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CONTRACT RISK INSURANCE FOR FABRICATORS & MANUFACTURERS
Why Contractual Risk Is One of the Biggest “Hidden” Exposures in Metal Fabrication
Many fabrication businesses believe their liability insurance automatically protects them against “whatever the contract says”. In reality, contract wording can expand your obligations far beyond standard negligence-based liability - and some of those expanded obligations are uninsurable or excluded under standard policies.
This page explains the most common contractual risk traps in metal fabrication and manufacturing - including penalties, broad warranties, “fitness for purpose” clauses, removal and reinstallation obligations, and chargebacks for delay. Insure24 can help you structure insurance and risk controls so you avoid expensive gaps.
Contractual Liability, Penalties & Warranty Risk: What It Means
In metal fabrication, your risk does not stop at welding quality or machining accuracy. It also sits in the contract you sign. Two businesses can do the same job with the same level of workmanship and face very different outcomes after a problem - simply because their contractual terms are different.
Contract risk typically shows up in three ways:
- Expanded liability – your contract makes you responsible for losses you would not normally be legally liable for
- Time and delivery penalties – late delivery or installation triggers liquidated damages or chargebacks
- Warranty and performance obligations – you guarantee performance, lifespan, compliance or “fitness” beyond reasonable control
Insurance can help with some of this exposure, but not all. The key is knowing what insurance is designed to respond to, and then aligning your processes, contract negotiation approach and cover options accordingly.
Where Standard Liability Cover Usually Helps
- Public Liability – injury/property damage arising from your on-site activities
- Products Liability – injury/property damage caused by your product after supply/handover
- Legal defence – solicitors, expert evidence and defence costs (subject to terms)
- Some contractual liability – where the contract liability mirrors what you’d be liable for in law anyway
- Completed operations – allegations linked to completed installation (policy dependent)
In short: standard liability policies are typically designed to respond to injury and third-party property damage claims, and associated defence costs - not “commercial loss” or contract penalties.
Where Contracts Commonly Create Uninsured Gaps
- Penalties and liquidated damages for delay, missed KPIs, or performance failures
- Pure rectification – “making good” your own defective work or replacing your own product
- Fitness for purpose clauses that go beyond negligence liability
- Broad warranties (e.g., 10–25 years durability / corrosion guarantees)
- Removal and reinstallation costs (especially after completion)
- Consequential economic loss not arising from injury/property damage
The best defence is a combination of contract review, clear scope definition, and insurance structured around your actual exposures.
Common Contract Clauses That Increase Risk for Fabricators
The following clauses appear frequently in OEM terms, principal contractor agreements, framework contracts and supply terms. Some can be acceptable with the right controls. Others need careful negotiation or a clear understanding that they may not be insurable.
1) Fitness for Purpose
“Fitness for purpose” can be a major problem. It may mean you are guaranteeing an outcome (performance or suitability), not just promising to take reasonable care. If something fails despite reasonable workmanship, you may still be on the hook.
- Common in design-and-build / turnkey arrangements
- Often appears in warranty schedules and technical requirements
- Can be difficult to insure if it exceeds negligence-based liability
Practical approach: be clear whether you are following a provided design or accepting responsibility for design/performance.
2) Indemnities and Hold Harmless Clauses
Broad indemnities can require you to reimburse losses even where you are not negligent, or for losses that are not injury/property damage (e.g., pure financial loss). This can create uninsured exposures.
- Indemnity for “any losses arising out of or in connection with the supply”
- Indemnity for downstream production loss or lost profits
- Indemnity extending to affiliated companies and “any person”
Practical approach: align indemnities to insurable triggers and cap liability where possible.
3) Liquidated Damages, Penalties & Chargebacks
These are typically pre-agreed financial amounts for delay or underperformance. They often trigger without a need for the customer to prove actual loss. Insurance rarely covers penalties and liquidated damages as they are contractual and/or punitive in nature.
- Daily/weekly delay damages for late delivery or installation
- Chargebacks for line stoppage, overtime or rescheduling
- KPI failure charges or service credits
Practical approach: build realistic lead times, document variations, manage dependencies, and negotiate caps.
