insured party declines the settlement, they may become liable for their defense costs.
- A hammer clause is a contractual provision that allows insurance companies to prompt insured parties to settle claims.
- Other aliases for a hammer clause include blackmail clause, settlement cap provision, and consent to settlement provision.
- A hammer clause features specific language outlining its terms and conditions.
Insurance companies indemnify policyholders against specified risks in the purchased policy. In claims situations, differing opinions between the insurer and insured on the settlement value can arise.
Insurers aim to mitigate escalating costs linked with prolonged claims processes, such as legal and adjuster fees.
Within a legal context, a hammer clause can mandate a manufacturer involved in a lawsuit to settle.
Conversely, the insured party seeks to minimize out-of-pocket settlement expenditures and may resist accepting an unfavorable settlement amount due to lower involvement in legal costs.
Sample Hammer Clause Wording
Hammer clauses contain specific language delineating the insurer’s rights and responsibilities regarding settlement matters. An example of such wording could include: “We retain the right to defend any claim, duly investigating each claim before settlement. Settlements require your written consent, subject to reasonable withholding, with an agreement for consultation to address settlement disputes.”
Example of the Hammer Clause
Let’s consider a scenario where a manufacturer faces a lawsuit due to consumer injuries linked to its product usage, necessitating defense under their liability policy.
The insurer, foreseeing prolonged legal proceedings, may propose a quick settlement to resolve the consumer suit efficiently. However, the manufacturer, reluctant to incur settlement costs, may resist the settlement offer. In this situation, the hammer clause could empower the insurer to enforce settlement against the manufacturer’s preferences.