Hammer clause in insurance
A hammer clause is a common professional liability policy provision that addresses what happens when an insurer wants to settle a claim, but the insured wants to fight it.
What is a hammer clause in insurance?
A hammer clause, also called a "consent to settle" clause, is a condition found in many professional liability insurance policies. It limits an insurance provider's financial responsibility if a policyholder rejects a claimant's settlement offer, opting to fight the claim.
In other words, if your insurer recommends accepting a settlement and you say no, the "hammer" drops: Your insurer caps what they'll cover, leaving you on the hook for any legal defense expenses that exceed that amount.
Hammer clauses are closely tied to your insurer's settlement authority, which is their right to negotiate and approve settlements on your behalf, and to define the financial consequences if you choose to decline. This authority stems from the duty to defend, a common professional liability provision that gives your insurer control over your legal defense and allows them to limit the cost of a claim.
Is a hammer clause specific to professional liability insurance?
No, hammer clauses aren't exclusive to professional liability insurance. They can be found in other liability policies, including directors and officers (D&O) insurance and employment practices liability insurance (EPLI).
However, the clause is most often associated with professional liability—also called errors and omissions (E&O) insurance, malpractice insurance, or professional indemnity insurance—where disputes over settlement decisions are more common. This is because professional service providers, including consultants, contractors, and attorneys, often have personal and reputational reasons to contest a claim rather than settle.
Professional liability policies are generally where a hammer clause can do its heaviest lifting, making it essential to understand when you're comparing policies.
Where can I find a hammer clause in my policy?
Hammer clauses are typically buried deep in a policy's language, often within a section called "Defense and Settlement", "Consent to Settle", or "Claims Conditions". When reviewing a policy, look for any language referencing your right to consent to a settlement, or that describes limits on the insurer's obligations if you reject a recommended settlement.
A hammer clause may also be referred to as a:
- Consent to settle clause
- Settlement cap clause
- Consent to judgment clause
If you're unsure whether a policy contains one, ask your agent to show you the relevant provision and explain the policy language before a claim arises.
What is the difference between a hard hammer vs. soft hammer clause?
There's no industry standard for hammer clauses—they can vary depending on the insurer, the amount of damages at stake, and the odds of winning at trial. Insurance companies use two types of hammer clauses, a hard or soft hammer clause, to determine how severely the policy will financially penalize you for rejecting a recommended settlement.
Hard hammer clause
A hard hammer clause, also called a full hammer clause, is the stricter of the two. If your insurance company advises settling and you refuse, the insurer's financial responsibility is capped at the settlement amount it recommended. This puts all future litigation costs and any judgment or settlement amount that exceeds the originally rejected offer 100% into your hands.
Soft hammer clause
A soft hammer clause, or coinsurance hammer clause, is a more flexible provision, allowing you to split the ongoing risk with your insurance company if you choose to keep fighting.
For example, if your professional liability policy has a soft hammer clause with an 80/20 split, your insurer will cover 80% of any claim expenses beyond the rejected settlement amount, and you will need to cover the remaining 20%.
This shared structure provides more freedom to contest a claim you believe is worth fighting without putting all of the financial risk on your shoulders.
| Hard hammer | Soft hammer | |
|---|---|---|
Excess cost responsibility | Policyholder, 100% | Split between policyholder and insurer (e.g., 80/20, 90/10) |
Insurer’s liability after rejected settlement | Capped at recommended settlement amount | Capped at their share of the split |
Ability to contest a claim | Limited—high personal financial risk | Greater—shared risk reduces exposure |
How does a hammer clause affect professional liability insurance settlements?
Typically, a professional liability insurance policy requires your insurer's consent to settle a claim. But, if the process breaks down, that's when the hammer clause can kick in.
Here's how this often plays out:
- A claim is made. A client or other third party sues you for professional negligence.
- A settlement is offered. The client offers to settle for a specific dollar amount.
- Insurer recommends settling. Your insurance provider believes the deal is fair to stop mounting legal defense costs.
- You reject the offer. If you feel you did nothing wrong or want to protect your professional reputation, you choose to fight it.
- The insurer invokes the hammer clause. Your insurance provider caps their liability at the proposed settlement amount.
- You absorb the financial risk. If the case goes to court and results in additional legal expenses or a larger judgment, you must pay the difference out of pocket.
For professionals who typically carry professional liability insurance, including IT firms, accountants, and construction companies, the instinct to fight a claim is a natural response when it feels like your reputation is on the line. But under a hammer clause, that instinct can be expensive. For example, if your insurer was willing to settle for $50,000 and a trial results in a $200,000 verdict, you could be stuck with a $150,000 bill.
Most businesses will experience a disagreement with a client or business partner over a perceived work mistake or professional error at some point, which could lead to a professional liability lawsuit. The defense costs over an alleged error can be considerable, even if you’re not at fault.
How to prepare for a claim if your insurance policy has a hammer clause
Before you purchase a professional liability policy, make sure you know if it has a hammer clause. If it does, you can be prepared for the claims process by reviewing these key factors:
- Understand the specifics, including whether it's a hard or soft hammer, what the cost-sharing split is, and what your financial risk could look like if you choose to reject a settlement.
- Know your rights, especially if you believe you have strong grounds to fight a liability claim. You're not legally required to settle.
- Weigh your financial exposure before rejecting a settlement by working with your insurance broker and legal counsel to determine the realistic cost of fighting a claim and how it compares to the settlement being offered.
How do I get professional liability insurance?
Insureon's licensed insurance agents are here to help you secure affordable professional liability insurance. Plus, they can tell you if a policy has a hammer clause and how those terms could affect a future claim.
To get started, submit one easy online application so you can compare quotes for professional liability coverage from our top-rated insurance partners.
Once you find the right policy, you can typically begin insurance coverage and get a certificate of insurance (COI) for your small business in less than 24 hours.
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