Consequential Loss and Liquidated Damages: Hidden Traps in Engineering Contracts

Consequential Loss: The Domino Effect

Consequential loss refers to indirect or secondary losses that arise from a failure in your services. Unlike direct damage (e.g. equipment failure or bodily injury), these might include:

• Lost production or revenue due to system downtime
• Business interruption or reputational damage
• Penalties your client owes to their clients
• Additional costs incurred due to delays

Most Professional Indemnity and Public Liability policies specifically exclude consequential loss unless it is explicitly endorsed to be included. Even when included, insurers typically apply narrow definitions.

Key risk: You may unknowingly be contractually liable for consequential losses that your insurance doesn’t cover.

Liquidated Damages: Pre-Agreed Penalties

Liquidated damages (LDs) are pre-agreed financial penalties for failing to meet project milestones or performance guarantees. These are a common feature in infrastructure, mining, or utilities contracts.

For example:
• A delay in commissioning a SCADA system leads to a missed plant go-live date.
• The client applies LDs of $50,000 per day for every day the system is offline.

Most insurance policies, including Professional Indemnity (PI), do not respond to liquidated damages, as these are considered voluntary contractual obligations rather than legal liability arising from negligence.

Translation: Even if the delay or issue was not your fault, you may still be contractually liable for the full amount and not covered by insurance.

What Should You Do?

1. Negotiate Contract Terms

Work with your legal advisor and broker to:

• Limit or exclude liability for consequential loss and LDs where possible
• Cap total liability to a fixed amount (e.g. your fees or a defined sum)
• Avoid “fitness for purpose” or performance guarantees without careful review

2. Align Insurance Coverage

A specialist insurance broker should:

• Review your contracts before you sign
• Identify clauses that exceed your policy coverage
• Suggest appropriate endorsements or higher limits if needed
• Help you negotiate contractual terms that align with insurance reality

3. Disclose LD Exposure to Your Insurer

If liquidated damages are unavoidable, your broker can approach the market for project-specific coverage, though this may require additional underwriting or premium loadings.

Bottom Line

Both consequential loss and liquidated damages can represent significant financial exposure, and in many cases, they are explicitly excluded from standard insurance policies. If you are signing contracts that contain these terms, particularly on high-value or critical infrastructure projects, you need a broker who understands how to manage them.

At KBI, we regularly assist engineering clients by reviewing these clauses, negotiating appropriate contract language, and structuring insurance programs that align with the actual risks involved.

Disclaimer:

KBI PTY LTD is an Authorised Representative (450152) of KBI Group Pty Ltd (ABN 56 167 437 121, AFSL 494792). Any advice in this article is general in nature and does not take your personal circumstances into account. When considering the purchase of an insurance policy, you should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the KBI Financial Services Guide and relevant product disclosure statement.