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Professional indemnity explained
Liquidated damages are a sum fixed in the contract for each week or day of late completion, payable without the employer proving its actual loss. They matter because many PI policies exclude them, so a delay caused by a design error can leave a contractor or consultant paying from its own balance sheet.
Part of: Professional indemnity insurance
In short
Professional indemnity insurance is usually written to cover legal liability arising from negligent professional services, not every sum a contract says you must pay. Most PI wordings exclude liquidated damages, penalties and liability you agree to under contract, often with a carve-back where the same liability would have existed at law without that term. So if a design error causes delay and the employer could have recovered similar losses as general damages anyway, some cover may respond, subject to the policy terms. Delay caused by your own programme, resourcing or site management is a performance risk PI is not designed to cover.
Usually not in full, and never automatically. A standard professional indemnity policy responds to claims for breach of professional duty: negligent design, advice, specification or supervision. Liquidated damages (often called LADs or LDs) are a contractual mechanism. The employer is entitled to them because the contract says so, whether or not anyone was negligent. That is why most PI wordings carry a contractual liability exclusion that removes liability assumed under contract, and many name liquidated damages, penalties and service credits expressly.
The important nuance is the carve-back. Many wordings say the exclusion does not apply to the extent the insured would have been liable in the absence of the contract term. Where a negligent design error causes the delay, the employer could often have claimed its actual delay losses as general damages for breach of duty. In that situation some PI wordings will respond up to the amount the law would have awarded, subject to the policy terms, the limit and the excess. The table in the next section shows how this commonly plays out.
| Situation | Typical PI position (subject to wording) |
|---|---|
| Delay caused by a negligent design error, employer claims its proven losses | Commonly within cover as a negligence claim, subject to limit, excess and other exclusions |
| Delay caused by a negligent design error, employer deducts LADs | LAD exclusion usually applies, but a carve-back may restore cover to the extent the loss would have been recoverable at law anyway |
| Delay caused by the contractor's own programme, labour shortages or poor site management | Usually outside PI; this is a commercial performance risk, not a professional error |
| Delay caused by late information from the employer or a third party | Usually a matter for extensions of time under the contract, not insurance |
| Service credits or penalty regimes in IT or outsourcing contracts | Commonly excluded; some technology wordings offer limited cover by agreement |
| Costs of your own acceleration to recover lost time | Usually excluded, though some contractor policies offer a mitigation or rectification extension |
Wordings vary a great deal, especially between consultants' PI and the design and build PI bought by contractors. Read the definitions of claim and damages alongside the exclusions, because some policies define damages to exclude liquidated sums altogether. For the wider picture of how insurers treat contract terms, see contractual liability treatment in PI.
In JCT design and build contracts, the rate of liquidated damages is set in the contract particulars, and the employer can deduct them once the completion date passes without an extension of time. In NEC contracts the equivalent is usually the delay damages secondary option, with a daily or weekly rate stated in the contract data. In both families, LADs are an exclusive remedy for late completion unless the contract says otherwise, which caps the employer's delay recovery at the agreed rate.
Two Supreme Court decisions shape how these clauses work. In Cavendish Square Holding BV v Makdessi [2015] UKSC 67 the court restated the penalty rule: a clause is unenforceable as a penalty only if it imposes a detriment out of all proportion to the innocent party's legitimate interest. Properly negotiated LAD rates in commercial construction contracts are rarely struck down on that test. In Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 the court held that, on the usual wording, liquidated damages for delay accrue up to termination even where the work is never completed, after which general damages apply.
For insurance, the point is that the LAD rate is a figure you agreed. An insurer will normally only pay what the law would have awarded for negligence, which may be more or less than that rate. If your LAD rate is high relative to the likely actual loss, the uninsured gap can be large.
The question that usually decides a PI claim is cause. If the in-house or sub-contracted design team specified the wrong steel connection, the frame has to be redesigned and fabricated again, and the job overruns by six weeks, there is a professional error at the root. If the same six weeks were lost because the groundworks gang was pulled to another site, there is no design error and PI is not the right policy.
Mixed causes are common. Expect an insurer to examine the programme, the design change records and the extension of time correspondence to separate delay flowing from the negligent act from delay the contractor would have suffered anyway. Contractors that sell design should read PI for contractors with in-house design teams and the design and build contractors PI guide, because the fitness for purpose and mitigation questions overlap with delay.
A structural engineer's drainage design fails to account for a known culvert. The contractor's works stop while the design is revised, and the employer's loss is mainly extra preliminaries and lost rent. A claim against the engineer for those losses would commonly be treated as a negligence claim within PI, subject to the policy terms.
A design and build contractor's in-house team under-sizes a plant room. The redesign costs four weeks and the employer deducts LADs at the contract rate. The contractor's PI may respond to the extent the employer could have proved equivalent losses at law, but the excess of the LAD rate over provable loss is likely to be uninsured.
A fit-out contractor misses completion because of labour shortages. No design was involved. The LADs are a commercial cost of the contract and PI would not usually respond.
For broader context see the main professional indemnity insurance page. Apex arranges professional indemnity for consultants and design and build contractors; a broker reads every enquiry.
Usually not as liquidated damages. Most PI wordings exclude sums payable only because a contract says so. Many include a carve-back where the same liability would have existed at law without the contract term, so if a negligent design error caused the delay, some cover may respond up to the loss the law would have awarded, subject to the policy terms.
Often yes, if the delay flows from a negligent design and the claim is for losses the employer could prove at law. The insurer will examine whether the delay was caused by the error or by other factors such as programme or resourcing, and the policy excess and exclusions will still apply.
Rarely in commercial construction. Since Cavendish Square Holding BV v Makdessi [2015] UKSC 67, a clause is a penalty only if it imposes a detriment out of all proportion to the innocent party's legitimate interest. A negotiated LAD rate between commercial parties will usually be upheld.
No single policy covers all delay. PI may respond to delay caused by negligent design. Contractors all risks covers physical damage to the works, and delay in start up cover can protect an employer's lost income after insured damage. Programme slippage from resourcing or management is normally uninsured.
Usually yes. Most PI policies require notice of circumstances that might give rise to a claim, and a design problem that threatens completion and LAD deductions is a typical example. Late notification can prejudice cover, so speak to your broker early.
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