Introduction
In a case of first impression, the United States District Court for the District of Columbia (making use of Illinois legislation) rejected a LEG3 exclusion as ambiguous. See S. Capitol Bridgebuilders “SCB” v. Lexington Ins. Co., 2023 U.S. Dist. LEXIS 176573 (D.D.C. Sep. 29, 2023). The London Engineering Group (“LEG”) is a consultative physique for insurers of engineering class dangers. Nearly 30 years in the past, LEG launched a collection of defects exclusions, together with LEG1, LEG2, and LEG3 (which was revised in 2006). Each supplies growing ranges of protection, with LEG3 being the broadest. Generally, whereas preserving some protection, LEG3 purports to exclude prices incurred to enhance defects of “material workmanship, design, plan, or specification.” Until now, regardless of frequent utilization in builder’s threat insurance policies internationally, there was a transparent lack of judicial steering relative to LEG3.
Factual Background
In S. Capitol Bridgebuilders, the insured was employed to construct Frederick Douglas Memorial Bridge in Washington DC and procured a builder’s threat insurance coverage coverage. In constructing and integrating the supportive buildings of the bridge, the insured’s poor vibration of concrete resulted in development malformations often known as “honeycombing” and “voiding,” which harmed the structural integrity of the bridge. This required the insured to interchange sizable parts of the bridge’s supportive buildings. The insured subsequently submitted an insurance coverage declare searching for indemnity for associated prices which the insurer denied for 2 causes: (ii) lack of direct bodily injury, and (ii) reliance on the coverage’s model of a LEG3 exclusion (known as the LEG 3 Defect Extension all through the opinion):
This coverage shall not pay for loss, injury or expense brought about immediately or not directly by any of the next.
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All prices rendered crucial by defects of fabric workmanship, design, plan, or specification and may injury (which for the needs of this exclusion shall embrace any patent detrimental change within the bodily situation of the Insured Property) happen to any portion of the Insured Property containing any of the stated defects, the price of substitute or rectification which is hereby excluded is that value incurred to enhance the unique workmanship design plan or specification.
For the aim of this coverage and never merely this exclusion it’s understood and agreed that any portion of the Insured Property shall not be considered broken solely by advantage of the existence of any defect of fabric workmanship, design, plan, or specification.
All different phrases and situations of the coverage stay the identical.
The Claimed Damage Was Within the Scope of Coverage
First, the Court decided that the claimed injury was inside the scope of protection. Given that “damage” was undefined, the Court turned to the “plain, ordinary, and popular meaning of the term, as well as the parties’ intent and “overall purpose of the contract.” The Court said that “damage” included the prices of fixing the concrete flaws that weakened the bridge. “A decreased weightbearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its supporting structures.” Considering that the insured bought an all dangers coverage for the development of a bridge, “[o]ne such risk, inherent in any complex construction project, is damage from errors in workmanship.”
The insurer unsuccessfully argued that the LEG 3 Defect Extension outlined “damage” in a manner that conclusively excluded defects attributable to materials workmanship. The insurer directed the Court to the ultimate paragraph of the availability, which said that “any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship.” The Court disagreed:
But “caused by” and “solely by virtue of the existence” usually are not the identical. The Extension doesn’t counsel that property can’t be “damaged” if there have been defects in materials workmanship someplace within the causal chain. Instead, it signifies that defects of fabric workmanship in and of themselves are inadequate to represent injury.
The Insurer Failed to Demonstrate that an Exclusion Was Applicable
After the insured had established protection beneath the coverage, the burden then transferred to the insurer to display that an exclusion utilized. In rejecting the insurer’s reliance on the LEG 3 Defect Extension, the Court said:
The LEG 3 Extension is ambiguous—egregiously so. To perceive this, one want solely try to learn it. In simply three sentences, [the insurer] managed to squeeze in a run-on sentence, an undefined time period, a number of mispunctuations, and a scrivener’s error…The Extension is internally inconsistent and bordering on incomprehensible. [The insured’s] assertion that the Extension is “convoluted” is an understatement.
The Court acknowledged that the availability excluded substitute or rectification prices incurred to “improve” the unique workmanship. In this context, the following inquiry involved what it meant to “improve” the unique workmanship. The insured prompt it meant “making it better than originally planned, and the insurer argued it meant “simply patching or replacing defective components constitutes an improvement.”
The Court famous that the insurer’s place had “intuitive appeal,” such that “repairing or replacing a defective component can technically be considered an improvement—unless that component is replaced with something worse.” However, the Court in the end decided that “to improve means to make a thing better than it would have been if it were not for defective work.” It defined that the language explicitly distinguished the “cost incurred to improve” work from “the cost of replacement or rectification.” Accordingly, the Court said that for the reason that LEG 3 Defect Extension was topic to a couple of cheap interpretation, it was ambiguous requiring development in opposition to the drafter-insurer.
Conclusion
Although the LEG exclusions usually are not new, they’re seldomly litigated. As a end result, S. Capitol Bridgebuilders is a landmark resolution which can seemingly create some uncertainty within the development insurance coverage market the place, because the Court famous, potential defects are inherent in any advanced mission.
Policyholders and insurers, alike, ought to stay conscious that the majority claims current distinctive points relying upon the coverage’s explicit language and factual circumstances. Lastly, it is very important word that whereas the choice is essentially antagonistic to insurers, it solely displays one courtroom’s perspective. Nevertheless, this resolution has the potential to reshape the panorama for LEG3 wordings.
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