There has been much debate in the London insurance market about the decision of Judge Royce of the United States District Court for the District of Columbia (the Court) and the application of the LEG3 (London Engineering Group).
Bearing in mind that LEG clauses (or derivatives thereof) are used in most international major engineering and construction projects, direct criticism of the standard clause may have implications for other issues involving LEG3.
The case concerns the construction of the Frederick Douglass Memorial Bridge in Washington, DC. The contractors South Capital Bridgers (SB) purchased a “Completed value developer risk“ from Lexington Insurance Company (Lexington) to insure against damage to insured property.
During the process, the joints of the bridge and two piers were made in place with several concrete tanks using formulas. To ensure placement, workers will vibrate the concrete to ensure even distribution. However, structural defects (known as “honey combing” and “voiding”) were observed during the removal of the formwork due to the defects caused by the vibration of the concrete. The honeycombs/hollows are several feet long, deep and visible to the eye.
SBB sought reimbursement from Lexington, which denied coverage for replacement of the bridge’s significant supporting structures. Then SCB issued proceedings. The court held that the honeycomb/vacuity was the damage that triggered the primary insurance clause of the policy.
The court considered that the policy was not too poorly drafted and addressed Lexington’s arguments regarding the effect and application of the terms.
The LEG3 clause in question reads as follows:
Defects in material, design, plan or specification cause necessary expenses and damages (for purposes of this exclusion, which includes any patentable change in the physical condition of the insured property) to any part of the insured. The cost of replacement or repair of property containing any of the specified defects is the cost of modifying the original material operating design plan or specification not included herein.
You understand and agree that for the purposes of this policy and this exclusion, none of the insured’s property shall be deemed damaged solely by reason of any material workmanship, design, plan or specification defect.
All other terms and conditions of the policy remain the same.
The policy insures against “all perils of direct physical loss or damage to the insured property.” The court stated that there is no specific definition of damages.
Damage “caused by” defect or defective workmanship or consequential damage covered materials and separately for incorrect or defective design, plan or specification were excluded under the same terms.
It was also accepted for the LEG3 clause, but strangely it was noted as an extension, and only sought to invalidate exclusions for defective design etc., not for defects in workmanship.
At issue is the court’s opinion (and lack of clear distinction) of what constitutes a defect and injury to the policy.
To trigger the policy, SCB had to show that there was an injury to its work. Absent a definition of damages in the policy, the court instead relied on Black’s legal dictionary. It defines harm as “destruction or damage to person or property” and more precisely as “any adverse effect on something”.
Using this definition, the court had no hesitation in finding that the SCB’s inadequate vibration reduced the weight-bearing capacity of the bridge and its supporting structures. This reduced the structural integrity of the bridge, a “bad effect” on the bridge and its supporting structure.
Research group 208B of the Insurance Institute of London, in its report on “Construction Insurance”, said that the words “loss”, “damage” and “property” are rarely used in the policy and are meant to find their everyday life. meaning”
But the court, seemingly disturbed by the lack of a divorce, resorted to legal lexicon. Even if a standard London market definition of damage is used as “physical loss, physical destruction or physical damage to material property”, it raises questions., Will the court decide whether the policy was triggered by malpractice? From the comments made in the judgment, the answer is yes.
In reviewing the cases relied upon by Lexington and determining their relevance, the court noted that none of them involved the same construction project or the same insurance policy, citing case law that, like builders’ risk policies, commercial general liability policies exist. “… are not intended to cover the costs of repairing and replacing the insured’s defective works and products.”
Although the court repeatedly stated that the “damage” was a reduction in the weight-bearing capacity of the bridge, this appears to be a potential future damage. It did not damage the level of pouring cement. Assuming that the piers and girders are constructed before the arches and bridge decks, there is no need to carry any weight at the working level during the failure mode. If that is correct, then the court’s finding is about potential future damages, one could argue that the insured is at risk.
Furthermore, when discussing damages as used in the context of LEG3, (Colin Edelman Casey 2006 adds that “this exclusion includes any change in the physical condition of the insured property which affects the title to the property”), the court also stated that “the structural integrity of the bridge and its components” may also be impaired. , regarding the honeycomb and emptiness, “…there is no doubt that there is an injurious change in circumstances.”
