Most professional liability policies contain a provision that essentially requires the consent of the insured in the settlement of a claim. Carriers typically call it the Consent to Settle clause. Ask most insurance agents about this provision and they will refer to it as “the Hammer clause” or “the blackmail provision”. Quite honestly, I believe that these characterizations are not accurate in the practical application.
The Consent to Settle clause requires the E&O carrier to secure the consent of the policyholder prior to settling a claim. In the absence of the Insured’s consent, it limits the carrier’s liability to an amount that either the plaintiff has agreed to (plus the defense costs incurred to date) or the amount the E&O carrier feels is appropriate.
Personally, I feel that the Consent to settle provision is beneficial for all parties. For the carrier, it is designed as protection and to ensure a settlement that is financially reasonable. For the insured, this ensures that the E&O carrier does not just settle the E&O matter without consultation and input from the policyholder. In the past, there have been E&O carriers that did not have this provision in their policy. In essence, this would enable the E&O carrier to settle the matter without even discussing it with the policyholder. For the policyholder, this could impact your professional reputation, not an issue to take lightly.
While this provision exists in most, if not all, E&O policies, it is certainly not applied as often as many may believe. In fact, I think that it is rarely applied. I have seen situations where the carrier rethought their position after further consultation with the policyholder.
Since not all of the Consent to Settle provisions read the same, agents should check to see how their specific policy reads. If you are not sure how it works in a practical manner, pick up the phone and discuss this with your E&O carrier. You may just find out that the provision is not as bad as you think it is.