Model defect exclusion clauses used in contractors all risks (CAR) and engineering all risks (EAR) policies across international markets since 1996 have been revised for the first time under the International Underwriting Association's (IUA) aegis.
The London Engineering Group (LEG) published three revised model defect exclusion clauses, formally launching them at Lloyd’s Old Library following LEG’s affiliation with the IUA in July. The new wordings carry the suffix /26, replacing the previous /96 and /06 versions that have been in widespread use.
Two US court decisions in 2023 and 2024 described the LEG 3 clause as “egregiously ambiguous” and “internally inconsistent,” finding that the language failed to clearly exclude the claims before them. Both cases caused concern in the insurance market, with reports that the LEG clauses had been withdrawn from use by some insurers. The initial shock subsided and LEG 3 cover remained available in the London market for international risks, but the cases made clear that a wording review was overdue.
The three clauses operate on a sliding scale. LEG 1/26 provides an absolute exclusion for damage caused by a defect. LEG 2/26 excludes the cost that would have been incurred to replace or rectify defective property had the defect been discovered before any damage occurred. LEG 3/26, which attracts a higher premium and narrower exclusion, removes only the additional cost of improving the material, workmanship, design, plan or specification used for the defective property.
The underlying intent of each clause has not changed, but the accompanying explanatory commentary, published alongside the revised wordings for the first time, sets out how that intent is meant to operate in practice. That commentary is available through the IUA’s clauses database.
Charlie Dee, UK construction underwriting manager at Berkshire Hathaway Specialty Insurance and chair of LEG, said the update was the result of extensive work. “It aims to ensure their underlying intent remains the same, but that they are relevant to the way construction risks are insured today,” he said. “We hope the new clauses and accompanying commentary will provide a clear and practical framework for insurers, brokers and clients.”
The LEG clauses were originally published in 1996, with LEG 3/06, last revised in 2006. Despite their wide international use, there had been no judicial treatment of them in English law until US courts stepped in and found the language ambiguous. The core dispute in both American cases centred on what constitutes “damage” as distinct from a “defect,” and what the word “improvement” means in the context of LEG 3’s exclusion. Following the decisions, a significant number of insurers withdrew LEG 3 from US construction risks, with many reverting to “cost of making good” endorsements instead.
The English law position on damage is clearer. A Court of Appeal ruling in 2024, Sky UK Ltd and Mace Ltd v Riverstone Managing Agency Ltd, confirmed that damage under English law requires an adverse physical change that impairs a property’s value or usefulness. The clause language remained the same wherever it was used, and the ambiguity it carried needed to be addressed at source. Insurers have since been granted leave to appeal to the Supreme Court, so the Court of Appeal’s definition of damage may be subject to further review.
Brokers placing CAR and EAR risks need to be aware that existing policies written on the old /96 or /06 language remain in force on those terms. The /26 clauses apply to new placements, and the difference in language will need to be explained to clients renewing or restructuring coverage.
The IUA’s clauses database and construction market infrastructure now provides a single access point for the new wordings and commentary, consolidating resources that were previously spread across LEG’s independent operations.
