Breach of contract cover in a professional indemnity policy addresses claims by clients alleging that the firm has breached its contractual obligations. Ordinary PI cover responds to breaches of the professional duty of reasonable skill and care; breach of contract cover extends that response to breaches of express contractual terms, but only up to a point — the wording carves out liabilities the firm has voluntarily assumed beyond what the common law would impose.
The cover is usually built into the main PI wording rather than appearing as a separate extension, but the boundary it draws is one of the most important and most misunderstood features of any PI policy. For the wider PI picture, see the Ultimate UK Professional Indemnity Insurance Guide 2026.
What breach of contract cover means in PI insurance
A professional’s relationship with their client is governed both by contract (the engagement letter, retainer or appointment) and by the common law tort of negligence. The two duties overlap heavily but are not identical.
The contract sets the express terms — scope of services, fees, timescales, deliverables, intellectual property, limitations of liability, indemnities. The common law imposes a duty to perform those services with reasonable skill and care. PI policies are designed around the common-law duty: they respond to claims that the firm has failed to perform with reasonable skill and care.
Where a client sues for breach of contract, the claim is dressed differently but often pleads the same underlying conduct. A negligent valuation is both a breach of the common-law duty of care and a breach of the contractual obligation to provide a competent valuation. Most PI policies respond to both formulations of the same underlying failure.
The problem arises where the contract imposes obligations that go beyond the common-law duty. Common examples include:
- A duty to achieve a specific result (fitness for purpose).
- An undertaking to meet a defined deadline regardless of cause.
- A guarantee of accuracy.
- An indemnity in favour of the client for any losses arising from the firm’s work.
- A duty to perform to a standard higher than reasonable skill and care.
These are voluntary contractual assumptions of liability that the common law would not impose. PI policies generally exclude or carve them out — under the heading of “liability assumed under contract” or “contractual liability exclusion”.
Breach of contract cover, properly understood, is the negotiated boundary between what the policy will pick up and what falls into the contractual-liability exclusion.
How it works in practice
Most UK PI policies operate on a civil liability basis (or close to it) but contain wording such as:
The insurer will not be liable for any claim arising from the assumption by the insured of any liability under any contract or agreement, except to the extent that such liability would have attached to the insured in the absence of such contract or agreement.
In plain English: if your contractual obligation simply restates the common-law duty of reasonable skill and care, the policy responds in full. If your contractual obligation goes further than the common law, the policy responds only to the extent of what the common law would have required.
So in practice, breach of contract cover responds to:
- Claims that you failed to exercise reasonable skill and care, dressed as breach of contract.
- Claims that you failed to meet an express contractual obligation that mirrors the common-law duty.
- Claims that you failed to deliver a service to a reasonably competent professional standard.
It does not respond to:
- Claims based on a fitness-for-purpose obligation.
- Claims based on an unconditional deadline or accuracy guarantee.
- Claims under indemnity clauses that exceed the firm’s actual liability.
- Claims for liquidated damages where the figure exceeds what the law would award as compensation.
A few insurers offer extended contractual liability cover for specific clients or specific projects, often subject to a sub-limit and an underwriting review of the contract.
Worked example with realistic figures
A Bristol-based engineering consultancy with annual fee income of £550,000 carries £2m PI cover with a £10,000 excess. The policy contains standard breach of contract cover within a civil liability wording.
The firm enters into an appointment to design a new manufacturing process line. The contract includes:
- A standard duty of reasonable skill and care.
- A fitness-for-purpose warranty that the design will achieve a specified throughput.
- An indemnity in favour of the client for any losses arising from the firm’s work, capped at £5m.
- A liquidated damages clause of £10,000 per week for late delivery beyond the agreed date.
After commissioning, the line achieves 85% of the specified throughput. The client claims £900,000 in losses: £600,000 of redesign and modification cost, £200,000 of lost margin, and £100,000 of liquidated damages for late delivery.
Under the policy:
- The PI insurer accepts that the consultancy was negligent in some respects of the design. Reasonable-skill-and-care cover responds to the proportion of the client’s losses attributable to negligence.
- After investigation, the insurer accepts £450,000 of the loss as flowing from negligent design (the £600,000 redesign cost, scaled to the proportion attributable to defective design rather than the warranted throughput).
- The fitness-for-purpose claim is excluded. The £150,000 element of the redesign cost that relates purely to achieving the warranted throughput (rather than correcting a defective design) is not covered.
- The £200,000 lost margin is partially covered to the extent it flows from negligence rather than the warranty.
- The £100,000 liquidated damages claim is excluded as a voluntary contractual assumption.
- Indemnity payment: approximately £550,000, less £10,000 excess.
- The firm bears approximately £350,000 itself, plus the excess.
These figures are illustrative. Apportionment between covered negligence and uncovered contractual assumption is one of the most fact-specific and contested parts of PI claims handling.
When this matters most
Breach of contract cover matters most for firms working under bespoke client appointments rather than standard terms. The exposure points include:
- Engineers and design consultancies entering into appointments with onerous performance warranties or fitness-for-purpose obligations.
- IT consultancies and software developers entering into delivery contracts with hard deadlines, performance guarantees or service-level commitments.
- Architects working under design-and-build arrangements where the contractor’s lead consultant agreement may impose fitness-for-purpose duties.
- Management consultants and project managers signing contracts with broad indemnities in favour of corporate clients.
- Recruitment firms signing master services agreements with onerous service-level and replacement obligations.
- Surveyors and quantity surveyors signing onerous indemnities in favour of lenders or developers.
