What is a Hammer Clause in a Professional Liability Policy?

What is a hammer clause?

A hammer clause, also known as a “consent to settle” or “settlement cap” clause, is a provision found in many professional liability policies. This provision may limit the amount your insurer will pay if you do not wish to settle a malpractice claim. As its name suggests, the clause means your insurer can “hammer down” a settlement—forcing you to either accept their recommendation or face the financial consequences.

How the hammer clause works.

Here’s how this clause typically operates in a professional liability policy:

• Insurer's Role: When a claim is made against you, your insurer  investigates and may decide that settling the claim is the preferred course of action.
• Insured's Decision: The insurer recommends a settlement amount that the claimants agree to accept and presents it to you for your consent to resolve the claim.
• Scenario 1 – Consent Given: If you agree to the recommendation, the claim is settled, and the insurer pays the agreed-upon amount.
• Scenario 2 – Consent Withheld: If you refuse to settle—perhaps because you believe you were not at fault or want to defend your reputation—the insurer may invoke the hammer clause, limiting the insurer’s financial responsibility to the amount they were initially willing to pay, and the claimant was willing to accept.

Sample Hammer Clause in a Professional Liability Policy

While the wording varies, here is a sample hammer clause:

"If the Insured withholds consent to any settlement recommended by the Insurer, then the Insurer's liability for all damages and expenses on account of such claim shall not exceed the amount for which the claim could have been settled, plus any defense expenses incurred up to the date of the refusal to settle".

Types of hammer clauses.

Not all hammer clauses are the same, but there are two common versions:

• A full hammer clause (the more often form) caps the insurer’s liability at the settlement amount offered that the claimant was willing [A1] to accept. This means that if you reject settlement, you are responsible for all subsequent costs (including defense expenses, settlements, and trial verdicts) to the extent they exceed what the insurer was willing to pay, and claimant agreed to accept.
• A soft hammer clause means the insurer agrees to share some of the aforementioned additional costs after a recommended settlement is refused. Instead of capping its liability at the proposed settlement, the insurer will often cover a percentage of the subsequent costs (such as 70%), while you pay the rest. This version offers more protection if you decide to contest a claim rather than settle.

The hammer clause in action: an example

Imagine this scenario:

A client files a malpractice claim against you for improper tax advice and demands $100,000 to settle the matter. Your Insurer investigates and recommends settling for $50,000. The client is willing to accept that amount to resolve this claim. However, you feel strongly that you did nothing wrong and want to continue to defend the claim in court—so you refuse to settle. If the case goes to trial and the court awards $200,000 to the claimant, the hammer clause may mean your insurer only pays the original $50,000 recommended settlement amount plus legal costs incurred up to the point you rejected the $50,000 settlement. As a result, you could be responsible for the difference ($150,000) + any additional legal costs.

Why do policies have this clause?

As a policyholder, you want to minimize the amount you may pay in a settlement—which means you may have less incentive to finalize a deal if the amount appears too high. The insurer typically seeks settlement when it believes, based on its experience resolving accountants’ claims, there is potential liability exposure. It also considers the costs it may incur to continue to defend the claim through trial and/or during additional settlement negotiations and the risk of a much larger adverse result at trial. Since the longer the process takes, the higher those costs can increase, many insurers include a hammer clause in their policies.

Bottom line: A policy with “no-hammer clause” may be preferable.

The policyholder and the insurer should have a common goal – to resolve matters at a cost that fairly reflects the true value of liability and damage at issue. While some contend that a hammer clause encourages reasonable and timely settlements, it can place limits on policyholders. A professional liability policy without a hammer clause is generally more favorable to the insured since it can provide the following key benefits:

• Protect your reputation. You can choose to defend your reputation or principles—and reject a settlement that you believe isn’t in your best interest.
• Avoid the financial fallout. If you refuse to settle, you are not required  to pay the difference between the rejected settlement offer and a larger future judgement (along with costs).

To find a policy without a hammer clause:

Talk with an experienced insurance broker or consultant to compare policies from various insurers

If you already have professional liability insurance, take these steps:

1. Review your policy to see if it contains a hammer clause.
2. Ask your insurance broker or provider to explain how the clause works in your policy.
3. If you’re concerned about the financial risk, consider trying to negotiate  a modified (soft) hammer clause.
4. Know your rights and responsibilities under the policy before a claim arises—if you’re unsure, consult your insurance broker or provider or legal counsel who specializes in professional liability insurance.