Constructive Notes®
Introduction
As observed in the prior Constructive Notes newsletter, Judicial consideration of London Market Design (DE) Clauses, commonly contract works policies utilised in major projects (whether written locally or by United Kingdom (UK) underwriters) are incorporating an exclusion from one of two sets of clauses derived from UK industry bodies.
There had not until relatively recently been any reported judicial consideration of the operation of the other set of clauses (London Engineering Group (LEG) Defects Wording).
A 2015 decision by the Court of Appeal for British Columbia provided the first considered judicial analysis of the operation of an LEG 2/96 Defects Exclusion, notwithstanding a large question mark over the status of the decision. More recently, US courts have handed down judgments in two cases which provided the first judicial consideration of the LEG 3 Exclusion.
These cases are analysed in this newsletter by Partner Patrick Mead along with their likely impact in Australia.
The London Engineering Group Defects Wording
The London Engineering Group ‘Defects Wording’ is commonly in use in both the UK and Australian market and increasingly in Canada and the USA.
The ‘mid point’ of this set of clauses is to be found in LEG 2.
The LEG 2/96 Model ‘Consequences’ Defects Wording invokes concepts of causation. It provides:
The Insurer 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 the 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.
The ‘high point’ of this set of clauses is to be found in LEG 3.
The LEG 3/06 Model ‘Improvement’ Defects wording is:
The Insurer(s) shall not be liable for:
All costs rendered necessary by defects of material workmanship design plan or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) 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 incurred to improve the original material workmanship design plan or specification.
For the purpose of the 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.
The LEG 2 and 3 exclusions share a common issue, which is the meaning of ‘All costs rendered necessary by …’. The question is whether the exclusions are intended to exclude defects without excluding damage which results from such defects. LEG 2 has further complications surrounding the basis for a hypothetical write back into cover while LEG 3 is bedevilled by what is meant by the reference to ‘cost incurred to improve’. In both clauses the question of what constitutes ‘damage’ looms large.
Judicial interpretation of LEG 2/96 Model 'Consequences' Defects Wording
Acciona Infrastructure Canada Inc v Allianz Global Risks US Insurance Company (Acciona) 1
This case was an appeal from a judgment at trial in favour of the plaintiff contractors who had sought indemnity from their insurers for losses and costs incurred to repair damage to concrete slabs forming part of a new patient care centre.
The insurers on appeal argued that the trial judge erred in finding that the damage to the concrete slabs constituted ‘direct physical loss of or damage to the property insured’ within the meaning of the policy, and that the damage was not excluded by a defects exclusion in the policy which was in relevant respects in the form of LEG 2/96.
The trial judge held that the over-deflection, bending and cracking was fortuitous damage which fell within the Perils Insured Clause and the Court of Appeal concluded that the judge did not err in making this finding.
The Court of Appeal summarised the trial judges’ findings in relation to the Defects Exclusion as follows:
[18] The Judge found that the Defects Exclusion was intended to exclude defects without excluding damage that results from such defects, but was designed to do so in a manner that avoids the ‘metaphysical’ debates that arise when a court must determine where a defect ends and resulting damage begins. The Defects Exclusion accomplishes this goal ‘by crystallizing the quantum of damage that is excluded at the moment just before any consequential damage resulting from defective work occurs’ [170].
[19] The Insurers sought to apply the Defects Exclusion to the whole of the loss, arguing that the over-deflection, bending and cracking was the manifestation of a defective design. The contractor responded that the Policy required a sequential analysis of the claim. First there must be a finding of damage under the Policy. The Defects Exclusion has no application unless the damage can be said to have been caused by a defect of one of the listed types. A determination must then be made of the total cost to repair or rectify the damage; then, from this recoverable cost, the Policy excludes only those costs of repair that would have remedied the defect immediately prior to the occurrence of the damage.
[20] The Judge accepted this was the correct analytical framework. He held the failure to take steps in the formwork and shoring/re-shoring procedures or to addressing any way the complex design of the forms was defective workmanship within the meaning of clause 5(b) of the Policy. He then held:
[223] The ‘damage’ in issue here is the cracking and over deflection of the concrete slabs. The ‘defect in material workmanship’ is the improper formwork and shoring/re-shoring procedures adopted that resulted in the damage to the slabs. Applying clause 5(b), the excluded costs are those that would have remedied or rectified the defect before the cracking and over deflections occurred i.e. the costs of implementing proper formwork and shoring/re-shoring procedures or incorporating additional camber into the formwork.
[21] The trial Judge noted there was no evidence of the cost of implementing proper formwork and shoring/re-shoring procedures. He concluded such costs would have been minimal (that is, no more than the defective procedures that were in fact implemented). Accordingly, he found that none of the claim was excluded by the Defects Exclusion.2
The ground of appeal by insurers was that the trial judge erred in holding that only the ‘preventative or avoidance costs’, which in this case were nil, were excluded from coverage by the Defects Exclusion.
The insurers argued that the judge approached the interpretation of the exclusion influenced by the approach taken to by the courts in the ‘resulting damage’ cases, which grapple with the distinction between defects in the insured’s own work, usually excluded, and damage resulting from those defects, often covered.
They argued that the enquiry mandated by the LEG 2 exclusion is temporal rather than causative — and that the proper enquiry — rather than being directed to distinctions between defects and resulting or consequential damage is one directed to identification and exclusion of costs that would have been incurred if the defect had been recognised and repaired or replaced before it caused any property damage. It was suggested by the insurers that this enquiry would lead to the exclusion of the entire claim.
