Collateral warranties and your PI cover

Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-10

If you practise as an architect, consulting engineer or design-and-build contractor on commercial development work, warranty requests arrive as routinely as valuations. They usually land late in the project, under commercial pressure, in a form drafted for someone else's benefit. The document looks standard. It rarely is — and the gap between what a warranty commits you to and what your professional indemnity policy is designed to respond to is where firms get hurt, sometimes a decade after practical completion.

What does a collateral warranty actually give the beneficiary?

Your appointment or building contract is with the employer — typically the developer. The funder financing the scheme, the purchaser who buys it and the tenants who occupy it have no contract with you at all. English law makes it difficult for those parties to recover pure economic loss — the cost of remedying a design defect, or the diminished value of a defective building — in tort. A collateral warranty exists precisely to bridge that gap: it creates a direct contract between you and the beneficiary, under which you warrant that you have performed, and will perform, your obligations under the underlying appointment with reasonable skill and care.

The warranty is meant to be parasitic on the underlying appointment, not an enlargement of it. That is why well-drafted warranties include "no greater liability" and equivalent-rights-of-defence provisions: the beneficiary should stand in no better position against you than the employer does, and you should be able to raise the same defences and rely on the same limitations. When a proposed warranty departs from that principle — imposing obligations the appointment never contained, or stripping out limitations the appointment includes — it stops being collateral and starts being a new, wider liability. That distinction is the heart of every PI question a warranty raises.

Why does a warranty request trigger questions about my PI policy?

Two reasons. First, warranties multiply the population of people entitled to sue you in contract. A single office scheme can generate warranties to a funder, a forward purchaser and multiple tenants, each with assignment rights. Insurers underwriting your practice want to understand that exposure, which is why proposal forms and renewal discussions ask how many warranties you give, in what form, to whom, and whether they are executed as deeds. Answer those questions carefully — they feed directly into how your risk is rated, and inaccuracy creates disclosure problems of its own.

Second, warranties can change the character of your liability, not just its audience. A warranty that faithfully replicates the duties you already owe under your appointment, subject to the same caps and limitations, usually sits comfortably within a practice's PI arrangements. The difficulties come from drafting that goes further: fitness-for-purpose language, deleted net contribution clauses, uncapped assignment, or insurance maintenance obligations pitched above the limit you actually buy. Many PI wordings exclude or restrict liability you assume by contract that would not have existed at common law — so a warranty can create a liability that is real and enforceable against the firm, yet sits partly or wholly outside the policy. Where a warranty or funding agreement demands a limit above your current programme, that is a commercial conversation worth having early — see our note on what to do when a contract requires a higher PI limit.

Which clauses cause the most trouble?

Five recur in almost every negotiation, and each has a PI dimension as well as a legal one:

• Net contribution clauses. These limit your liability to the share a court would apportion to you, on the assumption that other responsible parties have paid theirs. Beneficiaries — funders especially — routinely try to delete them. Without one, a beneficiary can pursue you for the whole loss and leave you chasing contribution from a contractor who may by then be insolvent. Retaining a net contribution clause materially improves the risk your insurer is carrying, which is why brokers fight for it.
• Step-in rights. Funder warranties typically allow the funder to step into the employer's shoes if the developer defaults, obliging you to continue performing. Watch the mechanics: whether you can suspend for unpaid fees before step-in, whether the funder must discharge arrears on stepping in, and how competing step-in notices are ranked. Step-in itself is normal; open-ended obligations to keep working unpaid are not.
• Assignment provisions. Each permitted assignment potentially hands your warranty to a party you have never met. Market practice is commonly to limit assignment — often to a small number of assignments without consent — and unlimited free assignment meaningfully widens the class of future claimants your insurer must price.
• Fitness for purpose. Any wording under which the works or design "shall be fit for their intended purpose" imposes a stricter standard than reasonable skill and care. Many PI policies exclude or curtail cover for such assumed obligations, so a fitness-for-purpose warranty can be, in substance, an uninsured promise. Design-and-build contractors should be especially alert to this language migrating from the building contract into warranties.
• PI maintenance obligations. Most warranties require you to maintain PI at a stated limit for a stated period — often twelve years from practical completion. You cannot sensibly promise the future state of the insurance market, so this obligation should always be qualified along the lines of "provided such insurance remains available at commercially reasonable rates and terms". Check the stated limit and basis against what you actually buy before you sign, not after.

How do warranties extend my liability tail?

Under English law, the limitation period for a claim under a simple contract is generally six years from breach; under a contract executed as a deed, twelve. Warranties are almost always executed as deeds — that is a deliberate choice by the beneficiary's lawyers — so each one you sign typically leaves you exposed to contractual claims for around twelve years, and the PI maintenance clause will usually mirror that period.

Now overlay the way PI insurance works. Your policy responds on a claims-made basis: the policy in force when the claim is first made against you (or when you notify the circumstance) is the one that answers, not the policy you held when the design work was done. A portfolio of warranty deeds therefore commits you, in practical terms, to keep buying adequate PI cover for the whole of that tail — through changes of ownership, through mergers, and into run-off if the practice closes or you retire. Firms winding up with live warranty tails need run-off arrangements sized and structured with those deeds in mind, not just the standard minimum their professional body or contracts require.

Assignment compounds the effect. A warranty given to the original purchaser can pass to a subsequent buyer years later, so the claimant who eventually emerges may be someone with no relationship to the project as you knew it. And where one design defect generates claims from the employer under the appointment and from several warranty beneficiaries at once, whether those are treated as one claim or several against your limit turns on your policy's aggregation language and the basis of cover — a point we unpack in any one claim versus aggregate PI limits. On warranty-heavy books, an any-one-claim limit is usually the stronger position.

Are third party rights a better answer?

Sometimes. The Contracts (Rights of Third Parties) Act 1999 allows a contract to confer enforceable rights on named classes of third party — funders, purchasers, tenants — usually activated by notice, without a separate deed for each beneficiary. Administratively it is far lighter than producing and executing dozens of warranty documents, and several standard-form contract suites accommodate it.

From a PI standpoint, however, third party rights deserve exactly the same scrutiny as warranties. The rights granted should mirror, not exceed, your underlying obligations; net contribution and liability caps should carry through; and the class of beneficiaries and any assignment of the benefit should be bounded. The legal mechanism differs, but the exposure — a wider population able to sue you in contract, for a long tail — is substantively the same, and your insurer will treat it that way. Note too that some funders still insist on traditional warranty deeds regardless, so most practices end up managing both regimes in parallel.

What should I do before signing anything?

Three disciplines, applied consistently, remove most of the danger. First, deal with warranties at appointment stage, not at practical completion: agree the forms of warranty as annexures to your appointment, so that late requests are a matter of executing an agreed document rather than negotiating a new one under deadline pressure. Second, have every proposed warranty — and every amendment to an agreed form — reviewed by a construction lawyer. This article is general commentary; the drafting in front of you is specific, and small manuscript amendments to familiar precedents are precisely where uninsured obligations hide. Third, send the form to your broker to be checked against your current policy before execution: the standard of care clause, the net contribution position, the assignment cap, the PI maintenance limit and period, and the basis of cover all need to line up with the wording you actually hold.

Finally, keep a warranty register — beneficiary, form, date, project, execution as deed, assignment history where known — and share it at each renewal. It makes your disclosure clean, it lets your broker present the risk properly, and when the practice eventually needs run-off cover it is the document everything else is built from.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This article is general information, not advice on a specific policy.