What is contractual liability in PI insurance?

Reviewed by Matthew Bartlett, Director, Apex Insurance Brokers Limited · Last reviewed 2026-08-05

The core idea: two ways to owe someone

A professional can become liable to a client in broadly two ways. The first is liability imposed by the general law — principally the tort of negligence and, for regulated advisers, statutory duties. If you fail to exercise the reasonable skill and care expected of a competent member of your profession and cause loss, you are liable whether or not your contract says so. The Supply of Goods and Services Act 1982 and the Consumer Rights Act 2015 also imply a standard of reasonable care and skill into many service contracts.

The second is liability you create yourself by signing up to it. A contract can promise more than the law demands: a guarantee of a particular outcome, an indemnity for the client's losses, an agreement to accept fault regardless of who was actually negligent, or a duty to meet a higher standard than "reasonable care". That extra layer — liability that exists only because you agreed to it — is what insurers mean by contractual liability or "liability assumed under contract".

Why PI insurers treat it differently

PI insurance is priced and underwritten around a knowable risk: your professional negligence. An insurer can assess how likely you are to make a mistake, but it cannot assess or price the open-ended promises you might sign in a contract it has never seen. If cover automatically extended to every obligation any client persuaded you to accept, the insured could effectively rewrite the scope of the policy with a pen.

For that reason, most PI wordings include an exclusion along these lines: the policy will not cover liability assumed under contract or agreement which would not have attached in the absence of that contract or agreement. The key phrase is "would not have attached". The exclusion does not strip out your ordinary negligence liability just because it also happens to sit inside a contract — a contract for services is normal and expected. It removes the additional liability that only exists because of a specific onerous term.

Negligence liability vs assumed contractual liability

Negligence liability (typically covered). A surveyor negligently values a property too high; a lender relies on it and loses money. The duty to take reasonable care exists at law. The claim is a bread-and-butter PI claim and the exclusion does not apply.

Assumed contractual liability (often excluded). The same surveyor signs a contract promising the valuation will be "accurate" and agreeing to indemnify the lender for any loss connected to the report. If the value turns out wrong despite reasonable care being taken, there is no negligence — but the contract still makes the surveyor pay. That liability exists only because of the clause, so a PI policy may decline it.

Common terms that create assumed liability include:

• Guarantees and warranties of outcome — promising results, fitness for purpose, or that work will be "error-free", rather than promising reasonable skill and care.
• Indemnities — agreeing to reimburse a client's losses, costs or third-party claims, sometimes regardless of fault.
• "Highest standard" or "best practice" clauses — raising your duty above the reasonable-competence benchmark the law applies.
• Uncapped or widened liability — removing limitations the law or a normal contract would otherwise give you.
• Liquidated damages — fixed sums payable on delay or breach that a court would not have awarded as damages.

Not sure whether a clause your client is asking you to sign is insurable? Talk to Apex before you sign it — it is far cheaper to fix wording than to discover a gap after a claim.

Why onerous contract terms matter so much

The practical danger is a mismatch between what you have promised a client and what your insurer has agreed to pay. A professional under commercial pressure may accept an indemnity or a fitness-for-purpose guarantee to win the work — then find, when a claim lands, that the very obligation driving the loss is the one the PI policy carves out. You keep the contractual liability; you lose the insurance behind it.

This matters for three reasons. First, exposure. Assumed liabilities are frequently the widest and most expensive kind, because they remove the natural limits the law provides. Second, uninsured risk sits directly on the business and its owners, not the insurer. Third, many clients — and regulators such as the SRA for solicitors, the RICS for surveyors, or the ARB for architects — require adequate PI cover; a contract that voids that cover can breach your own professional obligations.

Does any contractual liability get covered?

Yes — the exclusion is narrower than it first looks, and wordings vary. Several points soften it:

• Ordinary contractual duties are fine. Your core obligation to perform services with reasonable care is contractual and covered; the exclusion targets liabilities that exceed what the law would impose.
• Some policies grant back specific terms. Insurers may agree to cover certain assumed liabilities, or specific contracts, if disclosed and underwritten — particularly where onerous terms are unavoidable in a sector.
• Wording differs by insurer. No two PI policies are identical. The precise scope of any contractual-liability exclusion, and its exceptions, depends on your policy schedule and wording.

Because the exclusion turns on close reading, the sensible approach is to review demanding client contracts before signing and check them against your policy. Where a term cannot be softened, your broker can ask the insurer whether it can be endorsed in.

Disclosure and the Insurance Act 2015

Contractual liability also connects to how you present your risk. Under the Insurance Act 2015, a commercial policyholder owes a duty of fair presentation — disclosing every material circumstance it knows or ought to know, or giving the insurer enough information to ask questions. If you routinely sign contracts containing unusual indemnities or guarantees, that pattern of risk may be material. Setting it out clearly at renewal helps you get the right cover and protects you against remedies for a breach of the duty of fair presentation.

Common questions

Does PI insurance cover breach of contract?

It covers breaches that amount to negligence — failing to perform with reasonable skill and care. It typically will not cover a breach of an extra promise you assumed by contract, such as a guarantee of results or an indemnity, where you would not have been liable at law without that term.

What is a "hold harmless" or indemnity clause and is it insured?

It is a promise to bear or reimburse another party's losses, often irrespective of fault. Because it can create liability the law would not impose, it frequently falls within a PI policy's contractual-liability exclusion. Have such clauses reviewed before signing and check the wording against your cover.

How can I avoid an uninsured contractual liability gap?

Keep your obligations to "reasonable skill and care" wherever possible, resist fitness-for-purpose guarantees and broad indemnities, and share demanding contracts with your broker before signing. Where an onerous term is unavoidable, ask whether your insurer will endorse it into the policy.

Larger or more complex risk? Speak directly to a director — call 0117 325 0027 or email info@apexinsurancebrokers.co.uk.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This guide is general information, not advice on a specific policy or a substitute for reading your policy wording.