Hammer Clause | Practical Law (2024)

FAQs

What is the full hammer clause? ›

Some policies follow a traditional (or full) hammer approach, which allows an insurer to limit its claim payment to no more than the amount of the rejected settlement offer plus defense costs during that time.

If your insurer and the plaintiff agree to a settlement but you refuse, a hammer clause gives the insurer the right to cap its liability. This benefits the insurance company so it doesn't have to pay additional court fees as the case continues through the legal system.

For example, if the Hammer Clause stipulates 70/30, then the insurer would be responsible for paying 70% of defence costs while the insured would pay 30%. Again – this is only the case if the insured chooses to continue defending, despite the insurer recommending that they settle.

A consent to settlement clause is a provision (also known as the "hammer clause" and "blackmail settlement clause") found in professional liability insurance policies that requires an insurer to seek an insured's approval prior to settling a claim for a specific amount.

Hammer clauses allow the insurer to force the insured to settle. It does this by placing a cap on the amount of indemnification that it is willing to provide. This cap may be set, for example, at the amount the insurer thinks that the settlement is worth.

To help you understand what these numbers mean, let's take a look at the 80/20 risk share situation. With such a hammer clause, the insurer will take 80% of the liability and defense costs after the settlement offer, and the insured will 20% of the costs going forward.

For Example

If it's a 90/10 settlement clause, they'll pay 90%, you pay 10% or in some cases, that settlement clause is completely deleted and you don't pay anything and the carrier ends up paying the total over and above the initial settlement offer.

Pedroli and Gauthier, LLC. A “Hammer Letter” is a type of demand letter that is sent from the injured parties attorney to the insurer of a tortfeasor (at fault party), or from the tortfeasor or their attorney to the insurance company.

What Is Subrogation? Subrogation is a term describing a right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.

The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.

What is a 50 50 clause? ›

In a 50/50 insurance claim, each party will owe the other party for 50% of their total money damages. But this does not mean that each party owes the other the same amount of money. If party A has $20,000 in damages to their car damage and medical bills, then party B would have to pay them $10,000.

When a margin clause is in force it states that the most the insured can collect for a loss at a given location is a specified percentage of the values reported for that location on the insured's statement of values. The maximum is normally stated as a percentage that is greater than 100%, such as 110% or 125%.

If your policy contains this clause and you refuse to consent to a settlement, the insurer's liability will be limited. This means they will not have to pay the full amount awarded at trial. The amount the insurer must pay depends on the type of hammer clause.

Duty to defend is a term used to describe an insurer's obligation to provide an insured with defense to claims made under a liability insurance policy.

In the context of contractor insurance, a hammer clause refers to an exclusionary form added to your general liability policy. Its purpose is to restrict or eliminate coverage due to the insurance status of your subcontractors. Sometimes, the term “Sub-Warranty” is used interchangeably to describe the same concept.

A “hammer letter” is a letter written by or on behalf of the insured or excess insurer, that clearly and unequivocally (1) demands that the primary insurer settle the claim or suit within primary policy limits, and (2) warns that a failure to do so would leave the primary insurer responsible to pay any ultimate ...