The Court of Appeal did not agree with the insurers that the trial judge adopted the approach of the resulting damage cases, finding that the trial judge’s reference to the costs that would necessarily have been incurred to rectify the defective workmanship immediately before ‘consequential or resulting damage’ occurred was descriptive of the effect of the application of the Defects Exclusion to the circumstances of the case and not inappropriate reliance upon the ‘resulting damage’ case law.3
Rather the Court of Appeal said that the trial judge interpreted the Defects Exclusion to exclude from coverage the costs that would have been necessary to rectify a defect in workmanship immediately before that defect caused damage to the Insured property.4
The Court of Appeal said that the trial judge’s critical finding was that defects in the framing and shoring workmanship resulted in damage to the slabs (which was not challenged on appeal) and that in light of that finding the floor slabs cannot be considered to be a ‘portion of the insured property containing any of the said defects’ within the meaning of the Defects Exclusion. The Court of Appeal thus concluded:
[62] In other words, there was no defect in the slabs that could have been rectified in order to prevent the over- deflection, bending and cracking. The defect was in the workmanship. The Judge found that if the defect in the workmanship had been identified early enough, there would have been no material additional costs to implementing appropriate workmanship. There was no evidence of such costs. It was a coincidence, in this case, that the necessary rectification costs were equivalent to the avoidance costs — but this does not mean the Judge misinterpreted the Defects Exclusion to generally exclude only avoidance costs.5
The Court of Appeal next addressed the insurer’s contention that the Defects Exclusion requires a determination of the cost of ‘replacing’ the defective work, saying that this submission did not give adequate weight to the fact that the Defects Exclusion refers to ‘the cost of replacement or rectification’, suggesting that rectification costs could be seen as the costs of implementing proper formwork and shoring/re-shoring procedures and that such costs, the costs of ‘doing the job right’, represent ‘the moral hazard’ the insurers intended to avoid by the Defects Exclusion.6
Insurers then argued that the trial judge had failed to give proper weight to the commercial context, saying that it made little commercial sense to exclude from coverage only the minimal cost of preventative measures, so that could not be what the parties intended, and that the intention was that damage caused by those actions under the control of the insured and for which they were contractually responsible would not be visited upon the insurer.
The Court of Appeal said that it disagreed with this for two reasons. First, it said it was coincidental that sufficient preventative measures would not have added to the cost in this case and that if circumstances had been different, the costs may have been substantial. The Court of Appeal suggested that for this argument to be persuasive the insurers would have to establish that the parties intended that wherever physical property damage occurred in the course of construction as a result of faulty workmanship, a significant portion of the claim would be excluded and that this was not established.
Second, the Court of Appeal said that if the parties had intended to exclude all damage ‘caused by those actions under the control of the Insured’ they could have used simple and direct language to that effect. The Court contrasted the exclusion in the parties’ contract with the LEG 1 Outright Defect Exclusion, noting that in the present case the clear intention of the parties was not to exclude all damages caused by actions under the contractor’s control, but rather to exclude certain specified costs only while covering the balance of costs arising from damage to insured property.
Finally, the Court of Appeal considered reliance by insurers on extrinsic aids to suggest that the trial judge’s interpretation of the Defects Exclusion was erroneous, but was not persuaded that the trial judge erred. The Court of Appeal said:
[71] The Defect Exclusion is the LEG 2 model clause developed by the London Engineering Group. A similar model clause, LEG 3, excludes, the ‘cost incurred to improve the original material workmanship design plan or specification’. The Insurers argue that LEG 2 should provide a broader exclusion than LEG 3, which carries a lower premium, but the Judge interpreted the Defects Exclusion such that it is equivalent in effect to LEG 3.7
The Court of Appeal then noted the reliance placed by insurers on an article to which the Court was directed in which the author opined when discussing the decision under appeal:
… To the extent that cracking and over-deflection constitute physical damage, the cost of repair or rectification must be considered as at the date after construction and just prior to that damage. This should, on the wording of the exclusion comprise the cost of repairing/rectifying the defective slabs, so that cracking and over deflection would not occur. If no such repair could be undertaken, the exclusion would have to apply to the full costs of replacing the defective slabs.8
The Court of Appeal then went on to say:
In my view, the trial Judge did not do what the author is critical of him for doing. The author refers to ‘the cost of repairing/rectifying the defective slabs’, but the trial Judge did not find that the slabs were ‘defective’. The Judge expressly found that the slabs were properly designed; the defect that resulted in damage to the slabs was embodied in the supporting structures and workmanship. Accordingly, the Defects Exclusion did not exclude the cost of rectifying ‘defective slabs’ (which were not defective); it excluded the cost of rectifying defective workmanship. The slabs were not a part of the insured property containing the defects.9
And then:
In the circumstances of this case, the facts that the LEG 2 wording excludes no more of the loss than does the LEG 3 wording, and that the LEG 2 wording affords the same coverage as a policy with a ‘resulting damage’ exclusion, do not imply the Judge misread the Defects Exclusion. In my view, it was open to the Judge to find that the only costs excluded by the Defects Exclusion were costs that would necessarily have been expended to replace or rectify the defective workmanship immediately before that defective workmanship caused the over-deflection, bending and cracking of the concrete floor slabs.
The Insurers urge upon this Court an interpretation of LEG 2 that will produce a different result than LEG 3, yet they do not seek to distinguish LEG 2 from LEG 1, an outright exclusion that excludes ‘loss or damage due to defects of material workmanship design plan or specification’. In my view, the trial Judge’s construction of the Defects Exclusion was in accord with the words chosen by the Insurers and Contractor in the commercial context in which the Policy was written.10
The Court of Appeal concluded by considering two scenarios postulated by the author of the aforementioned article, and said:
In my opinion, given the Judge’s findings of fact, the case at bar most closely resembles the author’s first scenario. Inserting the appropriate findings of fact into that example, the author might have concluded as follows:
Up to the moment of the over-deflection of the concrete slabs, the defect in the workmanship could have been repaired by incurring the costs of adjusting or supplementing the support structures. Accordingly, those are the only costs that fall within the exclusion, on the LEG 2 wording. Those are the same costs (possibly subject to additional costs such as mobilization/demobilization), that would have been incurred to do the job correctly in the first place. That is not why those costs are excluded; they are excluded because they are the costs that would have been incurred, just prior to the over-deflection, to repair or rectify that portion of the property suffering from the defective workmanship.
This conclusion, of course, is precisely that of the trial Judge.11
The Court of Appeal thus concluded that the trial judge did not err in interpreting the Defects Exclusion to exclude only costs of implementing proper workmanship immediately before the defective workmanship caused over-deflection, bending and cracking.12 On the evidence before the judge, those costs were nil.
Analysis of the Court of Appeal decision
There are three initial observations which can be made in relation to a Defect Exclusion in the form of LEG 2.13
- The exclusion is of liability to indemnify ‘in respect of … costs’. There is nothing on the face of that wording which would preclude those relevant costs as comprising the full cost of repairs, reinstatement or replacement of the physical damage to insured property.
- The exclusion operates when those costs are ‘rendered necessary by defects’ of particular kinds. Arguably, if a cost would not have been incurred but for the defect, it is a cost rendered necessary by that defect.
- Where the damage occurs to ‘any portion of the Property Insured containing any of the said defects’, there is a formula provided for calculation of the costs of replacement and repair which appears to require consideration of the portion containing the defect separately to other damage to insured property.
