Decoding Hammer Letters

For the purposes of our discussion, we define a "hammer" letter as correspondence from an insured (or excess carrier) to a primary insurer, demanding that the latter settle a claim within policy limits. Often it includes a threat that failure to do so will prompt a bad-faith claim against the primary insurer. Here are some steps the adjuster can take in de-clawing the hammer letter.

Adjusters Take Action

First, renegotiate all time-oriented deadlines. Bargain for more time within which to weigh options. One problem is that insureds often make such demands close to the date of trial or the settlement conference.

Second, obtain coverage counsel. Have him thoroughly (and quickly) review the file. What does he recommend? Is there an alternative to caving to the policy limits demand? What is the local law on insured demands to disgorge policy limits? Can you rely on an "advice of counsel" defense? Does local coverage law presume bad faith if you guess wrong? It is also important to note that one should not pose these questions to defense counsel.

Third, press the insured for why it thinks it is liable for the full policy limits. By definition, liability policies only pay in case of legal liability. They aren't "no-fault" contracts. It is awkward for an insured to explain why it is legally liable. You may ask, "What is the reason for the change of heart? Please help us understand." This puts the onus back on the insured. Often, the insured will offer no rationale. It may not itemize reasons as to why it is legally liable or why the damages hold six- or seven-figure value. Nonetheless, keep pressing for details and specifics.

Fourth, respond quickly to all demands and communications. This might entail sending a note of thanks to the insured for its letter. Just be sure to promptly acknowledge all communications, thus never giving an insured reason to say, "Not only did they fail to settle the claim, but they were also lax in responding to my letters."

Tell the insured that you are trying to settle the claim — if that's true — but that it "takes two to tango." No insurer can unilaterally force a settlement. Also, no insurer serves an insured's interests by overpaying claims. That encourages additional lawsuits and excessive demands.

Base Strategy on Probabilities

If defense counsel supports you, then stress the unlikely possibility of an excess verdict. Sure, anything is theoretically possible. That does not mean that you base all actions on what is theoretically possible. Of course, good faith obligates an insurer to put policyholder interests above its own. Separating what is best for the policyholder versus what is best for the insurer is not always as clear-cut as it sounds during bad-faith saber rattling, though.

Be certain to alert the underwriter to "hammer" situations. Often, the adjuster faces having to pay a premium on a settlement — in effect overpaying — just because a policyholder made a bad business decision to buy low limits. Rather than shoulder the consequences for that poor choice, insureds can make the insurer the fall guy and shed a troublesome claim.

Often a correlation exists between having low limits and "bringing the hammer." The lower the limits carried by a policyholder, the higher the prospect of an uninsured excess verdict. Underinsured entities are prime candidates for "hammering" the adjuster. The insured's coercive attempt to force the insurance company to pay a claim merits mention to the account underwriter. It may be one factor that underwriters may want to weigh in renewal and pricing decisions.

Finally, consider settling. Maybe you are better off paying policy limits or paying a premium on the settlement instead of rolling the dice. If you pay policy limits, then that is the most you can pay. If you roll the dice and guess wrong, then a jury could return an award exceeding policy limits. In that case, the insured may sue you and the most you can pay would be above policy limits.

Do not automatically roll over and play dead whenever an insured instructs you to pay up. No one suggests opening up the checkbook in the face of every policyholder demand. On the other hand, do not let indignation cloud judgment. Instead, step back and assess the situation objectively. Weigh the merits. Consider the possibility that settlement does indeed make sense.

Hammer situations are tough. They lend themselves to no easy answers. An adjuster may have to pay a premium to settle a claim and defuse a potential excess/bad- faith claim. Nevertheless, the adjuster may still be able to settle below policy limits. Show the insured what you are doing to try to settle this case. Build a paper trail that demonstrates that you are pursuing settlement and asking the insured to document (with facts) the reasons for the reevaluation of the case.

Wade carefully through the minefield created by hammer letters. Provided that you navigate adroitly, you may be able to point to unused policy limits — or E&O coverage — and proudly say in the style of MC Hammer that "you can't touch this."

Kevin Quinley, CPCU, is an insurance executive, claim expert, and consultant. You can rap with him at kquinley@cox.net or at www.kevinquinley.com.