how a hammer clause works
hammer clauses allow the insurer to force the insured to settle it does this by placing a cap on the amount of indemnification that it is willing to provide this cap may be set for example at the amount the insurer thinks that the settlement is worth if the insured refuses to settle it may be responsible for its own defense costs insurance companies indemnify their policyholders from the risks outlined in the policy that they purchase if a claim is made the insurer is responsible for helping settle the loss in some cases the insurance company and the insured party will have a different opinion on what the settlement value should be the insurer wants to limit the costs that it incurs during the settlement process including legal fees and claims adjuster fees which can grow substantially the longer the claims process drags out a hammer clause allows the insurer to compel a manufacturer in a lawsuit to settle the case the insured party however is interested in reducing the amount of money it will owe in a settlement and since it does not incur the legal fees it has less of an incentive to finalize a settlement if the party is not pleased with the amount sample hammer clause wordingthere is wording specific to a hammer clause we have the right and duty to defend any claim seeking damages even if any of the allegations of the claim 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 to such settlement example of the hammer clausefor example consider a manufacturer that is being sued for injuries sustained by consumers who used its product the manufacturer s liability policy requires the insurer to defend the manufacturer in court the insurer may recognize that defending the insured will be a drawn out process and that the consumer lawsuit may be finalized quickly by offering a settlement the manufacturer however doesn t want the settlement because it will cost it money out of pocket a hammer clause will allow the insurer to compel the manufacturer to settle 