In liability insurance policies, the “consent to settle” clause is a nuanced provision that both empowers and restrains the policyholder. If the opportunity to settle a medical malpractice claim arises, the insurance company may not simply go forth and settle the claim with the advice and consent of the policyholder/insured healthcare provider. This is a benefit to the policyholder, giving them a voice in the handling of their claim, ensuring they are fully informed as to the potential outcome and the amount of money which the insurance company will cover or will not cover. Often, the insured healthcare provider fades to the background of a case - in the eyes of the insurance company and insurance defense lawyer, they are the interchangeable player in the equation and their needs come second to that of the insurance company, who pressures the defense lawyer into making legal decisions that will benefit the company in lieu of the defendant. The “consent to settle” clause hands a bit of the power back over to the insured defendant, allowing them to give the stamp of approval to a potential settlement, or to withhold approval if they are not in favor of the terms of the settlement.
"Blackmail Settlement Clause"
However, the "consent to settle" clause can be deceptive as it is cunningly worded. Also referred to as the “blackmail settlement clause” and the “hammer clause,” this provision is not always a friend to the insured defendant. Its wording allows the defendant, who holds the power to approve or deny a settlement, to be pressured into approving the settlement - effectively neutering the bit of power that was handed back over to the defendant. The visual of a “hammer” is used to describe the clause, because it may be used to “hammer” the defendant into an agreement with a settlement. This is because the clause also holds that if the insured does not agree to a settlement amount recommended by the insurance company, there will be consequences for not doing so:
- The insurance company will not be responsible for the defense costs that accrue after a first settlement recommendation is denied
- If a settlement is agreed to later on which exceeds the settlement amount that the insurance company initially suggested, they will not cover any amount that exceeds the settlement figure they had previously suggested
In essence, although the insured is given the power to “approve” or “reject” a suggested settlement, this decision is made with a figurative 'gun to the head.' The option to reject a settlement appears to be for show because there are such heavy financial consequences for the embattled defendant should they opt to reject it. This is also why it is openly referred to the “blackmail settlement clause.” In simplest terms, they have the right to say no, but if they do - they foot the bill for the lawsuit from that point onward.
Which policies contain consent to settle clauses?
Not all types of liability policies contain a consent to settle clause. Commercial general liability policies (CGLs) grant sole discretion to the insurance company to settle a claim as they see fit; the insured has no say in the terms of a settlement, deferring all rights to the insurance company. Because the company is solely financially responsible for the outcome of the case and will not be sharing the losses with any other party, they may settle the claim in any way which they see fit. The case is different, however, for medical malpractice insurance policies.
Medical malpractice suits hinge on the assumption that the medical professional breached or deviated from the standard of care owed to their patient. This allegation, if proven (and it needs to be proven in order to win a medical malpractice lawsuit), can have devastating effects on the career of the medical professional. While the insurance company has a great deal at stake financially, the medical professional has a great deal at stake professionally and reputationally; the outcome of a malpractice suit can have a substantial bearing on their ability to conduct business. This is known as indirect reputational loss exposure and because the defendant is exposed to it, the insurance company is no longer the sole proprietor of losses and must, therefore, include the insured in the decision to settle a claim. They swiftly reclaim the decision-making power they were forced to share, by imposing severe penalties if the defendant opposes a settlement that the company favors.
The consent to settle a provision is found in most professional liability policies, including medical malpractice, architect's and engineer's professional liability as well as lawyer's professional liability. It is also found in errors & omissions (E&O) policies and executive liability policies.
The provision is necessary because reputation and public image can be so critical to a physician's ability to practice medicine. If they are faced with unfounded or overblown charges, they are afforded the right to not be forced into a settlement that could hurt their practice because it is financially sound for the insurance company. These clauses, when present in a policy, generate a degree of tension between the insurance carrier and the policyholder. The phrase ‘conflict of interests' runs rampant in all areas of medical malpractice suits, and that truism is no exception here. The policyholder enters the suit with a conservationist attitude, seeking to salvage and protect their professional reputation when the claim is brought to a close. The insurance carrier, however, wants to settle the claim inexpensively and quickly - any damage to the professional reputation of the defendant is no consequence to them. The defendant is given leeway with this provision, although it is stiff.
Consequences of Medical Malpractice Settlement Rejection
There are objective, hefty consequences if the insured rejects a settlement and opts to go to trial on a claim, in the interest of legally refuting the claim and deflecting reputational damage. It bears noting that a doctor is not a lawyer or a claims manager - they may not be most adept at making this judgment call, just as a lawyer would not be the best candidate to perform vascular surgery. Although well-intentioned, the insured medical professional may not have the legal know-how to decide that a claim should go to trial.
It may very well be that the claim would have been better off and less expensive if settled when the first opportunity arose. Some have even argued that waiving the consent to settle can actually protect the insured, in the event that the insurance company opts to go to trial and a judgment is entered which is in excess of the policy limits. The insured may be able to sue the insurance company for bad faith, as the judgment was solely their own and the insured had no hand in it.