London group updates construction defect clauses
The International Underwriting Association-affiliated London Engineering Group (LEG) introduced updated model insurance clauses for construction defects, addressing ambiguity arising from recent legal interpretations. These revisions maintain the original intent while enhancing precision in coverage definitions for CAR policies.
LEG faced pressure to revise its wording following a legal decision. This ruling, concerning the most extensive of the previous defect clauses, LEG3, sparked concerns that coverage for damaged buildings under construction all risk (CAR) policies might be restricted or removed.
LEG’s standard defect exclusions are integral to construction and engineering all-risk insurance policies, offering varying levels of protection. LEG1 provides minimal coverage, while LEG3 offers the most full protection, covering costs for rectifying or replacing faulty workmanship or design.
The updated clauses introduce distinct coverage levels for physical damage resulting from defects. LEG 1/26 completely excludes damage caused by defects, while LEG 2/26 omits costs associated with replacing or rectifying defective property if the defect had been identified earlier.
LEG 3/26 excludes the additional cost of improving the material, workmanship, design, plan or specification used for the defective property.
Charlie Dee, UK construction underwriting manager at Berkshire Hathaway Specialty Insurance and chair of LEG, said the new clauses and accompanying commentary will provide a clear and practical framework for insurers, brokers, and clients. The update is the result of extensive work to provide greater clarity around their intended operation.
The three clauses have been issued with the support of the IUA Clauses Committee, a body of more than 80 London market wordings experts that reviews all IUA model policy wordings. They are available from the IUA’s clauses database at iua.co.uk/clauses.
It is expected that the new clauses will help to clarify the cover provided by construction all risk insurance policies. The LEG and the IUA Clauses Committee have worked together to produce these new clauses, which are intended to provide a clear and practical framework for the insurance industry.
