Hammer Clause
The hammer clause caps the insurer's liability at the settlement amount it recommended, plus defence costs incurred up to that point, where the insured rejects a settlement the insurer regards as reasonable.
- Clause type
- Condition
- Origin/Market
- US market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Under policies granting a consent-to-settle right, the insured can reject a settlement proposed by the insurer and insist on judicial determination instead. Without a counterweight, this veto right would strip the insurer of all cost control: the insured could refuse every settlement without bearing any financial risk itself. The hammer clause — also known as the “blackmail settlement clause” — creates that counterweight by placing the consequences of a refusal on the insured.
Effect and limits
Under a full (“hard”) hammer clause, rejecting a proposed settlement caps the insurer’s liability at the proposed settlement amount plus defence costs incurred up to the point of refusal; all further costs — additional defence, a higher settlement, or a judgment — fall solely on the insured. The “soft” or “coinsurance” variant instead splits these additional costs proportionally between insurer and insured, commonly in a ratio of 50/50 up to 80/20 in the insurer’s favour. The clause is found mainly in professional indemnity, D&O and employment practices liability policies where the insured has a say in settlement decisions.
Negotiation and practice
Insureds should actively seek a soft rather than a hard hammer clause, as this materially reduces the financial risk of a well-founded refusal. The clause is particularly relevant in employment practices liability and D&O cover, where settlements are frequently rejected for reputational reasons even though they would make sound insurance sense.