In short. Under Spanish law, when a public contract causes damage to third parties, the general rule in article 196.1 of Law 9/2017 on Public Sector Contracts (Ley de Contratos del Sector Público, LCSP) is that the contractor compensates all loss and damage it causes to third parties through the operations required to perform the contract: the liability of the public authority (responsabilidad patrimonial de la Administración) is the exception, not the rule. The authority answers in two defined cases (art. 196.2): damage that is the immediate and direct consequence of an order it gave, and damage arising from defects in the project design in a works contract, with a right of recovery against the designer within the limits of art. 315.2. The third party has one year to ask the contracting body to report on which of the contracting parties is liable for the damage, and that request interrupts the limitation period (art. 196.3). Between those two sides sits the contractor's liability policy, whose scope depends on its terms and conditions.
"It shall be the contractor's obligation to compensate all loss and damage caused to third parties as a consequence of the operations required to perform the contract." That is the literal wording of article 196.1 of the Spanish Public Sector Contracts Act.
When people speak of public authority liability in Spain, they almost always picture an individual claiming against the authority: a fall on a public pavement, damage caused by a municipal service. For the company performing a public contract, the law reverses the starting point. If the works you carry out for a city council, a regional government or the State damage a neighbour, an adjoining shop or a passing vehicle, the compensation is, in principle, yours. The authority only takes on the damage in two specific cases, and knowing where that line falls decides which policy pays.
What is public authority liability in Spain?
It is the duty of Spanish public authorities to compensate individuals for the harm they suffer to their property and rights as a result of the normal or abnormal functioning of public services, except in cases of force majeure or of damage the individual has a legal duty to bear. It is laid down in article 32.1 of Law 40/2015 on the Legal Regime of the Public Sector (Ley de Régimen Jurídico del Sector Público).
The requirements for the damage are set out in article 32.2 of the same law: it must be actual, economically assessable and individualised in relation to a person or group of persons. Article 34 adds that only harm the individual has no legal duty to bear is compensable, and sets the valuation criteria, using the scales in the applicable legislation as a reference in cases of death or personal injury.
It is a regime of strict liability: it does not require fault on the part of any official. But when the damage is caused not by the authority itself but by the company performing its contract, a special rule comes into play: article 196 of the LCSP.
Who is liable for third-party damage on a public contract?
Article 196 of the LCSP allocates the contractor's liability for damage to third parties through one general rule and two exceptions. Its scope should be made clear: it governs administrative contracts (art. 25 LCSP). Private contracts entered into by public sector entities are governed, as to their effects, by private law (art. 26), so this allocation does not apply as it stands.
The rule: the contractor is liable
Article 196.1 places on the contractor all loss and damage caused to third parties as a consequence of the operations required to perform the contract. It draws no distinction by type of damage, nor by whether the authority is the developer: the mere fact of working for it does not shift the liability.
The rule is consistent with the general principle in article 197: the contract is performed at the contractor's own risk (a riesgo y ventura del contratista), without prejudice to the provisions of article 239 for works contracts. That article provides that, in the cases of force majeure it lists, the contractor is entitled, provided it has not acted imprudently, to compensation for the loss and damage it has itself suffered: it protects the contractor's own losses; it does not shift damage caused to third parties onto the authority.
Exception 1: an immediate and direct order from the authority
The first limb of article 196.2 makes the authority liable where the damage has been caused as the immediate and direct consequence of an order it gave: in that case the authority is liable, within the limits laid down by law.
Both adjectives matter. It is not enough that the authority owns the contract, that it approved the works programme or that its site supervision team was present on site. What shifts the liability is that the damage derives from a specific instruction from the authority, and that it derives from it without any intervening decision of the contractor's own on how to carry it out. If the order leaves technical discretion and the damage stems from the way the contractor carried it out, the scenario reverts to the general rule.
In practice, therefore, relevant orders should be recorded in writing in the site order book or in the communications on the contract file: the burden of proving that the damage stems from an order lies with the contractor relying on it. How each case fits depends on the facts and on their assessment by the contracting body and, where applicable, by the courts.
Exception 2: defects in the project design
The second limb of article 196.2 makes the authority liable for damage caused to third parties as a consequence of defects in the project design in a works contract, and also in a contract for the supply of manufactured goods. If the works are carried out in accordance with the project and it is the project itself that was badly conceived, the contractor is not liable to the third party.