4) Removal, Reinstallation & Access Costs
If a fabricated component fails after installation, the customer may claim not only for damage caused, but also for the cost of removing the defective part and reinstalling the replacement. These costs can be significant - cranes, access equipment, shutdown time, permits and specialist labour.
- Can be excluded as “making good” or “your product” depending on wording
- Often appears in OEM terms and principal contractor schedules
- Severity increases dramatically for high-level or hard-to-access installations
Practical approach: understand your policy wording and consider extensions where available. Also manage quality and handover sign-offs.
Warranty Risk for Fabricators: What to Watch Out For
Warranties can be reasonable (e.g., you warrant your work is carried out with reasonable skill and care and meets the specification), or they can be onerous (e.g., guaranteeing lifespan, corrosion resistance, performance thresholds, or “no defects” for long periods).
The challenge is that warranties can convert a dispute into a contractual breach claim - even where there is no injury or property damage. Many insurance policies are designed around liability for injury/property damage (or professional negligence), not pure breach-of-warranty.
Examples of Onerous Warranty Language
- “The goods shall be free from defects for 10 years”
- “The work will be fit for purpose and achieve all performance criteria”
- “Supplier warrants the product will not corrode for 15 years”
- “Supplier is responsible for all consequential loss arising from failure”
- “Supplier shall replace and reinstall at its own cost on demand”
These terms can create liabilities that do not depend on negligence and may be difficult or impossible to insure.
How to Make Warranty Terms More Manageable
- Align warranty to specification compliance and reasonable skill and care
- Limit duration and clarify exclusions (corrosion environment, misuse, lack of maintenance)
- Cap liability and exclude consequential economic loss
- Define remedy: repair/replace only, not “all costs” including access
- Document installation conditions and handover acceptance
- Ensure material certifications and coating specs are recorded for traceability
Even small changes in wording can significantly reduce exposure and improve insurability.
“The contract included liquidated damages and broad warranty obligations. Insure24 helped us understand what was (and wasn’t) insurable, so we could negotiate sensible limits and structure cover properly.”
Operations Director, UK Metal Fabrication BusinessWhich Insurance Policies Help With Contractual Risk?
There is no single “contractual risk insurance” that makes every contract safe. Instead, the right solution is typically a combination of liability cover, professional indemnity (where design/advice is present), and project-specific covers where needed - backed by robust contract management and quality documentation.
Public & Products Liability
Public/products liability is the core of most fabrication programmes. It’s designed to respond to injury or third-party property damage claims. It can also include legal defence costs. However, it may not respond to:
- Penalties / liquidated damages
- Pure financial loss not linked to injury/property damage
- The cost of replacing your own product/work (making good)
- Breach of warranty claims without damage
If your contracts include “contractual liability” wording, insurers may accept some of it - but usually only where it does not expand beyond common law liability.
Professional Indemnity (PI)
If you provide drawings, design detail, calculations, specification advice, tolerances, fixing recommendations, or value engineering, PI can be essential. It is designed around professional negligence allegations.
- Useful where claims are “paper-based” (drawings, advice, calculations)
- Relevant where you accept design responsibility or sign off adequacy
- Helps with defence costs for technical disputes
PI will not usually cover penalties or deliberate contractual assumption of risk beyond negligence unless specifically agreed.
Contract Works & Project Covers
If you are installing or assembling on-site, contract works can protect the project while it is underway (materials, works in progress, and sometimes temporary works). This does not replace liability cover - it complements it.
- Damage to works on-site before handover
- Theft of materials from site (policy dependent)
- Helps manage disputes about who pays when damage occurs mid-project
Particularly useful where contracts place risk on you for the works until practical completion.
Recall / Rectification Extensions
Where available, recall/rectification cover can help with certain costs linked to withdrawal, replacement or rectification of defective products (subject to strict terms). This can be valuable for batch-driven manufacturing exposures, but availability depends on product type and risk management.
