DE3 vs LEG 2 exclusions

By Gareth Barnes
 

It is common that in the majority of policy wordings that anything defective, whether it be related to design, workmanship or materials is likely to be excluded. The extent to which an exclusion will apply will depend on the type of exclusion used.

There are two types of exclusion which are most common on contract works policies. The first we will look at is the DE3. A common example of this is as follows:

“This Policy excludes loss of or damage to and cost necessary to replace repair or rectify:

1. Property insured which is in a defective condition due to a defect in design plan specification materials or workmanship of such property insured or any part thereof;
2. Property insured lost or damaged to enable the replacement repair or rectification of Property insured excluded by (1) above.

Exclusion (i) above shall not apply to other Property insured which is free of the defective condition but is damaged in consequence thereof.

For the purpose of the Policy and not merely this Exclusion the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design plan specification materials or workmanship in the Property Insured or any part thereof.”

Basically what this says is that the insurer will not cover the repairing or rectifying a defective part (or any property lost or damaged in rectifying the defective part, but will cover the damage to other parts of insured property which is damaged as a result of the said defect.

The second exclusion we will look at is the LEG 2, an example of which is as follows:

“The Insurer(s) shall not be liable for:

All costs rendered necessary by defects of material workmanship design plan or specification and should damage occur to any portion of the Insured Property containing

any of the said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of the Insured Property had been put in hand immediately prior to the said damage.

For the purpose of this policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship design plan or specification.”

In general terms, what this is saying is that the total cost of rectification is covered however the cost to rectify or repair the defect immediately prior to the loss occurring is the cost that is excluded.

Although both exclusions appear similar they can give very different results when put into practice. It will be noted that the DE exclusion talks about the “part” which is defective and the “parts” damaged, and the LEG exclusion talks about the “cost” and “costs” of the rectification of damage and defect.

It must also be noted that the LEG exclusion also imports a further factor, being time of the damage.

Take for example a defect relating to a chemical bond breaker used in constructing a building out of precast “tilt-up” concrete panels. The common method used involves constructing formwork to the shape of the desired panel, installation of reinforcements and then pouring of concrete into the form work to create the desired panel. Once the process is complete it is repeated, one panel on top of the other, until a number of concrete panels are poured in layers. In this scenario, the lower panel effectively acts as the bottom formwork of the panel poured above.

A chemical “bond breaker” is applied to the upper side of each panel before the pouring of the next to ensure the panels separate with no damage when the upper panel is lifted of the one below.

In this example the concrete panels have not separated properly and as a result they have cracked and broken beyond use. It is later found that the bond breaker chemical used was defective causing the concrete panels to break when separated.

If we are to apply a DE3 exclusion then it is likely that the exclusion would extend only to sourcing and re applying a new non-defective chemical. The cost to rectify the resultant damage (reconstruction of the panels) is likely to be covered.

However if we are to apply the LEG 2 exclusion we need to establish what could have been done to rectify the defect immediately prior to the loss occurring as it is this cost that is excluded. Just because there is a defect in the system, being the defective bond breaker, does not mean that the policy will respond (as clarified in the proviso to the exclusion). Clearly when the panel is lifted, the damage occurs, being the cracking. In this case the Insured would need to apply a non-defective chemical to the concrete prior the panels being separated, however this would be impossible as the panels would first need to be separated to do this. The only way to replace the defective chemical would be to demolish both panels, rebuild the first panel, apply the non-defective chemical, then reconstruct the second panel. Therefore it is likely that it is these costs of rebuilding the panels and reapplying the chemical which is excluded (i.e. the whole claim).

It is clear that when applying the DE3 and LEG 2 exclusions the extent to which a claim is covered can differ considerably. The DE3 is more based on the “parts” of the loss whereas the LEG 2 is more based on the method and “costs” of repair. The above example however is based on applying both exclusions to the same incident.

In the next example we will apply the exclusions to 2 separate claims where the extent of damage and cause of loss are identical but applying the LEG 2 policy can have different results.
It is noticed that a number of tiles have cracked on a newly installed 1^st floor veranda and the whole veranda floor will need to be ripped up and retiled. On closer inspection there appears to be a faulty joist below the floor which has slipped causing the floor to sag and crack the tiles. Immediately prior to the defective joist slipping what would have needed to be done to prevent it or “put it in hand”? As the veranda is on the 1^st floor, the Insured could have obtained access under the veranda, located the faulty joist and replaced it. This is the cost that is to be excluded and the cost to rectify resultant damage (removal and replacement of the tiles, etc) would be covered. It should be noted that in this particular instance if a DE3 exclusion is applied it is likely similar same costs would excluded as with a LEG 2.

However let’s assume that the veranda is on the ground floor. Exactly the same thing happens, however the joist is not accessible from underneath as the veranda is on the ground floor. Therefore in applying a LEG 2 exclusion, immediately prior to the loss the only way to rectify the problem is to rip up the floor to access the defective joist, repair it, then relay the floor. This is the cost that is excluded and as this is what is being claimed then all of the repairs are likely to be excluded. If a DE3 were applied then the cost excluded would just be the cost to rectify the damaged joist once the floor was ripped up and all the other costs to repair and retile the floor are likely to be covered as they are a consequence of the defect.

So based on the repair method required the LEG 2 exclusion can operate in very different ways even when the cause of loss and the extent of damage are similar.