Every week at Protexure we talk to hundreds of law firms regarding professional liability insurance and address a number of questions around the policy provisions and pricing of insurance policies. I’ve managed lawyers’ professional liability business for over 30 years and want to share with you some perspective on claim management.
Recently we have received a number of inquiries regarding the hammer clause and if it is present in a policy, how it works. Knowing what the clause means, the impact it makes on your coverage and the type of policies it is offered on will help you understand your policy more.
What Is a Hammer Clause?
The hammer clause, which is also known as a “consent to settle clause,” is a common provision in professional liability policies and deals with the insured choosing not to settle a claim proposed by the insurance carrier.
Hammer clause language is typically found in the defense and settlement section of the professional liability policy. Here is an example of the hammer clause wording:
“The Insurer may make any investigation it deems necessary and may, with the Insured’s consent, such consent not to be unreasonably withheld, make any settlement of any claim it deems expedient. If the Insured withholds consent of such settlement, the Insurer’s liability for all damages on account of such claim shall not exceed the amount for which the Insurer could have settled such claim, inclusive of Defense Expenses, incurred as of the date such settlement was proposed to the Insured.”
- The insurance provider has the right and duty to defend claims reported regardless of the fact that the allegations in the claim are groundless, false, or fraudulent.
- The insurance provider has the right to select defense counsel, if needed.
- The insurance provider has the right to make any investigation it deems necessary in evaluating and handling the claim.
- The insurance provider, with the consent of the Insured, can make any settlement of a claim the Insurer deems expedient.
This type of wording allows the insurance provider to cap what they will pay in damages to resolve a claim in the event the Insured withholds consent. This clause is common in professional liability policies but, we have seen some insurance companies eliminate this provision in recent years.
Impact of Hammer Clause on Claims
Considering the overall claim process helps when understanding the impact, if any, that a hammer clause might have on a firm reporting a claim.
Perhaps the most important view I have developed regarding claim handling over my career is that unlike wine, claims do not improve with age!
One consideration to think about is when the clause might come into play. Again, the hammer clause addresses the situation where a claim reported develops to a point where the insurance provider recommends a settlement that you don’t consent to.
Typically claims that are open for an extended period of time are more likely to result in a situation where the hammer clause is used.
Early assessment and planning are critical to managing and resolving claims in a timely manner. In addition to the monetary implications, more important is minimizing the time demand on you and your law firm to get a claim resolved. It is in everyone’s best interest to work together to resolve claims quickly. After all, you have a business to run.
Early assessment of claims is critical to establish expectations for how and when a claim will be resolved and includes a thorough review of the facts and circumstances surrounding the claim.
After the initial assessment, many initial claim notices can be categorized as potential claims which include situations where a suit has not been filed. These cases typically have a very short life span and typically are closed out within a matter of months.
For instance, between 2015-2017 we received notice of 850 claims from our clients. 484 or 57% of those claims were resolved with no payments needed. Another 100 cases were closed out with an average payment of just over $5,000 and 110 claims resolved for an average of $25,000 paid. Over 80% of these cases were resolved within 6 months of being reported.
In summary, based on this sample of claims, many claims are resolved within a short time frame for relatively small dollar amounts and not requiring the insurance company to invoke the hammer clause. While the hammer clause potentially has an impact on a claim you report, it is not something that impacts all claims reported.
Again, early assessment, clear communication between the insurance provider and Insured, and setting expectations for resolving a claim are keys to a quick resolution.
Insurance Policies With a Hammer Clause
So, how important is the presence of a hammer clause when choosing between insurance programs for your firm?
As you review options offered by different insurance programs, the presence of a hammer clause should be secondary to the expertise and longevity the insurance company has in providing lawyers professional liability insurance.
As mentioned earlier, insurance carriers using the hammer clause is a last resort to getting a claim resolved and is rarely used. Carriers with a consistent track record insuring lawyers will have seasoned claim representatives and a network of defense firms working with them to efficiently handle claims reported.
As you review options for insuring your practice the hammer clause is one of many features you should consider in selecting an insurance policy that addresses your firm’s needs. Other coverage features, breadth of coverage and price need to be factored into your decision.