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WHY POLICY GAPS MATTER IN PRECISION ENGINEERING
Precision engineering claims are rarely “simple accidents”
In precision engineering and contract manufacturing, the biggest disputes often start with something that looks minor: a tolerance drift, a missing inspection record, a damaged finish, a late delivery, or a rejected batch. The commercial impact can be severe — scrap, rework, expedited remakes, line stoppage allegations, and contractual arguments about who should pay.
The challenge is that many standard business insurance policies are built for “classic” losses (fire, theft, third-party injury/property damage). Precision engineering disputes frequently involve your own work, pure financial loss, contractual penalties, or consequential loss that is not automatically covered.
This page explains the most common exclusions and policy gaps we see for UK precision engineering manufacturers — and the practical steps you can take to reduce the chance of being left uninsured when a customer dispute escalates.
The “Big 8” Exclusions That Catch Precision Engineers Out
Exclusions vary between insurers and wordings, but these themes appear repeatedly in precision engineering insurance. Understanding them early helps you structure cover correctly and manage customer expectations in contracts.
1) “Your Own Work” / Rectification / Rework
One of the most misunderstood issues: liability policies are generally designed to cover injury or damage caused to others, not the cost of correcting your own defective product or workmanship. In a precision engineering context, the cost of re-machining, re-grinding, re-finishing, re-inspecting, and remaking a batch can be significant.
- Typical gap: Policy may not pay for the cost to remake parts you supplied that are out of tolerance.
- Why it matters: Rework costs often arrive before a “claim” even exists — your customer simply rejects the batch.
- How to reduce risk: Align expectations contractually, strengthen QA evidence, and consider cover structures where appropriate (case-by-case).
2) Pure Financial Loss
Many precision engineering disputes are about money rather than damage. Example: a customer says your late delivery caused them missed production slots or penalty charges. If there is no injury or property damage, it may be treated as pure financial loss — often outside the scope of standard Public/Products Liability.
- Typical gap: “Financial loss” not arising from injury/property damage is excluded.
- Why it matters: OEM and contract supply chains can escalate disputes quickly, even when the part itself is intact.
- How to reduce risk: Consider Professional Indemnity where you design/advise; tighten contracts; manage delivery promises.
3) Contractual Liability & “Assumed Liability”
Contracts can create liabilities you wouldn’t otherwise have under law. If you sign broad indemnities, accept responsibility for a customer’s downstream costs, or agree to cover penalties, your insurance may not automatically follow — especially if the liability is “assumed under contract.”
- Typical gap: Policy covers your legal liability, but not extra obligations you accept in a contract.
- Why it matters: Purchase orders and frameworks often contain hidden insurance and indemnity clauses.
- How to reduce risk: Contract review before signing; align insurance evidence and endorsements; negotiate clauses.
4) Consequential Loss / Loss of Use / Line Stoppage
“Consequential loss” is sometimes used loosely, but the concept is consistent: a customer claims your component caused wider disruption beyond the part itself. In high-dependency environments, allegations can include loss of production, loss of profit, wasted labour, or expedited logistics costs.
- Typical gap: Loss of use, delay, or consequential loss is excluded or limited.
- Why it matters: A single defective part can halt an assembly process, even if the damage is minimal.
- How to reduce risk: Tight QA; traceability; clear contract limits; ensure your liability limit matches realistic exposure.
5) Product Recall / Withdrawal Costs
If your component is found to be defective after it has entered distribution or been installed, customers may demand a recall, withdrawal, or replacement programme. Standard liability may respond to injury/property damage — but recall costs themselves are often excluded unless you have specialist recall cover.
- Typical gap: “Recall” costs not covered under standard Products Liability.
- Why it matters: Even a “precautionary” withdrawal can be costly and reputationally damaging.
- How to reduce risk: Consider Product Recall/Withdrawal cover where exposure exists; strengthen traceability to limit scope.
6) Professional Services / Design & Specification Work
If you provide design input, advise on tolerances, propose material substitutions, produce prototypes, or issue drawings, a dispute may be treated as a professional error rather than a product defect. This is where Professional Indemnity (PI) can be relevant — and where relying only on Products Liability can leave a gap.
- Typical gap: Design/specification advice excluded under Products Liability.
- Why it matters: Many claims in precision supply chains are argued as “wrong advice” or “incorrect design.”
- How to reduce risk: Add PI where applicable; define scope of design responsibility; keep documented approvals.
7) Work Away / Installation / Commissioning
Many precision engineering firms do occasional installation or commissioning at customer sites. If that work is not disclosed, you may end up with restrictions on work away, heat works, or contract works exposures. This becomes especially important if you integrate assemblies, modify equipment, or work in higher-risk environments.
- Typical gap: Policy intended for “manufacturing only” does not match installation activities.
- Why it matters: A site incident can produce immediate PL claims and contract disputes about responsibility.
- How to reduce risk: Declare all activities; add Contract Works or relevant extensions; follow site permit systems.
8) Territory / Exports / USA/Canada Exposure
Exporting parts can change the entire risk profile. Some policies limit territories, exclude certain jurisdictions, or require specific underwriting approval for the USA/Canada. Even indirect exposure (parts supplied to a UK customer that then exports) can cause problems if not disclosed.