The authority, in turn, may seek recovery from the project designer. Article 315.2 of the LCSP provides that the contractor of the design service is liable for loss and damage caused both to the authority and to third parties through technical defects and shortcomings in the project. That liability has statutory limits: it reaches 50% of the loss and damage caused, up to a maximum of five times the price agreed for the project, and may be enforced for ten years from the authority's acceptance of the project; the remainder of any compensation payable to third parties is borne by the authority (art. 315.2 LCSP). For engineering firms and architectural practices that design projects for public authorities, that exposure is the territory of professional indemnity insurance.
Taken together, the allocation looks like this:
| Scenario | Who is liable to the third party | Route | Policy triggered |
|---|---|---|---|
| Damage caused by the operations of performance (general rule) | The contractor (196.1) | Request under 196.3 and claim under the applicable legislation; civil route if only the contractor is sued | Contractor's liability policy, subject to the policy terms |
| Damage caused by an immediate and direct order of the authority | The authority (196.2) | Public authority liability procedure (Law 39/2015) | Whatever cover the authority has in place |
| Damage caused by defects in the project design on works | The authority (196.2), which may recover from the designer up to 50% of the damage, capped at five times the project price (315.2) | Public authority liability procedure; subsequent recovery | Designer's professional indemnity, in the recovery action |
| Damage to the contractor's own property through force majeure on works | Not third-party damage: the authority compensates the contractor, unless the contractor acted imprudently (239) | Contract file | Not a liability scenario |
Do you know whether your liability policy covers defence in the article 196.3 procedure and the property of the contracting authority? Request a review of your programme.
How a third party's public authority liability claim is handled
Article 196.3 of the LCSP gives the injured third party a specific tool: within the year following the event, it may first request the contracting body, after hearing the contractor, to report on which of the contracting parties is liable for the damage. Exercising that right interrupts the limitation period for the claim.
For the contractor, that hearing is the first point at which its exposure is decided. It is where it argues, with supporting documents, that there was an order from the authority or a defect in the project. Reaching it without having notified the insurer of the event, or without a coordinated defence, weakens the contractor's position.
Article 196.4 adds that the claim shall in all cases be brought under the procedure laid down in the legislation applicable to each case:
- If the authority is liable, the public authority liability claim is processed under the procedure of Law 39/2015 on the Common Administrative Procedure (Ley del Procedimiento Administrativo Común). Article 32.9 of Law 40/2015 expressly refers to damage caused to third parties during the performance of contracts by direct order of the authority or by defects in the project, although its text still refers to the previous contracts legislation (Royal Legislative Decree 3/2011), now replaced by the LCSP. The time limit for claiming is one year from the event or from the manifestation of its harmful effect; for personal injury, from recovery or from the determination of the extent of the sequelae (art. 67.1 Law 39/2015).
- Jurisdiction lies with the contentious-administrative courts, including against private parties that contributed to the damage (art. 2(e) of Law 29/1998 and art. 9.4 of the Organic Law of the Judiciary).
- If the third party sues only the contractor, the route is civil: it is a non-contractual claim under article 1902 of the Spanish Civil Code, because there is no contract between the injured party and the company. We explain this in contractual and non-contractual liability. The injured party may also proceed against the contractor's insurer through the direct action in article 76 of Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro), which we review in the key points of the Insurance Contract Act for companies.
What role does the contractor's liability policy play?
It is the policy that responds in the general case under article 196.1, which is also the most frequent. Within liability insurance for companies, the section triggered is public liability during performance and, where agreed, completed operations liability once the works have been accepted (art. 243 LCSP), which covers damage to third parties that becomes apparent after acceptance, during the guarantee period and beyond, according to the period set in the policy. Its specific scope is always governed by the policy terms. To place this cover alongside insurance for damage to the works themselves, see liability on construction sites: CAR versus liability.
When reviewing the wording of a contractor that works for public authorities, there are points worth checking one by one. These are not covers we take for granted: they are questions that each policy wording answers differently.
- Definition of third party. Whether the contracting authority, and the property it owns around the works, count as third parties or are excluded. We cover this in common exclusions in a liability policy.
- Defence in administrative proceedings. Whether legal defence extends to the article 196.3 hearing and to the public authority liability procedure, and not only to court proceedings.
- Sub-limits. Pre-existing property, underground services, damage to adjoining properties from excavation or vibration: these usually carry their own sub-limit and a different deductible. See limits, sub-limits and deductibles in liability insurance. Who answers to the neighbour is covered in party wall damage.
