No.  It’s not ‘Hammer Time’.  It’s the ‘Hammer’ Clause. How many of you are familiar with the term ‘Hammer Clause’  and is it buried in your Professional Liability Policy? Who’s getting hammered?

When I was practicing I always knew to get a professional liability policy which gave me final say on settlement or litigation should I be sued for legal malpractice.  It never happened, thankfully, but I understood its value after reading a horror story with a local brain surgeon.  He wanted to go to trial, wanted to exonerate his good name after the press splashed his name and pending litigation for malpractice across the newspapers.  With his name destroyed and the only means for exoneration a trial which would find him innocent of medical malpractice, he wanted to salvage his reputation.  However, his medical malpractice policy did not give him final consent.  The insurer settled rather than incur the cost of litigation and potentially risk losing.  So, the insured lost his livelihood instead.

This was a powerful lesson.

Many insureds don’t really read or understand their professional liability policies.  This is especially true for new solos as they are often forced to shop on price while getting started and they are  insanely scared to ‘go bare’ if their states do not mandate insurance.

‘Going bare’, I believe, should always remain a lawyer’s choice (don’t make that sentence into something it’s not :-).  I know many lawyers disagree with me, but not all.  If a lawyer is willing to take on the risk, however ill-advised, that should remain his or her right. In my opinion, insurance is for the insured in order to protect their assets and future income, not for the aggrieved party (though that will make attorneys who represent plaintiff’s in lawyer malpractice cringe).

Anyway, since many a lawyer shops on price but ultimately wants control over the end  result of any action brought against them,  a new ‘hybrid’ has been born and it lives between a ‘no consent to settle’ policy and a ‘consent to settle policy.’  It’s called the ‘Hammer Clause’ but that’s not the term you will see in your policy.

Beware the Hammer Clause

“The most important words in any document are the words that follow ‘however.’”

This advice…..applies well to the hammer clause. The clause, tucked away in the jargon of many policies, sounds very similar to consent to settle… until those important words following “however.”

The inclusion of the hammer clause may mean a less expensive premium, but it could cost a (lawyer) greatly.

“The Insurer shall not settle any claim without the consent of the Insured. If, however, the Insured refuses to consent to any settlement recommended by the Insurer and elects to contest or continue the legal proceedings in connection with such claim, the Insurer’s liability for the claim shall not exceed the amount for which the claim could have been settled plus legal expenses incurred up to the date of such refusal.”

What does this mean?

The hammer clause means that if an insured withholds consent to settle, the insured will have to pay out of their own pocket any judgment in excess of the proposed settlement amount. This saves the insurance company money by cutting short the litigation process and reducing the insured’s ability to veto a settlement. *

For example, consider a (lawyer) facing a $200,000 settlement who has a $2 million limit on his policy. If the (lawyer’s) liability policy contains a “hammer clause,” the insurance company can invoke the clause for that settlement, in essence reducing the $2 million limit to $200,000 and forcing the (lawyer) to decide: either settle the claim on those terms or risk paying his own money. Many (lawyers) are not aware of this risk.

“(Lawyers) need to read their policies carefully regarding how much input they have in the litigation process,” said Tracy. “In exchange for a less expensive policy, they give an insurance company a little more leverage in the litigation process. And because the vast majority of claims are settled claims, the hammer clause can have a significant impact.”

The inclusion of the hammer clause may mean a less expensive premium, but it could cost a (lawyer) greatly.

“A (lawyer) motivated purely by price may end up with a policy provision he or she doesn’t fully understand, and it can have a significant impact on their personal financial situation.”.

This is an example of another ‘hammer clause’:

WE have the exclusive right to investigate, negotiate and defend CLAIMS seeking DAMAGES against the INSURED for which this policy provides coverage.  The INSURED may not negotiate or agree to a settlement of any CLAIM without OUR prior consent.  There is no coverage under this policy to pay any part of a settlement of a CLAIM made without our consent.

WE will not settle a CLAIM without the written consent of the INSURED.  If the INSURED refuses to consent to any settlement recommended by US and elects to contest the CLAIM or continue legal proceedings, then OUR liability for the CLAIM will not exceed the amount for which the CLAIM could have been settled within the applicable limit including CLAIM EXPENSE incurred with OUR consent to the date of such refusal.  The INSURED must cooperate with US in the investigation and defense without charge by the INSURED or reimbursement of the INSURED’s expenses, subject to the Supplementary Payment provision of the policy.

After WE have paid the limit of liability or resolved all CLAIMS covered by the policy WE will not:

(1) pay any CLAIM, judgment or expense.

(2) undertake or contine the defense or investigation of any CLAIM or suit.

I also think it is fair to say that attorneys don’t necessarily read and understand what they are actually getting.  (Now, don’t jump on my case about this.  When was the last time you read your insurance policy or the addendum that came in the mail after you just renewed?  You file it away and say, ‘I’m insured.’  It took me years to finally read them on my homeowner’s policy.)

The type of insurance you buy will be based upon your risk aversion, personal circumstances and state requirements.  There is nothing inherently right or wrong with ‘no consent’, consent with a ‘hammer clause’ or consent without a hammer clause. The hammer clause is not the devil.  The devil is your lack of understanding about the coverage you are receiving based upon the price you are willing to, or can currently afford to, pay.

Most interesting to me in the first quoted section was this – if you can’t afford the premium for full consent without restriction, do you need to pay an increased premium for $2 million dollar limits:

• if the majority of cases settle and
• you have a hammer clause in your policy which will in effect negate the high limit on your policy?

If you are a new attorney, do you need to pay a premium that first or second year for any consent whatsoever when your premiums are their lowest because insurances companies have deemed you to have the least exposure to potential malpractice?

I encourage you to listen to this free guest lecture at Solo Practice University® Everything You Ever Wanted to Know About Lawyer’s Professional Liability Insurance. It is jam-packed with very important information.

Bottom line:  Understand what you are buying based upon what you can afford.  You can always upgrade later.