“The
most important words in any document are the words that follow 'however.'”
This
advice, given by Martin Tracy, JD, CEO of PRMS, applies well to the
hammer clause. The clause, tucked away in the jargon of many policies,
sounds very similar to consent to settle… until those important
words following “however.”
The
inclusion of the hammer clause may mean a less expensive premium, but
it could cost a physician greatly.
"The Insurer shall not settle any claim without the consent of
the Insured. If, however, the Insured refuses to consent to any settlement
recommended by the Insurer and elects to contest or continue the legal
proceedings in connection with such claim, the Insurer's liability for
the claim shall not exceed the amount for which the claim could have
been settled plus legal expenses incurred up to the date of such refusal."
What
does this mean?
The
hammer clause means that if an insured withholds consent to settle,
the insured will have to pay out of their own pocket any judgment in
excess of the proposed settlement amount. This saves the insurance company
money by cutting short the litigation process and reducing the insured’s
ability to veto a settlement. *
For
example, consider a physician facing a $200,000 settlement who has a
$2 million limit on his policy. If the physician’s liability policy
contains a “hammer clause,” the insurance company can invoke
the clause for that settlement, in essence reducing the $2 million limit
to $200,000 and forcing the doctor to decide: either settle the claim
on those terms or risk paying his own money. Many doctors are not aware
of this risk.
“Doctors
need to read their policies carefully regarding how much input they
have in the litigation process,” said Tracy. “In exchange
for a less expensive policy, they give an insurance company a little
more leverage in the litigation process. And because the vast majority
of claims are settled claims, the hammer clause can have a significant
impact.”
The
inclusion of the hammer clause may mean a less expensive premium, but
it could cost a psychiatrist greatly.
“A
doctor motivated purely by price may end up with a policy provision
he or she doesn’t fully understand, and it can have a significant
impact on their personal financial situation,” said Tracy.
The
Psychiatrists’ Program has no hammer clause in its policy.
Instead, The Program offers a negotiated process in case of a disagreement,
in which case an expedited arbitration process reviews the facts of
the claim.** However, Tracy cannot recall a time when an arbitration
has even been necessary, due to The Program’s approach to accommodate
the needs of the insured.
“We
believe that a more reasonable approach to the settlement process is
to permit the insured with as much input as is reasonable. A settlement
process is highly emotional - a professional reputation is on the line
- and we understand it’s not purely a monetary decision.”
*
See policy for details
** There are five states that have developed loss histories requiring
a change in the Consent to Settle provision. In Louisiana, Michigan,
New Hampshire, Pennsylvania and Texas, and in cases involving sexual
misconduct, The Program will decide the issue of settlement if it strongly
believes that a claim should be settled based on the surrounding circumstances.
Beginning with the 1996-97 policy year, this change was implemented
in only these five states, due to the escalating loss ratios developing
in these areas.
