.svg)
Professional Indemnity Risk Management: Contractual Defences & Assumed Liability
Professional Indemnity insurance is only one part of a robust risk management strategy. While insurance provides financial protection when a claim arises, the most effective professional service firms focus on preventing liabilities from escalating in the first place.
Contractual Defences
Contracts represent the first line of defence against professional liabilities. Properly drafted contractual provisions can significantly reduce claim severity, improve insurability, and protect the long-term stability of the business.
In 2026, insurers are increasingly assessing the quality of the applicant's own risk management to make their underwriting decisions. If you are able to demonstrate you understand the risks and have robust controls in place, insurers are prepared to provide improved professional indemnity insurance terms, lower deductibles and more competitive premiums.
Limiting Liability Clauses
.svg)
A liability cap establishes the maximum financial exposure a professional firm is prepared to assume under a contract. Without a limitation of liability clause, there are no provisions for you or your insurer to rely on when rebuffing excessive financial demands.
Liability caps must be drafted carefully and adhere to the Unfair Contract Terms Act 1977 (UCTA), because courts can throw them out if they fail to satisfy the statutory test of reasonableness.
Excluding Consequential Losses
One of the greatest threats to professional firms is not the direct cost of correcting an error, but the downstream financial consequences suffered by the client. Consequential and indirect losses may include loss of revenue, loss of opportunity, reputational damage, financing costs, business interruption, and data recovery expenses.
These clauses, if well drafted can be upheld, however if they fail the UCTA reasonableness test you may not be able to avoid liability for the wider loss suffered by your client.
Contribution Clauses
Under English law, multiple parties involved in a project may be jointly and severally liable for the same loss. Even where another consultant, contractor, software provider, or subcontractor is primarily responsible, the claimant may pursue whichever party appears most financially capable of paying. A net contribution clause seeks to override this outcome.
Assumed Liability Under Contract
Companies may unknowingly assume liabilities through poorly reviewed contracts. Broad indemnities, unlimited liability, hold harmless provisions, fitness-for-purpose language, and consequential loss assumptions, can mean increased financial risks. Understanding how contractual indemnities interact with your PI insurance is therefore a critical component of professional risk management.
Importantly, you cannot expect your insurer to cover liabilities assumed solely under contract. Most policy wordings will exclude liability assumed under contract unless such liability would have arisen in the absence of such contract. An example would be a contract where the policyholder agrees to be liable for some damage to third party property even if it wasn't their fault.
Indemnity Clauses
An indemnity clause is effectively a guarantee of reimbursement by one party in favour of another. Indemnity clauses are an important consideration because they are often written in a way that can significantly expand a policyholder’s liability.
This usually happens because the principal contracting party requires the policyholder to agree to indemnify them under contract. The problem is that indemnity clauses often fail to restrict the indemnity requirements to (i) losses that arise solely out of the policyholder’s business activities; (ii) losses that are the fault of the policyholder.
The consequences of this are that a policyholder may unwittingly agree to provide an indemnity for things they aren’t otherwise legally liable for and this would significantly increase the potential for claims against them.
Hold Harmless Agreements
A ‘hold harmless’ clause seeks to absolve one party from any liability for losses. What this does is limit the extent to which a loss can be passed on to another party by the policyholder.
For example, if one of the policyholder’s employees is injured as a result of the actions of the other contracting party, if the policyholder has agreed to hold that party harmless, there will be no prospect of involving them in any claim that could follow.
Additionally, following a claim payment, insurers may seek to recover their losses from the subcontractor responsible for the error. However, poorly drafted contracts, ineffective recovery rights, or contractual waivers can restrict an insurer's ability to pursue recovery. Which means your claims history, availability of PI cover, and future premium costs are negatively impacted.
Our Approach
Risk management is not simply about avoiding claims, it can also improve the quality of risk information presented to insurers. Businesses that can demonstrate strong governance, will often benefit from more competitive PI terms.
Standard Engagement Letter
Submitting a copy of a well drafted and legally reviewed standard engagement can assist with the insurer's level of comfort concerning your PI risk.
Applying your standard engagement letter with all your clients or a vast majority will improve your risk profile. It’s not uncommon that smaller businesses have to accept the larger corporate or enterprise contracts in order to do business with them. A lack of bargaining power means you have to accept unfavourable terms which reduce the mechanisms available to protect your interests.
Presentation of Risk
Many businesses have excellent controls, but fail to communicate them effectively. A specialist PI broker helps present these controls clearly and consistently, ensuring they become a positive underwriting factor rather than remaining hidden within internal procedures.
Underwriters are not simply pricing turnover and claims history. They are increasingly assessing the principal’s experience and qualifications, in addition to governance, contractual controls, quality assurance procedures, and overall risk management culture.
A strong submission may include details of:
- Principal C.V’s;
- standard engagement letter;
- standard report templates;
- peer review or sign-off procedures;
- compliance monitoring;
- technical audits;
- project governance;
- client acceptance protocols;
- document and diary management systems; and
- professional training programmes.
Claims History Context
Unfortunately claims happen, even to well managed businesses. The difference between a favourable and unfavourable insurance renewal, often depends on how the claim is presented.
We will ensure you present sufficient detail as not to be penalised.
- what happened;
- why it happened;
- what remedial actions were taken;
- how controls were improved; and
- why the issue is unlikely to recur.
Frequently Asked
Questions
What about ‘joint insured’ PI clauses?
Adding a party as a joint insured is effectively like issuing the same policy in the name of the party that has been added. Whilst common in property insurance (where there are often multiple parties with an insurable interest), a person’s legal liability is uniquely their own.
Making another party a joint insured under a liability contract means the insurer is covering their legal liability as well as that of their original policyholder, and this has the potential to result in claims being made where the policyholder is not at fault.
What are Mitigation Costs under a PI policy?
One of the most effective ways to minimise Professional Indemnity losses is to address problems before they become claims. Many modern PI policies will include extensions covering mitigation or rectification costs.
These provisions may allow insurers to contribute towards implementing remedial solutions, or returning the fees paid or owed for the project, with the intention to stop a potential more costly claim under the policy from arising.
Authors
.webp)
