Understanding the Hammer Clause

Though insurance is financial protection for individuals and businesses against litigation and unreasonable settlement demands, there are times when those who are insured seem to be forced into making certain decisions over the life of a policy. Some of these decisions are the result of the hammer clause.

What Is a Hammer Clause?

There are different clauses within an insurance policy that inform the insured as to what the responsibilities of the insurer are and when these responsibilities take place. With this clause, an insurer can force the insured into settling a claim by issuing a cap on the payout the insurance company will provide. This is often referred to as the settlement cap provision. The cap is usually determined by the insurer as to what the claim or settlement is worth. For the insured who refuses to settle, the costs for defense could come from their own pockets.

When Is the Hammer Clause Used?

In situations where the litigation and defense process will be long and drawn out, the insurer may believe that settling the consumer lawsuit will be less expensive than the alternative. Even if a settlement amount is reached, the insured may still be forced to pay some funds out of pocket, often causing the insured to refuse to sign. In this case, the hammer clause would be applied.

This clause is a protection for the insurer, but it also reduces risks for the insured. Talk to an agent about the extent the hammer clause applies to your policy.

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