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

(Continued - Page 2)

“Hammer” clauses come in various forms. One common type of “hammer” clause states that if the insurer had an opportunity to settle for a specified amount of money and wanted to do so, but the insured said no, then the policy limit for that claim drops to the amount of the proposed settlement. Assume, for example, that a plaintiff sued on a frivolous claim of $2 million, the policy limit was $1 million, the insured refused to let the insurer settle for $50,000, and the jury sided with the plaintiff and awarded the $2 million sought. In that event, the insurer would be liable for only $50,000 of the judgment, rather than $1 million. The policyholder would be personally liable for $1,950,000.

Other types of “hammer” clauses are less severe. One modified version essentially splits the difference with the insured, so that the insurer and the insured are responsible 50-50 for any judgment that exceeds the amount of a settlement that the insured rejected. Another version provides incentives to the insured to explore settlement by, for instance, discounting or eliminating a sizeable deductible or self-insured retention if the claimant and the insured enter into early mediation.

Some “hammer” clauses go so far as to cut off the insured’s contractual right to a defense. They provide that if the insured rejects a settlement, then not only does the policy limit for the claim drop to the amount of that proposed settlement, but the insurer also need not pay any further costs of defending the insured.

Even though “hammer” clauses have varying provisions, they all diminish the insured’s say over whether to settle an errors-and-omissions claim. Insureds who withhold consent might expose themselves to non-covered liability that did not previously exist, litigation expenses that they must pay out of their own pocket, or both.