Bearing these matters in mind, the writer respectfully discerns some inherent difficulties with the approach taken by both the judge at first instance and the Court of Appeal in Acciona.
One problem with the Court of Appeal’s reasoning should become immediately apparent when one considers their finding that ‘the floor slabs cannot be considered to be a portion of the insured property containing any of the said defects’. Having made that finding, the Court of Appeal (respectfully) appears to have overlooked the fact that the precondition to the operation of the hypothetical basis for the calculation of the cost of replacement and repair is that ‘… damage occur to any portion of the Insured Property containing any of the said defects’.
It should also be borne in mind that the last paragraph of the exclusion expressly provides that any defect of material, workmanship, design plan or specification is not itself damage for the purposes of the policy by virtue of the existence of the defect. Notwithstanding this, in equating ‘rectification costs’ with ‘avoidance costs’ the Court of Appeal’s approach arguably had the effect of providing the contractor with full indemnification in respect of its defective work which was expressly excluded by the opening line of the exclusion (‘all costs rendered necessary by defects of material workmanship design plan or specification …’).
Given the possible intention of the drafters of the clause, for the exclusion to operate so as to exclude the costs of rectification of the defective workmanship or design but claw back into cover so called ‘resultant damage’, a question certainly arises as to how this is achieved by the clause other than in relation to Property Insured which is damaged and which contains a defect in design or workmanship.
One might well have thought that characterisation was in any event apposite to the circumstances of this case. The trial judge, however, found that the slabs were properly designed and that the defect that resulted in damage to the slabs was embodied in the supporting structures and workmanship. The Court of Appeal affirmed this, finding that ‘… the Defect Exclusion did not exclude the cost of rectifying “defective slabs” (which were not defective); it excluded the cost of rectifying defective workmanship’.
In the author’s view, while the slabs may have been properly designed, to treat the defective workmanship as being confined to the improper formwork and shoring/re-shoring procedures in isolation of the slabs of which they formed an integral role in their construction, is taking an artificially restrictive and too narrow a view. The very nature and manner of construction of the slabs support structure necessarily left the slabs susceptible to the damage which ultimately ensued.
It should be observed that the Judge at first instance grappled with what the author considers to be the ‘elephant in the room’ in relation to the operation of the LEG 2 exclusion. That is whether the opening line of the exclusion should have the effect of excluding all cover for damage to Insured Property where that is considered to be a ‘cost rendered necessary by a defect of material, workmanship, design plan or specification’. The Judge found that the exclusion was intended to exclude defects without excluding damage which results from such defects. This was not disturbed on Appeal.
Yet the clarifying rider makes clear that Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material, workmanship, design, plan or specification. Physical damage to Insured Property is required to trigger indemnity under the Policy, before considering what the exclusions take away. The words in the opening line of the exclusion need some work to do and should not be stripped of meaning.
If the balance of the clause is construed as leaving open partial recovery for physical damage to Insured Property caused by one of the enumerated defects, it is difficult to discern a sensible basis for this partial indemnity to extend to works which were partially defective, but not to damage to parts of the works which contain no defect.
The author would suggest that the hypothetical ‘write back’ only makes sense, in context, if the exclusion is treated as being an exclusion of the costs of all damage caused by a defect in material, workmanship, design, plan or specification, with the write back operating in circumstances where damage is occasioned by some independent cause to an item of Insured Property, which at the time contains a defect of that nature. This would then exclude the cost of rectifying that defect from the indemnity otherwise available, on the basis that cost was one which should always have been borne by the contractor. This construction in the author’s view makes commercial sense.
Another concern relates to the Court of Appeal’s embrace of what appeared to be a causal rather than temporal enquiry which it mandated by the hypothetical write back in the Defects Exclusion. This is encapsulated by the Court of Appeal’s comment that ‘there was no defect in the slabs that could have been rectified in order to prevent the over-deflection, bending and cracking. The defect was in the workmanship’. The judge found (as was accepted by the Court of Appeal) that if the defect in workmanship had been identified early enough, there would have been no material additional costs to implementing appropriate workmanship. Hence, none of the claim was excluded.
This approach, however, seemingly ignores the fact that while a defect in workmanship can bring about a defective condition of Property Insured, the quality of the work is not itself Property Insured, and it is the costs of repairing or rectifying damage to the Property Insured, which are the subject of the operation of the LEG 2 Defects Exclusion.
Further, as the writer referred to in the Court of Appeal’s judgment opined:
… the cost of repair or rectification must be considered … just prior to that damage. This should, on the wording of the exclusion, comprise the cost of repairing/rectifying the defective slabs, so that the cracking and over-deflection would not occur. If no such repair could be undertaken, the exclusion would have to apply to the full cost of replacing the defective slabs.14
This is in fact entirely consistent with the approach taken by the Australian courts when confronted with a similar (but not identical) exclusion in the case of Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd,15 which was an appeal from a decision of McDougal J.16 The claim against the insurer at first instance (and on appeal) failed in part because the trial judge said that the onus was on the insured to prove what would have been necessary to rectify the defective workmanship immediately prior to the collapse of the pavement and what costs would have been incurred in that rectification.
Conclusion on the status and impact of the decision
While Acciona is a decision of Court of Appeal for British Columbia, as it emanates from a common law jurisdiction it had the potential to be persuasive in Australia. This was observed in All Covers and Accessories Pty Ltd v Sidawi17where Victorian Associate Justice Mukhtar on appeal relied on a decision of the Court of Appeal for British Columbia, observing and following High Court of Australia authority in Cook v Cook:
Of course decisions of the Canadian Court of Appeal like any precedents of other legal systems are not binding, but are to be afforded a status depending on the degree of persuasion of their reasoning.18
It should however be noted that the decision of the judge at first instance and on appeal was made against the backdrop of a finding that the failure by the contractor to take steps in the formwork and shoring/re-shoring procedures or to address in any way the complex design of the forms was defective workmanship. In so finding the judge rejected insurers contention that the over-deflection, bending and cracking was the manifestation of a defective design.
Irrespective of whether this was the appropriate characterisation of what occurred, it means that the decision might be confined to instances where there is a finding of defective workmanship.
In any event, while the reasoning of the Court of Appeal certainly remains of interest, its decision appears to have little, if any, standing as a persuasive authority, given that Acciona’s appeal to the Canadian Supreme Court, saw the case referred back to the Court of Appeal, for the appeal to be redecided in accordance with principles from another case, and then subsequently settled before any further determination.
