By Emma Hughes, New Business Broker
The majority of Contract Works policies will look to exclude damage to property which is in a defective condition but will provide cover for other parts of the property which are damaged as a consequence of this defect. Insurers apply this exclusion in the form of a Defective Design Exclusion, tiered from DE1 (lowest level cover) to DE5 (highest level cover).
DE1: Outright Defect Exclusion
Excludes all losses arising from defects in the Design, Workmanship or Materials.
DE2: Extended Defective Condition Exclusion
Excludes property which is defective and property which relies for its support on property which is defective but covers other insured property which is damaged as a result of the defect.
DE3: Limited Defective Condition Exclusion
Excludes property which is defective but covers other insured property which is defect free and is damaged by the defective property
DE4: Defective Part Exclusion
This is similar to DE3 but the exclusion is restricted to apply only to any ‘component part or individual item’ which is defective eg. Only the defective nut, bolt or screw would be excluded.
DE5: Design Improvement Exclusion
Provides full cover for both the defective and non-defective products but damage must occur. The existence of a defect alone is not insured. The costs in improving the design, materials and workmanship are excluded.
A steel framed building collapses during the construction period due to the connective bolts being inadequate for their purpose. The building collapses after the roof has been erected, the cladding has been partially completed and a dwarf brick wall has been built. The various Defect Exclusions would pay as follows:
DE1: All damage would be excluded
DE2: All damaged items are excluded apart from the Dwarf Brick Wall
DE3: Steel Framework is excluded but the Roof, Cladding and Brick Walls are paid for
DE4: Only the Nuts & Bolts are excluded and all other damage is paid for
DE5: All damage is paid for but improvement costs are excluded
The most common level of cover found in a Contract Works policy is DE3 and there may be an option to uplift cover to DE4/DE5 if requested. As you can see from the above example it is prudent to ensure you have DE3 coverage as a minimum. Defective Design Exclusions should not be confused with Professional Indemnity insurance. Professional Indemnity would provide cover if the design was found to be defective but no damage had occurred.
Erimus Insurance Brokers is a trading name of Teesside Insurance Consultants Ltd. Registered in England No. 2043783.
Authorised and regulated by the Financial Conduct Authority No. 307660.
Directors: P.J. Davison, S.D.E. Hughes, I. Miller ACII, S.S. Pinnell. Non Executive Director: G. Lumby MBE, FCIBS.
Company Secretary: C. L. Nolan.