Understanding LEG 3 wording in a builders risk policy

On large multifamily developments - particularly garden-style and mid-rise projects with multiple trades and complex sequencing - construction defects are a common source of builders risk claims. But coverage for those claims depends heavily on one often-overlooked clause.

The “LEG” defects clauses, developed by the London Engineering Group, define how a builders risk policy responds when faulty work causes damage. The difference between LEG 1, LEG 2, and LEG 3 can determine whether your insurance absorbs the loss - or your balance sheet does.

Most Builders Risk Policies Don’t Include LEG 3 by Default

While LEG 3 is often discussed as a “market standard” or lender-aligned clause, it’s not automatically included in most off-the-shelf builders risk policies - especially for multifamily developments. Many policies either:

• Use vague or generic “defects exclusions” that fail to explicitly cover resulting damage, or
• Include LEG 2 or similar language, which may still exclude broad categories of damage.

 Why That’s a Problem

• Creates Coverage Gaps: If only LEG 2 or generic exclusions apply, developers may find that large portions of water intrusion, structural damage, or system failures are not covered — even when caused by subcontractor defects.
• Fails Lender Requirements: Most construction lenders expect resulting damage to be covered. Absence of LEG 3 puts developers at odds with financing terms.
• Increases Claim Friction: Without clear LEG 3 wording, insurers can exploit ambiguity to deny or limit payment — pushing losses back to the developer.

LEG Clause Comparison

Why It Matters for Multifamily Projects

• Multiple Trades, Interdependent Risk: Framing, plumbing, electrical, and MEP systems interact closely. One defect can cascade across buildings.
• Lender Requirements: Most construction lenders expect coverage for resulting damage. LEG 3 satisfies those requirements and avoids disputes.
• Claim Performance: When a defect causes water intrusion, structural cracking, or system failure, LEG 3 ensures the broader damage is covered - even if the original work is not.
• Risk Management Control: With LEG 3 in place, developers avoid unnecessary friction between the builder, insurer, and ownership group.

Real-World Example:

A joint venture experienced defective welds that caused structural damage during a major infrastructure project. The insurer denied coverage, arguing the defect was not “resulting damage.”

The court disagreed, confirming that under LEG 3, all resulting physical damage is covered, even if the initial defect is excluded.

For multifamily developers, the takeaway is simple:

"If a single construction defect causes damage across multiple units or structures, a LEG 3 clause can mean the difference between a covered $5 million claim and an uninsured one."

Risk Manager’s Perspective

At PEAK Risk Advisors, we advocate for LEG 3 wording in every builders risk program because it:

• Aligns with lender and investor expectations.
• Clarifies coverage and avoids claims ambiguity.
• Provides a measurable advantage over boilerplate “resulting damage” language.
• Signals proactive, institutional risk management.