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We arrange cover with specialist manufacturing insurers
WHERE “QUALITY” MEETS “CONTRACT” — AND LOSSES ESCALATE FAST
Why Contractual Risk Is a Major Exposure in Precision Engineering
Precision engineering customers often impose strict performance and quality obligations. A non-conforming batch, late delivery, or documentation failure can trigger rejection, chargebacks, line-stoppage costs, expedited freight demands, and (in certain sectors) formal recall or rectification programmes.
Many of these losses are contractual rather than “accidental damage” — which means they may fall into the gap between property/engineering cover and liability insurance. The solution is understanding where cover can apply, using the right extensions, and managing contract wording and operational controls.
Common Contractual Loss Scenarios
Contractual penalties and rejection losses can arise even when no injury occurs. Underwriters focus on how you prevent non-conformance, how you document processes, and how contracts allocate risk.
Rejection, Chargebacks & Rework
- Customer rejects a batch for dimensional non-conformance
- Chargebacks for inspection time, sorting and rework
- Urgent remanufacture with overtime and expediting
- Scrap of high-value material or WIP
- Loss of approved supplier status / re-qualification costs
Late Delivery & Performance Penalties
- Liquidated damages or late delivery penalty clauses
- Customer line-stoppage allegations
- Expedited freight demanded at supplier cost
- Short-notice subcontracting and outsourcing
- Reduced margin due to emergency production measures
Where Insurance Can Help (and Where It Often Doesn’t)
It’s important to set expectations: many “pure contractual” costs are not automatically insured. However, there are scenarios where cover can apply — particularly where defects cause third-party damage, or where product recall/rectification extensions are in place.
Products Liability: Third-Party Damage & Defence
Products liability insurance can respond when a defect causes third-party property damage or bodily injury, and it can provide legal defence for allegations and investigations.
- Claims alleging damage caused by your supplied parts
- Legal defence costs and settlements (subject to terms)
- Worldwide territories for exports (where arranged)
Common gap: many policies exclude the cost of replacing/remaking your own product (“your product/your work” exclusions).
Recall / Rectification Extensions
Product recall or rectification insurance may help with the costs of withdrawing products, notifying customers, investigation, and sometimes replacement logistics — depending on triggers and wording.
- Recall costs (notification, logistics, disposal)
- Rectification costs where policies allow
- Investigation and crisis management expenses
- Batch traceability and documentation expectations
Availability varies by sector (e.g., aerospace/automotive/medical) and by insurer appetite.
How to Reduce Contractual & Rejection Risk
Strong operational controls reduce losses and also make insurers more comfortable offering broader terms. The best underwriting submissions show clear process control, traceability and contract governance.
Quality & Traceability Controls
- First-off inspection and sign-off for each setup
- Non-conformance reporting and corrective action (CAPA)
- Batch traceability for materials, operators and machine programmes
- Calibration schedules and measurement system checks
- Controlled revision management for drawings and programs
Contract & Customer Management
- Review penalty clauses and cap liability where possible
- Align insurance limits to customer requirements
- Use acceptance criteria and inspection responsibility clearly
- Document deviations and customer-approved concessions
- Maintain robust supplier control for outsourced processes
FREQUENTLY ASKED QUESTIONS
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Does insurance cover contractual penalties or liquidated damages?
Often no. Many policies exclude contractual penalties and pure financial loss unless it arises from
insured third-party damage or a specific extension applies. Cover depends heavily on wording and triggers.
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Will products liability pay to remake rejected parts?
Typically not. Liability policies usually exclude the cost of repairing or replacing your own product.
They are designed to respond when defects cause third-party damage or injury.
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What is the difference between recall and rectification cover?
Recall cover typically focuses on withdrawal, notification and logistics costs. Rectification cover
may extend to repairing or replacing affected products, depending on wording and triggers.
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How can we make our risk more insurable?
Strong traceability, non-conformance processes, calibration records and contract governance
improve insurer confidence. Clear documentation and quality control are key.
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Can Insure24 help align cover with customer contracts?
Yes. We can help you map contract requirements, territories and liability limits to an insurance
programme, and highlight where contract terms create uninsurable exposures.