Hammer clause
| Hammer clause |
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Hammer clause (otherwise called a Settlement Cap Provision, a Blackmail Clause or an Agreement on the Terms of Settlement) is an insurance policy clause, thanks to which the insurer can force the insured to quickly settle the settlement[1].
The name of the hammer clause took its name from the metaphor - just like a hammer is used on a nail, just as the insurer has power over the insured.
Establishment of the Hammer Clause
In accordance with the clause[2]:
- The insurer imposes a limit on the amount of compensation that he is able to provide himself. The limit set is the value for the insurer. At the moment when the insured refuses to settle, he becomes responsible for all costs associated with the defense. These costs include the difference between the final court judgment and the amount of the settlement, even if the final judgment will be much larger than the initial offer with settlement.
- The clause finds its application during difficult market cycles, because it protects insurers against unnecessary costs that are generated by zealous insureds who carry out matters not based on economic justification but with ordinary rules.
For example, a producer who has been sued by consumers for injuries arising from the use of his product. According to the manufacturer's liability policy, the insurer should defend him before a court. The insurer believes that the process can be ended by offering a settlement, but the manufacturer does not want to pay out of his own pocket. In such a situation, the hammer clause allows the insurer to force the producer to accept the settlement[3].
Deletion of the Hammer Clause
Depending on the market, the insurer and the insured - the broker may negotiate the complete removal of the clause. This happens when the insured is not interested in dealing with disputes for no particular reason, because he considers the settlement to be a good solution. The majority of insured persons always check the impact of the situation on the business, time and resources they will have to spend - these factors influence the final decision[4].
In a situation where the clause is not completely removed, the insured may try to obtain a Modified Hammer Clause. This clause grants compensation greater than the initial settlement amount (it is 20-80% of the supplementary settlement and defence costs)[5].
Political formulations work in such a way as to encourage the insured to accept a settlement, offering him various incentives. This is called A Velvet on the Hammer Clause. The most common incentive is to reduce the cost of debt or deduction[6].
Examples of Hammer clause
- In case of a dispute between the insurer and the insured, the Hammer clause will set a limit on the amount of money the insurer can pay out to the insured, even if the insured is legally entitled to more.
- Another example of a Hammer clause is that the insured must agree to accept a certain amount as settlement of the claim and must not sue the insurer for any additional amount.
- A third example of a Hammer clause is that the insured must agree to waive any right to seek punitive damages against the insurer in the event that the settlement amount is not sufficient to cover the insured's damages.
- A fourth example of a Hammer clause is that the insured must agree to not pursue any further claims against the insurer, even if the settlement amount is not sufficient to cover the insured's damages.
- A fifth example of a Hammer clause is that the insured must agree to not pursue any claims against other parties involved in the dispute, even if the settlement amount is not sufficient to cover the insured's damages.
Advantages of Hammer clause
A Hammer clause can be a beneficial tool for an insured party, as it provides several advantages, such as:
- Reduced settlement time – A Hammer clause requires both the insurer and the insured to come to an agreement about the settlement amount within a certain time frame. This encourages the parties to quickly settle the dispute, thereby avoiding lengthy court proceedings.
- Reduced legal fees – When an agreement is reached quickly, the insured party can save on legal fees that they would otherwise have to pay to their legal counsel.
- Agreement on terms of settlement – The Hammer clause provides a definite set of rules and regulations that must be followed in order to reach an agreement on the settlement amount. This helps to ensure that both parties are aware of their rights and obligations, and that they can come to an agreement without any misunderstandings.
- Reduced risk of litigation – Since the agreement is reached within a certain time frame, there is less risk of the dispute leading to a costly and lengthy legal battle. This helps to protect the insured party from any additional costs or delays that may arise from court proceedings.
Limitations of Hammer clause
The Hammer clause is not without limitations. These include:
- The clause is not applicable in all states. Some states require the parties to go through court proceedings or a mediation process before settling.
- The clause does not apply to all types of insurance policies. It is generally used only in liability and property insurance policies.
- The clause may not be enforceable if the insured refuses to agree to the settlement amount proposed by the insurer.
- The clause may not be applicable if the insured has suffered a “catastrophic” loss, such as a natural disaster or a major accident.
- The clause may not be valid if the insurer does not make a good-faith effort to settle the claim in a timely manner.
- The clause may not be enforceable if the insurer does not provide the insured with a reasonable amount of time to agree to the proposed settlement.
In addition to the Hammer clause, there are several other approaches that insurers can use to force an insured to settle a claim quickly. These include:
- The insurer can offer a cash settlement in exchange for the insured waiving their right to any further legal action. This allows the insurer to pay the insured quickly and avoid costly and lengthy legal proceedings.
- The insurer can also use a “cost plus” approach, in which the insurer agrees to pay all the costs of the claim up to a certain amount and then requires the insured to pay any remaining costs. This approach allows the insurer to quickly settle the claim without paying more than necessary.
- The insurer can also use a “contingency fee” approach, in which the insurer agrees to pay a percentage of the settlement amount to the insured’s legal counsel. This approach makes it easier for the insurer to settle the claim quickly, as the insured’s lawyer will likely be motivated to negotiate a settlement quickly in order to maximize their fee.
In summary, the Hammer clause is just one of many approaches that insurers can use to force an insured to settle a claim quickly. Other approaches include offering a cash settlement, using a cost plus approach, or using a contingency fee approach.
Footnotes
References
- Berwick G., (2007), Executives Guide to Insurance and Risk Management 2nd Edition, Fastbooks, p.207
- Boggs C., (2010), Property and Casualty Insurance Concepts Simplified, Wells Media Group, Inc., p.112-113
- Murov B., (2005), The Practitioner's Guide to Defense of EPL Claims, ABA Publishing, p.267
- Pope D., (2001), Hammered by the Hammer Clause: Does It Mean What It Says?, „Defense Counsel Journal“, 68.2, p.236
- Weiner A., Rajbanshi S., (2012), Proper Tool Use, "Best's Review", 113.2, p.61-63
Author: Aleksandra Bizoń
