LEG3: A turning point for Construction Insurance?

Recent US court decisions on cover for inadequate concrete have caused controversy in the construction insurance market. They have also reopened debate around whether the London Engineering Group (LEG) suite of defects exclusion clauses needs to be amended. The LEG Committee has been consulting on proposed revisions to the standard wordings and has recently announced that updated clauses, together with guidance, will be issued in the coming months. The intention is to maintain the same level of cover, while removing some of the ambiguity in the current language.

Concrete failures remain a recurring feature of major construction claims worldwide. These can range from sudden structural collapse to wider concerns, such as punching shear in transfer slabs. Technology-enabled solutions are also increasingly being used on site to identify early-stage weaknesses. Against this backdrop, defects exclusions play a critical role in defining the scope of indemnity under construction insurance policies. Careful consideration should therefore be given to the level of cover available for resulting damage. Two recent US cases illustrate how these issues can arise in practice, and why the interpretation of defects exclusions continues to attract close scrutiny.
 

SCB v Lexington

In South Capitol Bridgebuilders v Lexington Insurance Co. (2023), a District of Columbia Court, applying Illinois law, held that the Frederick Douglas Bridge in Washington DC had suffered damage as a result of honeycombed concrete. This was caused by insufficient vibration during the third pour of concrete into the bridge abutments and piers. SCB was insured under a Builder’s Risk policy containing a LEG3 defects exclusion. Lexington declined cover for the claim on the basis that the concrete components were defective from the outset.

The policy did not define “damage”. The Court therefore applied a general meaning, taken from Black’s Law Dictionary, which included loss, injury or “any bad effect on something”. On that basis, it concluded that insured property had been damaged and that policy cover was engaged. In reaching this decision, the Judge described the wording of LEG3 in notably strong terms, including “egregiously ambiguous”, “tortured” and “bordering incomprehensible”.

The insurer also argued that fixing something broken inevitably involves improvement, meaning the rectification costs would be excluded in any event. This argument was rejected. The Court agreed with SCB that only costs incurred to upgrade the works to a higher standard than originally planned would fall outside the scope of cover. However, this concept was not explored in detail; “gold-plating” was the only example given.
 

Archer v Ace

In Archer Western - De Moya JV v Ace American Insurance Co. (2024), a District of Florida Court considered whether the use of inferior concrete in an elevated highway reconstruction project could give rise to insurance cover under the design and build contractor’s policy.

The Miami Signature Bridge design used concrete produced on site with the addition of fly ash. Certain batches were mixed with excessive amounts, allegedly due to the failure of a silo pressure relief valve. This reduced the proportion of cement and impaired the concrete’s compressive strength. As in SCB, “damage” was not defined in the policy. The Judge noted that, under Floridian law, the legal test requires a “tangible alteration to the covered property”, rather than merely economic impact or loss of use. This approach is consistent with decided cases arising from the Covid-19 pandemic.

Ace argued that the bridge components had always been defective, and that no external event had changed the insured property from a satisfactory condition to an unsatisfactory one. Following the decision in SCB, this argument was dismissed. The Judge accepted that contamination with excessive quantities of fly ash was capable of physically altering the cement. This was based on expert evidence that the fly ash had detrimentally affected the concrete’s compressive strength and rate of hardening, due to changes in the composition and microstructure of the binder.

The insured also relied on analogous US case law involving food spoilage and contamination, including Zurich v Cutrale Citrus Juices (2002). In those cases, US Courts held that the accidental introduction of an adulterant can amount to a physical event causing injury or damage, even if the resulting blend is not completely unfit for its intended purpose and could still be marketed under different labelling.

Taking account of the factual contradictions and ambiguous policy wording, the Court concluded that the disputed issues were more appropriate for resolution by a jury at trial. The previous acceptance of cover for adjacent formwork buckling at the base of a supporting pier, which Ace had attributed to faulty design and workmanship, was also seen as fundamentally inconsistent with the declinature of the later claim.

SCB and Archer were considered in the context of interim summary judgment applications in state-level Courts, with the underlying claims due to be determined at a later stage. Unlike London’s Technology and Construction Court, the US does not have nationwide specialist construction Courts. The claimants in SCB and Archer were related companies, and both policy claims subsequently settled on commercial terms. As a result, neither progressed to full disclosure, evidence or legal submissions at trial.

The Signature Bridge project has faced multiple delays and cost overruns due to concrete issues and design errors. Completion is now expected in late 2029.

Policy Wordings

Weakened concrete can create fertile ground for policy disputes. This is often due to differing interpretations of the current LEG and DE clauses, with the key areas of debate centred on damage, access costs and the quantification of improvements. The recent LEG3 cases have prompted a careful review of policy language. In some Construction All Risks and Builder’s Risk wordings, this has led to the introduction of a definition of damage, confirming the need for physical alteration that adversely affects the value or usefulness of insured property. The selection of English governing law and jurisdiction is likely to support this approach to claims assessment, subject to any local regulations that apply to dispute resolution.

Beyond policy definitions, tailored solutions can be achieved through express indemnities for intentional access damage. This may include intentional damage to defective property where it is necessary to repair accidental damage to non-defective property. Clearer wording can also help avoid disputes over improvement costs. For example, replacing “costs incurred to improve” language with wording that confirms only costs exceeding the cost of repairing the damage are excluded can reduce uncertainty around whether an improvement relates to original design intent or execution.

Greater clarity in these areas should help improve certainty and consistency in insurance outcomes, benefiting stakeholders on all sides.