Eric Kyler Discusses Demystifying the Hammer Clause

Author – Eric S. Kyler, Account Executive, Horst Insurance


In the intricate landscape of insurance policies, the Hammer Clause stands out as a provision with profound implications. But what exactly is a Hammer Clause, and how does it influence the dynamics between insurers and the insured? Let’s delve into the intricacies and shed light on this often-overlooked aspect of insurance contracts.

Understanding the Hammer Clause:

A Hammer Clause, nestled within certain insurance policies, such as, Directors and Officers Liability (D&O), Employment Practices Liability (EPLI), Professional Liability, and Errors and Omissions (E&O), dictates the course of action when an insured disagrees with their insurer’s recommended claim settlement.

Example Scenario:

Consider, company XYZ Inc is facing a lawsuit from a customer.  The lawsuit alleges that XYZ Inc made an error while performing their professional services, which caused the customer financial harm. Company XYZ files a claim with their E&O Insurance carrier.   After careful analysis, their insurance carrier recommends accepting a settlement agreement.  Despite the insurer’s recommendation to settle, XYZ Inc believes they made no error and decides not to settle the claim.   The Hammer Clause in their E&O policy may stipulate how the insurer will or will not continue to pay on the claim if XYZ Inc. does in fact refuse to settle as recommended.

Variability in Hammer Clauses:

Hammer Clauses are not one-size-fits-all; they can vary significantly. Found under headings like “Consent to Settle,” these clauses outline the terms under which the insured might be financially responsible if they reject the insurer’s settlement recommendation.

Determining Responsibility:

The Hammer Clause preemptively establishes the percentage of defense costs each party bears after the insurer suggests settling and the insured persists in defending a lawsuit. For instance, if it specifies a 60/40 split, the insurer covers 60% of defense costs, while the insured bears 40%. If it specifies 80/20, the insurer covers 80% of defense costs, while the insured bears 20%. Any combination of splits can be outlined in a Hammer Clause and they vary from policy to policy.


The Hammer Clause introduces a nuanced dynamic into some insurance agreements, requiring careful consideration by both insurers and the insured. Understanding its implications and the potential financial responsibilities it entails is essential for informed decision-making in the ever-evolving landscape of insurance claims. As we navigate these complexities together, knowledge becomes a powerful tool in securing the best possible outcome for all parties involved.