The Expert:
Karen Rice, Head of Global Claim Success Initiatives, Proactive
QUESTION: What kind of impact have the recent developments involving the LEG-3 extension had on builders risk and other construction claims?
A: Recent case law related to LEG-3 language has had a major impact on carriers, brokers, and insureds involved in commercial construction insurance.
I will start with a bit of history. Nearly 30 years ago the London Engineering Group (LEG), a consultative body for insurers of engineering class risks, introduced a series of defects exclusions (also referred to as extensions). LEG-1, LEG-2, or LEG-3 attach to builders risk (BR) policies. Each provides increasing levels of coverage, with LEG-3 being the broadest.
While initially available through London markets, these endorsements, or similar “cost of making good” endorsements, have become increasingly available and popular in the U.S., with the LEG-3 available particularly with larger construction projects and clients. Until recently, though, there were no published court cases in the U.S. that interpret the language in LEG-3. At least one recent decision changes that, and another influences it.
Without getting deep into the nuances, on Sept. 29, 2023, in South Capitol Bridgebuilders v. Lexington, 2023 WL 6388974, 21-cv-1436 (RCL), a federal district court in Washington, D.C. issued an opinion in a matter that involved concrete issues on a bridge, which allegedly decreased the strength of the bridge support structures, and where the insurers claimed there was no physical damage. The court observed that the LEG-3 replaced a broad workmanship exclusion with a narrower one, and thereby broadened the coverage available under the policy. The court also suggested that the extension/exclusion was egregiously ambiguous, and so, in a nutshell, the LEG-3 was construed in favor of coverage.
In January 2024, under a similar fact pattern in Archer Western - De Moya Joint Venture v. Ace American Insurance Co., the U.S. District Court, S.D. Florida denied Ace American’s summary judgment motion suggesting no coverage, citing South Capitol, amongst other issues.
“Other Insurance” clauses in commercial general liability (CGL) and contractors professional liability (CPL) policies typically limit coverage where there is BR coverage. The recent LEG-3 cases suggest that the existing LEG-3 endorsement may not exclude coverage, and so if it does provide coverage, there may be no coverage under the CGL and CPL policies.
One CPL underwriter for a newer carrier recently mentioned to me how he anticipated fewer claim submissions to his CPL policies as a result of there being available coverage on the BR claims.
Similarly, for CGL policies with construction-defect exposures, there is a likelihood that those carriers will be taking a close look at the BR policy and whether the LEG-3 endorsement is attached to help guide their decision based on their “other insurance” clauses.
What seems to be certain is that most carriers are taking a hard look at their LEG3 language and will likely be amending it to help restrict coverage the way they originally anticipated. Having said that, it’s also clear that it will depend upon the buyer’s power, as the bigger the contractor, the more influence they’ll have in getting their carriers to keep the LEG-3 language as it currently stands.
Policyholders and insurers alike should remain mindful that most claims present unique issues depending upon the policy’s particular language and factual circumstances. Lastly, it is important to note that while the decision is largely adverse to insurers, it only reflects one court’s perspective. Nevertheless, this decision has the potential to reshape the landscape for LEG-3 wordings.