The author would respectfully suggest that the reasoning of the Court of Appeal in this instance may not find favour with courts in Australia.
Judicial interpretation of LEG3 / 06 Model ‘Improvement’ Defects Wording
South Capitol Bridgebuilders v Lexington Insurance Co19
This was a decision of Judge Royce C Lambeth of the United States District Court for the District of Columbia handed down on 29 September 2023.
It was concerned with the interpretation of a ‘builders risk’ insurance policy (the Policy). South Capitol Bridgebuilders (SCB) was hired to build the Frederick Douglas Memorial Bridge. In building and integrating the supportive structures of the bridge, SCB’s poor vibration of concrete resulted in construction malformations known as ‘honeycombing’ and ‘voiding’, which harmed the structural integrity of the bridge. As a result, SCB had to replace sizable portions of the bridge’s supportive structures. Believing that the Policy provided coverage for those expenses, SCB sought reimbursement, however, the insurer, Lexington Insurance Company (Lexington), relying on its interpretation of the insurance policy, refused indemnity.
Before the Court, neither party disputed that the concrete repair expenses were necessitated by deficiencies in SCB’s workmanship but rather they simply disagreed over whether the insurance policy provided coverage, which was a question of law. Because the material facts were not in dispute, the Court ordered that Lexington’s liability under the policy was an appropriate question for summary judgment.
Consideration by the Court
The indemnity clause
The Court noted that the sole disagreement on the issue of coverage was whether ‘damage’ is properly understood to include the costs of fixing the concrete flaws that weakened the bridge. In concluding that the answer was unambiguously yes, the Court said that as a preliminary matter, the term ‘damage’ was undefined in the body of the Policy and hence the plain, ordinary and popular meaning of term was to be used.20 On the undisputed facts, the Court considered that SCB’s inadequate vibration caused a decrease in the weightbearing capacity of the bridge and its support structures and that a decreased weightbearing capacity was an injury, or at the very least a ‘bad effect’, on the bridge and its support structures.
In observing that the Court’s assessment of the meaning of ‘damage’ need ‘not end with the dictionary’, the Court considered that the Policy wording was consistent with faulty or defective workmanship being capable of causing loss, damage or expense.
The Court further went on to observe that the LEG 3 Defect Extension similarly suggested that SCB’s claim was within the scope of coverage of the Policy, with the Court considering that the Extension’s treatment of the term ‘damage’, which it defined as ‘patent detrimental change’, underscored that issues of defective workmanship can cause damage (although it did not accept SCB’s suggestion that ‘damage’ in the exclusion was identical to ‘damage’ as used in the coverage provision).
While the Court took further support for that construction of the wording from the penultimate sentence of the Extension, it rejected Lexington’s argument that this part of the Extension defined ‘damage’ in a way that conclusively excluded defects caused by material workmanship. The Court said that ‘caused by’ and ‘solely by virtue of the existence’ were not the same and that the Extension did not suggest that property could not be ‘damaged’ if there were defects in material or workmanship somewhere in the causal chain. Instead, the Court said it indicated that defects of material workmanship in and of themselves were insufficient to constitute damage.
In concluding that SCB did not seek reimbursement solely for its defective workmanship, but rather for honeycombing and voiding, which in turn led to decreased structural integrity of the bridge caused by defective workmanship, the Court held there was damage to which the Policy would prima facie respond. In arriving at this conclusion, the Court considered the ‘parties intent’ and ‘overall purpose of the contract’ and noted that one risk inherent in any complex construction project is damage from errors of workmanship.
The exclusion clause
Given the Court’s finding that SCB had established coverage under the Policy, Lexington had the burden of demonstrating that an exclusion applied. Lexington relied on the LEG 3/06 Defect Extension to do so.21 SCB argued that the language of the Extension unambiguously supported coverage. Lexington countered that it unambiguously excluded coverage. In this event, the Court held that neither party was correct. The Court said that the LEG 3 Extension was ambiguous (‘egregiously so’).
The Court noted that the parties’ first disagreement on the Extension began with its title: ‘LEG 3 Defect Extension’. More specifically, they disagree over whether the provision was in fact an extension at all. Lexington argued that the provision was really an exclusion because it was meant to delete and replace portions of the ‘Perils Excluded’ section of the Policy. SCB argued that the provision actually operated as an extension of coverage under the Policy.
In the event the Court said that the two things can be true at once. The Court said ‘Yes, the LEG 3 Extension is an exclusion — it even refers to itself as one’, however, in replacing a broad exclusion from coverage with a narrower exclusion, the endorsement functionally extended what SCB was entitled recover for.
Having accepted that damage had been established (the ‘honeycombing’ and ‘voiding’ resulting in a reduction in the weightbearing capacity of the bridge qualified as a ‘patent detrimental change in the condition of the insured property’), the Court then turned to the scope of the exception to the exclusion. The Extension excludes replacement or rectification of costs incurred to ‘improve’ the original workmanship. The Court posed the question: ‘But what does it mean to “improve” the original workmanship?’
The Court noted that SCB seemed to suggest this meant making it better than originally planned. Thus, if SCB decided to replace the defective concrete with ‘solid gold’, or otherwise upgrade it, SCB could not then seek reimbursement of those enhancements. By contrast, the Court noted that on Lexington’s view, simply patching or replacing defective components constituted an improvement. The Court again asked rhetorically: ‘After all, if something broken gets fixed, hasn’t that thing been improved?’ While noting that argument had intuitive appeal, the Court considered that it fell apart upon closer scrutiny.
While accepting that repairing or replacing a defective component could technically be considered an improvement — unless that component is replaced with something worse — the context of the Extension suggested that to improve meant to make a thing better than it would have been if it were not for defective work. In fact, it was noted (in rejecting the insurers suggestion that the two phrases were co-extensive) that the Extension explicitly distinguished the ‘cost incurred to improve’ work from ‘the cost of replacement or rectification’.
In the event the Court held that the LEG 3 Defect Extension was subject to more than one reasonable interpretation and was therefore ambiguous. As a result, the Court held that the Extension was ambiguous as to whether it excluded coverage and under Illinois law, the Court had to construe the Extension against its drafter, Lexington, and in favour of coverage.
Because the Extension did not exclude coverage for SCB’s claim for reimbursement, the Court held that Lexington was liable for breaching the Policy and granted SCB’s motion for summary judgment.
