At a glance
- Christopher Lynch, Senior Claims Adjuster at Zurich examines construction claims challenges: defects exclusion clauses
- CAR cover is not intended to cover the cost of rectifying defects, as that would amount to guaranteeing the construction work
- Defects are therefore more appropriately dealt with in the realm of professional indemnity insurance, or fall to be resolved on a contractual basis
Material damage cover – such as that found under a Contractors’ All Risks (CAR) policy, or similar – protects a project’s physical assets against unexpected harm. But, when that damage is due to a defect in design, specification, plan, workmanship or materials, things get a little more complicated.
CAR cover is not intended to cover the cost of rectifying defects, as that would amount to guaranteeing the construction work. Defects are therefore more appropriately dealt with in the realm of professional indemnity insurance, or fall to be resolved on a contractual basis.
Exclusion Clauses containing write backs of cover
In reality, however, policyholders want cover for damage caused by defects. To meet this demand, the market draws on two established sets of London Market exclusion wordings: the London Engineering Group Defects Clauses (LEG) or the London Market Defects Exclusions (DE).
Each set contains incrementally narrower exclusions of cover for claims involving defects, with LEG offering three options and DE offering five.
While these are written as exclusions, there are important “write backs” that address how the policy will respond to claims for damage to insured property involving defects.
The broadest exclusion clauses within each set (LEG 1 and DE 1) are absolute exclusions for damage cause by defects, while the narrowest exclusion clauses (LEG 3 and DE 5) will preserve cover for resultant damage, excluding only any costs that improve upon the original design, plan, specification or materials.
Most customers will purchase CAR policies containing LEG 2, DE 3 or above, which leaves them with cover for consequential damage to non-defective property as a minimum.
Challenging distinctions to draw
While these clauses pose no issues for the majority of claims, the nature of construction risk means that scenarios often arise that make it difficult to establish the extent of coverage.
One such challenge is that defects often occur within the insured property – for example, a defective mix that results in low-strength concrete within a pile which then causes a wall to collapse. This makes notions of defect and damage difficult to completely separate in reality, as they are often so closely intertwined.
Additionally, each increment of the LEG and DE clauses introduces more distinctions. For example, on a single claim you may need to separate out and attach costs to the following distinct concepts: defective property; property free from defects; constituent part deemed to be defective; consequential damage; and aspects that might be considered improvements.
Typically, that requires a complex factual analysis, with technical arguments surfacing both for and against each aspect being covered. This can create great uncertainty for all parties, as it is not always crystal clear what cover is available.
Securing the cover intended
When technical ambiguities such as these arise, you would usually expect to find a body of judicial precedence to provide guidance. However, in the case of defects, both insurers and policyholders have tended to avoid litigation due to the sheer uncertainty of outcome.
Instead, challenging claims are consistently settled on a commercial basis, with insurer, broker and policyholder coming to an agreement that satisfies all parties.
At Zurich we take a pragmatic approach, focusing on making sure our customers always get the level cover that was intended under these clauses. We are in the business of paying claims, so always strive to achieve the best outcomes for our customers.
For more detailed information on this topic and to find out more about our approach, take a look at our latest whitepaper, or speak with your local Zurich Account Executive.