- Time trigger. Whether the policy operates on an occurrence or a claims-made basis, and what happens to damage that becomes apparent after acceptance. See claims made versus occurrence.
- Series clause. Whether several injured parties affected by the same cause (a burst main affecting an entire street) are treated as a single claim with a single limit and a single deductible.
- Subcontractors. If the damage is caused by a subcontractor of the successful bidder, the main contractor remains liable to the third party and to the authority. That scenario is covered by the section we explain in contingent liability for contractors and subcontractors.
One final nuance. Article 87.1(b) of the LCSP accepts professional risks liability insurance as a means of evidencing economic and financial solvency. That tender requirement sets a minimum for bidding; it does not measure the real risk of performance. A policy that is enough to evidence solvency may fall short when a claim involves several injured parties.
The performance guarantee is not a liability policy
The two should not be confused. The performance guarantee (garantía definitiva), whether provided by bank guarantee or by surety insurance, responds to the authority, not to third parties. Article 110 of the LCSP states that it covers "only" the obligation to formalise the contract, penalties imposed on the contractor, proper performance, loss and damage caused to the authority by the performance of the contract or its breach, forfeiture in cases of termination and, in works, services and supply contracts, the absence of defects during the guarantee period.
Damage to a neighbour, a shop or a vehicle falls outside that list: it is the territory of the liability policy. We develop this in the performance guarantee under the LCSP.
We analyse your exposure on public contracts before approaching the market for a price. Talk to us.
The role of an independent broker
Two liability policies with the same limit and the same premium can behave very differently after a loss on public works, depending on how they define a third party, how far the defence extends and which sub-limits they contain. As an independent brokerage registered with the Spanish DGSFP under reference J0140, we act on the client's mandate, not the insurer's. We compare wordings across the whole market, we negotiate the wording and not only the price, and when a claim arises we represent the company before the insurer, including in the article 196.3 procedure.
If your company regularly carries out public works, insurance for construction companies brings together the sector's full programme.
Frequently asked questions
Who pays for damage that public works cause to a third party? As a general rule, the contractor (art. 196.1 LCSP). The authority is only liable if the damage derives from an immediate and direct order it gave or from a defect in the project design in a works contract (art. 196.2).
What is the time limit for a public authority liability claim? One year from the event or from the manifestation of its harmful effect; for personal injury, from recovery or from the determination of the extent of the sequelae (art. 67.1 Law 39/2015). A request to the contracting body under article 196.3 LCSP, made within that year, interrupts the limitation period.
Can the third party claim directly against the contractor's insurer? Yes, through the direct action in article 76 of the Insurance Contract Act. If it also sues the authority, art. 9.4 of the Organic Law of the Judiciary requires the claim against the private parties that contributed to the damage to be brought before the contentious-administrative courts as well (see also art. 2(e) of Law 29/1998).
Does the performance guarantee cover damage to third parties? No. Article 110 LCSP limits it to liabilities owed to the authority. Damage to third parties is the territory of the liability policy.
What happens if the damage is caused by an error in the project design? The authority is liable to the third party (art. 196.2) and may recover from the project designer up to 50% of the damage, capped at five times the project price (art. 315.2). The designer, in turn, relies on its professional indemnity insurance.
Sources and legislation
- Law 9/2017 on Public Sector Contracts (Ley de Contratos del Sector Público), articles 25, 26, 87.1(b), 110, 196, 197, 239, 243 and 315.
- Law 40/2015 on the Legal Regime of the Public Sector (Ley de Régimen Jurídico del Sector Público), articles 32 and 34.
- Law 39/2015 on the Common Administrative Procedure of Public Authorities, article 67.1.
- Law 29/1998 governing the Contentious-Administrative Jurisdiction, article 2(e).
- Organic Law 6/1985 of the Judiciary (Ley Orgánica del Poder Judicial), article 9.4.
- Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro), article 76.
- Spanish Civil Code, article 1902.
The allocation of liability between the authority and the contractor depends on the facts of each case and on their assessment by the contracting body and the courts; this content does not constitute legal advice.
This information is for guidance only and does not constitute binding advice. Covers, limits and exclusions are governed in every case by the specific terms of each policy. New Brokers Correduría de Seguros, S.L., registered with the DGSFP under reference J0140.
