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INSURANCE DESIGNED AROUND REAL CONTRACT RISK
Why Contractual Risk Matters in Engineering & Manufacturing
For engineering and manufacturing businesses, the greatest losses often begin with a contract clause — not an accident. Purchase orders, framework agreements, supply contracts, and project terms can introduce liabilities that go far beyond your standard duty of care. In practice, a customer can seek recovery for delays, rework, replacement costs, loss of use, consequential losses, or warranty obligations that last years.
While insurance cannot “remove” all contractual risk (and some exposures are uninsurable by nature), the right combination of covers can protect your business from the most financially damaging outcomes — and avoid common gaps that appear when contract terms go beyond standard liability wording.
Insure24 helps engineering manufacturers structure insurance to match contract realities: product liability, professional indemnity (design/specification), contract works, legal expenses, cyber/tech (where relevant), and tailored extensions.
Contractual Liability vs Penalties vs Warranty Risk — What’s the Difference?
These terms get mixed together, but they’re not the same. Understanding the difference is key to arranging the correct insurance and setting realistic expectations about what can (and cannot) be covered.
Contractual Liability
Contractual liability is liability you assume under a contract. Many liability policies cover your legal liability in negligence, but may restrict liability that exists only because you agreed to it contractually. Examples include:
- Agreeing to “hold harmless” or broad indemnities that go beyond negligence
- Accepting responsibility for third-party losses that would not normally be yours
- Assuming liability for a customer’s loss of profit or loss of production
- Taking on fitness-for-purpose obligations beyond reasonable skill and care
A well-structured insurance programme can sometimes respond to parts of contractual liability, but not always — and wording matters.
Penalties & Liquidated Damages
Many engineering contracts include liquidated damages (LDs) for late delivery or performance shortfalls. These are usually pre-agreed amounts payable if milestones aren’t met.
- Delay damages for late delivery
- Performance LDs (e.g., output, efficiency, tolerances)
- Service credits in ongoing maintenance contracts
- Back-to-back LDs passed down from main contractor to subcontractors
Important: many penalties/LDs are not insurable in the way standard liability claims are. Instead, risk is managed via contract negotiation, project controls, and in some cases specialist covers or BI structures for operational disruption.
Warranty Risk & Rectification Exposure
Warranty risk relates to your obligations to repair, replace, or rectify defects within a warranty period. This is common in manufactured goods, bespoke machinery, fabricated components, and engineered systems. Warranties often include:
- Defective workmanship or materials
- Repair/replacement obligations within a defined time
- Field service labour, travel, and call-outs
- Removal and refit costs (especially painful in installed equipment)
- Downstream costs where a defect damages other property
Warranty and rectification costs are frequently excluded or limited under standard product liability cover unless there’s resulting damage or injury. That’s why many engineering firms need a carefully layered approach.
Insurance Solutions That Help Manage Contractual & Warranty Risk
No single policy magically “covers contracts.” The solution is usually a combination of covers that respond to different parts of the exposure. Below are the most common covers used by engineering and manufacturing businesses to manage contractual liability, performance disputes, and warranty-related claims.
Public & Products Liability
Product liability protects you if a product you manufacture causes injury or property damage. It can also respond to some legal costs in defending claims.
- Third-party injury caused by a defective part or system
- Property damage caused by product failure (e.g., leak, mechanical failure causing damage)
- Legal defence costs (subject to policy terms)
- Worldwide exports options (where required)
Note: product liability usually does not cover the cost of repairing/replacing your own defective product where no damage occurs.
Professional Indemnity (Design & Specification)
If you design, specify, advise, prototype, or provide engineering calculations, professional indemnity (PI) can be vital. PI helps protect against claims alleging negligence in professional services, including:
- Design errors, calculation mistakes, and specification issues
- Incorrect material selection or tolerance advice
- Failure to meet stated performance requirements due to design
- Defence costs for professional negligence allegations
PI is often the closest “insurance tool” to contractual performance disputes — but it must be arranged to match your actual scope of work.
Contract Works / Project Cover (Build, Test, Commission)
For bespoke machinery builds and engineered installations, contract works insurance protects the value of work in progress and materials on site, and can be structured to cover transit and off-site storage (subject to underwriting).
- Work in progress (WIP) and materials awaiting installation
- Testing and commissioning phases (where included)
- Hired-in plant and tools cover options
- Transit and temporary storage extensions
This does not replace warranty cover, but it helps protect project value and reduces contractual stress if physical loss occurs mid-project.
Legal Expenses & Contract Disputes Cover
Legal disputes are common where contracts include strict tolerances, milestone dates, or performance criteria. Commercial legal expenses can help with:
- Contract disputes (pursuit or defence, subject to prospects and policy terms)
- Employment disputes and tribunal support (useful operationally)
- Tax and VAT investigations
- Debt recovery (often included)
It won’t “pay penalties”, but it can materially reduce the cost of handling disputes and help protect cashflow.
