{"id":383,"date":"2024-02-23T00:00:00","date_gmt":"2024-02-23T00:00:00","guid":{"rendered":"https:\/\/fenchurchlaw.hostingsystems.co.uk\/uk\/blog\/2024\/02\/23\/archer-v-ace-or-the-demise-of-leg3\/"},"modified":"2024-08-21T16:34:11","modified_gmt":"2024-08-21T15:34:11","slug":"archer-v-ace-or-the-demise-of-leg3","status":"publish","type":"post","link":"https:\/\/fenchurchlaw.com\/en-uk\/archer-v-ace-or-the-demise-of-leg3\/","title":{"rendered":"Archer v Ace (or, The Demise Of LEG3?)"},"content":{"rendered":"

Introduction<\/strong><\/p>\n

In the London Market there is, by and large, a common understanding about how LEG3 and the other defects exclusions operate, and what they are intended to do. That doesn\u2019t mean that disagreements don\u2019t arise about how a particular defects exclusion might apply to a particular set of facts, but those disagreements tend to be relatively rare, and the London Market tends to deal with what we call Construction All Risks claims (or what would be known in the US as Builders\u2019 Risk claims), quite well on the whole.<\/p>\n

As a result, those using the defects exclusions in the London Market, whether that is insurers, brokers, or the more sophisticated policyholders, tend to overlook the fact that several of the clauses, in both the LEG and DE suites of exclusions, are actually very difficult to understand for those who come to the clauses with the (surely reasonable) aspiration of wanting to determine the meaning of the clauses from the words that they contain.<\/p>\n

Towards the end of last year I wrote about the potential impact of the first Court decision anywhere in the world which considered the meaning of the defects exclusion which (along with DE5, which is much less commonly used outside the UK) is intended to preserve the most generous coverage for damage to works under construction, LEG3, in the case of South Capitol Bridgebuilders v Lexington<\/em><\/a>. That case was decided by a Court in the District of Columbia, but applied the Law of Illinois. Now, like buses, a second decision has been handed down in the US which considers LEG3, this time applying the Law of Florida, in the case Archer Western – De Moya Joint Venture v Ace American Insurance Co<\/em><\/a>.<\/p>\n

The decision in SCB <\/em>sounded alarm bells for the Builder\u2019s Risk community in the US, and presumably also for the LEG Committee, who are responsible for the LEG defects exclusion clauses. It raised at least two questions of significance: what constitutes damage for the purpose of triggering a Builder\u2019s Risk policy; and what is the meaning of the LEG3 clause? Its answers to those questions were striking: property that from an English law perspective would have certainly been regarded as merely being in a defective condition was held by the Court in SCB <\/em>to have suffered damage. With regard to the meaning of LEG3, the Court in SCB <\/em>appeared to be unable to form a view, and held that the clause was ambiguous: \u201cegregiously so\u201d<\/em>.<\/p>\n

The big question for those who, like me, have an interest in the health of the Builder\u2019s Risk market, was whether SCB <\/em>would come to be regarded as an outlier decision, or one that would have a meaningful impact? Archer v Ace <\/em>suggests the latter.<\/p>\n

The judgment in Archer <\/em>concerns an application for summary judgment by the insurer which was denied, and so the issues in the case will continue towards a substantive trial in due course. However, the judgment runs to some 66 pages, and so the issues were considered in some detail. I am not going to try to cover all of the detail but, as with my article on SCB, am going to focus instead of what the most important elements might mean for the Builder\u2019s Risk market.<\/p>\n

The facts<\/strong><\/p>\n

Again, I\u2019ll start with a very brief description of the facts, which up to a point may create a sense of Deja Vu for those familiar with the SCB <\/em>decision. Once more we have a Builder\u2019s Risk claim relating to inadequate concrete in a bridge under construction. We have a disagreement about whether the works under construction were damaged (so as to trigger the Builder\u2019s Risk policy), or whether the works were merely defective (which would not trigger the policy). We have a policy that contains a LEG3 defects exclusion. And we have disagreements about what LEG3 means, and about how one might establish what constitutes the \u201cimprovements\u201d <\/em>with which LEG3 is concerned.<\/p>\n

In Archer <\/em>the policyholder was a design and build contractor for the snappily titled \u201cI-395\/SR 836 Reconstruction \/ Rehabilitation Project\u201d <\/em>in Miami, Florida, which included the construction of a \u201csignature bridge\u201d<\/em>. The design of the bridge involved batches of concrete, the production of which included the addition of \u201cfly ash\u201d <\/em>from a pressurised fly ash silo, which had a mechanical system which was intended to allow specified amounts of fly ash to be added to the concrete batches. At some point between August and November 2020 the pressure relief valve of the silo failed, so that certain batches were \u201cadulterated by an excessive amount of fly ash\u201d<\/em>.<\/p>\n

I am not my firm\u2019s expert on concrete (the \u201cI \u2764\ufe0f<\/em>\u00a0concrete\u201d <\/em>mug on my colleague Joanna Grant\u2019s desk probably tells you who is) but, as the Court explained in Archer<\/em>, although cement and concrete are terms that are often used interchangeably, they aren\u2019t the same. Rather, cement is one of the ingredients of concrete, with the other common ingredients of concrete being fly ash, water, and aggregates. So, the presence of fly ash in concrete is not a problem in and of itself. In fact, in one sense, the more fly ash there is in the concrete, the better, as long as using additional amounts of fly ash does not come at the expense of the amount of cement used. High proportions of both fly ash and cement \u201cgenerally increases the overall compressive strength of the concrete\u201d<\/em>. The problem comes when, as in Archer<\/em>, additional amounts of fly ash are used at the expense of the amount of cement used. Then the compressive strength of the concrete is impaired.<\/p>\n

When the policyholder became aware that some of the concrete had inadequate compressive strength, it submitted a claim for indemnity for the cost of repairing the concrete. The insurer denied coverage \u201creasoning the concrete constituted a defective material due to to the excess fly ash, and `because of this defect the material was never in a satisfactory state and therefore was not damaged\u2019\u201d<\/em>.<\/p>\n

Based on the above, the Court was required to address the following questions:<\/p>\n