Analysis
There are a number of initial observations to be made in relation to the decision before considering the rationale behind the Court’s view of ‘damage’ and the operation of the LEG 3/2006 exclusion.
Firstly, the decision is welcome in that it provided the first judicial consideration anywhere in the world of the LEG 3/2006 exclusion. Given the incorporation of this exclusion into Contract Works Material Damage policies of insurance worldwide, it is surprising that there has been no prior judicial consideration of the clause.
While opining that the definition of ‘damage’ in the LEG 3/06 clause may shed light on the scope of ‘damage’ used in the coverage provision, the judge found that prefatory language in the clause’s damage definition suggested it was not necessarily used in the same way as ‘damage’ in the coverage provision.
This, coupled with the penultimate sentence of the exclusion (‘ … for the purpose of this policy and not merely this exclusion …’), indicated to the judge that while defects of material and workmanship in and of themselves were insufficient to constitute damage, the insured was not seeking reimbursement solely for its defective workmanship but rather for the costs of remedying the honeycombing and voiding, which in turn led to decreased structural integrity of the bridge, which the judge considered constituted damage.
A further matter of which to be conscious, is that the Court held that the exclusion was ambiguous, being ‘subject to more than one reasonable interpretation’, and as a result under Illinois law, the Court was obliged to construe the exclusion against its drafter, being the insurers, in favour of coverage.22
Turning now to the two substantive matters considered in the judgement, being the existence of ‘damage’ and the operation of the LEG 3/06 ‘Extension’.
The judge noted that the sole disagreement on the issue of coverage (prior to consideration of the LEG 3/06 clause) was whether ‘damage’ could be properly understood to include the costs of fixing the concrete flaws that weakened the bridge. In concluding that the answer was ‘unambiguously yes’, the judge appears to have given weight to factors which may not be so clearly determinative of the position in Australia or the United Kingdom.
The indemnity clause insured SCB against ‘all risks of direct physical loss of or damage to insured property’.
The first thing to note is that it is unclear whether the judge treated the word ‘physical’ as qualifying not just ‘loss’, but also ‘damage’. The better view is that the word ‘physical’ in a clause of this nature should qualify both23 yet the judge, in noting that the term ‘damage’ was undefined in the body of the Policy, appears to have adopted the ‘plain, ordinary and popular meaning’ of the term, unburdened by this additional overlay which can be quite significant.24
The second thing to note is that English cases have drawn a distinction between property which is damaged and that which is merely defective at the moment of its creation.25 In the circumstances of the SCB case, there does not appear to be any moment at which Insured Property the subject of the claim for indemnity existed other than in a defective state.
Further, and although in the context of a liability policy, in the case of Pilkington United Kingdom Ltd v CGU Insurance, Potter LJ said (at 107):26
Damage requires some altered state … it will not extend to a position where a commodity supplied is installed in or juxtaposed with the property of a third party in circumstances where it doers no physical harm and the harmful effect of any later defect or deterioration is contained within it. 27
Accordingly, while it is one thing to say (as the Court of Appeal did in the Acciona case) that the operation of the policy was not dependent upon elements of the construction being complete at the time of damage, it is the authors opinion another thing altogether to suggest that it is apt to treat Insured Property as ‘physically damaged’ when it has never existed other than in a defective state and was always incapable of performing or operating as expected.
It goes without saying that if in fact there is no ‘physical damage’ so to trigger policy response, there should be no scope for the operation of the LEG 3/06 clause which as an exclusion (even if styled as an ‘Extension’) operates to ‘cut something out already included by the general recitals and provisions’.28
Turning to the interpretation of the LEG 3/06 exclusion itself, unfortunately little real guidance is provided in the case as to how it might be construed to operate in practice.
One of the ‘difficulties’ with the LEG exclusions (2 and 3) is that they arguably conflate the occurrence of defect and damage with causation. The two concepts are uneasy bedfellows and have led to comments such as those from the judge in the SCB case who made referenced to the ‘… mishmash of terms that comprise the LEG3 Extension’.
There is however some small guidance which can be drawn from the decision.
The Court noted that both parties acknowledged that the ‘Extension’ began by generally precluding recovery for defects in material workmanship, and that both parties agreed that ‘nestled’ within the exclusion is some exception for instances in which there is ‘damage’ — a ‘patent detrimental change in the condition of the insured property’.
The Court found that ‘damage’ as used in the ‘Extension’ unambiguously encompassed SCB’s claim, on the basis that the honeycombing and voiding resulted in a reduction in the weigh bearing capacity of the bridge, which qualified as a ‘detrimental change in the condition of the insured property’, and that change was ‘patent’.
As mentioned earlier, the Court acknowledged that the prefatory language in the ‘Extension’ damage definition suggested it was not necessarily used the same way as ‘damage’ in the coverage provision. The author would agree and suggests that the required integer of damage to trigger policy coverage might not be satisfied by matters, which the Court considered inform the definition of damage in the LEG 3/06 clause.
The Court then turned its attention to the scope of the exception to the ‘Extension’ which excludes replacement or rectification costs incurred to ‘improve’ the original workmanship.
The notion promulgated by the insurer, that to patch or replace defective components constituted an ‘improvement’ within the meaning of the clause was rejected by the Court, noting that the ‘Extension’ explicitly distinguished the ‘cost incurred to improve’ work from the ‘cost of replacement or rectification’.
The Court said that while something that is broken which is fixed is in one sense improved (unless that component is replaced with something worse), the context of the ‘Extension’ suggested that to improve means ‘to make a thing better than it would have been if it were not for the defective work’.
Ultimately however, the Court provided no real guidance as to what that formulation might mean in practice. What does ‘make a thing better’ actually mean?
Judicial interpretation of LEG 3/96 Model ‘Improvement Defects Wording’
Archer Western - De Moya Joint Venture v Ace American Insurance Co 29
This United States District Court decision was handed down on 21 January 2024 by United States Magistrate Judge Jonathan Goodman. It traversed similar ground to the SCB decision30 which was commented upon in the judgment.
The case is arguably of limited precedent value from an Australian and UK perspective, given that it concerned a summary judgment motion filed by the insurer Ace American Insurance Company (Ace) which was ultimately declined on the basis of the Court’s finding that some of the language of the insurance policy was ambiguous and in accordance with Florida law was required to be construed against the drafter (Ace) together with factual disputes which precluded a summary judgement ruling.
The case does however consider a number of arguments both in relation to what constitutes ‘direct physical loss or damage’ so as to potentially trigger coverage under the policy as well as what might be meant by the word ‘improve’ in the context of a LEG 3 exclusion clause (which was in the terms of the 1996 rather than 2006 wording),31 and is accordingly worthy of consideration.
