What does a Hammer Clause allow an insurance company to do?

A Hammer Clause is typically found in professional liability or errors and omissions insurance policies. It allows the insurance company to take control of the settlement process if the insured refuses a settlement offer that the insurer believes is reasonable. If the insured decides to continue the case and it results in a judgment that exceeds the settlement offer, the insurer can limit its liability by not covering the excess.

Essentially, the Hammer Clause incentivizes the insured to accept reasonable settlements in order to avoid potential financial loss. Therefore, the provision permits the insurer to charge the insured for settlement delays if a delay in accepting a settlement leads to higher costs than what was originally proposed.

The other options do not accurately reflect the purpose of a Hammer Clause. The clause does not involve automatic claim approval, settling claims without the insured's input, or negotiating on the insured's behalf, as these processes do not capture the protective and sometimes punitive nature of the Hammer Clause within the context of risk management in insurance contracts.