The Hammer Clause: When Push Comes to Pound in a Settlement

When an insured and insurer disagree over whether to settle a case, it usually is because the carrier wants to settle but the insured doesn’t. 


The carrier normally views a case as a form of business transaction, weighing the cost of the settlement against the cost of continued litigation with the possibility it will still be followed by an adverse judgment or a later settlement.  The insured may have an emotional or other business investment in the case.  For example, the insured may want to establish that it did nothing wrong, set a precedent or perhaps just avoid giving money to a party with which the insured has had a strong disagreement.  Many reasons can inspire the insured to win the case whatever the cost.


The desire to win may be stronger for some kinds of insureds and cases — defamation claims against the news media, for example.  Traditional news outlets often have a strong desire to defend constitutional rights and to not be seen by their peers as one who failed to defend the holy grail —  the First Amendment’s guarantees of free speech and a free press.


But the ability to have a voice in settlements is important to almost all insureds so the settlement provision can be a key factor in policy placement.


Can the insured prevent a settlement? 

A random review of technology, internet and media liability policies shows two common policy approaches are available, although they are expressed in different ways. 


Perhaps the most common approach is to provide the insured with the right to block a settlement.  In turn, the carrier protects its interests by transferring back to the insured the risk of any increase in damages and legal costs after the insured refuses to settle.  In most policies taking this approach, the carrier will pay defense costs up to the point the insured rejected a settlement that the carrier felt should have been accepted, and the carrier will pay no more for damages than the rejected settlement would have cost the carrier.  Any additional defense expenses or damages are to be borne by the insured.


However, there are many policy forms on the market that provide the insurer the unfettered ability to settle claims as it deems expedient.  This approach is more likely to be found in miscellaneous and technology liability policies than in media policies, where the market insurers traditionally have been more accommodating to the needs of media companies.


The more important it is to the insured to have the ability to control its destiny in the event of a conflict over settlement, the more important the policy’s settlement provisions become.



Another key factor to consider is who is evaluating the claim.  Such conflicts may be rare, but because they can be critical to the insured when they do occur,  it is vital that the insurer’s claims personnel have a high level of experience and an understanding of the insured’s needs so they can be factored into the carrier’s settlement decisions.