Understanding the LEG3 Clause in Light of Archer v Ace: A Must-Know for Construction Professionals

As a construction professional, you of course understand that your projects face numerous risks and that insurance is essential to safeguard your investments. One critical aspect of Builder’s Risk insurance is the LEG3 clause, which has been under legal scrutiny recently.

The LEG3 clause excludes coverage for defective design, materials or workmanship but covers resulting damage to other parts of the project. A recent court case in America, Archer v Ace, exposed ambiguities in this clause that could lead to unexpected coverage gaps.

Let’s take a closer look at the Archer v Ace case and what it might mean for your construction business.

A concrete case

Archer v Ace proved to be highly significant in the insurance and construction law fields, particularly regarding the interpretation of the LEG3 defects exclusion used in Builder’s Risk policies. LEG3 is one of three defect exclusions created by the London Engineering Group (LEG) to address different levels of coverage for defective work or materials.

In the case of Archer v Ace, the issue revolved around concrete that was found to be defective due to an improper mix of materials, which reduced its strength. The policyholder filed a claim under their insurance policy to cover the cost of repairs, but the insurer denied it, arguing that the concrete was never in a satisfactory condition and therefore did not suffer damage that would be covered by the policy.

The court had to decide two key issues: whether the property suffered ‘damage’ and whether the LEG3 exclusion was ambiguous. The court found that there was enough ambiguity in the LEG3 clause to rule in favour of the policyholder, allowing the case to proceed, rather than granting the insurer a summary judgment. This decision, along with a similar earlier case, suggests that courts may interpret LEG3 in a way that favours policyholders, potentially broadening coverage under Builder’s Risk policies. This has raised concerns in the insurance industry, prompting discussions about revising the LEG3 clause to clarify its intent and application.

In essence, Archer v Ace signals a potential shift in how defects exclusions like LEG3 might be interpreted in the future, possibly leading to changes in policy wordings to avoid such ambiguities.

So, what does this mean for you?

Simply put, the clarity of the LEG3 clause in your policy could significantly impact the extent of your coverage in the event of a defect-related issue. Courts have found this clause ambiguous, which can lead to disputes and potential losses if your policy doesn’t explicitly outline what is and isn’t covered.

Why this matters

Understanding how the LEG3 clause works and how it might affect your coverage is crucial. If your policy language is unclear, you might find yourself without coverage for certain risks that you assumed were protected. This can be particularly problematic in large construction projects where the stakes are high.

What you can do

• Review your policy

Take time to carefully review the LEG3 clause in your Builder’s Risk insurance policy.

• Consult with your broker

Discuss the specifics of the clause with your insurance broker to ensure there are no ambiguities that could leave you exposed.

• Consider policy amendments

If necessary, work with your broker to amend the policy language to clarify coverage and exclusions, reducing the risk of disputes down the line.

• Protect your investments

The risks in construction are already significant - don’t let unclear insurance terms add to them. Ensuring your LEG3 clause is clear and comprehensive can save you from potential financial setbacks in the future.

Get expert help today

Not sure if your Builder’s Risk insurance adequately protects your projects? Contact Ascend today to review your policy and ensure you’re fully covered. Let’s work together to safeguard your investments with clarity and confidence.

Other blogs which may be of interest:

Insurance for modern construction

Construction: Its time to talk

Any questions? Please don’t hesitate to contact one of our team.

Stuart.Belbin@ascendbroking.co.uk | Mobile: 07736 956213