What Small Businesses Need to Know About Hammer Clauses in Professional Liability

A 2021 Deloitte study found that 85% of small business insurance buyers could purchase insurance through non-traditional channels. The uncertainty following the 2020 pandemic is undoubtedly a contributing factor to this inclination. 

Small businesses are often negatively impacted by new clauses, new rules, and unforeseen circumstances. But why specifically small businesses? It’s because small businesses are typically managed by a small team or a single owner, making them a little vulnerable when things don’t go according to plan.

The “hammer” clause, sometimes referred to as the “blackmail” clause, is one example of a clause that could cause problems. 

Let’s take a look at what exactly a “hammer clause” is and why small businesses need to be vigilant around them.

What Is a Hammer Clause and What Can It Look Like?

Lawsuits are always painful and can be detrimental to any business. But even with the best measures and services, all businesses know that there can always be gaps that allow for these lawsuits to come about.

Imagine, for instance, that you are being sued by a client for dishonest business practices and that the client’s insurance company has requested a specific claim to resolve the matter. After carefully considering the situation, the insurer, in this instance, ordered you to pay the settlement sum. You can either accept it or reject it. The rejection gives you the opportunity to file a lawsuit, defend your legal rights, and preserve your reputation; however, any legal costs that the client must pay must be covered by you, and don’t forget the notion that you acknowledge your error.

Since these kinds of clauses are not individually available, they are combined with various policies. Director and office liability, employment practice liability, professional liability, etc. are some examples of the same. Hammer clauses offer a logical way to avoid going to trial and resolve the issues without incurring legal fees and other costs.

Why Small Businesses Need to Know About Hammer Clauses?

Startups and small companies that employ consultants, craftspeople, or service providers must have professional liability insurance to safeguard themselves. This policy enables them to defend themselves in the event that a customer sues them for any harm, whether it be mental or physical. Most professional liability insurance policies include a “hard hammer” clause. However, over time, there have been hints of “soft hammer” clauses emerging too.

The “hard hammer” clause, as implied by its name, does not leave much leeway and requires the insured to accede to the requirement. When it comes to soft hammer, the insured can partially avoid paying the litigation fee to the complainant, if the insured chooses to file a lawsuit or even settle the matter without going to court.

Businesses should use these soft clauses to protect themselves from the potential financial harm that these policies may cause. The “soft hammer” clause applies to three different models. These are:

80/20 clause

20% of the determined claim is paid by the insured, with the insurer covering the remaining 80%.

50/50 clause

In this case, the insurance provider and the insured each contribute 50% of the overall sum that must be paid to the client or customer.

100/0 clause

The insured is responsible for paying the entire amount; however, there are no additional risks or costs if the parties cannot reach a settlement.

Different categories come with different premiums, and not all domains are eligible for these soft hammer clauses. Nevertheless, depending on the circumstance and premium costs, these may benefit the insured in the right case.

Exercising Caution & Making the Right Move

The knowledge of hammer clauses is, admittedly, somewhat esoteric. These are often hidden and sub-segmented in policies. When agreeing to contracts or policies that include these clauses, small businesses must exercise extreme caution. As always, they have the option of refusing to sign such contracts or changing them to suit their requirements.

Businesses can also accept such clauses into some of their policies, but a proper valuation must be carried out based on the business model and the security requirements it has. To accomplish this, they need appropriate guidance and understanding of handling this specific clause to be included with other policies.

Gonzalez Insurance provides personalized recommendations and quotes that are completely compatible with your business model. With our expert evaluations and expert advice, you can avoid any kind of hefty penalties or cash losses. Get in touch with us right away to talk in detail about the hammer clause or any other insurance needs.