18 August 2020 2454
Knowledge

Getting to Know London Engineering Group Defects Clause

The construction and installation project is a job that requires detailed preparation and execution with high accuracy. Small mistakes, both in the design phase, construction phase, and material selection, are very likely to cause major failure in the construction project. The emergence of insurance claims due to these mistakes is not something that rarely happens.
 
In the CAR and EAR standard policies, claims due to Design Defect, Bad Workmanship and Defective Material appear in a special exception to Section I. The CAR standard policy excludes all types of claims caused by Design Defect. Meanwhile, for Bad Workmanship and Defective Materials, exceptions only apply to materials or components that contain defects due to these two things. The consequences of material or component damage to other materials or components that have been properly processed (consequential damage) can be covered by the CAR policy. Slightly different from CAR, the EAR policy excludes all claims originating from these three things, including consequential damage, as shown in the quote from Special Exclusion I point C as follows: 
 
“Loss or damage due to faulty design, defective material or casting, bad workmanship other than faults in erection;”
 
In the article that the author wrote earlier, the discussion focused on errors in the design process or what is called Faulty Design and Endorsement 115. To recall, Endorsement 115 is an extension that allows insurance to compensate for damage caused to material that does not contain defects, which is caused by a material that contains defects due to a design process error. In this article, the discussion is expanded to include Bad Workmanship and Defective Materials with the main objective of introducing two clauses that have been widely applied in industry, namely the London Engineering Group Defects Clause (LEG) and the London Market Defect Exclusion (DE).
 
Both Indonesian Law and the Indonesian Dictionary (KBBI) do not have definitions related to Bad Workmanship and Defective Materials. One source that can be used to find out the definition of Bad Workmanship is "The Dictionary of Quebec and Canadian Law" which includes the definition of Bad or Poor Workmanship as a disability in the development process caused by work that is not in accordance with the rules of arts, which can be a guideline. work, norms and standards issued by the authorities, National Building Code, etc. [1,2]. In other words, Bad Workmanship is a construction or installation work that is not according to the method or standard it should be. Then, defective material or defects of material, based on the paper published by JLT, are materials that do not comply with the design criteria and do not function properly.

 
The application of LEG and DE in a CAR/ EAR insurance coverage allows the expansion of claims due to Bad Workmanship, Defective Material and Faulty Design in the standard CAR/ EAR policy. However, this expansion is highly dependent on the type of LEG and DE clauses used. Both LEG, and DE, both have a degree based on how broad a cover can be covered. LEG has 3 levels, namely LEG 1, LEG and LEG 3, while DE has 5 levels, namely DE 1, DE 2 to DE 5. This article will discuss the LEG clause further.
 
LEG first level or LEG 1 is also known as "An outright defects exclusion" or which means an exception for all claims caused by bad workmanship, defective material or faulty design. The official wording from LEG 1 is as follows: 
 
“The Insurer(s) shall not be liable for :
 Loss or damage due to defects of material workmanship design plan or specification
 
Therefore, the exceptions to LEG 1 are the same as the exceptions listed in the EAR policy exceptions. In other words, if there is material damage caused by these three factors, the insurer has no responsibility to make compensation.
 
LEG second level or LEG 2 is the "A Consequences of style wording". In essence, the application of LEG 2 to the EAR policy has similarities with the exception of Bad Workmanship and Defective Material in CAR policies. As explained in paragraph two above, the insurer is only responsible for the insured's losses as a consequence of damage to the component which contains the defect. Official wording from LEG 2 is shown as follows:
 
“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.”       
 
In the wording, it is said that the cost of replacement and repair is excluded in LEG 2 (the cost of replacement or rectification which is hereby excluded) is all replacement or repair costs that need to be done just before the damage occurs, the purpose of which is to prevent the damage (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 example, in a Gas Power Plant (PLTG) construction project, there is a geometric fault in the gas turbine shaft which is indicated by the bending of the shaft (defective material). This defective material was not realized by the contractor, so that during the turbine test, an imbalance occurred in the gas turbine and caused irregular rotation of the turbine blades and hit the turbine cover. As a result, the turbine shaft and blade broke and the turbine cover was thrown and hit the wall of the building.

 
The source of the damage in this case is a defect in the shaft. Thus, all costs that need to be incurred just before the damage occurs are all costs associated with replacing the shaft. These costs include the cost of opening the turbine cover, removing the turbine blade from the shaft, and the cost of purchasing a new shaft, which if these activities were carried out previously, the damage would not have occurred. These fees, according to the wording LEG 2, are excluded. On the other hand, the consequences of damage due to the defect, such as damage to the turbine blades, turbine covers and building walls, can be covered by the insurance company.
 
Finally, LEG 3 is also called "Improvements defects wording". LEG 3 only excludes costs for improvement or quality improvement as shown in the official LEG 3 wording as follows:
 
“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 incurred to improve the original material workmanship design plan or specification.”
 
It can be seen from the wording above, that the cost of replacement or rectification which is hereby excluded is the cost incurred to improve the quality of the original material (cost incurred to improve the original material). Because the costs that are excluded in LEG 3 are only costs related to improvement, the costs associated with defective materials (which were excluded in LEG 2) can be borne by the insurance company. In the case of shaft defects in the PLTG project previously described, if the clause used is LEG 3, the costs associated with the shaft can be covered by insurance. However, if the contractor intends to replace the axle with a new shaft that has a higher specification, then this cost is excluded in LEG 3 because it is considered an improvement cost.
 
 
Source:
[1]https://fisetlegal.com/en/real-estate-what-is-poor-workmanship/
[2]https://fisetlegal.com/en/what-are-the-rules-of-art-real-estate/
[3]Construction Whitepaper, JLT
[4]https://www.powerengineeringint.com/coal-fired/new-projects-coal-fired/malaysia-ultra-supercritical-coal-fired-plant-goes-online/)

Author

Maesha Gusti Rianta ST., M.Sc

Email: maesha@indonesiare.co.id