Australia: Construction Professionals And Fitness For Purpose Cover: Key Implications For Insurers

Last Updated: 6 November 2018
Article by Edward Burrell

While the current insurance climate suggests a hardening market, in previous years lower premiums and broader coverage have seen insurance carriers more willing to write policies with higher limits and are more flexible in their underwriting criteria. That presented the opportunity for insureds and their brokers to benefit from insurers' appetite to write risk by extending the scope of cover beyond its usual parameters.

In the construction space we have previously seen insureds, and their brokers, exerting pressure on insurers to write policies with cover specifically extended for claims against an insured for breach of a fitness for purpose warranty. 

In the current market the appetite to provide such broad cover appears to be diminishing. 

This article discusses the implications of providing cover for fitness for purpose warranties.

1. What is a Fitness for Purpose Clause

A typical express fitness for purpose wording has the following effect:

[The Consultant] warrants that all work, documents and deliverables it produces are fit for purpose.

Design and construct contracts (D&C Contracts) might include fitness for purpose clauses which operate to hold consultants responsible for ensuring their work is appropriate for the principal's intended purpose.  i.e. The end-product must, when the work is finished, be appropriate and suitable for the purpose of the principal. 

Standard form consultancy agreements such as AS4122-2010 do not include a fitness for purpose warranty. The agreement is often specifically amended by the principal to include the warranty as an amendment or special condition.

Davies J spoke about the virtues of implied fitness for purpose clauses in Viking Grain Storage Ltd v TH White Installations Ltd as:

It prescribes a relatively simple and certain standard of liability based on the reasonable fitness of the finished product, irrespective of considerations of fault and of whether its unfitness derived from the quality of work or materials or design.1

In layman's terms, the fitness for purpose clause imposes a professional duty on the consultant to "be right" as opposed to merely requiring them to "be careful". 

It places a greater obligation on the consultant than the mere exercise of reasonable skill, care and diligence and even where the consultant has conducted itself in accordance with, or even above its professional standards, the consultant may still be liable for damages in breach of a fitness for purpose clause.

As with any contractual provision the true extent and application of any specific fitness for purpose clause requires interpretation of the contract and the surrounding circumstances. 

Principals are motivated to employ these clauses because they offer a "one stop shop" for the principals to rely on if something in the project goes wrong.  Additionally, the onus of establishing a breach of a fitness for purpose clause is less than if they were required to prove a consultant's negligence.

2. Usual position in insurance contracts

Consultants face a conundrum if they agree to a fitness for purpose clause as an express term of its contract with the principal.

On the one hand, a principal might insist on a fitness for purpose warranty from its consultant.  On the other, if a consultant agrees to such a clause it runs the risk of being uninsured for potential claims for breach of that warranty.  This is because ordinarily a consultant's professional indemnity insurance would not respond to a claim made against the insured under a fitness for purpose clause. 

Professional indemnity insurance is a product which covers liability to a third party for a breach of a professional's common law duty, not for liabilities assumed under a contract.  It is therefore common, in insurance products, for contractually assumed liabilities to be excluded (Contractual Liability Exclusion).  Where a liability only arises because of an agreement entered into by the insured and where that liability would otherwise not exist (for example, there is no negligence by the consultant in its provision of services) that liability would be excluded.  In those circumstances section 54 of the Insurance Contracts Act does not provide insureds with any relief.  Further even if the consultant were negligent, a Contractual Liability Exclusion would operate to remove insurance cover for any additional liability assumed by the consultant as a result of the fitness for purpose clause. 

3. The increased risk assumed by insurers

A more recent trend that we have observed in the construction space is insurers offering to expressly write back cover, by way of endorsement or extension, for breach of a fitness for purpose clause.  

Even though fitness for purpose clauses have been present in design and construct contracts for some time, it is a relatively recent development for this risk to be underwritten by insurers.

Uncertainty of risk

A fitness for purpose clause can often represent an indeterminate exposure for an indeterminate period.  Insurers who agree to insure fitness for purpose clauses should know that if they agree to provide cover they assume this unknown exposure. 

Relevantly some agreements containing fitness for purpose clauses do not state the intended purpose of the work.  The practical effect of this is that it allows a wide scope for argument as to whether or not the work is fit for the purpose.  That increases the potential for drawn out and costly litigation.

If insurers agree to provide cover for fitness for purpose in an annual policy (as opposed to a project-specific policy), there is no certainty as to the number of contracts an insured has entered into or will enter into which warrant fitness for purpose.  The number of risks covered will not be known, and the terms of each of the insured's contract (specifically, the fitness for purpose wording) will not be known to insurers at the time of policy inception.  While this uncertainty can be mitigated through the use of a retroactive date, it illustrates the risks for insurers.

Risks associated with specific projects

There are certain types of projects which carry a greater risk of a consultant falling foul of a fitness for purpose clause. 

Projects which inherit a more significant risk of breaching a fitness for purpose clause are those in which the design of the project incorporates a minimum target for output.  Examples of these projects may be power plants, toll roads, and desalination plants.  If the design requires a specific level of performance, and the finished project does not produce that minimum level of performance or output, the consultant is likely to be in breach of the fitness for purpose clause. 

Breaches of this type could occur for a number of external reasons which could not have been anticipated or altered by the insured consultant, but it will be liable for the loss under a fitness for purpose warranty.  If cover has been extended to an insured then this liability will be passed onto its insurer.

These risks may be agreed between the principal and the insured consultant after the inception of a policy and exposes the insurer to risks which it may have not anticipated during the underwriting process.

4 Additional considerations

Where insurers wish to offer cover for breaches of express fitness for purpose clauses in construction professional indemnity products, the following should be considered and potentially implemented to provide greater certainty of the risks being written.

  • Insurers may consider only offering fitness for purpose cover on a project specific basis, rather than on a yearly policy period.  By doing so, insurers are more likely to have the opportunity to consider the D&C Contract and the relevant fitness for purpose clause.  It may also provide insurers with greater control over the amount of fitness for purpose risks they write at any one time.
  • Insurers should be more comfortable in providing cover for a specific project in circumstances where a fitness for purpose clause is agreed and the contract specifies the purpose of the design and construction project. 
  • Where the fitness for purpose clause is further tempered by the use of "reasonable" language (i.e. "reasonably fit for purpose") that will work to reduce an insured's potential exposure.

Consultants who are unable to obtain insurance cover for such clauses can, quite sensibly, point out to the principal that any perceived benefit of having such a clause is of limited utility where there is no insurance behind the consultant.  


1 (1985) 33 Build LR 108 at 118.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions