LEG-02 Defects Exclusion

Type of Defects:

A number of defects can be considered:

Defects of design plan and specification

Defects of material
Defects of workmanship

Note: Damage arising out of defects especially during the construction of a

project can often be significant. The type of defects exclusion under an
insureds Contract Works policy can have a dramatic impact on policy
response.

Defects Exclusion 1
MARSH MANUSCRIPT WORDING

Exclusions Applicable to Property Damage:

The Insurer shall not be liable for: the cost of making good:
- latent defects, defective materials and/or workmanship, faulty design,
plan or specification other than to plant or machinery
- wear and tear or gradual deterioration, fatigue, rust, mould, erosion,
corrosion or oxidation, wet or dry rot, shrinkage, evaporation, loss of
weight, dampness, dryness, marring, scratching, vermin or insect
damage
- any part of the Property Insured which is defective due to normal
settlement cracking or expansion of the buildings, subsidence,
shrinkage, expansion or erosion of soil
but the Exclusions above shall be limited to the part of the property
immediately affected and shall not apply to any damage resulting from
an ensuing cause which is not otherwise excluded.

Defects Exclusion 2
LEG-01/96 MODEL

Outright Defects Exclusion:

The Insurer(s) shall not be liable for Loss or damage due to defects of
material workmanship design plan or specification.

Defects Exclusion 3
LEG 2/96 Model
Consequences Defects 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 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 which
would have been incurred if replacement or rectification of the Insured
Property had been put in hand immediately prior to the said damage.

For the purpose of this 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.

Defects Exclusion 4
LEG 3/06 Model
Improvement Defects 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 this 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

Defects Exclusion 5
Case Example
Manifestation

In Skanska Construction Ltd v Egger (Barony) Ltd (2002)

The Court of Appeal discussed the question of manifestation of damage.

Lord Justice Mance all that has happened in the present case is that the
floor slab was (allegedly) badly designed and/or constructed, and that the
alleged defects in design and/or construction manifested themselves in
crackingunder ordinary usage. Had the defective design and/or
construction been observed before any usage (the contractor) would have
had to make good or replace the defective slab as necessary

In this contractual scheme, the mere manifestation of an effect under

ordinary usage, which the contractor is any way obliged to make good
under the contractual scheme relating to defects, cannot in my judgment
constitute loss or damage to the slab for the purposes of the insurance
requirement.

Defects Exclusion 6
 HOLISTIC VIEW:

LEG-01 LEG-02 LEG-03

Costs to remedy defects where no damage has occurred

Costs to remedy resultant damage due to defects

Costs to remedy resultant damage to Property supported by

defective property

Costs to remedy defective property

Costs to remedy defective part, portion or item

Loss, damage or costs incurred to access defective

Costs to improve original design, plan, specification,

workmanship or material

Defects Exclusion 7
Case Example: Sapphire Wind

Rotor Blade Pitch Bearing failure

Background:
Wind Turbine (WTG-32) tripped on Collective fault pitch controller
alarm caused by faulty bearing causing excessive wear.

As a result of the damages: Sapphire Wind suffered anticipated

revenue losses against the outage time arising from:
Breakdown losses
Repair losses
Replacement losses
Defects Exclusion 8
Case Example: Sapphire Wind
Bearing Closer Look

Defects Exclusion 9
Case Example: Sapphire Wind

Metal Debris:
Upon investigation, it was determined that metal debris were solely
from the worn out bearing and it is not possible for the said debris
to cause any ensuing damage to the nacelle due to the design of
the turbine which allows any debris to drift out of the open cone
casing.

Would you recommend coverage under LEG-02 Model?

Defects Exclusion 10
 Thank-you!!

Defects Exclusion 11