London Engineering Group Revises Defect Exclusion Clauses After US Courts Branded LEG 3 Ambiguous

What the New LEG /26 Clauses Change for CAR and EAR Policies

The London Engineering Group (LEG) has published three revised model defect exclusion clauses for contractors all risks (CAR) and engineering all risks (EAR) policies, marking the first update since 1996. The new wordings, carrying the suffix /26, replace the /96 and /06 versions that have been used across international markets for decades. They were formally launched at Lloyd's Old Library following LEG's affiliation with the International Underwriting Association (IUA) in July.

The revision was prompted by two US court decisions in 2023 and 2024 that described the LEG 3 clause as "egregiously ambiguous" and "internally inconsistent." The courts found the language failed to clearly exclude the claims before them. The rulings caused significant concern in the insurance market, with reports that some insurers withdrew the LEG clauses from use. Although LEG 3 cover remained available in the London market for international risks, 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.

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."

Why US Courts Forced the First LEG Rewrite Since 1996

Why US Courts Found LEG 3 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. The clause language remained the same wherever it was used, and the ambiguity it carried needed to be addressed at source. 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. That shift matters because LEG 3 is the narrowest exclusion and attracts a higher premium; its withdrawal narrowed coverage options for US construction risks and pushed some buyers toward broader, potentially more expensive alternatives.

The English Law Position on Damage

English law has a clearer definition. 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. However, 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. That pending appeal introduces a layer of uncertainty for London market insurers and brokers who rely on the English law definition when drafting and placing CAR and EAR risks.

What the /26 Clauses Mean for the Market

The revised clauses and the new explanatory commentary are available through the IUA's clauses database, which consolidates resources previously spread across LEG's independent operations. The commentary is significant because it is the first time the drafters have set out how each clause is meant to operate in practice, giving underwriters, brokers and clients a shared reference point. For context, model clauses like these are not mandatory; they are voluntary wordings that insurers may adopt, adapt or reject. Their influence comes from widespread market acceptance, so the /26 update will only reduce ambiguity where insurers actually adopt the new language.

Implications for Brokers and Insurers

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. This creates a transitional period where a single broker's book may contain a mix of old and new wordings, each with different exclusion scopes. Insurers, meanwhile, must decide whether to adopt the /26 clauses, retain the old language, or continue using alternatives such as "cost of making good" endorsements for US risks. The explanatory commentary may make the /26 clauses more attractive by reducing the risk of the kind of litigation that followed the earlier versions.

What Brokers and Insurers Must Do Before the Next Renewal

The first revision of the LEG defect clauses in 20 years gives the market clearer wordings and, for the first time, an explanatory commentary — but it does not automatically change existing policies.

• Brokers should identify every CAR and EAR policy in their book still written on /96 or /06 language and flag those accounts ahead of renewal, because those policies remain in force on the old terms.
• When renewing or restructuring coverage, brokers must explain the difference between the old and new clauses to clients, particularly the narrower scope of LEG 3/26 and its higher premium.
• Insurers that withdrew LEG 3 from US construction risks should review the /26 wording and commentary to decide whether to reintroduce it or continue with "cost of making good" endorsements.
• Underwriters and claims teams should familiarise themselves with the IUA clauses database, which now hosts the new wordings and commentary in one place.
• Watch for the UK Supreme Court's decision on the appeal in Sky UK Ltd and Mace Ltd v Riverstone Managing Agency Ltd, which could further refine the English law definition of damage.