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D&O Insurance

What is the Hammer Clause in a D&O Policy?

By January 8, 2022No Comments

Any insurance policy document is full of various clauses. Clauses are simply features of the policy. They have legal bindings. Both the insurer and the insured have to follow the clauses mentioned in the legal document, once the deal happens, complying to the terms and conditions of the policy. One such clause is the hammer clause.

Meaning of the Hammer Clause

It is important for a business to understand the meaning of Hammer Clause associated with D & O Policy. The clause ensures settlement of the claims made by the insured subject. The insurer has to mandatorily settle the claims, according to the Hammer Clause of D&O Policy. Hammer clause allows the insurer to force the insured to settle the claim. 

Another term of the clause

In the industry, the Hammer Clause of the policy document is also called The Blackmail Clause. Both the parties, the insured and the insurer, are involved within the regulatory framework of the clause. 

Avoiding going to a court

A major objective of the clause is to avoid the parties to visit a court in pretext of a legal disputed related to the claims of the insurance policy. It is wise to settle the claim without going to a court as both parties do not have to bear considerable legal expenses.

The clause places a compulsion

The Hammer Clause of the D&O Policy places a compulsion on the insurer to settle the claims of the insured. The terms and conditions of the insurance policy are legally taken into account while settling the claims. 

Who is the insured and who is the insurer?

The insured party is any business. It can be a private company or even a public listed organization. It can also be a start-up. On the other hand, the insurer is a company that covers the loss as defined by the D&O Policy.

Avoidance of ‘out-of-pocket’ expenses

The criterion of the Hammer Clause is to help the insurer too, by letting it avoid costs considered to be ‘out-of-pocket’. There is no miscommunication between the insured and the insurer. The insurer does not have to think about additional expenses to settle the case.

Placing a limit or cap

The function of the Hammer Clause in the policy document is placing a specific cap on the amount of indemnification, complying with the conditions laid by the policy. The legal term of coverage for any loss is indemnification. Such a cap makes it clear the amount needed to be paid to the insured. 

Setting the amount of indemnification

In several cases, the insured and the insurer discuss the amount of indemnification. It is more like negotiating and agreeing to a particular amount. Disagreements are common in such cases. In most situations, it is the responsibility of the insurer to set the amount.

Complying with other terms and conditions 

The Hammer Clause complies with the other terms and conditions of the D&O Policy, within the legal framework. The clause is designed in a way to blend with the essence of the insurance policy document.

Aiming for the most profitable outcome

Where a situation arises to apply the Hammer Clause of the policy, both parties aim to get the best possible or most profitable outcome. As a person responsible for buying an insurance policy on behalf of a company, it should be one of your top priorities to read the features of the clause.

Both the insured and the insurer can consult with legal experts to assess the Hammer Clause in a better way. They are free to set respective strategies after the initial discussions and assessment with the experts.

The goal of the insurer

The goal of the insurer is to avoid a lengthy and tiring legal procedure through settlement. The avoidance can practically save a lot of money and time for the insurer. It is for the greater good of the insurer to comply with the clause. 

The goal of the insured

The goal that the insured wants to meet is avoiding any type of ‘out-of-pocket’ expense. Such costs don’t do any good to the insured. A wiser strategy is to take steps according to the features of the Hammer Clause of the D&O Policy. It ensures convenience. 

Reducing indemnification

The objective of the insurer is obviously to reduce the amount of the indemnification. When the amount is low, it naturally benefits the insurer. The costs get reduced for the insuring company. The insurer does its calculations to set the amount considering several financial and legal factors. 

Finalizing the settlement

The insured has the objective to finalize the settlement as smoothly as possible. The aim is to limit the costs. Usually, the settlement feeds keep on increasing as time passes by. So, the insured wants the settlement sooner. It helps in lowering the expenses to a significant extent.

Go through the clause details

If you are the CA or HR Head of a company, in charge of recommending D&O Insurance, then it is one of your top duties to read the details of the Hammer Clause printed on the policy document. Read it and re-confirm it with the insurer.

There are different types of legal expenses that can be conveniently avoided by the application of the Hammer Clause in the insurance policy document. It is vital to strategically use the clause, within a well-defined legal framework, complying with the laid terms and conditions, as clearly mentioned in the D&O Policy

  • The high costs of hiring lawyers, especially more experienced lawyers
  • The expenses of hiring legal agents and interpreters 
  • The considerable costs of mediators (required in certain legal cases)
  • The usual court fees
  • Documentation expenses and other miscellaneous costs 

Purchase insurance from a trusted broker

If your business is searching for transparent D&O Insurance with a well-defined Hammer Clause, then it is highly recommended to buy the policy from the reliable Insurance Broker PlanCover. It has good expertise in selling insurance policies to several types of businesses across India. Call PlanCover today. 

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