What is a Hammer Clause in D&O Insurance?
As company executives, company directors and officers (D&O) need insurance protection from professional liability. This insurance coverage is necessary to protect them from personal losses resulting from claims and lawsuits against their company. Unfortunately, businesses now operate in an increasingly litigious society. Your customers or clients can sue you at the drop of a hat. Getting coverage under MD D&O Insurance can therefore be crucial for the success of your business. Keep in mind that the provisions of D&O insurance policies are pretty complicated, particularly the hammer clause. Let’s take a look at what this provision is and how D&O coverage works.
Hammer clause: arm-twisting for the insured to settle
The hammer clause typically applies to claims on D&O insurance policies. This provision is intended to address disputes between the insurance company and the insured party regarding the settlement value of a claim.
Disagreements between the insurer and the insured occur for various reasons. Some businesses may refuse to settle a claim because it could encourage others to make similar claims. Settling a claim could also affect a company’s business reputation negatively.
With a hammer clause, the insurance company could compel the D&O policyholder to settle a claim. This provision essentially works like a hammer to nail a settlement to a specific value. Because of its mandatory nature, the clause is also known in the trade as a blackmail clause, signifying a company’s consent to settle and placing a cap on the settlement amount.
How and when this provision applies
There are many ways by which insurance firms can use the hammer clause to compel D&O policyholders to settle claims. For example, they could put a cap on the indemnification amount, limiting it to what they think the settlement is worth. The D&O policyholder would then have to shoulder the remaining costs.
Businesses shopping for D&O insurance could choose between “hard” and “soft” hammer clauses. The hard clause requires the policyholder to bear the full cost of indemnity and defence for rejecting a claim that the insurer would have accepted. The soft hammer clause makes D&O policyholders who refuse settlement accountable for a percentage of the indemnification and defence costs.
In the fine print of D&O policies, hammer clause are usually worded:
We have the right and duty to defend any claim seeking damages, even if any of the allegations of the claim are groundless, false, or fraudulent. We will investigate any such claim we deem appropriate. We will not settle any claim without your written consent, which shall not be unreasonably withheld. You and we agree to consult with each other to resolve any differences to such settlement.
D&O insurance policies vary
D&O insurance policies come in many forms, with the option determined by the nature of the company’s business and its risks. Manufacturers face possible damage or injury claims resulting from the consumption or use of their products. D&O policies may also cover risks such as employment malpractice, reporting errors, inaccurate disclosures, insolvencies, and regulation violations
Companies usually purchase D&O insurance to cover a group of executives rather than the policyholders themselves. When choosing a policy for your business, it is advisable to go with an insurance company that has extensive experience in this particular area. Expect to pay an average of $5,000 to $10,000 annually for $1 million worth of D&O insurance coverage.
Studies show that companies without D&O insurance incurred average losses of $390,000. These mainly resulted from damage related claims made by vendors, customers, and other third parties. For this reason, large and small companies alike should seriously consider D&O insurance and its hammer clause.
About Moody Insurance Worldwide
Moody Insurance Worldwide, a division of Moody & Associates that was founded in 1914, is a leading provider of risk management programs and insurance coverage to individuals and businesses across the East Coast. We write all sizes of businesses, with technical expertise in many key industry areas, and provide personal insurance programs for estates and high net worth individuals. Our licensed, experienced commercial account managers can work with you to determine the coverage that you need at a competitive rate. Contact us today at (855) 868-0170 to learn more about what we can do for you.