Collateral warranties create direct contractual relationships between construction professionals and third parties. Understanding their PI implications is essential.
What Is a Collateral Warranty?
A collateral warranty is a contract under which a construction professional (architect, engineer, contractor) provides a direct duty of care to a third party who is not a party to the original building contract. Common beneficiaries include:
- Funders and lenders
- Purchasers of completed developments
- Tenants
Why Do Collateral Warranties Matter for PI?
Collateral warranties extend your professional liability beyond your immediate client. They create additional parties who can bring claims against you directly, and they may impose obligations that exceed those in your primary appointment.
Key PI Implications
- Extended limitation periods: Warranties executed as deeds carry a 12-year limitation period, compared to 6 years under simple contract
- Additional claimants: Each warranty beneficiary is a potential additional claimant
- Onerous provisions: Some warranties contain provisions that go beyond reasonable skill and care
- Net contribution clauses: The absence of a net contribution clause can expose you to liability for other parties' negligence
What to Check Before Signing
- Does your PI policy cover the obligations in the warranty? Some policy wordings exclude liability arising from collateral agreements unless notified to the insurer
- Is the warranty consistent with your appointment? The warranty should not impose greater obligations than your primary contract
- Is there a net contribution clause? This limits your liability to your proportionate share of any loss
- Is the warranty under hand or under deed? This affects the limitation period
How PLB Can Help
We regularly advise construction professionals on the PI implications of collateral warranties. Before signing a warranty, speak to your broker to ensure your cover will respond if a claim arises from it.