Introduction
Following recent cases in North America (South Capitol Bridgebuilders v Lexington and Archer Western de Moya Joint Venture v Ace American Insurance Co), many discussions have taken place and much has been written about the London Engineering Group’s LEG3/06 defect exclusion.
The LEG committee is understood to be redrafting LEG3/06 to clarify what constitutes the mere existence of a defect from what is the manifestation of damage. Underwriters will also be eager to double-check that damage is defined within their policies.
Other than the definition of damage, there are several related issues that we hope the LEG committee will address.
For more than 25 years, CCi, a Rimkus Company, has been at the forefront of Delay in Start-Up (DSU) analysis, shaping how DSU delay analysis is undertaken. We remain the only company that provides a truly global perspective on DSU, with experience in the application of LEG2/96 and LEG3/06 and their respective market positions across the globe.
Whilst progress and a common understanding have been achieved over that period, the application of LEG2/96 and LEG3/06 has been an enduring point of contention and the cause of many protracted claim settlements.
This was illustrated perfectly last year, as the drafting committee of the Insurance Institute of London’s (IIL) Delay in Start-Up Insurance textbook was unable to narrow it down to a single position. Instead, the textbook presented two separate opinions on the practical application of these defect exclusion clauses.
From a “delay analyst’s-eye view”, there are three main issues that I hope can be addressed, along with the definition of damage:
Should the LEG defect exclusions exclude delay?
The most common point of difference is whether LEG2/96 and LEG3/06 should extend to exclude delay resulting from the rectification or improvement of a defect. I will not attempt to articulate the different schools of thought here – the IIL’s Delay in Start-Up Insurance publication does a great job of that and is an excellent read – but on the face of it, this appears a fairly simple fix that could help a claim settlement save months or even years of protracted discussions.
What exactly is meant by “put in hand”?
This question is specific to LEG2/96 and fairly self-explanatory. What does it mean for a defect rectification to be “put in hand” immediately prior to damage? In the case of a design defect, does it mean just the time taken to physically rectify the defective design, given the project’s status immediately before the damage occurred? Or does it infer a scenario where the defect has been identified immediately before the damage occurs? If the latter, the time excluded would be extended to cover the time required to design the rectification, procure any resources necessary, and the time taken to physically rectify defective design.
What exactly is an “improvement”?
This final common point of debate, delay-wise, concerns LEG3/06 and the definition of an “improvement”. What appears as a fairly simple concept has in fact held up the settlement of dozens of claims. It is understood that LEG3/06 offers a greater degree of indemnity than LEG2/96 and therefore an improvement must consist of more than the scope needed to just rectify a defect.
In the case of a design defect, the design must be changed in order for it to be rectified. A change cannot in itself be seen as an improvement, otherwise there would be no operational difference between LEG2/96 and LEG3/06. So, how do you improve a defective design? Does it need to increase production capacity? Or improve efficiency to minimise running costs of the future business under construction? In my experience, these situations are incredibly rare and would mean LEG3/06 would never exclude anything in operation. In practice, it can take a significant amount of time for discussions to resolve the point at which a rectification becomes an improvement.
Conclusion
The above are issues that have been widely and commonly encountered. Given that LEG2/96 is now 26 years old and 18 years have lapsed since the roll-out of LEG3/06, it is perhaps time to apply the learning from the industry’s collective experience, provide resolutions to these issues, and improve the claims experience for policyholders.
About the Author
Steven Horne
Managing Director – Global Insurance Operations
Steven is Managing Director for CCi’s global insurance operations. Having started his career as a Planning Engineer with a building services contractor, Steven moved to CCi in 2011 and for the past 13 years has specialised in analysing DSU claims, becoming recognised as one of the most experienced DSU focused delay experts. He has advised insurance markets in the UK, Europe, Middle East, Africa, North America, Latin America and Asia Pacific on more than 150 losses.
Steven has shared his experience and knowledge of DSU delay analysis at industry conferences across the UK, Europe and Asia, having been invited to speak at events hosted by the Chartered Institute of Loss Adjusters (CILA), London Engineering Group (LEG), the Onshore Energy Conference (OEC), the Singapore Institute of Insurance (SII), the South East Asia Property and Energy Conference (SEAPEC) and the International Association of Engineering Insurers (IMIA). In 2022, Steven was a co-author of ‘Delay in Start-up Insurance’ a textbook published by the Insurance Institute of London (IIL) and the Chartered Insurance Institute (CII).
Disclaimer
This article aims to offer insights into the prevailing industry practices related to delay analysis. Nonetheless, it should not be construed as legal or professional advice in any form.