Factual matrix
The plaintiff joint venturer is the design-build contractor (the Contractor) for a reconstruction/rehabilitation project in Miami, Florida, which includes construction of a signature bridge (the Project).
The Project included three main segments and in addition involved the construction of a dry concrete batch plant at the Project site designed to produce concrete for construction of various parts of the Project.
The matter involved concrete from one of the on-site batch plants operated by Contractor which was reportedly mixed with excessive amounts of fly ash with an alleged reduction in compressive strength and increased hardening time, requiring certain bridge elements to be rectified because of low strength concrete.
The at-issue concrete was poured into various Project components including roadway segments, piers, piles, footings and seal slabs, which failed to meet the required 28-day compressive strength test and hence did not meet Project specifications.
The root cause of the subject concrete’s low compressive strength remained in dispute. The Contractor’s concrete construction expert explored other potential causes of the concrete’s weakened strength and did not find any evidence that anything other than excess fly ash was the cause of the weakened concrete, although conceded that his conclusions were inconclusive.
He further testified that the contamination of the cement mix (which is an element of concrete) did not alter chemically or physically ‘the individual microscopic-sized particles’ themselves, but rather he opined that the bulk of the cement mix was damaged by virtue of contamination with large volumes of fly ash.
He opined that the failure of the subject elements to meet the specified compressive strength rendered them structurally inadequate, and that their replacement with structurally adequate elements meeting the specified strength was necessary to comply with the original structural design, and was therefore not an ‘improvement’.
The Contractor had initially submitted a claim to Ace for a formwork loss which manifested when formwork collapsed (buckled) during a concrete pour. Ace granted coverage for the formwork loss which it attributed to faulty design and workmanship. It purported, however, to exclude from coverage costs associated with improving the original formwork, design, workmanship or material in accordance with the relevant exclusion clause (referred to as an Extension) which was in the form of LEG 3/96.
At the time of the formwork loss, Ace was unaware that the Contractor would later be making a claim for defective concrete in the Project elements. When it did so, Ace denied coverage for that loss, reasoning that the concrete constituted a defective material due to the excess fly ash, and ‘[b]ecause of this defect the material was never in a satisfactory state and therefore was not damaged’.
The Insuring Agreement in the Policy was to insure against all risk of ‘direct physical loss or damage to property of every kind and description intended to become a permanent part of, or consumed in, the fabrication, assembly, installation, erection or alteration’, of the Insured Project.
There was a broad ‘ensuing loss’ exclusion in relation to faulty or defective workmanship, materials or supplies, which pursuant to an endorsement was ‘deleted and replaced’ by a clause in terms of LEG 3/96 (which is in effectively identical terms to the LEG 3/2006 clause save it omits the words ‘… (which for the purpose of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) …’).
There were said to be additional undisputed material facts, including that the Policy does not define ‘direct physical loss or damage’, nor ‘improve’ (as used in the exclusion for ‘cost incurred to improve the original material’), nor did it require that the property be in an initial satisfactory state.
Consideration by the Court of the insuring clause and the LEG 3 Provision32
The Court had to construe the Policy under Florida law which meant that the Policy should be read ‘as a whole, endeavouring to give every provision its full meaning and operative effect’. After setting out a number of further relevant principles of insurance policy construction under Florida law, the Magistrate Judge observed:
As the Florida Supreme Court has explained, an ‘all-risk policy’ does not extend coverage to ‘every conceivable loss’ SA Palm Beach, LLC, 32 F.4th at 1357.
The Court noted that Ace’s motion requested that the Court find that the Policy does not cover the damage at issue because the Contractor could not meet its burden of proving covered loss. The Court noted that the summary judgment motion did not concern the initial formwork claim, which Ace had already paid, subject to the deductible.
In noting that the losses for which coverage is provided are clearly dependent upon the specific language of the builder’s risk policy, the Magistrate Judge observed (at 32):
‘Builder’s risk insurance is a type of property insurance coverage, not liability insurance or warranty coverage – and should not be transformed into a guarantee against design and construction defects’, and
‘The purpose of this type of insurance is to provide protection for fortuitous loss sustained during the construction of the building’.
In applying the rules of interpretation, and ‘assuming for the sake of discussion’ that the COVID-19 cases ‘control’ a non-COVID-19 scenario, the Court said that the Contractor had to establish that each of the 16 bridge elements constructed with inadequate cement, which resulted in low-strength concrete, sustained ‘direct physical loss or damage’ — but that damage (1) must involve an ‘actual’ and ‘tangible’ ‘alteration’ to the property; and (2) cannot be caused ‘solely by virtue or [sic] the existence of any defect of material, workmanship, design, plan or specification’.
The author would observe at this juncture that what appears at (2) above suggests that the Magistrate Judge, with respect, misconstrued the rider to the LEG 3/96 exclusion by importing notions of causation into that part of the clause for which there is clearly no warrant. This continued to inform the Judge’s thinking as would become apparent when Ace’s decision to meet the earlier formwork claim was discussed later in the judgement.
In seeking to address these requirements, the Court noted Ace’s argument that the bridge elements did not sustain a distinct, physical, tangible alteration because they were never properly constructed in the first place and were always in a state of low strength.
Significantly, the scenario here was not one where the defective components collapsed and damaged or destroyed adjacent property which had been properly constructed. Instead, it was a case of defective initial construction with there being no event which changed the concrete placed in the 16 bridge components from a satisfactory to unsatisfactory state.
Ace pointed to non-binding case authorities outside of the COVID-19 cases (which the Contractor contended were inapposite) which had held that defective initial construction does not qualify as ‘direct physical loss or damage’.
The Magistrate Judge noted Ace’s contention (citing mostly out-of-circuit non-binding cases) that to constitute ‘direct physical loss or damage’, an external event is also required, with all-risk insurance policies limiting recovery to ‘those losses in which the cause is “external” to the “structure insured” as opposed to an “internal” or “inherent” defect in the item of property which is damaged’.
The Contractor on the other hand stressed the point that the Policy conferred expansive ‘all-risk’ coverage to ‘property of every kind and description’ intended to be used in the Project, noting that it was the batching failure of items of covered property on-site which resulted in excessive levels of fly ash mixing with the cement paste and ultimately producing the low strength concrete. In doing so, it emphasised its position that the raw cement mix was damaged by contamination with excessive fly ash and analogised that scenario to food spoilage and contamination law.
