Collateral Warranties and Your PI Programme

Construction and property professionals sign collateral warranties the way other firms sign NDAs: frequently, under commercial pressure, and with the attention drifting after the tenth one. Each warranty seems minor — a side agreement confirming to a funder or future purchaser that the firm owes them the same care it owes its client. Collectively, they are something else entirely: a second client base, assembled over years, of parties the firm never chose, most of whom it has forgotten, all of whom hold a direct contractual route to sue it. The PI programme is the asset that stands behind every one of those promises. The two need to be managed together, and usually are not.

What a warranty portfolio actually does to PI exposure

A collateral warranty converts a third party’s difficult negligence claim into a straightforward contractual one. Without a warranty, a funder or subsequent purchaser suing a consultant must overcome the awkward law of pure economic loss in tort; with one, they simply sue on the contract they hold. Multiply that across a warranty book and the firm’s pool of potential claimants expands well beyond its client list — and each project may carry several warranties: funder, purchaser, tenants, sometimes with rights to assign onwards.

The drafting details matter to the insurance position. A net contribution clause — limiting the firm’s liability to its fair share of the blame — is the difference between paying your portion of a defect and being pursued for the whole of it because the contractor has become insolvent; warranties signed without one quietly accept joint and several exposure. Step-in rights let a funder take over the appointment if the developer fails, meaning the firm can acquire a new, possibly distressed, client mid-project by operation of a document signed years earlier. And most warranties contain an obligation to maintain PI insurance at a stated limit for a stated period — typically twelve years from practical completion — which is a promise about future insurance buying made today, enforceable by someone the firm may never hear from again until it matters.

Why insurers ask about warranty volumes — and what they do with the answer

PI proposal forms for construction professionals ask about collateral warranties for a simple reason: the warranty book changes the frequency and severity of what the policy may face. More warranties means more parties with direct claims; warranties without net contribution clauses mean larger shares of multi-party losses; long express liability periods mean a longer tail. Underwriters price what they are told, and — the sharper point — they rely on what they are told. A firm that materially understates its warranty exposure on a proposal form is not saving premium; it is building a fair-presentation argument for an insurer to deploy at claim time, under the Insurance Act 2015 duty to make a fair presentation of the risk.

Insurers also read warranty behaviour as a proxy for risk management generally. A firm that can state how many warranties it gives a year, on what standard forms, with what departures permitted and who signs them off, presents as a firm in control of its liabilities. A firm that answers “various, on request” presents as the opposite, and is priced accordingly.

The warranty register: the document your broker needs and your insurer respects

The practical instrument that connects the warranty book to the PI programme is a register: every warranty given, the project, the beneficiary, the date, the form used, whether a net contribution clause survived negotiation, the required insurance limit and maintenance period, and any assignment provisions. It does three jobs at once. It lets the firm answer proposal-form questions accurately. It reveals the aggregate insurance-maintenance obligations the firm has signed up to — including, occasionally, the discovery that some warranty demands a limit higher than the programme currently carries. And it gives the broker the evidence to present the exposure well: a documented, controlled warranty book is an underwriting positive even when it is large.

Building the register retrospectively is tedious — warranties live in project files, deal bibles and solicitors’ archives — but it only has to be done once, and the alternative is describing the firm’s largest hidden exposure from memory.

Assignment, legacy warranties and the long tail into run-off

Assignment is the mechanism that makes warranty exposure genuinely unpredictable. Most warranties are assignable, typically once or twice, so the beneficiary the firm negotiated with is not necessarily the claimant it will face: the warranty travels with the building, through sales and refinancings, to parties with no relationship to the firm and no reason for restraint. The claimant a warranty ultimately produces may be a fund that bought the building a decade after the firm’s involvement ended.

Which is the final point: warranties outlive projects, and they outlive the firm’s active life. Executed as deeds, they commonly carry twelve-year limitation periods from practical completion. A firm that ceases trading, sells, or merges still leaves its warranty book in force — and because PI cover is written on a claims-made basis, cover must exist when the claim arrives, not when the work was done. That is what makes run-off cover a warranty issue: the insurance-maintenance clauses in the warranty book effectively dictate how much run-off the firm has promised to buy, and for how long. Principals planning retirement or sale should read their warranty register before they price the run-off, because the register is where the true length of the tail is written down.

Frequently asked questions

Do collateral warranties need to be disclosed to our PI insurer?

Yes — proposal forms ask, and the Insurance Act 2015 duty of fair presentation covers the warranty book regardless of the precise question asked. Volumes, standard forms and any unusual departures are exactly the kind of information a prudent underwriter wants. Accurate disclosure protects the firm at claim time; understatement invites a coverage argument when it is least affordable.

Is a warranty with a net contribution clause safe to sign?

A net contribution clause materially improves the position, but no clause makes a warranty “safe” — it remains a direct contractual duty to a third party, usually for many years. The other terms matter too: the insurance-maintenance obligation, assignment rights, step-in provisions and any departures from the firm’s negotiated appointment. Legal review sets the terms; the register and the PI programme deal with what has been signed.

We have stopped giving warranties — does the old book still matter?

Entirely. Warranties already given remain enforceable for their full limitation period, commonly twelve years from practical completion where executed as deeds, and may have been assigned to parties you have never met. Because PI operates claims-made, the historic book is a live rating factor and a live reason to maintain cover — or run-off cover — until the tail genuinely expires.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). Every risk is different: nothing on this page is advice on your own programme, and outcomes depend on your firm’s circumstances and the market at the time.