The 'consent to settle' clause in professional-liability policies

By Matthew D. Taylor

Professional-liability insurance policies routinely provide that the insurer may settle a claim only with the policyholder’s consent. But how much power over the settlement process does that provision really give the insured? Sometimes, not so much, as a result of a related policy provision commonly known as the “hammer” clause.

Commercial general liability, or CGL, insurance policies usually state that the insurer has the sole right to settle any claim. CGL policies do not permit the policyholder to block a settlement that the insurance company wants to make.

Professional-liability and executive-liability errors-and-omissions insurance policies, however, cover claims that bear on the insured’s professional or business reputation and competence. Insureds typically have stronger feelings about fighting versus settling such claims, since a settlement might be perceived as an admission of malpractice and could damage their business. For this reason, such errors-and-omissions policies usually contain a consent-to-settle clause that permits the insured to veto the insurer’s settlement of such claims.

Settlement negotiations in such cases can put the insurer and the insured at odds. Insurance companies often want to resolve claims as inexpensively as possible, sometimes by settling early and cheaply and thereby avoiding large legal expense in defending such claims. Policyholders, on the other hand, may oppose settlements because they want to protect their professional reputations or simply firmly believe that they did nothing wrong.

Thus the “consent to settle” provision would seem to give insureds great say over settlement decisions, in the very types of cases where they care the most about those decisions. But it rarely does. A “consent to settle” clause also usually accompanies a provision nicknamed the “hammer” clause, because it figuratively holds a hammer over the insured’s head that threatens adverse consequences if the insured does not consent to a settlement that the insurer favors.