Another LEG3 decision from the United States

The South Capital Bridgebuilders v Lexington Insurance Company [29.09.23] (SCB), a District of Columbia decision was shortly thereafter applied in another case involving sub-par concrete and the interpretation of LEG 3, namely Archer Western – De Moya Joint Venture v Ace American Insurance Company [12.01.24] (Archer Western), a Floridan decision.

As with SCB, the Archer Western case did not deal with the issues Kennedys’ have raised with LEG3 over the years, but instead opined on, and evidenced the US courts view, of what is regarded as damage for the purposes of an insurance claim on a construction project.

Here, the insured was the design and build contractor for the reconstruction of a major road in Miami, Florida. Insurers issued a builder’s risk (CAR) policy to the design-build contractor which contained a LEG 3 clause. 

The insured used inadequate concrete for a bridge section of the project because it accidentally incorporated too much fly ash in the cement mix, during batching. The insured submitted a claim on the policy for the cost to remediate bridge components constructed with inadequate concrete (which supposedly failed to meet project specifications).

Insurers declined cover and the insured brought proceedings in the District Court of Florida.   Insurers brought an application for summary judgment submitting that "the concrete constituted a defective material due to the excess fly ash," and because "of this defect, the material was never in a satisfactory state and therefore was not damaged”.

The court found that the property does not need to be in an initial satisfactory state to be capable of sustaining damage as insurers had contended.

Looking at South Capital Bridgebuilders a case the court in Archer Western described as “strikingly similar”, the court also rejected insurers primary arguments:

1. that the insured property must be altered, not merely defectively constructed, to constitute physical loss or damage
2. the concrete components did not become defective because they were defective from the start, when they were fabricated and
3. the incorporation of defective components into a larger project does not constitute damages.

The Florida District Court noted that insurers had not explained how concrete, which failed its 28-day test, is anything other than a compromise to the physical integrity to the bridge components in which the cement was poured. It was not prepared to accept insurers’ argument that damage to the cement did not involve a physical alteration.

As to the application of the improvement element of the LEG 3 exclusion:

• the insurers contended that the works performed in response to the ‘concrete failure’ were improvements which are excluded by the Policy
• the insureds contended that the works were to repair damage.

The court observed that “the improvement/repair distinction in the policy is an especially thorny issue here…it could be argued that any work done to shore up the concrete and other components would constitute an improvement”.

It concluded that the language concerning costs to “improve” the original materials and workmanship is subject to more than one interpretation, meaning that it is ambiguous and must be construed against the drafter (i.e. insurers) and in favour of coverage. 

As the Judge’s comments were in relation to a summary judgment application only, the court expressly acknowledged that certain coverage arguments remained, including late notification of the claim. The issues of damage/defect and application of LEG3, the court noted, would be decided by a jury. In that regard, insurers contended that it was prevented from adequately evaluating the claim because the insureds had already finished remediation work and had removed physical evidence of the concrete elements which had to be discarded and repoured. This triggered the insured’s burden to show that the late notification was not prejudicial to insurers.

Comment

Both the SCB and Archer decisions tend to support a view that the US courts struggle with applying LEG3 and the clause will have a limited effect on cover, as the US courts appear all too willing to determine that a defective product or defective workmanship is damage. 

While these decisions are not binding on an Australian court, they are significant decisions globally and have already triggered a review of the application and wording of the LEG exclusion clauses.

Related items: South Capitol Bridgebuilders v Lexington Insurance Company: is this really a case on issues with the LEG3 wording?