Insurance Requirements for Engineering Contracts: The Hidden Cost of Winning New Work

Securing a new contract often means agreeing to higher insurance limits. Most engineers are happy to do it. What many don’t realise is that the increased premiums don’t stop when the project does, and failing to account for this upfront can quietly erode the profitability of otherwise well-priced work.

This article explains how contract insurance requirements work, why elevated premiums are a long-term commitment, and how to price for them correctly to protect your margins.

What Do Engineering Contracts Require for Insurance?

It’s standard practice for engineering and construction contracts to specify minimum insurance levels that must be in place for both parties throughout the engagement and for a defined period afterwards.

In Australia, this period is often aligned with the 6-year limitation period for contractual claims, although longer periods may apply. This is particularly true for professional indemnity and public liability cover, where latent defects, design errors, or structural failures may not become apparent until well after practical completion.

A contract’s insurance clause will typically specify:

• Minimum indemnity limits (for example, $10 million professional indemnity, $20 million public liability)
• Required policy types (professional indemnity, public liability, contractors all risk, workers compensation)
• Retroactive dates that must be preserved and maintained
• The duration for which cover must remain in force after the contract ends

These are conditions of contract. Meeting them is not optional, and failure to maintain the required cover can constitute a breach, with significant legal and financial consequences.

Why Increased Insurance Premiums Are Not Temporary

This is the point most engineers miss, and it’s the most important one.

When you increase your insurance limits to meet a contract requirement, you cannot simply reduce them again once the work is finished, without potentially putting yourself in breach of contract. The reason comes down to how professional indemnity insurance works.

How Claims-Made Insurance Works

Professional indemnity insurance operates on a claims-made basis. Unlike home or car insurance, which responds to events that occur during the policy period, professional indemnity responds based on when the claim is made, not when the underlying work was done.

This means the policy in force at the time someone lodges a claim against you is the policy that needs to respond. If you completed a project in 2024 but a claim is made in 2029, it is your 2029 policy that will be called on.

This has two critical implications for engineers who increase their limits to win a contract:

• You cannot safely drop back to lower limits at project completion. If a claim arises during a 6-year contractual tail period and your limits have been reduced since the project ended, the policy in force at the time of the claim may not meet the levels the contract required. You could be in breach of your obligations and personally exposed to any shortfall.
• You cannot safely cancel the policy. Cancelling your professional indemnity cover leaves you without protection for any claim arising from completed work. The project may be finished, but your professional liability for it is not.

How Long Do You Need to Maintain the Higher Limits?

You need to maintain the elevated limits for the full period specified in the contract. For a contract with a 6-year post-completion insurance requirement, that means up to 5 years of elevated premiums after you’ve delivered the last piece of work and issued the final invoice.

This is a real, ongoing cost of taking on that contract, and it must be treated as one.

How to Price a Contract With Elevated Insurance Requirements

The additional cost of maintaining higher insurance limits over the life of a contract is a direct project cost. It should be factored into your fee at the proposal stage, just like labour, subconsultant fees, and overheads.

Work through these steps before submitting:

1. Identify the required limits from the draft contract or the client’s insurance schedule.
2. Contact your insurance broker for a premium indication at the required limits, including the projected ongoing annual cost.
3. Calculate the total insurance cost across the full tail period, not just year one.
4. Include that cost in your fee. If the contract requires 6 years of elevated cover and your annual premium increases, that is six years of increased premium costs incurred as a contractual requirement.
5. Review the insurance clause with your broker before signing. Make sure you understand exactly what is required, for how long, and whether your insurer can meet those terms.

Worked Example: What the Real Cost Looks Like

Suppose your current professional indemnity limit is $2 million. A new infrastructure contract requires $10 million. Your annual premium increases from $4,500 to $11,000 per year, a difference of $6,500. The contract specifies that cover must be maintained for 5 years after completion.

The additional insurance cost attributable to this contract, not accounting for annual premium fluctuations, is:

$6,500 x 5 years = $32,500

That $32,500 is a cost of doing this job. If it isn’t in your fee, it comes out of your profit. On a project with tight margins, it can be the difference between a job worth taking and one that isn’t.

Frequently Asked Questions

Can I take out a separate policy just for the contract period?

Possibly, but this requires careful coordination with your broker. Any separate policy still needs to maintain the required limits for the full tail period, and the interaction with your existing policy (particularly around continuity of cover and retroactive dates) needs to be managed correctly. Don’t do this without specialist advice.

What happens if my insurer withdraws from the market or changes their terms?

You are still obligated to comply with the terms of the contract. Some contracts will include caveats such as “where commercially available” to account for situations where an insurance product becomes unavailable.

But if the contract does not contain a caveat and your current insurer can no longer provide it, you’ll need to find alternative cover that meets the contractual requirements. This is another reason to review the insurance clause carefully before signing, and to work with a broker who understands the engineering insurance market.

Do these requirements apply to subcontractors?

Many principal contractors will flow the insurance requirements down to subcontractors. If you are engaging subconsultants or subbies on a project, check whether the contract requires you to ensure they hold equivalent levels of cover, and whether you carry any liability if they don’t.

Key Takeaways

• Contract insurance requirements for engineering work commonly extend up to 5-10 years post-completion.
• Professional indemnity insurance is claims-made, meaning the policy in force when a claim is lodged is the one that must respond.
• You cannot reduce your limits or cancel your policy at project completion without risking a breach of contract and uninsured exposure.
• The full cost of maintaining elevated premiums over the tail period is a project cost and should be priced into your fee before you sign.
• Talk to a specialist insurance broker before accepting a contract with elevated insurance requirements, not after.