FCA authorised · FRN 724952 0117 325 0027Quote & buy →
Professional indemnity explained
Step-in rights are terms letting a funder, tenant or purchaser take over a consultant's or contractor's appointment if the original client defaults or termination looms. They matter because they change who you owe duties to mid-project, and your PI insurer needs that change to fit the cover you hold.
Part of: Professional indemnity insurance
In short
Step-in rights usually appear in collateral warranties or third party rights schedules given to a project funder. If the employer defaults, the funder can serve notice and take the employer's place, keeping the design team in post. PI insurers commonly accept standard step-in provisions, provided the beneficiary gets no greater rights than the original client, you keep the same defences, and you are paid for work done. Problems arise when step-in is combined with extra duties, duplicated liability, uncapped terms or a beneficiary who is not a funder. Have a broker review the wording before you sign, and treat an employer's insolvency as a possible notification point.
A step-in right is a conditional promise. You agree that if your client, usually the developer or employer, commits a breach that would let you terminate your appointment, or becomes insolvent, you will give notice to the funder rather than walk away. The funder then has a set period to decide whether to step in. If it does, it (or its nominee) takes over the employer's rights and obligations under your appointment, including paying fees, and the project carries on with the same design team.
Funders want this because a half-finished building without its designers is poor security for a loan. Tenants of a whole building and purchasers sometimes ask for step-in as well, though it is less common and often resisted, because they are not usually exposed in the same way as a lender.
Step-in rights reach you through one of two routes. The first is a collateral warranty, a separate contract between you and the beneficiary. The second is a third party rights schedule in your appointment, which relies on the Contracts (Rights of Third Parties) Act 1999 to let a named beneficiary enforce specified terms. Our guide to third party rights in construction explains the mechanics.
Step-in and novation both swap the party you work for, but they happen for different reasons and carry different insurance points. For design teams moving from employer to contractor in design and build, see novation and PI in design and build.
| Feature | Step-in | Novation |
|---|---|---|
| Trigger | Employer default or termination event, at the beneficiary's option | Planned transfer, usually at contractor appointment |
| Who takes over | Funder or its nominee, sometimes tenant or purchaser | Design and build contractor |
| Original client | Drops out of the appointment from step-in | Drops out, often with rights released or retained by agreement |
| Main PI concern | No greater liability, payment of fees, duplicated claims | Whether the novation is ab initio, and conflicts between duties to employer and contractor |
| Frequency | Rarely exercised, commonly granted | Routine on design and build projects |
Most professional indemnity insurers are comfortable with step-in rights in industry standard collateral warranties and third party rights schedules, provided certain protections are present. A typical acceptable position, subject to the policy terms, looks like this:
What tends to cause concern is anything that enlarges the original deal: step-in for a beneficiary with no real need, warranties that survive longer than the appointment, indemnities, liquidated damages, or a clause letting the beneficiary step in without assuming the employer's payment obligations. Our collateral warranty review service looks for exactly these points.
A project can carry one appointment and a dozen warranties. Each warranty is another party who could sue you for the same defect. A well drafted warranty says the beneficiary cannot recover a loss the employer or another beneficiary has already recovered, and that you have no greater liability than under the appointment. Without those words, you may face overlapping claims for the same loss.
Your PI limit does not multiply with the number of warranties. If the limit is on an each and every claim basis, separate claims from separate beneficiaries may each attract the full limit, but related claims arising from one design error are often aggregated as one claim under the policy. If the limit is aggregate, every warranty and every project draws on the same pot for the year. See aggregation of claims and collateral warranties and your PI programme.
Duration matters too. Warranties are often executed as deeds, which under the Limitation Act 1980 gives a 12 year period for claims rather than 6 years for a simple contract. Make sure your PI maintenance obligation and any run-off plan match that exposure.
A developer enters administration midway through a residential scheme. The architect gives the required notice to the funder, which steps in through a nominee and assumes the appointment, including fees from the step-in date. The architect's PI is unaffected in principle, because the liabilities are the same as before. The architect should still tell its broker, because the insolvency and any unpaid fees may themselves be circumstances worth notifying.
A prospective tenant's warranty grants step-in and also asks the engineer to warrant that the building will be suitable for the tenant's specialist use. That second term is effectively a fitness for purpose promise. Many PI wordings exclude it, so the engineer would be accepting an uninsured risk unless the term is removed.
A cladding defect leads the funder (under its warranty) and the purchaser (under a third party rights schedule) to both claim the same remedial cost. A no double recovery clause limits the consultant's exposure to one recovery; without it, the dispute becomes how far the limit and aggregation clause stretch.
Construction professionals can read more in the architects PI guide and the engineers PI guide, or the main professional indemnity insurance page. Apex arranges PI for construction consultants and reviews collateral warranties; a broker reads every enquiry.
They let a beneficiary, usually the project funder, take over a consultant's or contractor's appointment if the employer defaults or the appointment is about to be terminated. You must give the funder notice and a period to decide. If it steps in, it assumes the employer's rights and obligations, usually including paying your fees.
Usually yes, for industry standard forms, subject to the policy terms. Insurers look for no greater liability than under the appointment, equivalent defences, a liability cap, a net contribution clause where agreed, and no fitness for purpose duty. Unusual beneficiaries or extra obligations may need insurer approval.
Step-in is a conditional right a funder may exercise if the employer defaults. Novation is a planned transfer of your appointment, typically from employer to design and build contractor. Both change who you work for, but novation raises different issues, such as duties owed before the transfer date.
They can. A third party rights schedule in the appointment can give named funders, purchasers or tenants enforceable rights, including step-in, under the Contracts (Rights of Third Parties) Act 1999. The schedule should mirror the protections a good warranty contains, such as no greater liability and equivalent defences.
No, the warranties do not add new limits. Separate claims may each have access to the limit on an each and every claim policy, but related claims are often aggregated, and an aggregate policy shares one limit across all claims in the year. Check your aggregation and limit basis.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Get a PI quote Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
