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THE “GOTCHAS” THAT CAUSE DISPUTES AT CLAIM TIME
Why Engineering Insurance Gaps Matter
Most claims disagreements aren’t about whether you “have insurance” — they’re about whether the policy responds to the way a loss actually happened. Engineering businesses are especially exposed to grey areas: defects vs damage, design vs manufacture, contract promises vs negligence, and what counts as “consequential loss”. Add in underinsurance (particularly WIP and BI), security conditions, and transit limitations — and you can see why many manufacturers discover gaps only when it’s too late.
This guide highlights common exclusions and policy gaps for metal and engineering manufacturers. It’s not legal advice and it doesn’t replace reading your policy wording, but it will help you understand where to focus when reviewing your programme at renewal.
If you want us to review your current covers and identify the most likely gaps, call Insure24 on 0330 127 2333 or request a quote online.
1) Defective Work, Rework, Scrap and “Own Product” Costs
The biggest misconception in manufacturing insurance is that liability covers the cost of replacing your defective parts. In most cases, liability insurance is designed for injury or third-party property damage — not the cost to repair your own work, scrap parts, remake a batch, or pay for expedited freight because you need to replace what you made incorrectly.
In a defect dispute, you’ll often have two cost categories. First, the direct defect cost: scrap, rework, replacement labour, retesting, re-commissioning, collection and redelivery. Second, the “damage cost”: downstream damage caused by the defect to third-party property (or injury). Standard products liability is usually aimed at the second category, not the first.
This is why quality controls and contract caps matter. Insurance can’t remove all defect pain; it can protect you from catastrophic downstream losses.
- Rework, scrap and remake costs are usually not covered by liability
- “Own product” and “own work” exclusions are common
- Downstream damage may be covered if it causes third-party property damage
- Batch failure costs are often uninsured unless specialist solutions exist
- Expedited freight and overtime due to defects are typically uninsured
- Strong quality systems reduce frequency and improve defence
2) Pure Financial Loss and Consequential Loss
Many engineering disputes are financial. Your part fails and the customer suffers downtime. They claim for lost production, hire costs, penalties, and project delay. These can be large numbers — and they may be framed as “consequential loss”. Liability policies often respond best where there is physical injury or property damage. Pure financial loss (without damage) is a common gap.
Even where there is property damage, customers may attempt to recover consequential losses, and the contract may affect what you’re responsible for. This is why limitation of liability clauses and caps are central to risk management in engineering.
A joined-up insurance and contract approach is usually required: don’t rely on “insurance will sort it”.
- Pure financial loss is often not covered under PL/products liability
- Consequential loss claims can exceed the value of the defective part
- Contracts can expand liability beyond negligence
- Caps and exclusions in terms help control exposure
- PI/technical liability may be needed where advice/design is involved
- Clear acceptance testing reduces disputes over “who is at fault”
3) Contractual Liability and “Assumption of Liability” Clauses
Many engineering contracts include broad indemnities: you agree to be responsible for losses “howsoever caused”, accept liability for customer downtime, or agree to levels of responsibility beyond what you would have under common law negligence. Insurers may exclude liability assumed under contract unless you would have been liable anyway. This can create a gap where your contract is more aggressive than standard liability.
This is particularly important for OEM supply chains and large construction/industrial projects, where standard terms can shift risk down the chain. We often recommend reviewing contract clauses that create large exposures: unlimited indemnities, fitness-for-purpose promises, uncapped consequential loss, and broad “hold harmless” provisions.
Insurance can help, but it cannot always “undo” a bad contract. The best approach is controlling contract terms and aligning insurance accordingly.
- Liability assumed under contract can be excluded
- Indemnities and “hold harmless” clauses can create uninsured exposure
- Fitness-for-purpose promises can exceed negligence-based cover
- Uncapped consequential loss can dwarf policy limits
- Align insurance limits with contract caps where possible
- Review warranty periods and acceptance criteria in contracts
4) Design Responsibility and the PI Gap
Many engineering firms believe they do “no design” — but in practice they advise on tolerances, material choices, interfaces, manufacturability, and sometimes supply drawings or calculations. If a claim is framed as negligent advice or design error leading to financial loss, public/products liability may not respond. This is the classic PI gap.
PI/technical liability is often needed for bespoke engineering, design & build machinery, integration work, and any activity where advice or specifications can be alleged to be wrong. Remember that PI is usually written on a claims-made basis with a retroactive date — another area where gaps arise.
If you do any form of design input, it’s worth reviewing whether PI is required and whether the scope matches what you actually do.
