My Account
We compare quotes from leading insurers
INSURANCE & RISK CONTROL FOR CONTRACTUAL PENALTIES, WARRANTY OBLIGATIONS & DELAY DISPUTES
Why Contractual Penalties & Warranty Risk Can Be a “Coverage Gap”
Many industrial equipment contracts include liquidated damages (LDs), delay penalties, performance guarantees and broad warranty obligations. The problem: many policies (PI, products liability, contract works and property/BI) do not automatically cover pure penalties, agreed damages, or “fit for purpose” obligations — and some are uninsurable as a matter of policy wording.
Insure24 helps you identify what can be insured, what needs contract restructuring, and how to align PI/PL/products/contract works and engineering covers to the way claims actually arise on equipment projects.
What Insurance Can (and Can’t) Do for Liquidated Damages & Warranty Exposure
There is rarely a single “LD insurance” policy. Instead, you manage these exposures through contract design plus a programme of PI, public/products liability, contract works, engineering and (where relevant) legal expenses / contract dispute support. What responds depends entirely on wording, definitions and exclusions.
The goal is to avoid uninsurable obligations, ring-fence consequential loss, and ensure your insurance responds to the claim types you can’t contract away.
- Professional indemnity (PI) — can respond to negligence allegations in design/specification/advice, including defence costs (claims-made; contractual liability often restricted).
- Public & products liability — third-party injury/property damage (usually not “pure” performance shortfall or penalties).
- Contract works / erection all risks — sudden physical loss/damage during installation/commissioning (delay-only triggers are commonly excluded).
- Engineering breakdown — sudden breakdown of insured plant (relevant where you operate plant; different from project delay exposures).
- Legal expenses / contract dispute — may assist with dispute costs in some structures (scope varies significantly).
- Product recall / rectification — specialist wordings may help where there is safety/defect trigger (often tightly defined).
- What’s often not covered — liquidated damages/penalties, agreed damages, purely contractual performance warranties, and “fitness-for-purpose” obligations (unless expressly covered, which is uncommon).
- Key message — manage LD exposure at contract stage; insure the negligence/physical-damage events that drive claims.
Common Contractual Penalty & Warranty Dispute Scenarios
Underwriters (and claims teams) want to see you understand where disputes start: acceptance criteria, change control, interfaces, commissioning, and delivery dependencies. Typical scenarios include:
- Delay triggers LDs — late delivery/commissioning leads to LD claims even where the equipment eventually works.
- Performance guarantee dispute — throughput/efficiency not achieved at acceptance test; customer claims breach of warranty.
- Interface / scope gap — responsibilities between OEM, integrator and principal are unclear; each party blames the other.
- Change control failure — unmanaged revisions to drawings/BOM/software create rework and schedule slippage.
- Commissioning defect — programming/controls issue delays handover; costs escalate with engineers, access and retesting.
- Fitness-for-purpose allegation — contract wording expands obligations beyond negligence and beyond insurance scope.
- Consequential loss creep — customer attempts to recover lost production/profit through contract language or negligence framing.
- Warranty period disputes — disagreement over when warranty starts (handover vs acceptance vs production run).
What Underwriters Look For (and How to Improve Terms)
Contract-driven risk is assessed on governance, clarity and your ability to avoid disputes. Strong project controls and sensible Ts&Cs can materially improve PI/contract works appetite and pricing.
Key appetite and pricing drivers
Typical project values, delivery timeframes, the size of LD exposure relative to turnover, contract wording (caps, consequential loss, fitness-for-purpose), your QA/testing regime, and how robust your change control and sign-off processes are.
Examples of “quote-ready” evidence
- Contract pack — sample customer contract, Ts&Cs, liability caps and LD clauses (where used).
- Acceptance criteria — FAT/SAT scripts, performance test definitions, sign-off process and handover documents.
- Project controls — Gantt/milestone control, risk register, dependency tracking and escalation.
- Change control — revision control for drawings/BOM/software and customer approvals.
- Subcontractor management — back-to-back terms and evidence of subcontractor competence/insurance.