- Typical gap: Territory limitation excludes claims arising in certain jurisdictions.
- Why it matters: Contract supply chains can create “unknown” end-use and final destination risks.
- How to reduce risk: Confirm territories and end-use; structure policy correctly; ensure contract terms don’t overreach.
Where Policy Gaps Commonly Appear in the Real World
Policy gaps don’t show up on a quiet day — they show up when a customer is under pressure and needs someone to pay. Below are common real-world scenarios for precision engineering manufacturers, and the cover areas that often become contested.
Scenario A: Batch Rejection
A customer rejects a batch for tolerance deviation and invoices you for rework and additional inspection time. There is no injury or property damage — just a commercial dispute.
- Often treated as rectification / own work (commonly excluded)
- Can be pure financial loss if the dispute is about costs
- Your protection is often in contracts + QA evidence, and sometimes PI depending on the cause
Scenario B: Line Stoppage Allegation
A component is alleged to have caused a line stoppage. The customer claims wasted labour and downtime costs. The part itself is low value, but the allegation is high value.
- Claims may be framed as consequential loss / loss of use (often limited/excluded)
- Insurance response depends heavily on wording, proof of damage, and causation
- Contract limits, liability limits, and traceability are key controls
Scenario C: Design Responsibility Dispute
You propose a material change, adjust a tolerance, or provide a drawing revision. Later, the assembly fails and the customer alleges your advice was wrong.
- Often a PI-style dispute (financial loss)
- Products Liability may not respond if it’s argued as “professional error”
- Documented approvals and defined scope can be as important as insurance
Scenario D: Fire at the Workshop
Fire damages machinery, tooling, fixtures and stock. Your biggest loss becomes downtime.
- Property cover may respond, but underinsurance can reduce settlement
- BI commonly fails due to short indemnity periods and underestimated gross profit
- Lead times for specialist machinery can exceed 6–12 months, sometimes longer
We assumed our liability policy would cover a quality dispute — it didn’t. Insure24 helped us restructure our programme, tighten contract wording, and improve our risk presentation so we weren’t relying on assumptions.
Director, Precision Engineering Supplier (UK)How Insure24 Helps Reduce Gaps
Insurance alone can’t remove every commercial dispute — but you can reduce the “surprise” factor by structuring cover properly and making sure the policy matches how you actually operate.
- Policy fit review – we align activities, products and territories to the wording
- Contract awareness – we help you understand how common clauses interact with insurance
- Risk presentation – stronger submissions can improve insurer appetite and terms
- Specialist add-ons – PI, recall, cyber, machinery breakdown and tooling where appropriate
- BI realism – we help you choose sums insured and indemnity periods that match lead times
A Practical “Gap-Reduction” Checklist
If you want fewer unpleasant surprises, focus on the fundamentals below. These are the areas that most often turn a manageable incident into a high-cost uninsured dispute.
- Activities: Declare everything you do (manufacture, assembly, installation, design input, prototyping)
- Territories: Confirm where products end up (including indirect exports)
- Contracts: Identify indemnities, penalties, and insurance clauses before you accept them
- QA evidence: Inspection records, calibration, traceability, non-conformance process
- Machinery/Tooling values: Accurate replacement costs, including installation/commissioning
- BI: Gross profit calculation + realistic indemnity period based on lead times
- Cyber: Protect CAD/CAM, ERP and invoice/payment processes
- Claims narrative: If you’ve had issues, show what changed and what controls improved
FREQUENTLY ASKED QUESTIONS
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Will Products Liability insurance pay for rejected parts and rework?
Often not. Products Liability is typically designed to cover injury or property damage caused to third parties, not the
cost of redoing your own work or replacing defective parts. Policy wordings vary, so it’s important to review exclusions
and structure cover with your real exposures in mind.
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What does “pure financial loss” mean in precision engineering claims?
It usually means a claim for money that doesn’t arise from injury or property damage — for example delay costs, wasted labour,
downtime charges or contractual penalties. Many standard liability policies exclude or restrict pure financial loss.
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Do I need Professional Indemnity if I’m mainly “build-to-print”?
Not always — but if you advise on tolerances, propose substitutions, issue drawings, prototype, or provide any technical
guidance that influences outcomes, PI is strongly recommended. Many disputes are argued as “wrong advice” rather than
“product damage,” which can create a gap if you rely only on Products Liability.
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How do contracts create insurance gaps?
Contracts can require you to accept liabilities beyond what you would normally have under law (broad indemnities,
penalties, consequential loss commitments). Insurance often covers your legal liability, but not additional liability
you “assume” under contract unless specifically endorsed.
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What’s the best way to reduce gaps without overpaying for insurance?
Start with accurate disclosure (activities and territories), align liability limits to contracts, improve QA/traceability
evidence, and ensure machinery/tooling/BI values are realistic. Then add specialist covers only where your operations
genuinely need them (PI, recall/withdrawal, cyber, machinery breakdown).
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Can Insure24 review my policies to identify exclusions that matter for my contracts?
Yes. We can review your current covers, highlight likely gaps for precision engineering and OEM supply, and help you
structure a programme that matches how you operate and what your customers require.