Hammer clause

Hammer clause
See also
Indemnity bond Aggregator model Value added tax Funding agreement Selling away Pure risk Trade exchange Barter agreement Dual insurance

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.

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:

• 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.

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.

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).

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.

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