LEG3 Insights from the South Capitol Bridgebuilders vs. Lexington Insurance Case in Construction Insurance

The South Capitol Bridgebuilders vs. Lexington Insurance Company case is recognized as a significant LEG3 precedent in the insurance sector. Despite potential confusion in legal language, the judgment favored the insured party, establishing a distinctive legal interpretation in insurance matters.

In the case background, South Capitol Bridgebuilders, engaged in constructing the Frederick Douglas Memorial Bridge in Washington, D.C., faced issues due to improper concrete vibration. This led to malformations, impacting the bridge's structural capacity. Seeking coverage under the Builder’s Risk policy, SCB's claim was denied by Lexington Insurance Company, citing the LEG 3 exclusion and the absence of physical damage.

LEG3 wording:

The Insurer(s) shall not be liable 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.

Two interpretations arise:

Interpretation 1: Viewing the bridge construction as a single work, then, according to the second part of the wording (for the purpose of ....), it can be interpreted that the defect in this work didn't contribute to any physical damage to any other part of the construction than its own, which is sufficient to reject this claim.

Interpretation 2: However, Considering vibration concreting as a sub-work, then according to the meaning of impaired property (The most common uses of E&O policies) in construction industry, it can be interpreted that the vibration concreting work damaged the structural capacity of the bridge, which can be egiliable under LEG3 clause.

Impaired property: “Impaired property” means tangible property, other than “your product” or “your work”, that cannot be used or is less useful because:

a. It incorporates “your product” or “your work” that is known or thought to be defective, deficient, inadequate or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by the repair, replacement, adjustment or removal of “your product” or “your work” or your fulfilling the terms of the contract or agreement.

If we replace "your work" with "vibrating concrete work" in the above definition, we could understand the interpretation.

In addition to this, as per D4 (Defective Clause) definition, where LEG3 is considered equal to D4 & D5, which Excludes damages to only that constituent part of the property that is deemed defective (the “faulty part”); covers consequential damage to any other property free of defective condition.

In the complex context of construction, determining the independence or interdependence of tasks is challenging. In the absence of clear distinctions, all tasks may be considered interconnected or potentially impaired. Unless both defect and damage are confined to a particular component, any element of the construction work could potentially qualify under the LEG3 clause.

Case Source

LEG3 & D4