The Core of the Consent to Settle Provision
In the world of Employment Practices Liability Insurance (EPLI), the duty to defend and the right to settle are pivotal components of the policy contract. Most professional liability and specialty lines policies contain a "Consent to Settle" clause. Unlike a standard General Liability (GL) policy where the insurer typically retains the absolute right to settle a claim as they see fit, EPLI policies often allow the insured (the employer) to have a voice in the settlement process.
However, this voice comes with a significant financial caveat known colloquially as the Hammer Clause. For those preparing for the complete EPLI exam guide, understanding the mechanics of this clause is essential, as it dictates the risk-sharing relationship between the carrier and the policyholder during litigation.
How the Hammer Clause Operates
The Hammer Clause is triggered when the insurance company recommends a settlement that is acceptable to the claimant, but the insured refuses to consent to that settlement. Employers often refuse to settle for non-financial reasons, such as protecting their reputation, deterring "frivolous" future claims, or out of a sense of moral principle.
When the insured refuses a recommended settlement, the Hammer Clause limits the insurer’s liability. Under a standard "Hard Hammer" provision, the insurer's liability is capped at:
- The amount for which the insurer could have settled the claim.
- Plus defense costs incurred up to the date the insured refused to settle.
Any judgment or defense costs incurred after the refusal become the sole responsibility of the insured. This effectively "hammers" the insured into accepting the settlement to avoid massive out-of-pocket exposure.
Hard Hammer vs. Soft Hammer Clauses
| Feature | Hard Hammer Clause | Soft Hammer Clause |
|---|---|---|
| Insurer Responsibility | Caps at the proposed settlement amount only. | Pays proposed settlement + a percentage of excess. |
| Insured Exposure | 100% of costs above the settlement offer. | A shared percentage (e.g., 20% or 50%) of excess. |
| Negotiation Power | Favors the insurer significantly. | Provides a compromise for the insured. |
| Commonality | Standard in basic EPLI forms. | Often negotiated or added via endorsement. |
The Rise of the 'Soft Hammer'
Because the Hard Hammer clause is often viewed as overly punitive, many modern EPLI policies utilize a Soft Hammer Clause. This provision is more favorable to the insured. Instead of capping the insurer's liability strictly at the settlement offer, the insurer agrees to pay a specific percentage of the additional losses and defense costs.
For example, a "70/30 Soft Hammer" means the insurer will pay the original settlement amount plus 70% of any costs exceeding that amount, leaving the insured responsible for the remaining 30%. This allows the employer to continue fighting a case they believe is meritless without facing total financial ruin if they lose at trial.
Common Coinsurance Splits in Soft Hammer Clauses
Exam Tip: Defense Costs and the Hammer
Strategic Implications for Employers
When analyzing a claim under the Hammer Clause, an employer must weigh the risk of a "runaway jury" against the desire for vindication. If a claimant offers to settle for $100,000 and the insurer recommends it, but the employer refuses and the jury later awards $500,000, the financial impact is determined entirely by the Hammer Clause type:
- Under a Hard Hammer: The insurer pays $100,000. The employer pays $400,000 plus all post-refusal legal fees.
- Under an 80/20 Soft Hammer: The insurer pays $100,000 + 80% of the $400,000 ($320,000). The employer pays 20% ($80,000) plus 20% of post-refusal legal fees.
Understanding these nuances is vital for risk managers and agents when evaluating policy language. For more scenario-based learning, you can review practice EPLI questions.