“Hammer” Clause (or Settlement Cap Clause)

In essence, a hammer clause sets a maximum dollar amount that the insurer is obligated to pay in the event of a settlement. In some cases, the hammer clause may be set at the full, stated policy limit, while in other cases, it may be set at a lower amount. In either case, if the settlement amount exceeds the cap, the insured will be responsible for paying the difference.

The purpose of a hammer clause is to protect the insurer from paying out more than it is obligated to. By capping the amount that the insurer is required to pay, the insurer can ensure that its financial exposure is limited and that its policy limit is not exceeded.

By setting a hammer clause, the insurer is also able to protect itself from large settlements. For example, if an insured director or officer is sued and the settlement amount is significantly higher than the stated policy limit, the hammer clause can protect the insurer from paying the entire amount of the settlement.

In summary, a hammer clause (or settlement cap clause) is a provision in a D&O insurance policy that limits the amount of money that the insurer is obligated to pay in the event of a settlement. The purpose of the clause is to protect the insurer from paying out more than it is obligated to, and to protect itself from large settlements that could exceed the stated policy limit.