Malpractice Insurance Primer: Part 2 -- Understanding the 'hammer clause'

For both the insurer and the insured, a professional liability policy sets forth the rights, duties, and obligations concerning the settlement of a claim. Have you ever wondered exactly what your rights are with regard to such settlements?

Marketing material or company philosophy may imply you have rights; however, you should investigate the actual policy language to determine if you actually have a pure consent to settle clause. A pure consent-to-settle clause will require the insurance company to obtain your approval before settling any claim -- no exceptions and no strings attached. For instance, an example of this could read as follows:

We will not compromise any claim hereunder without the consent of the Insured.

It is important to note that not every professional liability policy provides pure consent, and often you will find policy provisions that have the effect of giving authority regarding settlement of a malpractice claim back to the insurance company.

Consider the following text from an actual oral and maxillofacial surgeon's (OMS) professional liability policy that does not provide a pure consent to settle clause:

If you refuse to consent to a good faith settlement recommendation by us and elect to continue to defend the claim or continue any legal proceeding in connection with the claim, our duty to pay claims expenses is limited to the total amount incurred to the date of our recommendation to settle.

In the insurance industry, the quote above is called a "hammer clause," and it, or similar language, is included in many OMS' professional liability policies. These clauses pressure insured practitioners to agree with a company's decision to settle a case rather than pursue litigation. In addition to the hammer clause provided above, there are "full" and "modified" hammer clause types. Each applies a varying degree of pressure to the policyholder to agree to settle:

• Under a typical full hammer clause, if the insured practitioner rejects the carrier's recommendation to settle, the carrier's liability for the claim is then capped at that recommended settlement amount, plus claims expenses up to the date of the rejected settlement. The insured would then be responsible for any amounts that exceed that cap -- whether stemming from, for example, legal expenses or a large jury verdict.

• A modified hammer clause usually functions in a similar manner, with the difference being that the carrier agrees to pay a certain percentage of the amounts above the cap. The percentage varies, but industry standard is usually either 50% or 70%. To further clarify, policies with a modified hammer clause are likely to be more expensive than policies with full hammer clauses.

The hammer clause provision could leave you with a tough choice between choosing the settlement of a claim or the risk of paying a large amount of money out of your own pocket. Compare that with a pure consent provision, in which no similar dilemma exists.

Make sure you review the consent to settle provision in your professional liability policy, and see if there are any exceptions to pure consent.

Jennifer Gibson is with the Medical Protective Dental Team, based in Fort Wayne, IN.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.