Do you know what the consent to settle clause in an E&O policy is commonly referred to? The Hammer clause. The hammer that when the agency does not want to agree to what the E&O carrier believes they can settle a case at, the carrier can invoke a “penalty”. With some E&O carriers, the penalty is that any settlement (loss and defense) that is over and above what the carrier thought they could settle the case at is the agency’s responsibility.
Sounds like a pretty strong hammer!
Let’s look at how an E&O settlement could take place in the absence of a consent to settle clause. There have been (and probably still are) E&O carriers that don’t have this clause in their policy. Essentially what this does is to allow the E&O carrier to settle the case whether the agency agrees or not. This could very easily result in a claim being settled against the agency when they did not feel they had done anything wrong. How could this happen?
Compare the following:
#1 An E&O carrier settles a case against the agency for $10,000, only paying $5,000 in defense costs – total $15,000 minus the agency deductible.
#2 The E&O carrier fights the case and takes it to the courts (and wins) incurring $20,000 in defense costs.
Which is the better settlement? From the carrier’s perspective, it is #1 because the dollars / the financial impact is less. Personally, I think the winner is #2 because the E&O carrier fought for the agency to protect their level of professionalism (isn’t that what the E&O carrier is supposed to do?). Also, with #1, the agency now has a paid claim on their record for something that they really didn’t do. This could result in a higher rate, higher deductible, etc.
A consent to settle clause is a good thing. It prompts dialogue between the E&O carrier and the agency. There has been many an E&O claim where the agency’s insistence that they committed no wrong played out favorably for the agency when the carrier aggressively fought the claim. This, of course, requires the agency to be totally honest in communicating exactly what happened.
It is interesting that many E&O carriers are making some modifications to their E&O policy in this area. Instead of the claim being essentially capped at the amount the carrier thought they could settle the case at, there is new language that adds some additional coverage for the agency. The language is similar to the following:
“If we recommend a settlement which is acceptable to the claimant and you do not agree to that amount, we will pay the amount which the claim could have been settled at plus 40% of the amount of damages which are in excess of that settlement”. The remaining 60% is the responsibility of the agency.
This is a positive development and language like this should become the norm in short order. Don’t get me wrong – E&O carriers want to minimize the amount they pay for an E&O claim – that is good business sense. However, they understand that the agency should have a strong say in the direction the claim goes. The consent to settle clause helps to do that.