If you have been looking at directors’ and officers’ ( D&O ) liability insurance policies, you must have encountered the term ‘hammer clause’. It is important to understand what this means because it has financial implications for your claim settlement. This post examines the hammer clause to help you make the right choice when buying a D&O liability plan.
What is the hammer clause?
An insurance provider usually includes a hammer clause in your directors’ & officers’ policy. It allows them to reduce the limit of their liability and protect their own interest. The hammer clause allows the insurer to propose an amount to settle a claim out of court and to avoid court proceedings. The clause stipulates that if the insured does not accept this settlement amount, the insurer can restrict claim payments. These restrictions can take the form of caps on the amount of money an insurer is liable to pay or exclusion of defense costs, etc.
The hammer clause is also referred to as the ‘consent to settle clause’ and ‘blackmail settlement clause’. This is because it is seen as a tactic that compels the consent of the insured for the terms of the insurer.
To understand how the clause works, consider an example. An insurance company recommends Rs 50 lakh as a settlement amount. However, the insured refused to settle the case. Eventually, at the end of court proceedings, the actual cost comes to Rs 55 lakh. Then, the insurer applies the hammer clause and is liable to pay only Rs 50 lakh.
So, a hammer clause is required in D&O (Directors and Officers) insurance to protect the insurer’s interests in settlement negotiations. It allows the insurer to limit its liability by giving the insured the option to accept a settlement offer or proceed with litigation at their own expense if they disagree with the proposed settlement.
Pros and cons of hammer clause
When purchasing a D&O liability policy, try and ensure that it does not have a hammer clause. Of course, this could increase the cost of insurance. However, it is better than the alternative, which would involve restrictions or caps on claim settlement amounts.
A modified hammer clause takes on some percentage of the defense cost. It might even take on 50% or 70% of the cost of the settled claim in excess of what it proposed initially. However, in the worst case, a harsh hammer clause negates even the defense cost and might only provide the settlement amount.
Often, a hammer clause may be considered a negative imposition on your policy. However, it helps to assess whether you need court proceedings or not. This is because businesses might not be able to assess litigation costs and procedures. But insurance companies have the expertise and experience to compute an appropriate settlement amount. Such a recommendation might help companies avoid hefty litigation or defense costs. Instead, they might be able to manage an out-of-court settlement with the help of the insurance company. A loss in court might also damage a company’s reputation and lead to financial crises.
Thus, it helps to study the advantages and disadvantages of a hammer clause before purchasing D&O liability insurance.
The relevance of a hammer clause in D&O insurance in the Indian context depends on the specific policy terms and conditions. While hammer clauses are commonly used in D&O insurance globally, their applicability and usage may vary among insurance providers operating in India. It is important for insured parties to review and understand their policy’s provisions regarding settlement negotiations and potential hammer clauses.
If you need assistance finding the right D&O insurance for your employees, SecureNow can help. Contact us at 96966 83999 or write to us at support@secuenow.in and share your coverage requirements.
About The Author
Rajesh
MBA Finance
With a wealth of expertise in the insurance realm, Rajesh is a distinguished writer specializing in articles focusing on directors and officers insurance for SecureNow. Boasting 9 years of experience in the industry, he profoundly understands the complexities surrounding directors and officers liability coverage. Their articles delve into the intricacies of D&O insurance, providing readers with invaluable insights into risk mitigation strategies and policy considerations. Renowned for their comprehensive knowledge and attention to detail, Rajesh is dedicated to delivering informative and engaging content that empowers individuals and businesses to navigate the complexities of insurance with confidence.
