The Hammer Clause - Not What You Think

"Doctor, Lawyer, Indian Chief" - Besides being the name of a popular song from 1945, what do these occupations all have in common?  Each requires that the individual with the title possess a special skill holding them to a higher standard of conduct.  They are considered professionals.  Plumbers, programmers, carpenters...the category of professional has evolved.

If allegations arise that one of these individuals failed to render services of a professional nature, their business liability policy, sometimes referred to as a Commercial General Liability (CGL) policy, will not respond.  Professional liability is excluded under CGL policies.

The astute professional carries a professional liability policy in addition to his CGL.  Professional liability insurance, also referred to as malpractice insurance, will protect the professional when allegations of errors or omissions in professional services arise.  But you knew that.

What you may not know is that many professional liability policies contain an unusual clause, known as the "hammer clause".  The hammer clause requires the insurer to seek the insured's approval prior to settling a claim for a specific amount.  Some professionals believe that settling claims out of court is an admission of error that may harm their professional reputation.  So the hammer clause appears to be a great way for the professional to have the final say before settling a suit that they deem frivolous or unsubstantiated.

However, what many professionals fail to realize is that if they do not approve the recommended settlement, the hammer will fall.  You see, the hammer clause goes on to say that the insurer will not be liable for any additional monies required to settle the claim or for the defense costs that accrue from the point that the insurer makes the settlement recommendation.

An example will demonstrate the point.  Dr. Smith has a $5 million limit on his professional liability policy.  His insurance adjuster/lawyer recommends that a settlement be reached in a malpractice claim for $500,000.  Dr. Smith refuses and wants the case to proceed to trial.  Any defense costs from that point on, as well as any settlement over $500,000, will not be paid by the insurance company.  Talk about putting the hammer down!

The 1945 song goes on:  "Tell the doc to stick to his practice; Tell the lawyers to settle his case.".  My interpretation, always work with an insurance professional who can explain these important policy provisions to you.  That way, you won't get hammered.