At a glance
- Bernadette Hackett, Global Relationship Leader at Zurich, discusses defects on construction projects: overcoming challenging claims
- Defects in design, plan, specification, materials or workmanship can result in damage to project assets and have a range of associated costs
- Material damage cover – such as that found under a Contractors’ All Risks (CAR) policy, or similar – starts from a position of excluding claims involving defects
Without a doubt, dealing with defects can be one of the trickiest parts of construction claims. Situations often arise that make it difficult to establish the precise cause of a loss, who it is attributable to, and whether you have some type of recourse.
Challenging claims such as these demonstrate the value of a strong relationship between insurer, broker and policyholder.
Damage resulting from defects
Defects in design, plan, specification, materials or workmanship can result in damage to project assets and have a range of associated costs.
However, material damage cover – such as that found under a Contractors’ All Risks (CAR) policy, or similar – starts from a position of excluding claims involving defects. This is because material damage cover is intended to protect against unexpected harm, not to guarantee quality of work by covering defects.
In practice, though, policyholders can opt to purchase incremental cover. This ranges from protecting against resultant damage to non-defective property, right up to covering all associated costs except those that result in improvements.
Exclusion clause wordings
This incremental coverage is normally achieved by inserting a clause from one of two established sets of London Market wordings – the London Engineering Group Defects Clauses (LEG) or the London Market Design Exclusions (DE).
Each clause requires various important factual distinctions to be drawn, such as: defective property; property free from defects; consequential damage; and improvements.
While this is relatively simple with most claims, circumstances often arise that make these distinctions difficult to assess, creating uncertainty for all parties over the extent of recovery available.
Finding pragmatic solutions
Things are not made any easier by the lack of case law to give parties clear direction on how difficult conceptual issues should be decided. The existing ambiguity results in most parties tending to avoid the uncertainty of litigation.
Instead, challenging claims are invariably settled on a pragmatic basis, with insurer, policyholder, and broker working together to find a reasonable solution.
Achieving the best outcomes
Brokers and their clients use the LEG and DE clauses to secure a certain level of protection against damage caused by defects. At Zurich, we therefore focus on ensuring our clients recover any costs where possible, achieving the best outcomes for their project.
When the situation is clear-cut, and recovery is not available under material damage cover, we will be open about this from the outset.
However, when defects are involved, there are often other potential sources of recovery – such as in contract or via other insurance policies, such as professional indemnity. We aim to alert our broker partners and customers to explore alternative avenues and take further advice where appropriate.
Crucially, when the coverage position is ambiguous, we stand out from others in the market in our desire to work collaboratively and find a solution.
Zurich is in the business of paying claims, and we always start from that position. We work hard to form genuine relationships with our brokers and clients, so that when such challenges arise, we can work together to find a constructive solution.
For more detailed information on this topic and our approach, read our latest whitepaper or speak with your local Zurich Account Executive.