“Renewable and sustainable energy is increasingly recognized as essential not only to planetary health but also human wellbeing more generally,” said Nathan McLellan (pictured above) vice president of first party claims in Asia-Pacific for Liberty Specialty Markets (Liberty).
Insurance Business was asking McLellan to explain why he and Matthew Foglia, Wotton + Kearney’s (W+K) special counsel, decided to write a complex technical paper about the London Engineering Group (LEG) insurance coverage clauses. According to W+K, the LEG clauses are “ubiquitous in Australian Construction All Risks (CAR) and Erection All Risks (EAR) policies.”
He said what first piqued their interest in writing the paper – that ended up winning W+K’s Turning Point competition – was the recent commitment, on a global scale, to decarbonisation technologies.
“That's going to require new ideas, new approaches, new construction techniques and because of that novelty we're going to have potentially fertile sources of defects, that these clauses might ultimately be enlivened by,” said McLellan. “We wanted to support that future vision for a lower carbon way of producing energy and power through getting these clauses tweaked to provide more clarity.”
The Liberty expert explained what the LEG clauses cover and where they need “tweaking” in a previous interview.
However, a second motivation behind “The importance of clarifying LEG2 and LEG3 during the transition to clean energy,” was the pairs’ concern about the increased risks to renewable energy projects located in Australia.
“We're very conscious that, whether it's an onshore solar farm or an offshore solar farm, or a wind farm, or whatever the case may be, it's quite often the case, particularly in Australia, that these assets and projects are geographically remote and can be situated in a hostile environment,” said McLellan.
Australia’s unique environment, he said, poses potentially increased risks connected to “the durability and performance of new technologies.”
“That suggested to us that getting these clauses right, given that they're ubiquitous, and given how commercially necessary they are, was an endeavour worth pursuing,” McLellan said.
The LEG insurance coverage clauses take their name from the London Engineering Group who drafted them during the mid-1990s. According to industry experts, the structure and language of the clauses can lead to contested outcomes and McLellan’s paper calls attention to technical nuances in LEG2 and LEG3 that warrant refinement to better suit the Australian market.
“The London Engineering Group, who is the ultimate author of these clauses, has done a commendable job in developing policy provisions that respond to this demand for cover that selectively protects against certain costs in agreed circumstances,” said McLellan. “But experience has revealed how these clauses can be further refined.”
McLellan and Foglia hope that the London Engineering Group take on board their paper’s suggestions for the next version of the LEG clauses.
“Ultimately, and I believe I can speak for Matt here, what we don’t want to see is regionally specific variations of LEG2 or LEG3 produced and adopted in different parts of the world,” said McLellan, “The better outcome would be for local concerns to be identified and articulated and then funnelled back to the London Engineering Group to consider so that any future iterations are as apt here in Australia, or Europe, or the US, as they are anywhere else in the world.”
A presentation by Neville Green, underwriting manager for Allianz Engineering Construction and Power based in Manchester, England, explains the history of CAR and EAR policies. Green details the evolution of Defect Exclusion (DE) clauses in the 1980s and then LEG clauses a decade later.
The first CAR policy, according to Green’s paper, was issued in 1929 for the construction of Lambeth Bridge in London. The five-span steel arch bridge is carried on granite-faced reinforced concrete piers and abutments and opened in 1932.
Until CAR and EAR policies, “all losses arising from or caused by defective design, workmanship or material were excluded” from construction insurance policies, says Green’s paper. These losses were regarded as a business risk.
The paper explains that, as the construction market matured, insurers and brokers “established the principles that a defect is a condition, not a peril” and began to exclude defects from policies but include coverages for resultant damages.
What do you make of the challenges in the property, energy and infrastructure market? Please tell us below