Meanwhile, the Contractor also relied heavily on the SCB case, which the Magistrate Judge noted was ‘strikingly similar’ and which he thus thought warranted a comprehensive discussion.
The Magistrate Judge then went on to note an additional feature here which he said undermined Ace’s position, but which was not present in the SCB case. The Judge was referring to Ace’s coverage position concerning damage to adjacent components which it had paid under the policy, and which he described as ‘inconsistent’.
The author would suggest that no inconsistency is apparent, with the Magistrate Judge’s misapprehension of the position, seemingly arising from his [with respect] erroneous view of the operation and effect of the rider to the LEG 3 exclusion. The Judge then referred to this ‘seemingly illogical coverage analysis’ stating (at 52):
Of course, if ACE paid for the JV to repour concrete, then the new concrete would arguably be an improvement (albeit a necessary one) over the defective concrete. But ACE says the LEG 3 provision does not pay for improvements.
The Court then noted (at 53) the Plaintiff’s reliance on ‘a few other cases’ to bolster its position that incorporation of damaged concrete into a larger system constitutes property damage, including Pavarini Construction Co (SE) Inc v ACE Am Ins Co.33 In that case, the insured defectively installed concrete masonry walls and reinforcement steel which compromised the building’s structural integrity leading to various cracking.
The Court found the insurer responsible for defective work which caused the cracking to otherwise non-defective property. Perhaps unsurprisingly, Ace sought to distinguish this case (and others) presumably on the basis that they were illustrations of where defective work or materials resulted in actual physical damage which compromised the structural integrity of otherwise non-defective property.
Turning to the LEG 3 exclusion, the Magistrate Judge stated (at 55):
The so-called LEG3 provision effectively expands coverage by deleting exclusions (paragraphs 19 and 20) and replacing them with narrower exclusions (and an additional deductible).
In finding that the provision narrowed an earlier exclusion ‘ … which is another way of saying that the provision expanded coverage’, the Court adopted an approach unlikely to be followed in other jurisdictions, given that the clause in question was entitled ‘Excluded Causes of Loss’ and replaced a more-limiting exclusion (the original clauses being ‘deleted and replaced’). In any event, the Court found (at 58) that the endorsement generated a functional extension, or broadening of coverage.
Although the Court also suggested that the LEG provision applies for the purpose of the entire Policy, it is of course only the rider which has such application. In any event, the Court appeared (at 57) to then note the distinction drawn by the SCB Court, which to that point appeared, with respect, to have eluded it, which was that ‘caused by’ and ‘solely by virtue of the existence’ are ‘not the same’.
The Court then turned its attention to the SCB Court’s consideration of the scope of the exception with its reference to costs incurred to ‘improve’ the original workmanship.
Observing that the Court focused on the practical realities flowing from the use of the term ‘improve’, it noted (at 59) their finding that the provision was ambiguous because it was ‘subject to more than one reasonable interpretation’, concluding that the insured’s reading was ‘more plausible’ and construing it against the drafter of the policy Lexington in favour of coverage to the insured pursuant to Illinois law.
The Magistrate Judge noted that in light of the fact that SCB undermined Ace’s position and provided support for the Contractor’s interpretation, Ace attempted to distinguish it. It did so primarily by arguing that SCB involved resulting damage to property other than the defective concrete — a bridge which was not independently defective.
Ace argued (as noted at 60) that in this case, it involved ‘defective concrete pours — nothing more’, there being no alteration to non-defective aspects of the Project because ‘there is no allegation that any other properly constructed elements suffered a loss of weight bearing capacity’ (overlooking, so the Court thought, the expert opinion).
Ace argued that the Contractor was seeking costs incurred solely to rectify defective material or workmanship — not resulting damage or loss of capacity to some other aspect of the Property. In addition, Ace argued that the repairs were to improve the property — a circumstance in which coverage is not provided.
The Magistrate Judge however reaffirmed his view that the term ‘improve’ is ambiguous and therefore must be construed against Ace.
Further, he noted that consistent with SCB, the Contractor contended that it was not seeking coverage solely for defective work, but rather damage caused by the defective work (ie, the Plant — specifically its malfunction during the batching process).
Noting that Ace urged the contrary position, the Magistrate Judge concluded (at 62) that the issue was one more appropriate for resolution by a jury at trial, and that given the significant factual disputes and ambiguous language in the Policy, Ace’s primary position of no coverage should be evaluated at trial and not conclusively determined in a summary judgement setting.
Analysis
It should be appreciated that the applicable Rule 56 of the Federal Rules of Civil Procedure provides ‘summary judgement is appropriate where there is no genuine issue as to any material fact’ and that the moving party is ‘entitled to judgement as a matter of law’.
Accordingly, while the SCB decision was of some import due to the fact that it granted summary judgment in favour of the insured, the failure to grant summary judgment in this case in favour of Ace as the insurer seeking a finding of no coverage, does not finally determine anything other than that the requirements for a grant of summary judgment were not met in this instance.
While in this case, the Court was concerned with Florida law which requires a distinct, demonstrable, physical alteration of the property, more akin to the test for ‘physical damage’ in the Australian and UK jurisdictions (although those words do not answer the question of the applicable test to be invoked), there are a number of readily discernible differences in approach by the Florida court, which means the case is of very limited guidance, in so far as a case can ever really be of guidance when arguments are ventilated at length but ultimately not determined.
Further, even allowing for the more onerous test for ‘physical damage’, it seems clear that the threshold for that requirement would not be met in Australia and the UK, on the postulated facts of this decision.
Some of the comments made by the Judge are perhaps surprising, in that in wishing to treat the LEG 3 clause as an expansion of cover, he seemed to favour a very limited view of what was meant by ‘improvement’, even though the broader view advocated for by the successful insured in the SCB case appeared to have been preferred by that court. The author observes that the more narrow view would appear to be at odds with the notion of the LEG 3 exclusion providing broad defect cover to the insured.
Further, the Court affirmed the view that the LEG 3 provision does provide coverage for costs incurred for the repair of defective workmanship, material, design, plan or specification, as long as the work is not to improve the original material, workmanship, design, plan or specification.
By seemingly however misconstruing (with respect) the effect of the rider by importing causal notions into its operation, the Court appeared unduly influenced by Ace’s conduct in earlier granting cover in what it regarded as an analogous circumstance. Arguably the rider, properly construed, only had work to do (if any) in circumstances of the subject claim and not the earlier Formwork claim.
