As most will know, professional indemnity policies contain exclusions relating to collateral warranties and similar documents. The wording of these exclusions differs; some exclude cover for "express guarantees" which is what will be considered here.
Below we demonstrate sample policy exclusions to illustrate the type of clause being referred to:
- A policy excluding cover for "any claim arising from any contractual agreement in respect of…any express guarantee given by you including any relating to the period of a project".
- A policy excluding cover for any claim arising from collateral warranties in respect of "any express guarantee contractual penalty or liquidated damages in so far as liability assumed by you exceeds the amount of your liability in the absence of such an agreement".
What does express guarantee mean?
There does not appear to be any clear case law in the context of insurance policy exclusions, and so we must turn to the meanings of these words singularly and the application of relevant legal principles.
There is no sole, definitive legal meaning of guarantee. However there are some relevant contexts where the meaning of "guarantee" has been considered:
Section 5(2)(b) of the Unfair Contract Terms Act 1977 outlines that anything in writing will be considered a guarantee if it contains a promise or assurance that defects will be made good by complete or partial replacement or by repair monetary compensation or otherwise.
In DeColyar on Guarantees, guarantee is defined as:
"a collateral engagement to answer for the debt, default or miscarriage of another person".
The Court considered the meaning of the word "guarantee" further in the case of Alumno Miller Telford Ltd’s The Board of Management of Edinburgh’s Telford College  ScotCS CSOH 213. The Court held that:
"the word "guarantee"can, in a particular context, legitimately be understood in the general sense of assurance, promise or acknowledgement. As he rightly accepts, a guarantee properly so called involves a tripartite relationship. The term 'indemnity' is more elastic, but in my opinion it must take its meaning in this case from its juxtaposition with 'guarantee'. It is not intended to widen the scope of the obligations for which the College requires prior consent before entering into".
"Express" has been legally defined as:
"an act evidencing intention is said to be express when it is done with the direct objection of communicating the intention as opposed to the implication. The communication may be effected by speech, writing or gestures; thus a promise in the words "I promise to pay you X" will be express whether spoken or written". In the case of Pettitt v Pettitt  AC 777, 810 it was held that legally express is the preferred adjective used in the sense of “specific, definite or clear.”
When does a contractual term amount to an express guarantee?
In the context we are considering, express warranties will usually amount to express guarantees. Other clauses involving promises or undertakings may amount to an express guarantee where it amounts to a warranty or pledge that the services will be carried out in a particular way and/or the services or project will achieve particular parameters / aims. This will however therefore be dependent on the context of the particular clause concerned. We give some of the most common examples below by way of reference.
The following clauses are likely to amount to express guarantees:
- Where the Insured is stated to "guarantee", "warrant", "covenant" or "ensure" that no prohibited materials have been used by a third party(e.g. sub-consultant or sub-contractor).
- Where the Insured is stated to "guarantee", "warrant", "covenant" or "ensure" that the performance of services/the project will achieve particular parameters or aims, where these services/works will be carried out (or partly carried out) by a third party (e.g. sub-consultant or sub-contractor). This is fact sensitive and dependent, among other things, on what the parameters concerned are.
- Where the Insured is stated to "guarantee", "warrant", "covenant" or "ensure" fitness for purpose (fitness for purpose obligations are often expressly excluded by professional indemnity policies).
- When the Insured has promised to fulfil the obligation of a third par if that third party fails to do so.
What can be done to mitigate the risk that an express guarantee is uninsured?
- In contrast to the above examples, an express warranty to exercise reasonable skill and care is unlikely to be regarded as an 'express guarantee', for these purposes: the contractual obligation to exercise reasonable skill and care is arguably no more than analogous to the statutory duty of reasonable skill and care that would otherwise be implied (under S.13 Supply of Goods and Services Act 1982).
- Thus wherever possible any express guarantee/warranty of performance should be qualified by reference to the reasonable skill and care duty of the consultant or 'design and build' contractor/sub-contractor (as the case may be).