In 1996, the London Engineering Group (LEG) first introduced a set of model defects clauses applying to physical loss or damage to insured property caused by defects in material, workmanship, design, plan, or specification, known as LEG 1, LEG 2, and LEG 3. Since then, only the LEG 3 version has undergone any revisions. The three LEG clauses provide varying levels of coverage: LEG 1 excludes coverage for all loss or damage due to defects of material, workmanship, design, plan, or specification; LEG 2 excludes coverage only for those costs which would have been incurred if replacement or rectification of the insured property had been put in hand immediately prior to the damage occurring; and LEG 3 excludes coverage only for those costs incurred to improve the original material, workmanship, design, plan, or specification. Although the model wording has been in circulation for nearly thirty years, it has never been tested in an American court until now.
In South Capitol Bridgebuilders (“SCB”) v. Lexington Insurance Co., No. 21-cv-1436 (RCL), 2023 U.S. Dist. LEXIS 176573, 2023 WL 6388974, (D.D.C. Sept. 29, 2023), the U.S. District Court for the District of Columbia in a case of first impression recently concluded that the LEG 3/06 Model “Improvement” Defects Wording is “ambiguous—egregiously so.” Not mincing its words, the district court found the LEG 3 wording to be “internally inconsistent and bordering incomprehensible.” The district court went on to state that the authors “managed to squeeze in a run-on sentence, an undefined term, several mispunctuations, and a scrivener’s error” in “just three sentences.”
The LEG 3 exclusion at issue provided that there was no coverage 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 claim at issue in SCB was a claim under a builder’s risk policy that involved the construction of the Frederick Douglass Memorial Bridge in Washington, D.C. The bridge design included cast-in-place concrete substructure elements and a composite deck supported by three consecutive steel arches on each side of the bridge, which in turn were supported by concrete abutments. The district court explained that “due to inadequate vibration of concrete during placement, once the concrete dried and workers removed the formwork, SCB observed structural deformities referred to as ‘honeycombing’ and ‘voiding’ in the concrete.” These deformities weakened the bridge and its support structures by causing a decrease in their weight-bearing capacity. Lexington declined to cover the cost to replace the flawed concrete, arguing that the bridge and supporting structures were not damaged and that the costs to correct the defects (i.e., the “honeycombing” and “voiding” in the concrete) were excluded by virtue of the LEG 3 exclusion.
Lexington contended that its position was supported by the second paragraph of the exclusion, which provided “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 court, however, rejected the argument that the flawed concrete did not constitute physical loss or damage because “insured property must be altered, not merely defectively constructed,” and, in this case, the honeycombed concrete components “were defective from the moment the concrete dried and the components became fabricated.” Looking to Black’s Law Dictionary, the court defined “damage” as “loss or injury to person or property” or “any bad effect on something.” It went on to explain that “[a] decreased weightbearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its support structures,” and thus concluded that “a change that results in a reduction in the weightbearing capacity of a bridge is an ‘alteration’ to that bridge.”
Turning its attention to the remainder of the LEG 3 exclusion, the court concluded that the wording was ambiguous because both parties presented reasonable interpretations of what it means to improve the original workmanship. Even though it found both interpretations offered by the parties reasonable, the court all but rejected Lexington’s interpretation that any repair or replacement of the defective property constitutes an improvement because this interpretation would encompass the replacement of any defective component unless that component was replaced with something worse. Nonetheless, the court found that “Lexington’s argument—while far from convincing—me[t] the low bar of being reasonable in light of the mishmash of terms that comprise the LEG 3 Extension.”
In dicta, the court offered its own view, which was largely consistent with SCB’s interpretation, that “to improve means to make a thing better than it would have been if it were not defective work.” This would mean in effect that “if SCB decided to replace the defective concrete with solid gold, or otherwise upgrade it, SCB could not then seek reimbursement of those enhancements.” However, regardless of its own view on the matter, the court followed the well-worn maxim that policy wording that is subject to more than one reasonable interpretation is ambiguous and must be construed against the insurer. It thus held that SCB was entitled to coverage since it also found that the deformities qualified as a patent detrimental change in the physical condition of the insured property as required by the policy language because it resulted in a reduction in the weight-bearing capacity of the bridge.
The court also noted that there was a scrivener’s error in the LEG 3 wording concerning which defects exclusions in the policy the LEG 3 exclusion replaced. According to the court, “[w]hile a scrivener’s error is not dispositive of the existence of ambiguity in a contract provision, when viewed in light of the morass that is the LEG 3 Extension, the additional error reinforce[d] [its] conclusion that the text of the Extension is far from ‘clear, definite, and explicit.’” Given its many other pronouncements about how it found the model wording “convoluted,” it seems unlikely a different result would have been reached if the scrivener’s error did not exist at all.
As the first case to address the LEG 3 exclusion, this decision has the potential to have an outsized influence on how future courts interpret the model wording. We note that although the decision is largely unfavorable, it represents only one trial court’s view and does not constitute binding precedent. It thus remains to be seen whether this decision will be a harbinger of future decisions to come or merely a footnote in history.
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If you have any questions regarding this coverage alert, or would like to receive a copy of the decision, please contact Philip C. Silverberg, William D. Wilson, or Craig R. Rygiel.