Therefore, the court considered not only the potential loss of weight, but also the defective crushed concrete built into the work as damages.
Accordingly, the policy appears to be no more than a construction warranty.
The Court uses some symbolic language in its assessment of LEG3 (“internally inconsistent and unintelligible”) and states that it “challenges the language of the stricken extension”.. In fact, the Court looked only to costs incurred in modifying the definition of damages and the intent behind the exclusionary language in the LEG clause.
There is no analysis of the LEG3 criteria so that the defect and damage are in the same “class”, or what comparison is intended by the wording of the exclusion, to evaluate what is the improvement. An unincorporated amendment requires a comparison with “original material practice, etc.” He seems to have no idea what “original” means.
LEG3 is mentioned as an extension to the policy. The court also observed that LEG3 is an extension of the articles it is intended to replace by providing broader coverage. Thus, “SBB essentially extends the right to recovery.”
The court also noted that LEG3 provides for specific “damages” in LEG3 and limitations on “damages” applicable within the guidelines. In terms of damages, the court noted that the “change to property rights” requirement is only for exclusionary purposes. In any case, the court stated that it was a reduction in the weight bearing capacity of the bridge and a fundamental alteration of the honeycomb.
The rider at the end of LEG3 (also found in clauses DE 2-5 and LEG2 and applied by the judge to the policy as a whole) is intended to clarify the existence of defects in coverage.
But the court ruled that the rider does not include defects “caused” by the operation, but only defects “caused by its existence”. They decided that this “in themselves” is equivalent to the defects of the material system. As SCB’s structural integrity declined, this was not a “mere” claim for defective operation.
There is confusion here, as the court stated that the honeycomb and the void (operational errors) are harmful changes and thus damages.
There is confusion regarding the exclusion of replacement or repair costs to improve the original system. SCB pointed out that remedial exclusion meant “making it better than originally intended,” which the court agreed with. The court further explained that if SCB decided to “replace the damaged concrete with solid gold or otherwise improve it”, they could not seek the cost of the improvement.
However, this similarity does not refer to functional maintenance, but to the addition of materials. SBB didn’t want to argue that the concrete was defective, for example it needed to be replaced with gold or something else. An issue related to the cement process. An incorrect analogy is being used to try and explain the improvement.
Holding that SCB’s and Lexington’s amendments were both reasonable interpretations of the sentence, it was determined that there was ambiguity, and as such, under Illinois law, Lexington was to be construed.
In fact, in LEG3 terminology, exclusion of the amendment can be viewed in several ways:
(a) the full exclusion of the cost of those works which carry out the improvements; or
(b) the costs incurred to restore the defective property to its original condition, or
(c) Additional cost of improvements to the original purpose of the work.
According to the principles of English and Welsh law, this decision, although it does not have a precise definition of damage in the policy, is difficult to understand. The claim is based on a defect in the work. In England and Wales this claim does not trigger cover. It raises the question under what conditions the court can decide that the work is only defective and not harmful.
According to the decision made when writing a business in North America, copywriters may need to identify and identify flaws and disadvantages. This could be worded in policy definitions along the following lines:
“For the purposes of this policy:
A defect is a defect in the work done or the quality of the item constructed, which means that the work is of less value than intended or is not fit for purpose.
Impairment means a physical injury or physical change to the work that is adverse and detrimental to the utility or value of the property and is distinct from and cumulative of a defect.
Obviously, the change in the definition of damage and breakdown in the insurance clause should be reflected in the LEG clauses.
For policies with English and Welsh jurisdiction, due to the many legal issues surrounding what constitutes defect/damage, a definition of damage under the 208B survey is arguably unnecessary. However, if insurers wish to clarify the position, they may use the starting point of the above definition.
Although this decision and the wording used by the court may be seen as a slight on those who drafted the LEG clauses, despite the original intention of the clauses to be used in engineering accidents, it is noteworthy. Insurers and brokers understand the purpose of LEG clauses and are now widely used in CAR policies for large projects around the world.
Although this may be the first court decision on LEG3, many arbitrators have highlighted issues with the wording of the LEG and this decision was originally made 27 years ago (with the LEG3 amendment in 2006) and only emphasizes the clauses used outside of their original intent. It needs evaluation.