It also matters for any firm signing contracts from large corporate or public-sector clients without legal review. Standard purchase-order terms from major buyers frequently contain indemnities and liability assumptions that are well outside the firm’s PI cover.
For firms that mostly use their own standard engagement letters, the exposure is significantly lower because the engagement letter typically restates the common-law duty without expanding it.
Common variations and market wording
Wordings vary in important ways:
“Civil liability” vs “negligence” basis. Civil liability wordings cover all civil claims subject to the policy’s exclusions. Negligence-only wordings respond only to claims framed in negligence. Civil liability is broader and is the wording most current UK PI policies use. The narrower negligence wording can leave gaps when contract-based claims are pleaded.
Express contractual liability exclusion. Almost all wordings exclude liability “assumed under contract to the extent it exceeds the liability the insured would have in the absence of the contract”. Some wordings are stricter, excluding any contractual liability at all unless specifically endorsed.
Indemnity clause cover. Some insurers offer specific cover for liabilities the firm has assumed under client-side indemnity clauses, usually for an additional premium and after underwriting review of the contract.
Liquidated damages. Most wordings exclude liquidated damages clauses entirely; some pick them up where the liquidated sum represents a genuine pre-estimate of loss rather than a penalty.
Fitness-for-purpose carve-out. Almost all wordings exclude fitness-for-purpose obligations. A few will pick them up for specific projects subject to underwriting review.
Contract review service. Some PI insurers offer a free or low-cost contract review service so the firm can check, before signing, whether a particular client contract will be covered. This is a useful service and worth asking about.
Related concepts
Breach of contract cover sits closely alongside the civil liability extension, which broadens the trigger to civil claims generally. It interacts with the dishonesty extension where the breach involves deliberate non-performance. It is also affected by sector-specific extensions such as the contract works PI extension for construction work.
Frequently asked questions
Does my PI policy cover all breach of contract claims?
Generally yes, where the breach involves a failure to exercise reasonable skill and care. The PI policy responds to the underlying professional conduct regardless of whether the client pleads the claim in contract or negligence. Where the breach involves an obligation that goes beyond reasonable skill and care — a fitness-for-purpose warranty, an unconditional deadline, an indemnity clause — the policy may not respond. The wording of the contract matters as much as the wording of the policy.
What is a “fitness for purpose” obligation and why is it excluded?
A fitness-for-purpose obligation requires the professional to ensure that the deliverable achieves a specific result — that the design will work, that the system will perform, that the building will meet a defined function. The common law only requires reasonable skill and care. Fitness-for-purpose is a stricter standard and represents a voluntary assumption of additional liability. PI insurers exclude it because they price the policy against the common-law duty.
What about indemnity clauses in client contracts?
Client-side indemnity clauses typically require the firm to indemnify the client for any losses arising from the firm’s work. Where the indemnity simply restates the firm’s liability under the common law, it is covered. Where the indemnity is broader — for example, covering consequential losses the law would not award, or covering matters beyond the firm’s own fault — the broader element is generally excluded. Have the indemnity reviewed before signing.
Are liquidated damages clauses covered?
Most PI policies exclude liquidated damages, on the basis that they are contractually-fixed sums that bear no necessary relationship to the firm’s actual fault. A few policies will respond to liquidated damages where the sum represents a genuine pre-estimate of loss rather than a penalty. Where the firm regularly accepts liquidated damages clauses, specific cover should be discussed with the broker.
Does the cover apply to consequential losses claimed by the client?
Consequential losses (lost profit, lost margin, business interruption) are generally covered where they flow from negligent performance of the firm’s professional duty and are recoverable as a matter of contract law. The policy follows the underlying liability. Where consequential losses are excluded by the firm’s own engagement letter, the policy does not put them back in.
What is the difference between a contractual liability exclusion and a contractual liability extension?
The contractual liability exclusion in most wordings carves out liability assumed under contract beyond the common-law duty. A contractual liability extension, where offered, narrows that exclusion to pick up specific assumed liabilities — usually for a named project, named client or specific contract reviewed by the insurer. The extension does not generally remove the exclusion altogether; it brings defined exposures back within cover.
Should I have client contracts reviewed before signing?
For larger or more onerous contracts, yes. A short contract review can identify fitness-for-purpose warranties, broad indemnities, unconditional deadlines, liquidated damages and accuracy guarantees that fall outside PI cover. Some insurers offer this service as part of the policy; otherwise a broker or solicitor with professional indemnity experience can assist. The cost of review is small compared with the cost of discovering a coverage gap after a claim.
Can my engagement letter help limit the breach of contract exposure?
Yes. A well-drafted engagement letter restates the common-law duty of reasonable skill and care, expressly disclaims fitness-for-purpose obligations, limits liability to a defined cap (typically aligned to the PI limit) and excludes consequential losses. Where the firm controls the engagement letter, the breach of contract exposure stays close to what the PI policy covers. Where the client imposes its own terms, exposure can widen significantly.
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About Apex Insurance Brokers Ltd
Apex Insurance Brokers Ltd is a Bristol-based insurance broker authorised and regulated by the Financial Conduct Authority, firm reference number 724952. The firm is registered at Companies House under number 07014570. We can be contacted at info@apexinsurancebrokers.co.uk or on 0117 325 0027.
Last reviewed: May 2026 by Apex Insurance Brokers Ltd.
Important: this article is general information, not advice on your specific circumstances. For advice on PI insurance for your firm, contact us on 0117 325 0027 or info@apexinsurancebrokers.co.uk.