by Tony Buckle
There has been much discussion around policy wordings in Engineering and Construction in recent weeks, particularly in relation to LEG 3/06.
The debate to date has focused on legal interpretation. Understandably so. But we think it useful to factor in market practice and its underlying reasons, particularly with regard to the issue of betterment. Because this explains why insurers deem it so necessary to distinguish between a defective part and a damaged one.
Contractors ask for LEG 3 cover when they would like indemnification for damage caused by the unwitting incorporation of a defective part. The defective part itself might be trivial in terms of value – a poor quality bolt for example – but its incorporation and subsequent failure can cause significant damage.
But on their side, insurers do not want to cover the costs of rectifying the defect – even the cost of upgrading the bolt – for the very good reason that this would amount to betterment. If betterment is allowable under the policy, insurers would essentially be extending the value or function of the insured object, be it a tunnel, building or road. It is not the role of insurance to finance upgrades until the object is fit for purpose.
Insurers are not able, allowed nor expected to expose their balance sheets to such uncertainty. If in certain jurisdictions the law does expect them to do so as a short-term gain to a limited number of policyholders, their likely response will not help the market. Either they will radically increase the cost of cover, or they will just withdraw broad defects covers like LEG 3/06, with ensuing upheaval.
Neither of which helps anyone.