The Hammer Clause: When Being Right Can Cost You

Most business owners assume their insurance company will defend them when a claim arises. But a clause buried in their policy could leave them paying significant legal costs, even when they’ve done nothing wrong.

It’s called The Hammer Clause.
Common in professional liability, directors and officers (D&O), and errors and omissions (E&O) policies, this provision can limit an insurer’s financial responsibility if you reject a recommended settlement.

Consider this: Your insurer offers to settle a $500,000 claim for $100,000. You refuse because you believe the allegations are false. The case proceeds, generating $300,000 in legal and expert costs.

Depending on your policy wording, your insurer may only be responsible for the proposed settlement with limited costs covered. The remaining expenses could become your responsibility.
Working with forensic accountant Dave Oswald of Forensic Restitution, we know that the facts are not always clear when settlement decisions are made. Investigations can uncover evidence that dramatically changes the value or validity of a claim. An insurer may prefer an early settlement to avoid escalating legal costs, while forensic evidence could ultimately establish that the allegations were unfounded.

What to do:
Ask your broker to confirm if this clause or some similar clause is limiting your payout. Negotiate it out and if not, before your next renewal, try and find an insurer who will not force you to have this clause that protects the insurer and not your own interests.

Judi Smith | Risk Management
CIP, CRM (BA), CIOO, RIBO
Tel: 647-204-1227 | E: judi@judismithriskmanagement.com | www.judismithriskmanagement.com

Judi Smith
Executive Risk Management Advisor
Founder & Principal Advisor | Judi Smith Risk Management
Identifying hidden, operational, governance and commercial insurance risks before they become costly.

Every organization has its own unique risk profile.
If your organization is facing growth, change or increased complexity or you never have had time to read your coverage, and you’d like an independent perspective on governance, operational or commercial insurance risk, I’d be pleased to start the conversation. No company is too small or big. Do not wait until it is too late to find out that your are not protected.
Connect with Judi on LinkedIn or e-mail for practical insights on governance, risk management and commercial insurance.

Judi Smith, CIP, CRM (BA), CIOO
📞 647-204-1227
✉️ judi@judismithriskmanagement.com
www.judismithriskmanagement.com