A hidden clause in their malpractice policies is forcing many doctors around the country to settle out of court with patients filing malpractice suits against them, even though they are completely innocent of any wrong‑doing. To save time and money, their insurance companies want the case to "just go away" but they fail to consider the negative impact such settlements have on doctors.

According to "Rupp's Insurance and Risk Management Glossary" -- considered the insurance industry's authoritative standard -- "a settlement can affect the reputation and earning ability of the insured."

An article in Medical Economics explained the impact of settlements in more detail. "The adverse effects can be significant. The settlement will be reported to the National Practitioner Data Bank, where the information will be accessible to hospitals as well as to any third‑party payers you contract with. Your status with these organizations could be affected and so could your future insurability with your present insurer or a different one. Your malpractice premiums could increase. ("Should you sign a 'consent to settle'?" by David Karp, Medical Economics, Oct. 20, 2006)

Many doctors aren't even aware that their policies deprive them of their right to decide whether or not they want to fight the case or settle out of court. They assume they have a say in their own defense but find out too late that their policies do not contain the all‑important consent‑to‑settle clause. Instead, their policies have obscure wording that's seldom explained when the policy is sold, wording that allows the insurance company to make that decision without the knowledge and consent of the doctor.

The only way to avoid this potentially devastating situation is to choose a policy with a consent‑to‑settle clause that specifically states that the insurance company will not settle with a claimant unless you sign a consent to settle agreement.

This doesn't mean the insurance company won't ever recommend or even strongly urge settling out of court. Sometimes, depending on the situation and the evidence involved, it may be the smartest strategy. But with a consent‑to‑settle clause, you get to make the final decision.

The consent‑to‑settle provision has become so important that many malpractice policies are beginning to include them, but are tacking on another clause that makes them nearly worthless: a "hammer" clause.

The hammer clause practically forces you to settle against your will even if there is a consent‑to‑settle provision, by making it financially risky to reject the insurance company's settlement recommendations.

Under the hammer clause, if you refuse a settlement offer recommend by your insurance company, the company's liability is limited to the amount of the recommended settlement offer.

For example: Your insurance company wants you to settle a case out of court for $25,000. You know settling the case will make it look like you're guilty, so you refuse to settle. If you go to court and lose your case, the insurance company will pay only $25,000 regardless of the final decision in the case. If the judgment is $75,000, you will end up being responsible the other $50,000.

Another version of the hammer clause (called a modified hammer clause) limits the insurance company's liability to a percentage of the judgment in excess of the recommended settlement. It may, for instance, set a 50% limit. In the above case, the insurance company would pay the amount of the offered settlement ($25,000) plus one half of the amount over that figure ($25,000). You'd still to liable for the final $25,000.

Of course, with the huge judgments being handed out in courts today, the actual figures might be far higher.

As Kenneth S. Meters pointed out in an article for the Association of Business Trial Lawyers: "The practical effect of a hammer clause might come as a surprise to many professionals insured under a policy containing such a provision. For example, a professional with a policy containing limits of $2 million per claim would normally have no uninsured exposure when facing a claim with a potential maximum value of $1 million. If, however, the insurer invoked the hammer clause after the insured's refusal to consent to a settlement of $300,000, the insured could face potential liability for all legal expenses incurred subsequent to the refusal, as well as potential liability for the amount of any judgment in excess of the recommended $300,000. Thus, by invoking the hammer clause, the insurer has transformed a $2 million policy into a $300,000 policy."

Don't bother looking in your policy for the term "hammer clause." Insurance companies don't call it that in writing! Instead, they slip the wording into the Defense and Settlement section, often using confusing terminology to obscure the meaning of the provision.

Here's a sample hammer clause:

If the Insured refuses to consent to a settlement or compromise recommended by the Insurer and elects to contest or continue to contest a Claim, the Insurer's liability shall not exceed the amount for which the Insured would have been liable for Loss if the Claim had been so settled when and as recommended, and the Insurer shall have the right to withdraw from the further defense of the Claim by tendering control of the defense thereof to the Named Insured. The operation of this subsection shall be subject to the Limits of Liability and Retention provisions of this Policy.

If you're not absolutely sure your policy contains a consent‑to‑settle provision or a hammer clause, take the policy out and read it carefully. Or, get on the phone to your insurance company and ask them point blank about these provisions. If they can't ‑‑ or won't ‑‑ give you a straight "yes or no" answer, start looking for another policy. In our litigious society, you can't afford to be without a policy that gives you the ultimate protection.