Common Engineering Contract Clauses That Can Create Insurance Gaps
Below are clauses that frequently increase your exposure beyond what “standard” insurance assumes. You don’t need to become a lawyer — but you should recognise these terms and raise them early so we can align your insurance and manage expectations.
High-Risk Clauses
- Unlimited liability or very high caps not aligned with insurance limits
- Fitness for purpose obligations (beyond reasonable skill and care)
- Consequential loss wording that captures loss of profit, loss of production, loss of use
- Broad indemnities including third-party losses not caused by your negligence
- Warranty periods extending multiple years with wide “rectify at your cost” wording
- Liquidated damages that are high and not capped
- Back-to-back terms where subcontractor assumes main contract liabilities
Operational Clauses That Increase Cost
- On-site service response time commitments
- Mandatory spare parts holdings or service level credits
- Testing/acceptance regimes with rejection rights
- Customer “set-off” rights against invoices
- Broad “flow-down” compliance requirements (site rules, permits, approvals)
- Duty to mitigate obligations requiring rapid spend to keep project on track
These clauses don’t automatically mean “don’t sign.” They mean you should price the risk correctly and ensure your insurance programme is built around your true exposures.
Warranty Risk: The Hidden Cost in Bespoke Engineering
Warranty obligations are often the most underestimated financial risk — because the cost isn’t only the part. It’s the labour, travel, downtime, removal/refit, and client relationship damage. Many firms discover too late that liability insurance is aimed at third-party injury/property damage, not the cost of “making good” their own work where no damage has occurred.
If you supply machinery or engineered components that are installed into a wider system, a defect can lead to:
- Strip-down and investigation time
- Replacement manufacturing at speed
- Site labour and crane/lifting costs
- Recommissioning and re-testing
- Customer production loss allegations
Your risk is best managed through a combination of quality controls, contract clarity, and insurance structured to respond to resulting damage claims, design allegations, and dispute handling costs — while recognising that pure “rectification of own work” is often limited.
How We Quote: The Key Details Insurers Need
To arrange competitive cover that matches your contracts, insurers need clarity on what you do, how you do it, and where contractual liabilities may arise. A fast quote is possible when the information is clear.
Business & Contract Profile
- Turnover split (manufacturing vs design vs installation/service)
- Typical contract values and largest single contract value
- Standard terms used (your terms vs customer terms)
- Typical warranty length and scope
- Any fitness-for-purpose or performance guarantee language
- Export territories (if applicable)
Risk Management & Quality Controls
- Quality assurance processes and inspection regimes
- Testing, commissioning and acceptance processes
- Traceability of materials and supplier approvals
- Document control and change management
- Claims history and known issues addressed
Why Choose Insure24 for Contractual Risk Insurance?
- Manufacturing-aware placement: We understand project delivery, tolerances, commissioning, and real-world warranty exposure.
- Policy layering: We help align PL/Products, PI, contract works and legal expenses so you don’t rely on one policy for everything.
- Contract-ready certificates: We support common client requirements and evidence of insurance requests.
- Practical guidance: Early help identifying likely gaps before they become disputes.
- Claims support: If something goes wrong, we help you navigate the response and documentation needed.
FREQUENTLY ASKED QUESTIONS
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Does insurance cover contractual penalties or liquidated damages?
In many cases, contractual penalties and liquidated damages are not covered by standard liability insurance, because they are pre-agreed contractual payments rather than third-party damages arising from negligence. However, we can help you manage the broader exposure using appropriate policy structures (e.g., PI where design allegations exist, legal expenses for disputes, BI where downtime causes loss, and contract works to protect project value).
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What is “contractual liability” in an insurance policy?
Contractual liability refers to liability you assume under a contract. Many policies cover liabilities you would have in law even without a contract (e.g., negligence), but can restrict liabilities that exist only because you agreed to them. Policy wording and endorsements determine how far contractual assumptions of liability are covered.
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Does product liability cover warranty and rectification costs?
Product liability typically covers third-party injury or property damage caused by your product. It often does not cover the cost of repairing or replacing your own defective product where no damage has occurred (sometimes called “own work” or “rectification” costs). If a defect causes resulting damage, that damage aspect may be covered subject to policy terms.
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When do engineering manufacturers need professional indemnity?
If you design, specify, advise, produce drawings, provide calculations, or prototype solutions, professional indemnity can be crucial. It covers claims alleging professional negligence (such ass), such as design errors or incorrect specifications that cause financial loss to a client, subject to the policy wording and exclusions.
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What information do you need to quote contractual risk-related cover?
Typically we’ll request turnover split (manufacturing vs design vs installation), largest contract value, typical warranty period and scope, the type of terms you sign (your terms vs customer terms), export details if relevant, and claims history. For PI, insurers also often want examples of work, QA processes, and document control/change management.
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Can you help align our insurance with client contract requirements?
Yes. We regularly help engineering firms align limits and evidence of insurance with client requirements, including Products Liability and Professional Indemnity limits, territorial/jurisdiction settings, and project-related covers. If a contract includes unusual clauses (e.g., fitness for purpose, uncapped liability), we can highlight likely insurance limitations and options to manage the exposure.