Hammer Clause

Example

“The doctor's malpractice policy included a hammer clause, so when he refused the insurer's recommendation to settle for $500,000, his coverage was limited to that amount even though the jury awarded $2 million.”

Memory Tip

Think of a judge's gavel (hammer) - the insurance company can 'bang the gavel' and limit their payment if you reject their settlement advice.

Why It Matters

This clause protects insurance companies from unlimited exposure when policyholders make poor settlement decisions, but it can leave insureds financially vulnerable if they misjudge a case's value. Understanding this provision is crucial for anyone facing significant liability claims.

Common Misconception

Many policyholders believe they have absolute control over settlement decisions and that their insurer will pay any judgment regardless of their choices. In reality, hammer clauses can leave them personally responsible for amounts exceeding the recommended settlement.

In Practice

A business owner faces a $1.5 million lawsuit and his insurer recommends settling for $800,000. His policy has a hammer clause, but he refuses the settlement, believing he'll win at trial. The jury awards $2.2 million, but due to the hammer clause, his insurance only pays the $800,000 settlement amount, leaving him personally liable for the remaining $1.4 million plus legal costs.

Etymology

Named metaphorically for the insurance company's ability to 'hammer down' or limit their financial exposure when insureds reject reasonable settlement offers, giving insurers leverage in settlement negotiations.

Common Misspellings

Related Terms

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