The Hammer Letter

By Rob Edwards, NBIS

What It Is, and How It Can Hurt You

There is one segment of the insurance industry that may work against you in certain circumstances. Even though you’re paying your hard-earned money to an insurance company to defend and protect your business from the crushing financial burden of a loss, it may be that an insurance company forces a payment to be made in one particular circumstance: the hammer letter. To illustrate how this circumstance happens, let’s review a hypothetical situation that could easily happen to any pumping company.

The Situation

Your company has been hired to place concrete into a retaining wall against a hill next to a highway. To northbound traffic, the job is on the right-hand side of the road, and hidden from view until you get around the last of many hills in the area. There is another hill on the left side of the road, across from the job site. That hill has no construction at this time.

Upon arrival at the job, you’re told where to set up by the contractor. Your left rear outrigger is, when extended, on the shoulder of the right lane of the road. Cones and barricades are set up for a quarter mile before the job, and there are orange barrels, construction zone signs, and a sign that says “no shoulder.”

The job is proceeding as planned. Suddenly, a convertible sports car with the top down, occupied by two under-the-influence young men, comes around the corner too fast, sees your outrigger near the edge of the road, overcompensates when he steers left to avoid the outrigger, loses control, and crashes into the hill on the far side of the road, across from the job site. The passenger, who was not wearing a seatbelt, was thrown from the car and is badly injured.

People on the job site call 911. Ambulance and police arrive; eventually a helicopter arrives to take the car’s passenger to a trauma center. That is all you will know of the accident for several months.

A Suit Is Filed

Four months later, you are served papers naming you in two lawsuits. The plaintiffs are the two men in the car. From the summons and complaint, you discover that the driver, who was wearing his seatbelt, sustained neck injuries and a broken ankle. The passenger, who was not wearing his seatbelt, sustained massive head injuries, spinal injuries, several broken bones, a fractured skull and loss of the use of his legs. Both your company and the contractor are named as defendants. The complaint asserts that the cause of the accident was your outrigger being set up on the shoulder of the roadway, and insufficient signs to warn of the upcoming hazard.

You’re Covered, Right?

For the purposes of this article, and to avoid confusing several different topics, we’ll assume that you have regular insurance, and not NBIS. Your agent has procured general liability insurance for you in the amount of $1,000,000 per occurrence, and excess insurance in the amount of $5,000,000. Because of the sales volume and loss history of your company, you’ve paid $65,000 to company A for general liability, and $22,500 to company B for the excess insurance. The two companies are not related.

Discovery

The investigation done by your insurance company shows what you already know: you did nothing wrong. You may feel sorry for the young man who will be paying for his mistakes for the rest of his life, but that doesn’t mean it’s your fault. The conversations held behind closed doors at the insurance company aren’t necessarily so cut-and-dried. The driver is a nuisance case; they’ll contribute $5,000 to make it go away. The passenger is a different story, though. A young man is badly hurt and crippled. Regardless of how little you had to do with it, a jury could decide to compensate him for his injuries at your expense.

Because of the extenuating circumstances: the drinking, the lack of seatbelt use, the excessive speed and the placement of your machine by the contractor—the insurance company decides to fight for you. They begin mounting a defense. Depositions are taken, photographs are produced, blood alcohol records of the two men are subpoenaed, and the accident is reconstructed through measurement of tire tracks and other forensic evidence. Your operator had his ducks in a row; he’d had plenty of sleep and time off, the equipment was in tip-top shape—you feel good about your chances.

Pretrial

In court-ordered pretrial meetings, the plaintiff makes a demand for $5,000,000. Your team ends the meeting shaking their heads in disbelief. After more testimony is gathered from some of the laborers who witnessed the accident, it becomes apparent that the driver is the one who caused this accident and you and your defense team feel confident that any jury will see it that way. The plaintiff attorney asks for another pretrial meeting. This time, in light of all the eyewitness testimony, he lowers his demand to $2,000,000. Your defense team presents their expectation for this case: “We’ll go to trial, no jury will find us guilty.”

A month later, the plaintiff attorney, in another pretrial meeting, lowers his demand to $1,000,000. You know you’ll be found not guilty, and now you know that the plaintiff attorney also knows it, so you again say “no.”

Unfortunately, your case is about to come apart for an unexpected reason at the last minute: the excess carrier’s self-interest.

The Hammer Letter

The excess carrier usually watches the claims management of the primary carrier claims team without much input—until the settlement demand is made within the primary layer limit, which is what just happened in the above example. At that time, your excess carrier (company B, who is not working for or with company A) sends a letter to your defense team: “Plaintiff’s demand for settlement is now within the primary layer. We demand that you settle this case for that amount. If you do not, any amount of jury award in excess of $1,000,000 and all future defense fees will have to be paid by company A.”

What company B has done is legal. They have demanded that you NOT go to trial, and instead settle the case for any amount you can that is within the primary layer, company A’s $1,000,000 general liability policy.

The plaintiff attorney knows about this maneuver. He knew he had a losing case and should not go to trial; you’d win. So by lowering his demand to the limit of the primary policy, he knows that the excess carrier will demand settlement for a million dollars. The worst part is that you paid your excess carrier $22,500 to protect your company for this year. Instead, what they did was force company A to pay a million dollars on a claim that was not your fault so they wouldn’t have a nickel at risk.

The Consequences

Because of the hammer letter, you now have a million dollar loss on your record. It will stay on your loss runs for a minimum of five years. Your insurance premiums will go up in the neighborhood of 35 percent for your primary general liability policy and your excess policy may go up somewhere around 20 percent—thereby adding insult to injury.

The Hammer Letter’s Place

There is a place for the hammer letter—particularly if the primary carrier is gambling with the exposed money or assets of the insureds or the excess carrier, and the liability is questionable. In the example given in this article, if this was a state with a “pure comparative” fault law, it is not beyond imagination that a jury would conclude that the insured was 10 percent liable—and 10 percent of a $20 million verdict unreasonably exposes the excess carrier.

What Can You Do?

One way to avoid the hammer letter is to get your excess coverage from the same company that issues your primary coverage. If the claims management is being handled by the same people for both policies, the event of the hammer letter will probably not occur because they are the same company. NBIS does, in fact, issue its primary general liability policy and its excess policy from the same company, and NBIS administers the claims for both policies.

The other way—much more difficult and challenged by time and political power—is for your legislature to change the laws and the rules of the game. Fighting that sort of battle is a massive undertaking: if you have a relationship with your congressional representatives, mention this idea to them. If NBIS can be of assistance or if you have any questions, please contact us at (877) 860-RMSS.

What Is a Hammer Letter?

Usually, the excess carrier monitors the claims activity of the primary carrier with little or no input and implied approval of the claim’s management until the settlement demand falls within the primary layer limit, as it does in the example. When it does approach the primary layer limit the hammer letter ensues.

A “hammer letter” is a letter written by or on behalf of the insured or excess insurer, that clearly and unequivocally (1) demands that the primary insurer settle the claim or suit within primary policy limits, and (2) warns that a failure to do so would leave the primary insurer responsible to pay any ultimate judgment in excess of the primary policy limits. More often than not, this demand and warning is followed by a threat that, if the primary insurer does not settle within its limits, the “hammering” party (whether insured or excess insurer) will take legal action against the “hammered” insurer.