What is the "Hammer Clause" in D&O Insurance?

The "Hammer Clause" is a provision commonly found in Director and Officer Liability Insurance (D&O Insurance) policies. It is also known as the "Consent-to-Settle Clause" or "Cooperation Clause." The Hammer Clause defines the circumstances under which the insurer can settle a claim without the consent of the insured directors and officers, and how the financial liability for the settlement is allocated between the insurer and the insured individuals.

Here's how the Hammer Clause typically works:

Consent Requirement: Without the Hammer Clause, the insurer would typically need the consent of the insured directors and officers to settle a claim. In such cases, the directors and officers have significant influence over whether to accept a settlement offer or proceed to trial.

Hammer Clause Activation: When the Hammer Clause is activated, the insurer can settle a claim without obtaining the consent of the insured parties, but it does so at the risk of a specific financial consequence.

Financial Consequence: If the insurer decides to settle a claim without the consent of the insured directors and officers, the Hammer Clause specifies that the insurer's financial liability for the settlement will be limited to a certain amount. The remainder of the settlement amount, beyond the limit set by the Hammer Clause, becomes the financial responsibility of the insured individuals.

Insured's Decision: The insured directors and officers have the option to either accept the settlement as proposed by the insurer or, if they believe that proceeding to trial is in their best interests, they can choose to do so. However, if they reject the settlement and proceed to trial, they may become personally responsible for any damages that exceed the amount the insurer would have paid had the settlement been accepted.