Self-insured retentions (SIRs) are a common tool used by insureds to control claims, but many times they just aren’t sufficient to prevent a bad settlement.
How often do agents hear insureds complain about an insurer settling a case that could have been won if only the case went to trial? Rather than developing a strategy to avoid this occurring in the future, generally the policy terms and structure (deductible or SIR) remain largely the same year to year. The assumption is that nothing can be done.
What about requesting the carrier provide a true consent to settle endorsement in the policy provisions?
Consent to Settle Endorsements
Consent to settle is a common clause or endorsement in professional liability policies. The policy language typically states that the insurer will not settle any claim without written consent of the named insured, and that such consent shall not be unreasonably withheld. Insurance carriers evidently recognize the reputational harm to professionals that settling claims can cause, so they include this language to give professionals a say in the resolution of a claim.
Shouldn’t manufacturers and other businesses be given this same say in products and other casualty exposures? While some general liability policies contain consent to settle provisions, they are not nearly as common as they are in professional liability policies.
A consent to settle clause obviously requires the insurer to communicate with the insured prior to settling a claim and afford the insured the right to either consent or not consent to a proposed settlement. Given that the insured often understands certain aspects of a claim that a carrier’s adjuster may not have considered, just the requirement that the parties are communicating is a positive. This type of communication may also change the valuation of the claim when the insurer has a better understanding of all potential defenses. Obviously, this type of structure is not suited to all insureds, but for those that take an active interest in investigating and understanding their claims, the right to consent to settlements may be very useful.
Hammer Clause
Unfortunately for insureds, many consent to settle provisions are accompanied by what is commonly referred to as a hammer clause, which punishes an insured for not settling a claim if that is what the carrier desires.
Here is an example of a hammer clause excerpted from a GL Casualty policy:
If you refuse to agree to a settlement we recommend and the resulting judgment or settlement exceeds our recommended settlement, our liability for that “occurrence”, claim or “suit”, subject to the Limits of Insurance, will not exceed our recommended settlement amount (less any amount of the Retained Limit remaining). In such event the company will have no further obligation with respect to “Allocated Loss Adjustment Expense” subsequent to the date of such refusal.
The hammer clause serves to cap the insurer’s liability exposure to an amount the carrier and claimant would agree can settle the claim. Critically, it also cuts off payment of defense expenses from the date of the refusal to settle. In other words, it hammers the insured for not capitulating to the settlement. Hammer clauses are currently almost universal for consent to settle provisions in general liability policies.
Given the impact of significant settlements on a product or company’s reputation, along with future premiums, the hammer clause disincentivizes the insured from litigating further, which can be contrary to the insured’s best interest. If an insured insists on proceeding with the claim, not only do they bear the costs going forward, but they also take on the exposure above the proposed settlement. In essence, the carrier wins, the insured loses.
Instead of such an unfair arrangement for the insured, a different approach to the consent to settle provision, absent the hammer clause, is warranted. The insurer can be protected while according the insured the opportunity to get the satisfaction of a verdict, hopefully in its favor. This is a win-win.