What the heck is The Hammer Clause?

Imagine for a moment that you’re being sued for something you're confident you didn't do. Your insurer wants to settle, but you want to fight.

You can, but your policy might make you pay for the privilege.

Welcome to the hammer clause.

So what is it?

When someone makes a claim against your business, your insurer usually runs your defence. It pays the lawyers, and it pays any damages up to your policy limit.

That gives your insurer a say in how the claim ends. If the claimant offers a settlement the insurer thinks is fair (when balanced against the cost of defending you), it may recommend that you take it.

Most policies need your consent to settle, so you can say no. The hammer clause is what happens next. If you refuse a settlement your insurer recommended, its payout is capped at what the claim could have settled for, plus the legal costs up to that point.

Anything above that, and you can’t touch this. Ahem.

What usually happens

As an illustrative example using fake figures; a client claims your software failure cost them £300k in lost revenue. You're confident the fault was theirs, not yours.

Six months in, the client offers to settle for £100k. Your insurer weighs up the legal costs still to come and the risk of losing, and recommends accepting.

You could refuse, and there are often a number of valid reasons for doing so. A settlement can look like an admission of guilt, even when it isn't one legally, and you don't want that following you into your next pitch or stinking up your reputation within your industry.

The case goes to trial. There are two ways it can end:

• You win. No damages. Your principles held up. Good job.
• You lose, and the court awards £250k. Your insurer pays £100k, the amount it could have settled for. You pay the other £150k, plus the legal bills from the day you said no.

Nobody's the villain

It's tempting to cast the insurer as the bad guy (and we often do!).

But your insurer is spending its own money and making a commercial judgement: settle now for a known amount, or keep paying lawyers for an unknown outcome. That's a reasonable position.

So is yours. For a lot of businesses, reputation is the product. Settling a claim you believe is baseless can cost you more in lost trust than it saves in legal fees.

Not all hammers hit equally hard

Hammer clauses come in different strengths:

• Hard hammer. The insurer's liability stops at the settlement figure. Everything above it is yours.
• Soft hammer. Costs above the settlement figure are shared between you and the insurer, in a split set by the wording.
• No hammer. Some wordings leave it out altogether, so you can refuse a settlement without penalty.
• MC Hammer. A rapper and dancer who found fame in the early 90s, completely unrelated to insurance or this article.

A softer version, or none at all, may be available if you ask, though it can come at a higher premium.

What to do about it

Find it before you need it. The hammer clause usually sits in the defence and settlement section of your policy, sometimes under a heading like "consent to settle". It's more common in professional indemnity and directors' and officers' cover.

Know how hard it hits. Full cap or shared split makes a big difference to your exposure if you refuse.

Decide where your line is now, not mid-claim. If your reputation depends on never settling certain kinds of claim, that's worth knowing before you buy. It might be worth paying for a softer clause.

Get advice before you refuse. Saying no to a settlement is a financial decision as well as a principled one. Understand the numbers first.

Where we come in

We read the settlement terms in your wording before you buy, and we'll tell you in plain English what happens if you and your insurer disagree.

Principles are worth having. It's better to know what they cost before you're asked to pay.

And we know a thing or too about sacrificing revenue for your principles.