A “hammer clause” is a provision typically found in insurance policies, particularly in Directors and Officers (D&O) liability insurance, professional liability insurance, and other types of liability coverage. The purpose of a hammer clause is to allow the insurer to limit its liability in cases where the insured rejects a settlement offer that the insurer deems reasonable and chooses to continue litigation.

Key features of a hammer clause:

1. **Settlement Authority:**
– The hammer clause typically gives the insurance company the right to take control of the settlement process. It grants the insurer the authority to decide whether to accept a settlement offer on behalf of the insured.

2. **Reasonable Settlement:**
– If the insurer receives a settlement offer that it deems reasonable and within policy limits, the hammer clause allows the insurer to accept the offer. The insurer may then have the right to settle the claim even if the insured prefers to continue with litigation.

3. **Limitation of Liability:**
– If the insured rejects a reasonable settlement offer and chooses to proceed with litigation, the hammer clause often includes a provision that limits the insurer’s liability. The insurer may be liable only for the amount that would have been payable under the rejected settlement offer.

4. **Insured’s Consent:**
– Some hammer clauses require the insurer to obtain the insured’s consent before settling a claim. However, if the insured rejects a reasonable settlement offer, the hammer clause allows the insurer to limit its liability.

5. **Encourages Cooperation:**
– The inclusion of a hammer clause is intended to encourage cooperation between the insured and the insurer in settlement negotiations. It aims to prevent insured parties from unreasonably rejecting settlement offers that the insurer believes are in the best interest of both parties.

6. **Risk Management:**
– From the insurer’s perspective, the hammer clause serves as a risk management tool. It helps limit the potential financial exposure of the insurer in situations where the insured’s decision to reject a settlement offer may be deemed unreasonable.

7. **Negotiation Point:**
– During the negotiation of an insurance policy, the inclusion or exclusion of a hammer clause can be a point of negotiation between the insurer and the insured. Insured parties may seek modifications to the clause to protect their interests in settlement decisions.

It’s important for policyholders to carefully review the terms of their insurance policies, including any hammer clauses, and understand the implications of such provisions. Legal and insurance professionals can provide guidance on how these clauses may impact a policyholder’s ability to control the settlement process and manage potential liabilities.