Hammer Clause: What it Means, How it Works, Example

What is a hammer clause?

A hammer clause is a provision in an insurance policy that enables the insurer to force (or effectively compel) the insured to accept a settlement offer. It’s also called a blackmail clause, settlement cap provision, or consent-to-settlement provision. The clause exists because insurers and insureds may disagree about whether to settle a claim — and at what cost.

How it works

• The insurer has the duty to defend claims covered by the policy. When a claim arises, the insurer can investigate, negotiate, and propose settlement terms.
• A hammer clause sets a limit on the insurer’s indemnity or allocates responsibility for defense costs and damages if the insured refuses a reasonable settlement.
• If the insured declines a settlement that the insurer deems appropriate, the clause typically reduces or eliminates the insurer’s obligation for any amount above the proposed settlement and may require the insured to pay defense costs beyond that point.

In short: the insurer can offer a settlement; if the insured refuses, the insurer’s financial exposure is curtailed and the insured may bear excess costs.

Why insurers use hammer clauses

• To control litigation costs and limit exposure to large judgments.
• To encourage timely resolution of claims and avoid prolonged, expensive defenses.
• To protect the insurer’s interests when continued litigation is unlikely to yield a better outcome than the settlement offered.

Typical clause wording (example)

A common form of a hammer clause might read:
“We have the right and duty to defend any claim seeking damages, even if any of the allegations are groundless, false, or fraudulent. We will investigate any such claim we deem appropriate. We will not settle any claim without your written consent, which shall not be unreasonably withheld. You and we agree to consult with each other to resolve any differences regarding such settlement. If you refuse to settle a claim for an amount we consider reasonable, our obligation to indemnify you for any amount in excess of such settlement shall be limited as specified in this policy.”

(Note: policy language varies—always read the actual policy text.)

Example

A manufacturer faces a product-liability suit. The insurer thinks a quick settlement is the most cost-effective resolution and offers to settle for a specified amount. The manufacturer, concerned about admission of liability or out-of-pocket costs, refuses. Under a hammer clause, the insurer’s obligation may stop at the settlement amount; any judgment above that amount and some additional defense costs could become the manufacturer’s responsibility.

Considerations for insureds

• Risk allocation: A hammer clause shifts risk to the insured if they reject a settlement the insurer deems reasonable.
• Negotiation: Insureds can negotiate policy language to soften the clause (for example, requiring mediation before the clause triggers or limiting insured liability).
• Counsel involvement: Insureds should involve legal counsel early to evaluate settlement offers and the potential financial consequences of refusing them.
• Business implications: Beyond financial exposure, settlements can carry reputational, regulatory, or contractual consequences that insureds should weigh.

Key takeaways

• A hammer clause gives insurers leverage to settle claims and limits their exposure if the insured refuses a reasonable settlement.
• It aims to control costs and encourage resolution, but it can leave insureds liable for excess judgments and defense costs.
• Policyholders should review and, if possible, negotiate hammer-clause terms and consult legal counsel when disputes about settlement arise.