- Potentially relevant for repetitive components and supply chains
- May require traceability, QA systems and incident response planning
- Often has sub-limits, conditions and defined triggers
It is not a “blank cheque”, but it can materially improve resilience if you’re exposed to batch failure costs.
Practical Ways to Reduce Contractual Risk in Fabrication
Insurance is only one part of managing contractual exposure. The strongest outcomes come from good contract discipline, documentation, variation control and quality assurance - because most disputes are ultimately evidence disputes.
Contract Controls That Make a Real Difference
- Scope clarity – define what is included/excluded, especially design responsibility
- Lead time realism – document assumptions (materials, access, approvals)
- Variation process – require written approval for changes and keep a variation log
- Acceptance criteria – agree inspection and sign-off points (hold points)
- Liability caps – cap exposure to a sensible level (e.g., contract value or insurance limit)
- Limit warranties – align to specification and reasonable skill and care
- Exclude consequential loss – where commercially achievable
- Document handover – sign-offs, photos, as-built records and commissioning evidence
These controls help reduce disputes and also support insurance underwriting and claims defence.
Quality & Traceability Controls That Support Defence
- Material certificates and batch traceability
- Weld records, WPS/PQR documentation (where relevant)
- Inspection records (visual, dimensional, NDT where required)
- Calibration records for measurement equipment
- Coating specs, prep records and environmental conditions
- Nonconformance reporting and corrective action logs
- Change control on drawings and revisions
- Delivery notes and installation sign-off documentation
When a customer alleges a defect, your ability to evidence compliance can be as important as the technical facts.
FREQUENTLY ASKED QUESTIONS
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Does liability insurance cover contract penalties and liquidated damages?
Usually not. Penalties and liquidated damages are typically contractual and/or punitive in nature, and many liability policies are designed to respond to injury or third-party property damage claims rather than commercial delay charges. The safest approach is to negotiate caps and manage delivery dependencies carefully.
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What is “contractual liability” and is it insurable?
Contractual liability is liability you assume under a contract. Some of it can be insurable where it mirrors your normal legal liability (for example, negligence leading to injury or property damage). But if the contract expands liability beyond common law (e.g., fitness for purpose, broad indemnities or pure financial loss), that expanded portion may be excluded or uninsurable.
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Do warranties create uninsured exposures for fabricators?
They can. A broad warranty can turn a dispute into a breach-of-contract claim even if there is no injury or third-party property damage. Many policies are not designed to pay for pure breach of warranty or the cost of replacing your own defective work. Keeping warranties aligned to specification compliance and reasonable skill and care can reduce risk.
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Is removal and reinstallation cost covered if my product is defective?
Not automatically. Some policies may respond where removal is necessary to repair third-party property damage, but “making good” your own defective product/work and associated access costs can be excluded. The exact position depends on policy wording and the nature of the claim, so it’s important to align cover to your contract obligations.
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When should a fabricator buy professional indemnity (PI) as well?
If you provide design input, drawings, calculations, specifications, fixing recommendations or value engineering, PI can be important. It is designed for allegations of negligence in professional services, which may not be covered by standard public/products liability.
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Can insurance cover chargebacks for production line stoppage caused by late delivery?
Chargebacks for delay are usually treated as contractual/commercial losses rather than insured liability claims. Even where a customer suffers real loss, policies typically require an insured trigger (like injury or property damage, or professional negligence under PI) rather than contractual delay. Managing timelines, documenting dependencies and negotiating caps is usually the best protection.
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What can I do to reduce contractual risk on fabrication projects?
Focus on scope clarity (especially design responsibility), robust variation control, realistic lead times, documented handover/acceptance, clear warranty wording, liability caps, and traceable QA records (materials, inspection, weld records, calibration). These steps reduce disputes and improve your position if a claim arises.
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How quickly can Insure24 help with contract-aware insurance cover?
Once we understand your activities (fabrication vs supply & install), typical contract terms, requested liability limits, territories and claims history, we can usually progress quotes quickly. If you have an urgent tender or onboarding deadline, call us and we’ll prioritise your request.