“Stop! Hammer Time” was to be the title of this two-part series but was changed for fear of suit from 80′s rapper, MC Hammer. But he can’t touch this article as it has nothing to do with his music or career but rather about a provision within most specialty liability policies known as the “Consent to Settle” clause, with more specific emphasis on a small part of the clause that potentially penalizes the insured if they don’t consent.
Generally found in professional liability, errors and omissions and executive liability coverage forms, insurance industry practitioners affectionately refer to the entire consent to settle clause as the “hammer clause;” mostly because one small part acts to “hammer” the insured into compliance with the insurance carrier’s desire to settle a claim.
This is a mischaracterization of the entire clause; the consent to settle clause is, of itself, advantageous to the “innocent” (or at least not-liable) insured with only one part of the clause containing a penalty for not consenting. Further, not every “consent to settle” provision contains a hammer clause (most do, but not all).
Which Liability Forms Contain “Consent to Settle” Language
Commercial general liability (CGL) polices grant solely to the insurance carrier the right to settle any claim; the insured cannot oppose or disallow a settlement. The carrier’s right to settle is reasonable considering the types of losses covered by the CGL – bodily injury, property damage and personal and advertising injury (as defined in the form and detailed in an earlier series). Rarely do any of these injuries or damages harm the insured’s reputation in the community or industry.
However, some individuals and entities occupy a position of trust arising out of presumed knowledge, training and/or professional or legal guidelines. A perceived or real violation of this trust, even unintentional, can cause a type of loss or injury to a third party not anticipated in or covered by the CGL. Charges made against an insured for violation of this trust, if proved in court or even settled out of court, can damage the insured’s reputation and future business. The reason, the charges convey a negative connotation regarding the way the insured conducts business or practices its profession.
Insureds subject to this indirect reputational loss exposure are generally granted the opportunity to decide if a settlement is appropriate (consent to settle). If the insured does not feel a settlement is warranted, they have the right to refuse the carrier’s recommendation to settle; but doing so may subject them to a severe penalty pending the outcome of a trial or judgment depending on the breadth of the “hammer clause” provision contained within the consent to settle wording.
Only a few policy types protect insureds against this violation of trust arising out of charges of poor management or improper professional practices. “Consent to settle” wording is nearly always found in the following policy types:
- Professional Liability Policies: This includes such coverages as medical malpractice, lawyer’s professional liability, architect’s and engineer’s professional liability and pastoral professional liability (not an all-inclusive list). These policies insure the specified professionals in the event they inadvertently mal-perform their trained-for duties.
- Errors and Omissions Policies: The most commonly considered is insurance agent’s errors and omissions coverage. This coverage is also purchased by mortgage brokers, investment counselors, real estate brokers and other such operations. An E&O policy provides protection against the financial consequences of an incorrectly performed special duty owed to clients or members of the public.
- Executive Liability Policies: Directors and officers (D&O), employment practices liability insurance (EPLI) and fiduciary liability insurance are examples of executive liability policies. Each of these, in some way, protect against the financial consequences of mismanagement of the business.
Difference Between “Professionals” and “Non-Professionals” from an Insurance Perspective
Professional liability and errors and omissions coverage are described separately above to highlight the difference between the individuals or entities covered by the policies. “Professionals,” for liability purposes, are generally those that require some level of organized higher education to initially qualify for entry into the field and ultimately full licensure. For example, doctors must complete medical school to be eligible to practice; architects must attain the proper degree as do engineers. Professions are commonly subject to some type of peer review in the event of a malpractice.
Errors and omissions liability is generally reserved for those whose actions or inactions could result in another person’s or entity’s unexpected or undeserved financial loss. Individuals protected by E&O policies are generally not required to have a specific amount or focus of education. A license to work in one of these areas may be required by a particular governing jurisdiction (state or federal government), but beyond that, there are few barriers to entry. Rarely are operations that qualify for E&O coverage subject to any type of peer review for improper acts (they may be subject to regulatory investigation).
Why “Consent to Settle” Language is Necessary
Reputation and good will, although hard to value, are of utmost importance to a business. A doctor can have the most modern and inviting office in the country, but if he is known to have a poor bed-side manner or to be a mediocre medical practitioner, his practice will likely suffer. The same is true of the company that is viewed as discriminatory in its employment practices. Neither will do as well as they could with a better public image. Such entities need the ability to protect their image against harm based on unfounded or trumped-up charges, thus the creation of the consent to settle provision.
A certain amount of tension exists between the insured and the insurance carrier when the consent to settle clause is available. The insurance carrier wants to get out of the claim as inexpensively as possible and the insured wants to protect its reputation if it feels there has been no wrong doing, or at least nothing different from usual and customary practices.
Without the consent to settle language, the insurance carrier could settle the claim regardless of the insured’s opinion (just as in the CGL) or really any regard for the insured’s reputation. “Consent to settle” language gives the insured a voice, allowing them to make a business decision regarding the merits of the case, the affects of a settlement and the possible result should the offered settlement be refused. It’s the result following a refused settlement around which the “hammer clause” is based.
Application of the “Hammer Clause”
Few words are as dangerous in the insurance contract as “however.” Nearly everything prior to it is negated by its presence. The “hammer clause” follows the “however” in the consent to settle provision. The extent of the “however” varies from form to form and carrier to carrier.
The specifics of the “hammer clause” are the focus of the next post. It’s affect on limits, the involvement of the insurance carrier and example language are each discussed and provided.
Reply
This article does not explain the repercussions of allowing the insured to decide whether or not to go to trial. For example, the article states that a doctor has his/her reputation in mind and that is exactly true. Often times, this line of thinking is what gets you into trouble. With jury trials, it is not about what happened but more about what you can prove. A doctor that has poor documentation may choose to go to trial because there was no medical error. Well four years later after the insurance company has spent thousands preparing a defense (depositions and expert witnesses, etc.) now that doctor, after hearing the plaintiff atty’s opening statements about how the doctor neglected to note the patient’s chart properly, has decided that a settlement may have been a better way to go. Well now that plaintiff atty is certainly not going to accept the same settlement amount he would have four years ago. Now the settlement is higher and the doctor’s record reflects a higher number and the insurance company loses more money resulting in higher premiums for everyone. Just as you wouldn’t want a claims manager performing surgery on you, sometimes doctors are not the best people to decide whether or not to go to trial. Best to leave that decision to those who are experts in medical malpractice defense. Insurance companies may be looking for the most inexpensive way to handle claims but that includes fighting frivilous suits. A company that settles every case that comes their way, they may gain a reputation among plaintiff attys resulting in more attys taking cases against them. If you are the company that fights everything, those attys will make sure that that claim has merit before going through the hassle with that insurance company. Aside from that, we all learned from Rova Farms that waiving your right to consent to settle is your biggest protection as an insured. If the insurance company is the one who decides to go to trial and the judgement is in excess of the policy limits, that insured has every right to sue their insurance company for bad faith. But if it is the doctor’s decision, he will be paying out of pocket for the excess judgement.