An attorney’s reputation is considered one of their most valuable assets, which is why legal malpractice insurance policies require the insured consent to settlement before the insurer can settle the claim.

But what happens if the insured refuses to consent to the proposed settlement? The answer lies within the wording of your insurance policy. A provision that reduces the available limit of liability if the insured refuses to consent to settle a claim is known as a hammer clause. Hammer clauses vary, and their nuances influence your coverage.

The following are examples of the types of consent to settle hammer clauses.

Full Hammer Clause—Standard Policy

With this type of hammer clause, an insured’s consent to settle is requested. If the insured declines to consent, then the insurer will no longer pay for any additional defense of the claim and the insurer’s responsibility for loss is capped at the amount that could have been settled. At that point, any future defense costs are the insured’s responsibility.

Additionally, the insurer’s responsibility for payment of damages is limited to the amount that the claim could be settled.

Soft Hammer Clause—Better Policy

Some legal malpractice insurance policies instead contain a “soft hammer” clause. In this case, the insured’s consent to settle is still requested. If the insured declines to consent, the insurer and the insured will share in the additional damages incurred, but not all policies will pay for additional defense costs.

Policy wording typically states the percentage of future costs that will be paid by the insurer and the percentage paid by the insured (e.g., 50%/50%, 80%/20%).

Here is an example of an 80%/20% with no additional defense costs paid.

If any Insured refuses to consent to the settlement of any Claim which the Insurer recommends and which is acceptable to the claimant, subject to the applicable Limit of Liability or Deductible, the Insurer’s liability for all Loss from such Claim shall not exceed:

1. The amount the insurer would have contributed to the settlement including Defense Expenses incurred up to the date of such refusal; and
2. Eighty percent (80%) of such Loss in excess of the amount for which the Claim would have been settled.

Here is an example of a 50%/50% with percentage of additional defense costs and damages paid.

If we recommend a settlement of a claim which is acceptable to the claimant, and you refuse to consent to such settlement, then our obligation to pay damages and claim expenses on account of such claim, shall not exceed the sum of:

1. The amount for which we could have settled such claim, plus claim expenses incurred up to the date of your refusal to consent to such settlement; and
2. Fifty percent (50%) of damages and claim expenses incurred in connection with such a claim in excess of the amount referenced in paragraph 1 above. All remaining damages and claim expenses shall be borne by you uninsured and at your own risk.

No Hammer Clause—Best Policy

The best insurance policies have no hammer clause. In this case, the insurer cannot settle the claim without the insured’s consent. If the insured refuses to consent, then the insurer is responsible for future defense costs and settlement, subject to the policy limits of liability.

The following is an example of a no hammer clause:

C. Settlement
The Company shall not settle a claim without the written consent of the Named Insured.

When you’re assessing legal malpractice insurance policies, be sure to consult with insurance experts, like Pearl Insurance. Our tailored approach and expertise in the legal realm can help guide you in selecting the most suitable coverage for your unique practice.

Questions?

At the end of the day, Pearl Insurance is here for you. We work tirelessly to help you find a policy that fits your firm’s exact needs. Pearl takes our responsibility to protect your firm seriously and will always put people before profit.

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These highlights are intended to present a general overview for illustrative purposes only. It is not intended to constitute a binding contract. Please remember that only the relevant insurance policy issued to a law firm can provide the actual terms, coverages, amounts, conditions, and exclusions for an insured.