Stop; Hammer (Clause) Time

Litigation is big business with big dollar signs.  As a result of the large awards that can result from malpractice suits, many professionals, their attorneys, and insurers are interested in early settlement discussions.  When considering settlement, the defense team must balance “right and wrong,” pride, defense costs, and other complicated factors that are difficult to quantify.  For the professional, the decision may be more about reputation and morals than budgets.  As a result, insureds may not always want to follow their insurer’s inclination to settle. Enter the “hammer clause.” 

Many PL policies contain consent-to-settle clauses which require approval from the insured before entering into a settlement agreement.  This right of the insured is often balanced with the inclusion of a “hammer clause,” which provides that if an insured refuses to settle, the insured is responsible for any exposure in excess of the settlement offer.

The potential consequences of the hammer clause were considered by the Central District of California in Freedman v. United Nat’l Ins. Co., (C.D. Cal. Mar. 1, 2011).  Freedman arose out of an underlying legal malpractice action.  The defending attorney referred the claim to his professional liability carrier, which offered to settle with the plaintiffs.  However, the defendant attorney refused to settle because he believed that the action lacked any merit.  When the insurer invoked the hammer clause, the attorney still declined to settle and filed a bad faith claim.

The particular PL clause at issue provided that the insurer could not settle any claim without the written consent of the insured but if the insured refused to consent to a settlement recommended by the insurer, the insurer’s liability was capped at the amount that the case could have been settled.  Ultimately, the court considered the two provisions of the policy together and concluded that an insurer may invoke the hammer clause only when an insured’s refusal to settle was unreasonable.

This decision provides an important lesson to professionals about the implications of hammer clauses and the necessary considerations for the professional, her attorney and the carrier when considering settlement.  Not all PL policies include the “hammer” but some of the major players do include these clauses. In this context, when the chance of asserting a defense is limited and a settlement offer is made within policy limits, a refusal by the professional to accept the offer could lead to personal exposure as a result of a hammer clause.


2 Comments

  • Cary Carrillo, 10th Thursday 2013 at 6:29 am

    Reply

    Did the Court define “unreasonable?”

  • Larry Liquori, CIC, 3rd Friday 2014 at 4:29 pm

    Reply

    I’ve heard that MDs can sometimes buy out of the hammer clause on their malpractice. Is that option ever available for attorneys or law firms?


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