Builder’s risk insurance: Perils exclusion (USA) – Part 3

Published Date: 11/24/2023
Source: By Donald Dinnie, Norton Rose Fulbright

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In this judgment considered here and here the policy under consideration included an Extension which deleted the previous Perils Excluded wording and replaced it with:

“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.”

The insurer had the burden of showing that the exclusion applied.

The court said that the relevant wording was ambiguous “egregiously so”. In just three sentences the insurer “… managed to squeeze in a run-on sentence, an undefined term, several mispunctuations, and a scrivener’s error. … The Extension [in which the exclusion was found] is internally inconsistent and bordering incomprehensible …”

The court agreed that the Extension is an exclusion but, in replacing a broad exclusion from coverage with a narrow exclusion, the endorsement functionally extended what the insured was entitled to recover for.

The court rejected the insurer’s invitation to ignore the unclear and error-riddled wording of the Extension which the insurer drafted and signed and sought to rely on to deny coverage.

The court held that “damage” as used in the Extension unambiguously encompassed the insured’s claim, that the honeycombing and voiding resulted in a reduction in the weightbearing capacity of the bridge and that qualified as “a detrimental change in the condition of the insured property”. The change was “patent”.

The honeycombing and voiding were several feet long, deep and visible to the naked eye. 

The Extension excluded replacement or rectification of costs incurred to “improve” original workmanship. The insurer argued that simply patching or replacing defective components constituted an improvement. The court said that superficially repairing or replacing a defective component could technically be considered an improvement unless that component was replaced with something worse. But the context of the Extension suggested that to improve means to make a thing better than it would have been if it were not for the defective work. The Extension explicitly distinguished the “costs incurred to improve” work from the “cost of replacement or rectification”. The two were not co-extensive.

At the very least the Extension was unambiguous as to whether it excluded cover and it was construed it against the drafter of the insurer. 

Accordingly, the Extension did not exclude coverage for the insured’s claim for reimbursement.

The result would be no different in South African law. Any exclusion needs to be clearly and unambiguously worded.