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In recent years, large Builder’s Risk policies have included coverage terms from the London Engineering Group (LEG) that expand coverage by redefining how the policy will pay for claims involving construction defects. The broadest of these endorsements is called LEG-3 which excludes coverage only for the cost of the insured to improve the original material workmanship design, plan, or specification. These policies have not been truly tested in the U.S. courts.
Defective Work
To date, there has been little litigation or case law established regarding LEG-3 coverage. Carriers often narrowly interpret the exclusion. However, the precedent established under South Capitol Builders case is a great win for the construction industry. In this case, the carrier treated the endorsement as an exclusion. Essentially, the carrier viewed the rectification as an improvement, and it deemed there was no damage other than the faulty work itself. It argued, for coverage to be triggered, the defective work must affect other works. The defective work in question was synonymous with the damages being claimed. The insured viewed the coverage as an enhancement. The court opined both parties were correct in their interpretations.
What is important is that the courts distinguished between the defective workmanship and the resulting damage (property damage was not defined). The defective workmanship for the loss of the load bearing capabilities constituted direct physical damage to the bridge and yielded coverage as determined by the courts. There is also clarity around the rectification that it does not yield a betterment, as the repairs would bring the structure to the original state without defect (here the honeycombing). This distinction is important because all remedial work could be construed as betterment. This precedent will be relied upon when contractors litigate this matter in the future.
Endorsement Wording
Considering this decision, carriers may look to revise and clarify wording within their endorsements. The courts are consistent in construing ambiguity in the favor of the insured. True LEG coverage, if possible, should be procured. Doing so can lead to standardized language and create more favorable case law in the future. The applicable endorsements can vary widely. Carriers issue endorsements that mimic LEG wording but may include additional conditions or exclusions. For instance, these endorsements all have varying wording with similar intent:
- Extension for Repairing or Replacing Defective Covered Property (LEG-3) Endorsement
- Amendment to Excluded Causes of Loss—Cost of Making Good
- Faulty, Inadequate, or Defective Workmanship or Design Exclusion Amendment
- Defects Exclusion—Betterment (LEG-3)
- Faulty, Inadequate, or Defective Conditions and Cost of Making Good Changes
- Modified Cost of Correcting or Making Good Exclusion
- Amendment to Cost of Making Good Exclusion
When a broker presents a claim, it is important to distinguish between improvements and rectification. The language of the endorsements is often silent on this distinction. Demonstrating that remedial work is different than the original work would also be beneficial. From an agency perspective, careful analysis of the forms attached to the policy including any added sublimit or conditions is important to eliminate mistakes or inconsistencies.
As the coverage originated from the London Engineering Group the wording being utilized in the U.S. has many inconsistencies which is evidenced in this case. There are also varying challenges with this coverage across the pond. Should you have questions about your insurance endorsements reach out to us today and speak with one of our Risk Consultants.
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East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA
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