Conclusion on the impact of the overseas decisions in Australia
There are no legal case authorities in this jurisdiction on the operation of the LEG Clauses, which is surprising given that they are widely in use in the Australian insurance market.
While it may be tempting to treat the Acciona decision as turning on a factual finding that the slab was not defective (questionable in the authors view), the Court appears to have overlooked that even on their view of the clause (i.e, that the opening line does not operate as a blanket exclusion on the recoverability of the cost of rectifying damage caused by defects), no occasion arises for the application of the temporal test unless there is damage to the item of Insured Property containing the defective works.
These matters, coupled with the fact that the decision was remitted back for redetermination and was subsequently settled, mean that not only was it arguably (with respect) wrongly decided, but of little — if any — precedent value in any event.
With respect to the two US authorities which initially seemed to garner some excitement in the Australian insurance market, the first turned on an approach to the meaning of ‘damage’ that does not correspond to Australian Law and a test for ambiguity which informed the courts’ approach to the exclusion, which would similarly not find favour in this jurisdiction. The second, which itself took a very liberal approach to the possible meaning of ‘physical damage’ and its causal link to the damage ultimately sustained, ultimately turned on whether the standard for a summary determination had been met.
The only meaningful guidance to the possible approach in Australia provided by the cases is in relation to the meaning of ‘Improvement Costs’ in the LEG 3 clauses, with the court in Lexington seemingly rejecting the restrictive notion contended for by insurers that the cost to remedy the defect ‘improved’ the Insured Property. The court favoured the notion that to improve something means to ‘make a thing better than it would have been if it were not for the defective work’.
Beyond that, it was clear that in both cases the court considered that defective workmanship could be a cause of damage in respect of which there was at least some scope for cover to be afforded under the respective LEG 3 exclusions. This was notwithstanding the opening words in the exclusion, which it shares with LEG 2, and which the author has highlighted are problematic, at least in the context of their operation in that exclusion.
1 Acciona Infrastructure Canada Inc v Allianz Global Risks US Insurance Co, 2015 BCCA 347; (2015) BCWLD 5448.
2 Above at [18]–[21].
3 Above at [65].
4 Above at [61].
5 Above at [62].
6 Above at [66].
7 Above at [71].
8 Article published by Continuing Legal Education Society of British Columbia, September 2014 (pp 27–28).
9 CA Blackwell (n 2) at [73].
10 Above at [74].
11 Above at [76].
12 Above at [77].
13 With due attribution to then Senior Counsel.
14 Acciona (n 11) at [72].
15 Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2006] NSWCA 356.
16 Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2004] 220 ALR 267; [2004] NSWSC 1041.
17 All Covers & Accessories Pty Ltd v Sidawi (2012) 36 VR 113; [2012] VSC 48 at [36].
18 Cook v Cook (1986) 68 ALR 353; [1986] HCA 73.
19 South Capital Bridgebuilders v Lexington Insurance Co (DC, Case No 21–cv-1436 (RCL), 29 September 2023 unreported).
20 Traveler’s Ins Co v Eljier Mfg Inc, 757 NE2d 481 at 496 (Ill, 2001).
21 The Policy included endorsements that modified the insurance provided by the Policy, including a LEG 3/06 Model ‘Improvement’ Defects ‘Extension’. The ‘Extension’ relevantly stated:
Perils Excluded, Item C. is deleted and replaced by the following:
All costs rendered necessary by defects of material workmanship, design, plan, or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) 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 incurred to improve the original material workmanship design plan or specification.
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.
All other terms and conditions of the policy remain the same.
22 This is not the test that the Australian courts adopt in relation to determining ambiguity. The fact that a clause is susceptible to more than one reasonable interpretation will not mean that the court will automatically invoke the principle of contra proferentum, which as has recently been confirmed by the New South Wales Court of Appeal in Allianz Australia Insurance Ltd v Rawson Homes Pty Ltd [2021] NSWCA 224 at [46] (Allianz Australia Insurance), is a rule of last resort.
23 See, eg, Axa Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (2004) 13 ANZ Ins Cas 61-611 at [43] and [50]; Vero Insurance Ltd v Australian Prestressing Services Pty Ltd [2013] NSWCA 181 at [30]–[32]; Allstate Exploration NL v QBE Insurance (Australia) Ltd [2008] VSCA 148 at [15].
24 For a discussion of the dichotomy between ‘damage’ and ‘physical damage’, see Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd [1997] 9 ANZ Ins CAS 61-336 and Technology Holdings Ltd v IAG NZ Ltd [2008] NZHC 1228.
25 See Bacardi v Thomas Hardy Packaging [2002] 2 Lloyd’s Rep 379.
26 Pilkington United Kingdom Ltd v CGU Insurance [2004] BLR 97.
27 Although see more recently, in the context of the definition of Property Damage invoking ‘physical damage’ in the context of liability cover: Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) [2023] FCA 814 and Capral Ltd v Insurance Australia Ltd (t/as CGU Insurance) [2024] FCA 775.
28 Per Leeming JA in Allianz Australia Insurance Ltd v Rawson Homes Pty Ltd [2021] NSWCA 224 at [10].
29 Archer Western – De Moya Joint Venture v Ace American Insurance Co (SD Fla, Case No 1:22-CV-21160-Goodman, 12 January 2024).
30 South Capital Bridgebuilders v Lexington Insurance Co (n 29).
31 The wording of both versions of the LEG 3 clause can be found available at <www.londonengineeringgroup.com> (accessed 4 September 2024).
32 The Insuring clause provided: ‘PART A, INSURING AGREEMENT, This Policy, subject to the terms, conditions and exclusions stated herein, or endorsed hereto, insures against all risk of direct physical loss or damage to property of every kind and description intended to become a permanent part of, or consumed in, the fabrication, assembly, installation, erection or alteration of the Insured Project, as defined in the Declaration Page for which values have been declared and deposit premium paid.’
The Exclusion clause provided: ‘The following changes are made to ACT 0219, Part D, Excluded Causes of Loss, [paragraphs] 19 and 20 are deleted and replaced by the following: “This policy does not insure any 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 costs incurred to improve the original material, workmanship, design, plan or specification. 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 or the existence of any defect of material, workmanship, design, plan, or specification.” The deductible applicable to this coverage is $100,000.’
33 Pavarini Construction Co (SE) Inc v ACE Am Ins Co 161 F Supp 3d 1227 at 1230 (SD Fla, 2015).
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