The contract your PI won’t follow: liability caps, net contribution and fitness for purpose

Most firms read their professional indemnity wording carefully and skim the client contract. For a larger practice that is the wrong way round. The policy is broadly the same from one renewal to the next; it is the contracts your people sign, week in and week out, that decide how much of your risk it will ever be asked to carry. A term agreed by a project lead to win an instruction can expand the firm’s liability in ways no insurer agreed to cover — and nobody notices until a claim arrives and the two documents are read side by side for the first time.

This is a programme-level question, not a project one. The exposure builds up across every appointment, warranty and framework the firm signs, and it is the managing partner, the finance director or the general counsel who carries it in aggregate — almost entirely manageable in advance, and almost impossible to fix once the ink is dry.

What your PI policy actually insures

The core insuring clause of a standard professional indemnity policy covers your civil liability to a client or third party arising from a negligent act, error or omission in the professional services you provide. The key word is negligent. The law expects a professional to exercise the reasonable skill and care of a competent member of the same profession — not to be perfect, and not to guarantee a result. PI is built around that standard: did the firm fall below the standard of care, and did that cause the client a loss?

That matters because a contract can promise something the law would never imply. When it does, you can be liable under the contract while your PI — which only follows liability for negligence — stays on the sidelines. A few contract terms create most of this daylight.

Fitness for purpose: the promise your PI won’t back

A “fitness for purpose” or “reasonable skill and care” clause looks like boilerplate, but the difference between the two is the whole game. If you agree only to exercise reasonable skill and care, you are liable when you fall short of your profession’s standard — exactly what PI insures. If you agree that your work, or the end result, will be fit for a particular purpose, you have given an absolute obligation: the outcome has to be achieved, and you are liable if it is not, however careful you were.

Professional indemnity policies are not designed to carry that. Most wordings exclude, or do not extend to, liability arising purely from a contractual obligation to achieve a specified result or fitness for purpose — liability that would not have existed had you simply been held to the ordinary standard of care. So a firm that signs a performance guarantee or a fitness-for-purpose warranty can find the one liability it has taken on is the one its insurer never agreed to insure. For design and construction consultants this is the most common way a contract outruns the cover, but it reaches any profession asked to warrant an outcome rather than a standard of work.

Net contribution: who pays when others share the blame

Where several parties contribute to the same loss, the default position in English law is joint and several liability. A claimant can pursue any one of them for the entire loss and leave that party to recover the others’ shares itself, relying on the Civil Liability (Contribution) Act 1978. In practice the claimant goes after the party that is solvent and well insured — which, on a project with a thin main contractor and several consultants, is often the professional firm with the serious PI limit.

A net contribution clause changes that. It limits your liability to the share of the loss fairly attributable to you, assuming the other responsible parties pay their share, rather than leaving you exposed to the whole of it. Standard professional appointment forms frequently include one; bespoke contracts drafted by a client’s solicitors frequently strip it out. Deleting it does not change what your PI covers — the policy still responds to your negligence — but it can sharply increase the size of the claim your policy, your excess and then your balance sheet are exposed to. It is one of the most valuable clauses to protect, and one of the first a client will try to remove.

Liability caps and the uncapped tail

A liability cap sets the maximum you can be held liable for under the contract. Thought about properly, it should line up with the cover standing behind it: a cap at or around your PI limit, for each claim and in the aggregate, keeps the firm’s exposure inside what the policy can pay. Problems start when a contract is uncapped, when the cap sits well above your PI limit, or when certain heads of loss are carved out of the cap altogether. In each case the firm is knowingly agreeing to liabilities larger than its insurance — the shortfall is simply uninsured, and it falls on the partners or the company.

A firm with a £5m limit that routinely accepts £10m caps, or uncapped indemnities, is carrying a layer of risk no excess policy has been bought to meet. Setting a house floor below which project teams do not go without sign-off is a cheap programme control, and a far better one than buying your way out after the event.

Indemnities and “assumed” liability

An indemnity is a promise to meet another party’s loss, often on terms more generous to them than the law would give. A clause requiring you to indemnify a client against all losses, or against third-party claims, can commit you to pay out where you were not negligent at all — and PI, which follows liability for negligence rather than liability assumed under contract, generally will not respond to the extra you have taken on. Broadly drawn indemnities deserve the same scrutiny as the headline liability cap, because they can quietly do the same damage.

Collateral warranties multiply the people who can sue you

In property and construction especially, a firm is rarely asked to sign one document. Alongside the main appointment come collateral warranties — to funders, purchasers, tenants and buyers — each giving another party a direct contractual right to sue you on the same piece of work, sometimes years later. Your PI follows your negligence under a warranty just as it does under the appointment, so warranties on reasonable-skill-and-care terms are usually manageable. The danger is a warranty that smuggles in a fitness-for-purpose obligation, drops the net contribution clause, or widens the duty beyond the appointment it sits behind. Every warranty should be checked against the underlying appointment, not signed on the assumption that it merely repeats it.

The time dimension makes this sharper than it used to be. Claims can arrive long after a job is finished, and the Building Safety Act 2022 lengthened the limitation window for certain building-safety claims considerably. The more parties who hold a warranty against you, and the longer they can bring a claim, the more it matters that each of those documents sits within what your cover — today and in run-off — can actually answer.

What a managing partner or FD should check

None of this calls for the firm to become a drafting shop, and the current market helps: PI capacity has been more plentiful and competitive through 2026, a better moment to align contracts and cover than a hard market would be. A handful of controls does most of the work. Set a house standard that appointments are on a reasonable-skill-and-care basis, and resist fitness-for-purpose wording. Protect the net contribution clause, and treat its deletion as a point to escalate rather than concede. Agree a liability cap that relates to your PI limit, for each claim and in the aggregate. Read indemnities as carefully as caps. And check collateral warranties against the appointment they follow rather than signing them blind.

Above all, give one person the job of seeing the contract and the policy together. A term that outruns the cover is invisible if the people who negotiate contracts never read the PI wording and the people who place the insurance never read the contracts. The firm that closes that gap deliberately — before a claim finds it — is the one actually insured for the risk it is running, rather than the risk it assumed it was running.

Frequently asked

If a contract makes us liable for more than our PI covers, will the policy still pay the part that is negligence?
Generally yes. A professional indemnity policy responds to your liability for negligence regardless of what else the contract says; what it will not do is follow you into liability that exists only because you promised a result, assumed another party’s loss, or gave an indemnity. The practical risk is that the contract enlarges the claim — by removing a net contribution clause or a cap — so the negligence part the policy does cover is far bigger than it needed to be.

A client’s solicitor has deleted the net contribution clause. Is that a problem if we are properly insured?
It can be. Your cover is unchanged, but your exposure is not. Without a net contribution clause you can be pursued for the whole of a loss that several parties caused, then left to recover their shares yourself — which is slow, uncertain and sometimes impossible if the others are insolvent or uninsured. It is one of the terms most worth protecting, and worth escalating rather than conceding to win the work.

We are asked to sign fitness-for-purpose warranties to win instructions. What should we do?
Push back to a reasonable-skill-and-care standard wherever you can, because fitness-for-purpose and performance-guarantee obligations are the classic exposure a PI policy will not back. If a client insists, that is a decision for the firm to take with its eyes open and, ideally, with its broker in the room — because the firm, not the insurer, is carrying that particular promise.

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.