What Is a Consent to Settle Clause in Business Insurance?

​A consent to settle clause is a provision in an insurance policy that means the insurer must get your approval before settling a claim. These clauses are often included in professional liability insurance, such as errors and omissions (E&O) coverage. Consent to settle clauses are especially important for architects, consultants, accountants, attorneys, engineers, tech firms, healthcare providers, and other professional businesses.

Many businesses think they can always approve or reject a settlement, but that is not always true. Consent to settle and hammer clauses help clarify this right.

​Are consent to settle clauses good for businesses?

Consent to settle clauses can help businesses protect their reputation and gain more say in their legal strategy. However, rejecting a settlement can lead to higher costs for your business. Not every professional liability policy includes a consent to settle, and it is usually not added later. So, check your policy carefully and ask your broker how settlement decisions are handled.

How does a consent to settle clause work?

According to insurance technology provider Zywave, a consent to settle clause gives you two options:

“Accept. If the insured approves the insurer’s recommendation, the claim will be resolved, and the insurer will pay the final settlement amount.

​Reject. If the insured refuses the insurer’s recommendation, the claim will proceed. In these instances, the risk of litigation often increases.”

Hypothetical example of a consent to settle clause:

Suppose a client sues an architect for a design mistake. The insurance company wants to settle quickly for $100,000 to avoid legal costs. However, the architect believes they did nothing wrong and is concerned that a settlement could hurt their reputation. ​If the architect’s policy includes a consent to settle clause, they may approve or reject the settlement.

Here is how this situation might unfold:

• The carrier recommends settling for $100,000
• The architect refuses
• The case later costs $200,000 in court
• The insurer may only pay up to the original recommended amount, leaving out-of-pocket costs like attorney fees, additional judgments, and damages beyond the settlement offer, to the architect 

Consent to settle vs. hammer clause

A consent to settle gives your business the right to approve or reject a settlement. A hammer clause limits how much the insurer will pay if you turn down a recommended settlement. If the insurer offers a settlement and you decline, the insurer may pay only the cost of the settlement. You could be responsible for any extra costs or damages above that amount, which can increase your financial risk.

​What small and midsize businesses (SMBs) can do now:

For small and midsize businesses, reputation can matter just as much as the cost of a claim. Settling a lawsuit quickly may end it, but some business owners worry it could hurt client trust, licensing, or future opportunities. Think carefully about this as you review your liability policy for a consent to settle clause. 

• When reviewing your policy, critical items to consider include: premiums, deductibles, and whether the policy has a hammer clause (hard or soft).
• Talk to a trusted professional if you need help understanding your policy or have questions. Understanding how these clauses work before a claim arises is key.  Reach out here.

Sources:

• Zywave. Coverage Insights.  The Consent to Settle Clause and How it Impacts Liability Coverage.
• IRMI (International Risk Management Institute) Consent to Settle: https://www.irmi.com/term/insurance-definitions/consent-to-settlement-clause
• IRMI  (International Risk Management Institute) Hammer Clause:https://www.irmi.com/term/insurance-definitions/coinsurance-hammer-clause

Disclaimer:

This information is intended for reference only and should not be considered as financial or legal advice. Consult with a qualified professional for personalized guidance.

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