EPLI GLOSSARY

Hammer Clause

Also called the consent-to-settle provision — understanding this clause can save you from a very expensive mistake when your carrier recommends settlement.

DEFINITION

What Is the Hammer Clause?

The hammer clause — formally called the consent-to-settle provision — is a policy term that addresses what happens when the insurance carrier wants to settle a claim and the insured (the employer) refuses. Under a standard hammer clause, if the insured rejects a settlement that the carrier recommends, the carrier’s liability for future defense costs and indemnity payments is capped at the amount it would have paid to settle plus defense costs incurred up to that point. The insured then bears financial responsibility for everything above that cap. The provision is called the “hammer clause” because the settlement recommendation effectively “drops the hammer” on the insured’s future liability exposure.

Why the Hammer Clause Matters in EPLI

EPLI carriers have a financial incentive to settle claims efficiently. Litigation is expensive, and employment cases before a jury — particularly in California — can be unpredictable. The carrier’s claims team may recommend settling a case for $150,000 even if the employer believes the claims are meritless, simply because the cost and risk of trial exceed the settlement amount. The hammer clause gives the carrier leverage to push the employer toward settlement.

From the employer’s perspective, settlement can feel like an admission of wrongdoing, and some employers refuse on principle. This is where the hammer clause becomes critical. Under a hard hammer clause, the carrier’s responsibility is capped at the settlement amount once the employer refuses. If the case goes to trial and results in a $400,000 judgment plus $80,000 in additional defense costs, the employer may be responsible for the difference.

Under a soft hammer clause, the carrier and employer share the excess costs according to a predetermined split — often 50/50. This is generally more favorable for employers because it limits the financial exposure of refusing settlement while still preserving the right to contest meritless claims. Most market-standard EPLI policies today use a soft hammer clause, but the split percentage and mechanics vary by carrier and form.

Hard Hammer vs. Soft Hammer

HARD HAMMER

Hard Hammer Clause

!Carrier liability capped at recommended settlement amount
!Insured bears 100% of costs above the cap
!More common in older and surplus-lines policies
!Significant financial risk if you reject settlement and lose at trial
!Less common in standard admitted EPLI markets today

SOFT HAMMER

Soft Hammer Clause

✓Costs above the settlement cap are shared (e.g., 50/50)
✓Insured retains right to contest claims
✓More common in current admitted EPLI market
✓Limits but does not eliminate employer’s excess exposure
✓Split percentages vary by carrier and form

Example: The Rejected $150K Settlement

Scenario: A California restaurant company faces an EPLI claim alleging harassment and retaliation. After investigation, the carrier’s claims team recommends settling for $150,000. The employer, who believes the claims are fabricated, rejects the settlement and insists on going to trial. At trial, the jury awards the plaintiff $400,000 plus $60,000 in additional attorney’s fees. Total claim cost: $460,000.

Under Hard Hammer

Carrier pays $150,000 (the capped amount). Employer owes the remaining $310,000 out of pocket.

Under Soft Hammer (50/50 Split)

Carrier pays $150,000 + 50% of the additional $310,000 = approximately $305,000. Employer owes approximately $155,000.

Under No Hammer (Full Consent Required)

Carrier pays the full $460,000 — but this structure is rare and generally not available in standard EPLI markets.

Key takeaway: The difference between a hard and soft hammer can be hundreds of thousands of dollars. Know your policy’s terms before a claim arises.

Why Employers Sometimes Reject Settlement Recommendations

Principle

The employer believes the claims are false and does not want to reward bad-faith accusations.

Reputation Concern

A settlement can appear on certain background checks or industry databases, which matters in regulated industries.

Precedent Concern

Settling one claim may encourage future claims by other employees.

Business Context

The employer may have evidence that strongly supports their defense and believes trial is winnable.

While these concerns are legitimate, the financial consequences of the hammer clause make it essential to consult with both legal counsel and your broker before rejecting a settlement recommendation.

What to Look For When Comparing Policies

1
Ask whether the policy uses a hard or soft hammer. Most carriers today use a soft hammer; request the specific split percentage.
2
Read the “Consent to Settle” section of the policy form carefully — some policies require the carrier to obtain your consent before settling; others give the carrier broader authority.
3
In California, where employment jury verdicts can be substantial, even a 50% excess share can represent significant exposure. Factor this into your limit selection.
4
Some policies include “hammer-free” clauses for settlements under a threshold amount (e.g., under $25,000). Ask your broker.

Common Mistakes

Not reading the consent-to-settle provision before a claim — discovering the hammer clause mid-litigation leads to poor decisions under pressure.

Reflexively rejecting settlement recommendations without quantifying the downside under the hammer clause.

Assuming all EPLI policies have the same hammer clause terms — they vary significantly by carrier and form.

Related Terms

Defense Within Limits EPLI Coverage EPLI Glossary

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Frequently Asked Questions

Does every EPLI policy have a hammer clause? +

Most EPLI policies include some version of a consent-to-settle or hammer provision, but the terms vary significantly. Hard hammer clauses cap the carrier’s liability entirely at the settlement amount. Soft hammer clauses share excess costs between carrier and insured — often 50/50 but the split varies by carrier and form. A small number of policies give the insured full consent rights with no financial penalty. Review the consent-to-settle language in your specific policy form.

Can I negotiate the hammer clause when buying EPLI? +

In some cases, yes. For larger accounts or preferred risks, carriers may be willing to offer more favorable consent-to-settle terms, including a softer split or a higher threshold below which the employer’s consent is not required. This is typically a negotiating point your broker can raise during placement or renewal. Availability varies by carrier and form.

Does the hammer clause apply to settlements I initiate, or only carrier-recommended settlements? +

The hammer clause is typically triggered when the carrier recommends a settlement and the insured refuses. If the insured independently seeks to settle (and the carrier agrees), the hammer clause generally does not apply in the same way. However, most EPLI policies require the carrier’s consent before the insured can settle — making unauthorized settlements a separate coverage risk. Review your specific policy language.

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