Will your insurance program’s Builders Risk policy respond if a major loss occurs from faulty workmanship at a job site? The best time to determine if it will is before a loss occurs.
The basic premise behind insurance is to pay for damages resulting from an “accident.” Merriam-Webster defines an accident as “An unfortunate event resulting from carelessness, unawareness, ignorance, or a combination of causes.” However, you typically cannot find these terms in the definitions section of a Builders Risk policy form. Instead, carriers exclude coverage for any defect in materials, design, or workmanship.
The insurance industry is constantly evolving, seeking cost-effective ways to provide protection to their policyholders. Beginning in the 1990s, London insurers began excluding coverage for events triggered by faulty workmanship. However, the line between physical damage and faulty workmanship is often blurred.
Borne out of that dilemma was the birth of the London Engineering Group’s (LEG) clause, known as LEG 1, LEG 2 and, most recently, LEG 3. LEG 1 is the most restrictive and LEG 3 the broadest. LEG3/06 will provide full cover for both defective and non-defective property provided damage results to any portion of the property that contains the defect as a result of that defect. Conversely the LEG 3/06 clause excludes any additional costs of improvements to the original plan, design, specification, materials, or workmanship.
Many reading this probably have not seen much of this wording in the North American marketplace over the past 20 years. Experienced risk managers and insurance brokers, sophisticated construction managers and educated owners/sponsors/developers typically request this wording. It’s important not to overlook this coverage amendment when placing insurance coverage for a project with a value in excess of $100 M. Ranging from large infrastructure projects to an urban high rise, it is imperative that every party to the risk management process seriously consider the LEG clause options as part of their overall risk management plan.
At The ALS Group, we have worked in this arena with construction teams and their clients for many years. We are fully versed in the nuances of faulty workmanship and Builders Risk policy structure. We can assist you to best manage the risk of loss from faulty workmanship.
About the Author
John Mooney is a Consultant with The ALS Group. Click here to request more information about The ALS Group or for help with developing a risk mitigation strategy and improving your Builders Risk coverage.
