Collateral warranties and what they mean for your professional indemnity
Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-05
If you work in construction, engineering, architecture or surveying, you will meet collateral warranties regularly. A developer’s bank, a future tenant or a purchaser wants the right to sue you directly if your work is defective, even though they never appointed you. The collateral warranty is the document that gives them that right — and signing one carelessly can quietly expand your exposure beyond what your professional indemnity (PI) policy will pay.
What a collateral warranty actually does
Your main appointment or building contract is between you and the client who engaged you. A third party who relies on that work — a lender financing the project, a company buying the finished building, a tenant taking a long lease — has no contract with you, and generally cannot recover pure economic loss from you in tort. A collateral warranty bridges that gap. It is a separate contract that runs “collateral” to the main one and gives the beneficiary a direct route of claim.
Because it is a genuine contractual liability, a claim under a collateral warranty is treated by your insurer much like a claim under your original appointment. The critical question is always the same: does the warranty ask you to do more than your PI policy insures?
Why your PI insurer cares
A standard PI policy covers your legal liability for breach of your professional duty — the duty to exercise reasonable skill and care. That is the ordinary standard the law expects of a competent professional. Problems arise when a warranty tries to raise the bar above that standard, because your insurer never priced for the extra risk and the wording may exclude it.
The most common trap is a fitness for purpose obligation. This promises that the finished work will actually achieve a stated result, regardless of how carefully you performed. It is a much stricter duty than reasonable skill and care, and most PI policies specifically exclude liability that goes beyond your professional duty. Sign a warranty containing one and you may be personally exposed with no cover behind you.
Before you sign a warranty, make sure your PI cover matches what you are promising.
Get a PI quote →The clauses that affect your cover
Not every clause is a problem. Well-drafted collateral warranties — including the standard forms published by the JCT and the model wordings from bodies such as the ACE and RIBA — contain protections that keep you inside your policy. Here is what to look for.
| Clause | Effect on your PI |
|---|---|
| Reasonable skill and care | Matches the standard PI insures. This is what you want the duty limited to. |
| Fitness for purpose / warranty of result | Goes beyond your professional duty and is usually excluded — a serious red flag. |
| “No greater liability” clause | Caps your liability under the warranty at what you owe under the main appointment. Very helpful — keep it in. |
| Net contribution clause | Limits your share to a fair and reasonable proportion of the loss, rather than the whole. Protects you where others are also at fault. |
| PI insurance obligation | Requires you to keep cover at a set limit for a number of years. Check the limit and duration are realistic and available. |
| Assignment provisions | Control who can take over the beneficiary’s rights. Uncapped assignment multiplies the parties who could sue you. |
| Step-in rights | Let a funder take over the client’s role if the client defaults. Common and usually acceptable, but read the payment terms. |
Two clauses deserve extra attention. The “no greater liability” wording is one of your strongest protections: it means a beneficiary cannot recover more from you than your original client could. A net contribution clause is equally valuable, because without one you could be pursued for the full loss even where a contractor or another consultant caused most of it.
Insurance obligations inside the warranty
Most warranties oblige you to maintain PI cover of a specified amount — commonly expressed as generic options such as £1m, £2m or £5m each claim — for a fixed period after completion, often several years, “provided such insurance remains available at commercially reasonable rates.” That qualifying phrase matters. It recognises that cover can become expensive or hard to obtain, particularly for higher-risk work such as fire safety and cladding.
Before you commit, confirm three things: the limit named is one you actually hold, the run-off period is achievable, and any specific requirement — for example on cladding or fire safety — is not excluded by your current policy. Agreeing to a limit or duration you cannot maintain is itself a breach of the warranty.
Third party rights as an alternative
You will not always be handed a warranty. Under the Contracts (Rights of Third Parties) Act 1999, a project can instead give named third parties direct rights through a schedule attached to the main appointment. This avoids signing separate documents for every funder and tenant, and from a PI perspective it carries the same principle: the rights granted should mirror the reasonable skill and care duty in your appointment, with the same protections you would insist on in a warranty.
Talk to Apex about a PI policy that keeps pace with the warranties you are being asked to sign.
Practical steps before you sign
- Read every warranty in full — never assume it repeats the last one.
- Delete or challenge any fitness for purpose or absolute performance wording.
- Keep the “no greater liability” and net contribution clauses in.
- Check the insurance limit and run-off period against the cover you actually hold.
- Watch how many beneficiaries and assignees the warranty creates.
- If a clause worries you, take legal advice and speak to your broker before signing.
Common questions
Does my PI policy automatically cover collateral warranties?
Usually yes, as long as the warranty does not impose a duty greater than reasonable skill and care. A fitness for purpose obligation or an absolute guarantee can take the liability outside your cover, so the wording matters more than the label on the document.
What is the single most dangerous clause to watch for?
A fitness for purpose or warranty-of-result clause. It promises an outcome regardless of how carefully you worked, and most PI policies exclude liability that exceeds your professional duty. Removing it, or capping the warranty with a “no greater liability” clause, keeps you inside your cover.
Can I be asked to sign warranties years after the project finishes?
Yes. Beneficiaries such as later purchasers or tenants may request warranties well after completion, which is why maintaining run-off PI cover for the period stated in your appointment is important. Check each request against the cover you currently hold before signing.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This guide is general information, not advice on a specific policy or a substitute for your policy wording.