- Claims narrative — any prior disputes/claims and what controls you implemented afterwards.
- Territory / jurisdiction — UK vs overseas projects; correct jurisdiction planning for PI.
- Limitation strategy — how you cap LDs, exclude consequential loss and avoid fitness-for-purpose obligations.
Practical Ways to Reduce LD & Warranty Risk
The best “insurance” for contractual penalties is contract design and project governance. Insurers favour businesses that can demonstrate clear scope, controlled changes, and objective acceptance testing.
Controls that reduce disputes
- Cap LDs — keep LDs proportionate (often a % of contract price) and avoid open-ended liability.
- Exclude consequential loss — make sure “loss of profit/production” is excluded contractually where possible.
- Avoid fitness-for-purpose — use reasonable skill & care language rather than absolute guarantees (where negotiable).
- Define acceptance tests — objective criteria, tolerances, measurement methods and sign-off timelines.
- Change control discipline — no change without documented impact on cost/time and written approval.
- Dependencies & access — document customer responsibilities (utilities, access, materials, permits) to protect the programme.
- Warranty clarity — start date, scope, exclusions, and the process for defects/repair.
- Back-to-back supply chain — align supplier warranties and lead times to your own obligations.
How to Arrange Insurance for Contractual Penalties & Warranty Risk
- 1. Map your contracts — identify LDs, performance guarantees, warranty scope, caps and exclusions.
- 2. Separate what’s insurable — negligence/physical damage vs pure penalties and agreed damages.
- 3. Align your programme — PI + PL/products + contract works + any legal expenses extensions as appropriate.
- 4. Evidence project controls — FAT/SAT, change control, sign-off and dependency management.
- 5. Place & document — ensure consistency with your contractual commitments and provide insurer-ready packs.
“The claim wasn’t about damage — it was about delay and acceptance. Insure24 helped us tighten the contract language, document dependencies and align PI so we could defend the dispute properly.”
Commercial Director, Industrial Equipment OEMPROTECT YOUR BUSINESS
- Specialist guidance on what is (and isn’t) insurable in LD and warranty-heavy contracts
- Support aligning PI, products/PL and contract works to your delivery and commissioning profile
- Help improving contract wording: caps, consequential loss, acceptance tests and change control
- Underwriting-ready packs for complex industrial equipment and automation projects
- Fast, specialist broking for manufacturing and engineering-led businesses
FREQUENTLY ASKED QUESTIONS
+-
Are liquidated damages (LDs) covered by insurance?
Often, LDs and contractual penalties are not covered because they are agreed damages/penalties rather than compensation for insured events. In some cases, related insured triggers (e.g., negligence claims under PI or physical damage under contract works) may respond to parts of a dispute, but coverage is always wording dependent.
+-
Does professional indemnity cover warranty and performance guarantees?
PI is designed for negligence allegations in professional services (errors and omissions). It may not cover purely contractual performance guarantees or “fitness-for-purpose” obligations unless specifically included, and many policies restrict liability assumed under contract.
+-
What’s the best way to reduce exposure to delay penalties?
Strong contract design and project controls: cap LDs, exclude consequential loss where possible, define acceptance tests, document customer dependencies, and enforce disciplined change control so delays are managed and allocated fairly.
+-
Does contract works insurance cover “delay” losses?
Contract works typically covers sudden physical loss or damage during installation/commissioning. “Delay-only” or pure financial losses are commonly excluded. The key is aligning the policy trigger to realistic project loss scenarios.
+-
What contract clauses create the biggest insurance problems?
Common problem areas include fitness-for-purpose wording, uncapped LDs, broad consequential loss obligations, unclear acceptance criteria, and liability assumed under contract beyond negligence. These can create exposures that are difficult or impossible to insure.
+-
What do insurers need to quote contract-driven risk properly?
Insurers typically want sample contracts, clarity on LD exposure, typical project values/timeframes, acceptance testing (FAT/SAT), change control, dependency management, subcontractor arrangements, and claims/dispute history with evidence of governance improvements.