Getting the Insured’s Consent Without the Hammer

This is the first post at PLUS Blog by Steven N. Joseph. Steven is an accomplished Senior Steven JosephExecutive and Consultant with more than 30 years of success spanning insurance and related verticals (professional liability, financial services, professional services, legal malpractice, accounting malpractice). His broad areas of expertise include litigation, mediation, negotiation, business evaluation, professional liability, insurance law, product liability, legal liability, reinsurance, claims management, D&O insurance, underwriting, legal malpractice, and property & casualty.

He is a recognized industry speaker, has written and presented on the topics of Managing Professional Liability Actions and Negotiation Techniques for the Professional Liability Underwriting Society, Practicing Law Institute, Corporate Counsel of America, and the American Bar Association.


One of the common features of an errors and omissions or directors and officers policy is that, for an insurer to be able to first resolve a claim, they must first obtain the written consent to settle from the insured.

While for some insureds this provision may go unnoticed, for others it is of great importance. They may have an interest in protecting a reputation. They may have a valid concern that a settlement of one claim may spur on and encourage future claims.

Insurers, in exchange for giving the insured the right to consent to any settlement, are given the right to reduce the available limits, typically to the amount that the insurer would have been able to settle the claim for had the insurer been able to obtain the insured’s consent when the demand to settle was made, or a reasonable date certain after that to allow the insured to accept the demand.

The insurer’s interest may be different than the insured’s. They are looking at the cost of defense and the uncertainty of litigation. Their experience may tell them that a settlement would be more cost effective than rolling the dice at trial. A settlement ultimately may be more beneficial to the insurer’s bottom line.

When the insured refuse to settle, too often, almost instinctively, the insurer’s claims professional will issue a letter with reference to the “reduction of limits” clause, and it is typically referred to as a “hammer” letter.

While a “hammer letter” may be necessary in certain circumstances, the issuance of one comes at a certain cost because it pits the insurer against the insured, and creates an adverse relationship. The best way to resolve a claim at the lowest cost is when both the insured and the insurer is working towards the same objective.

As with most negotiations, the most effective way to get movement is to listen and show your understanding of your opposing side’s position. I like to tell insureds that, years ago, I got a call from an insured attorney who was sued for legal malpractice.

The insured told me that he got a call from the plaintiff. I said “The plaintiff? What did the plaintiff have to say?”

The insured then replied, “Well, he told me that I should not take the lawsuit personally. He only wants the insurance money.”

So, of course, I asked the insured how he reacted to this.

The insured then responded; “I first thought of the $100,000 deductible. So, it is cost me money to defend this claim, but this guy does not want me to take this personally.

Then, I thought of the time I have to spend meeting with attorneys, looking at documents, testifying in a deposition, but this guy does not want me to take this personally.

Then, I thought of my reputation. I had to report this to the bar, and my partners are upset with me.

So, it is costing me my  money, my time, and my reputation, but this guy does not want me to take this lawsuit personally.”

The point of this story is that the claims professional needs to show we understand, and we get it. It is very personal, and as much as we talk about emotional claimants who cry how they were injured, there can be very emotional defendants on the other side as well.

While I want to show them that I fully understand their position, I want to make sure that I can give them an understanding of the process. First, I never expect to make any deal, including obtaining consent, because I am making arguments why it is my best deal. I have to explain why it is their best deal as well.

A line I always like to use is “I read the book, and I know the ending.” This line is used to do a bit of hand holding of the insured. Then, I tell them that I have had many insureds who have told me “I have been practicing for 40 years and have never been sued. I want my day in court.”

The response, I explain is that I would love to tell them that their day in court is next Tuesday, about 2 PM, and it should last an hour, maybe an hour and a half. However, too often, it is the month of July and you are not getting your billing hours in, you are not seeing clients, you are not looking at your kids during dinner, and you are not taking that vacation to Disneyland. That same insured then says “Why did I buy insurance. Let’s settle the case.”

The problem with that kind of plan is that by the time you get to the courthouse steps years later, it becomes more difficult to settle the case. Both sides have made huge investments in their positions. Feelings harden. The number you can now settle the case is many times what you may have been able to settle the case years earlier.

I have never had an insured not understand this approach. However, while some insureds will understand, and give the consent to settle, other insureds may push back with a justified fear that once they give their consent, I will give away the candy store.

Another mistake that a claims professional may make is simply seek blanket consent to settle. However, a limited consent to settle may be all that the insurer needs to resolve the case.

Another story I frequently tell insureds in this situation is about a settlement conference in Hartford I attended many years ago before a Federal Court Judge. The opposing sides and their counsel had great animosity for each other and you could feel it in the courtroom.

The Judge opened the conference by saying to everyone, “Principles are a very nice thing to have until it gets in the way of reason.”

I liked that line very much. We settled the case and both sides were equally unhappy with the result. Because I liked that line, I had to tell it to my wife, given the fact that she happens to be a person of great principle.

After I told her the line, she looked at me puzzlingly, as if I came from another planet. She then remarked, “Without principles, there is no reason.”

I use this story to explain to insureds that there may be a number that makes sense to put aside some principle for the sake of reason, or just getting on with life. Then, at some point, the number becomes too high, and there is the line in the sand, and it becomes about principle. I assure them that I do not want them to abdicate that principle that can be seen in the line in the sand.

This approach does not only obtain consent from the insured, but a willing partner appreciative of an insurer who is only looking out for the insured’s, not insurer’s, best interest even when the insured may not necessarily understand what their best interest may be.

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