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Beware the Hammer Clause
“The
most important words in any document are the words that
follow however.”
This
advice, given by Martin Tracy, JD, CEO of PRMS, applies
well to the hammer clause. The clause, tucked away in
the jargon of many policies, sounds very similar to
consent to settle… until those important words
following “however.”
| The
inclusion of the hammer clause may mean a less expensive
premium, but it could cost a psychiatrist greatly. |
"The
Insurer shall not settle any claim without the consent
of the Insured. If, however, the Insured refuses to
consent to any settlement recommended by the Insurer
and elects to contest or continue the legal proceedings
in connection with such claim, the Insurer's liability
for the claim shall not exceed the amount for which
the claim could have been settled plus legal expenses
incurred up to the date of such refusal."
What
does this mean?
The
hammer clause means that if an insured withholds consent
to settle, the insured will have to pay out of their
own pocket any judgment in excess of the proposed settlement
amount. This saves the insurance company money by cutting
short the litigation process and reducing the insured’s
ability to veto a settlement. *
For
example, consider a psychiatrist facing a $200,000 settlement
who has a $2 million limit on his policy. If the psychiatrist’s
liability policy contains a “hammer clause,”
the insurance company can invoke the clause for that
settlement, in essence reducing the $2 million limit
to $200,000 and forcing the doctor to decide: either
settle the claim on those terms or risk paying his own
money. Many doctors are not aware of this risk.
“Doctors
need to read their policies carefully regarding how
much input they have in the litigation process,”
said Tracy. “In exchange for a less expensive policy,
they give an insurance company a little more leverage
in the litigation process. And because the vast majority
of claims are settled claims, the hammer clause can
have a significant impact.”
The
inclusion of the hammer clause may mean a less expensive
premium, but it could cost a psychiatrist greatly.
“A
doctor motivated purely by price may end up with a policy
provision he or she doesn’t fully understand, and
it can have a significant impact on their personal financial
situation,” said Tracy.
The
Psychiatrists’ Program has no hammer clause in
its policy. Instead, The Program offers a negotiated
process in case of a disagreement, in which case an
expedited arbitration process reviews the facts of the
claim. However, Tracy cannot recall a time when an
arbitration has even been necessary, due to The Program’s
approach to accommodate the needs of the insured.
“We
believe that a more reasonable approach to the settlement
process is to permit the insured with as much input
as is reasonable. A settlement process is highly emotional
- a professional reputation is on the line - and we
understand it’s not purely a monetary decision.”
*
see policy for details
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