DEFINITION of 'Hammer Clause'

An insurance policy clause that allows an insurer to compel the insured to settle a claim. A hammer clause is also known as a blackmail clause, settlement cap provision, or consent to settlement provision. This clause gets its name from the power given to the insurer to force the insured to settle, much as how a hammer is used against a nail.

BREAKING DOWN 'Hammer Clause'

Insurance companies indemnify their policyholders from risks outlined in the policy that they purchase. If a claim is made, then the insurer is responsible for helping settle the loss. In some cases, the insurance company and the insured party will have a different opinion on what the settlement value should be. The insurer wants to limit the costs that it incurs during the settlement process, including legal fees and claims adjuster fees, which can grow substantially the longer the claims process drags out. The insured party, however, is interested in reducing the amount of money it will owe in a settlement, and since it does not incur the legal fees has less of an incentive to finalize a settlement if the party is not pleased with the amount.

Hammer clauses allow the insurer to force the insured to settle. It does this by placing a cap on the amount of indemnification that it is willing to provide. This cap may be set, for example, at the amount the insurer thinks that the settlement is worth. If the insured refuses to settle, it may be responsible for its own defense costs.

For example, consider a manufacturer that is being sued for injuries sustained by consumers who used its product. The manufacturer’s liability policy requires the insurer to defend the manufacturer in court. The insurer may recognize that defending the insured will be a drawn out process, and that the consumer lawsuit may be finalized quickly by offering a settlement. The manufacturer, however, doesn’t want the settlement because it will cost it money out-of-pocket. A hammer clause will allow the insurer to compel the manufacturer to settle.

RELATED TERMS
  1. Valuation Clause

    A provision in certain insurance policies that specifies the ...
  2. Cancellation Provision Clause

    It is a provision in an insurance policy that permits an insurer ...
  3. Abandonment Clause

    A clause in a property insurance contract that, under certain ...
  4. Waiver Of Coinsurance Clause

    Language in an insurance policy that says the insurance company ...
  5. Insurance Premium

    The amount of money that an individual or business must pay for ...
  6. Cumis Counsel

    Legal counsel chosen by the insured when the insurer has a conflict ...
Related Articles
  1. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  2. Managing Wealth

    Protect Your Company From Employee Lawsuits

    Understanding employment practices liability insurance is easy, once you know the basics.
  3. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  4. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  5. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  6. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  7. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
RELATED FAQS
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. What are examples of the largest companies in the insurance sector?

    Read about some of the largest and most influential companies in the insurance sector, a list that includes Berkshire Hathaway ... Read Answer >>
  3. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
Hot Definitions
  1. Time In Force

    Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before ...
  2. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  3. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  4. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  5. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  6. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
Trading Center