A hammer clause (also known as a blackmail clause) is an insurance policy provision that permits the insurer to force the insured to settle a claim. Settlement of a suit is far more advantageous than going to court because both parties avoid various legal expenditures.
Here is an example of how the hammer clause works. Someone is being sued for dinging another person’s car. The insurer is required by insurance plans to defend the insured (the person who dented the other automobile) in court.
If the insurer believes that offering a settlement will allow them to bypass the lengthy defense procedure, they will do so. The insured does not want this because it means they will have to pay the settlement costs out of pocket. The clause enables the insurer to compel the insured to pay.
A hammer clause, as previously stated, permits the insurer to compel the insured to settle their claim outside of court. Here are some of the costs you can avoid:
- Lawyers’, agents’, and/or interpreters’ fees
- The price of a mediator (if needed)
- Fees in the courtroom
- Fees for photocopying and document preparation
In general, choosing a settlement might be a far more financially viable alternative due to the costs saved. To pick the most equitable alternative, you should compare the indemnification cap to the potential legal cost incurred if you choose to settle in court.
Maintaining a hammer clause can save you a lot of money in the long run.