- Public/products liability focuses on injury/property damage
- PI covers negligence allegations causing financial loss
- “We only manufacture” is not always true in practice
- Claims-made cover depends on retroactive date and continuity
- Contract caps should align to PI limits where possible
- Ensure PI scope includes advice, drawings, specs and IFUs if relevant
5) Business Interruption: Underinsurance and Indemnity Period Shortfalls
BI is one of the most valuable covers for manufacturers — and one of the most commonly mis-set. Underinsurance can arise when gross profit is underestimated or when turnover has grown. Another common gap is an indemnity period that is too short. In engineering, downtime can be driven by machine lead times, commissioning and calibration, tooling rebuild, and capability requalification — not just building repairs.
Some businesses also assume BI covers any interruption. In reality, BI usually follows insured damage (fire/flood etc.). If the interruption is caused by a non-damage event (like a supply chain issue), you may need specific extensions and these are limited.
If you want to reduce “survival risk”, review BI properly at least annually — especially after growth or new machinery investment.
- Gross profit undervaluation can reduce claim payments
- Indemnity periods often too short for realistic recovery
- Machine lead times and commissioning can drive downtime
- BI usually requires insured damage — not all interruptions are covered
- Supplier/customer and utilities extensions are limited and wording-specific
- Bottleneck machine planning improves BI structure and resilience
6) Transit, Off-Site Tools, and Security Conditions
Many losses occur away from the main premises: goods damaged in transit, tools stolen from vans, and site equipment taken from customer locations. Standard premises policies may have strict limits or exclusions for these. Goods in transit cover needs correct basis: own vehicles vs carriers, annual sendings vs any one consignment, and packaging/security requirements.
Security conditions are another common tripwire. Theft cover often requires alarms to be set, locks to be engaged, and physical security standards met. If you operate night shifts or have shared premises, these conditions can be misunderstood unless disclosed properly.
Review transit and tool cover alongside security warranties — they are linked in practice and frequently involved in disputes.
- Goods in transit may be excluded without specific cover
- Tool theft from vehicles and off-site tools often need extensions
- Any one consignment limits can be too low for high-value shipments
- Packaging and security requirements can affect claim outcomes
- Theft cover is often conditional on alarms/locks and key control
- Shared sites and night shifts can create “unattended” grey areas
We didn’t realise our policy wouldn’t cover the cost of remaking defective parts — and our BI indemnity period was far too short for machine lead times. Insure24 highlighted the gaps, helped us update sums insured, and improved our contract and insurance alignment.
Director, Fabrication & Machining BusinessA GAP-FOCUSED REVIEW (SO YOU DON’T FIND OUT IN A CLAIM)
- Identify “defect vs damage” exposures and realistic worst-case scenarios
- Review BI gross profit and indemnity period against lead times and bottlenecks
- Assess PI/technical liability needs where design/advice exists
- Check transit, tool and off-site exposures and any one consignment limits
- Review security warranties and reduce claim dispute risk
- Help align contract caps and insurance limits for procurement requirements
FREQUENTLY ASKED QUESTIONS
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Why doesn’t liability insurance cover the cost of remaking defective parts?
Liability insurance is typically designed to respond to injury or third-party property damage. Many policies exclude “your product/your work” and do not cover your own costs to repair, replace, scrap or remake defective items unless there is insured third-party damage (wordings vary).
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What is “pure financial loss” and why is it a common gap?
Pure financial loss is loss without physical injury or property damage — for example, downtime costs, project delay or rework costs. Public/products liability may not respond well to pure financial loss claims, so contract caps and (where relevant) PI/technical liability become important.
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Can my customer contract create uninsured liability?
Yes. Contracts can expand your responsibility through broad indemnities, fitness-for-purpose promises, or uncapped consequential loss. Insurers may exclude liability assumed under contract unless you would have been liable anyway, creating a gap between contract and policy.
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When do engineering businesses need professional indemnity (PI)?
If you provide design input, drawings, tolerances, calculations, specifications or advice, PI/technical liability can be important because claims may be framed as negligence leading to financial loss rather than injury/property damage.
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Why do BI claims fail due to “indemnity period” issues?
If the indemnity period is too short, BI payments can end before you’re back to normal trading. Engineering recovery often depends on machine lead times, commissioning and calibration, tooling rebuild and capability requalification — not just the building repairs.
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What’s a common transit/tools gap for manufacturers?
Many premises policies have limited cover for goods in transit or tools away from premises. Any one consignment limits can also be too low for high-value shipments. Separate transit or tools extensions are often needed depending on your operations.
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How can we reduce claim disputes related to security conditions?
Ensure your security arrangements match policy requirements: alarm setting procedures, lock standards, key control, CCTV retention and maintenance records. Disclose night shifts and shared occupancy clearly so “unattended” conditions aren’t misunderstood.