Design Clauses

What are Design Clauses

 When a loss event arises from defective
design, materials, or workmanship, the
design clause determines what is covered and
what is not.
 The London Market Defect Exclusion (DE)
and Munich Re wordings help sort the
confusion about the standard wordings found
in the market place
 Example
 A marble column fails because its inner steel
supporting rod (the faulty part) is defective in design
or material. The roof collapses, causing extensive
damage to an expensive tile floor.

 DE 1 covers nothing.
 DE 2 covers the floor, but doesn't cover the roof or
the column.
 DE 3 covers the floor and the roof, but doesn't
cover the column.
 DE 4 covers the floor, the roof, and the column, but
doesn't cover the supporting rod itself,
 DE 5 covers everything, but doesn't cover a different
type of supporting rod to be used in repairs.
FAULTY
ROD
 I. London Market Design Clauses
 The five clauses under this are in order of
increasing coverage

 DE1: Outright Defect Exclusion

◦ Excludes all damage to property due to defective
design, plan, specifications, materials or
workmanship
 London Market Design Clauses
 DE2: Extended Defective Condition
Exclusion
◦ Excludes :
a. Property in defective condition
b. Property that relies on (a) for support

◦ Covers:
 Consequential damage to other property free of
defective condition
 London Market Design Clauses

 DE3: Limited Defective Condition

Exclusion
◦ Excludes damage to property that is defective
condition, in whole or in part
◦ Covers consequential loss to any other property
free of defective condition
 London Market Design Clauses
 DE4: Defective Part Exclusion
◦ Excludes damage only to the part of the property
that is defective i.e. “the faulty part”
◦ Covers consequential loss to any other part free
of defective condition

 DE5: Design Improvement Exclusion

◦ Excludes additional costs of improvement to the
original design, materials…
◦ Covers all the damages
This chart shows the increasing coverage of the design
clauses
Design Clauses
6

3
Design Clauses

0
DE1 DE2 DE3 DE4 DE5
 Example
 A marble column fails because its inner steel
supporting rod (the faulty part) is defective in design
or material. The roof collapses, causing extensive
damage to an expensive tile floor.

 DE 1 covers nothing.
 DE 2 covers the floor, but doesn't cover the roof or
the column.
 DE 3 covers the floor and the roof, but doesn't
cover the column.
 DE 4 covers the floor, the roof, and the column, but
doesn't cover the supporting rod itself,
 DE 5 covers everything, but doesn't cover a different
type of supporting rod to be used in repairs.
FAULTY
ROD
 II. Munich Re Design Clauses
Munich Re Contractor’s All Risk (CAR)
Policy

 Defective materials or workmanship

are covered in the basic policy – equivalent
to DE 4
 Faulty design is excluded and needs to be
covered by an endorsement – equivalent to
DE 1
 Munich Re Design Clauses
 Reasoning
◦ CAR policy covers civil engineering projects like
roads, bridges, buildings,airports, etc
◦ Materials are standardized to some extent so do
not present high risk
◦ Risks lie in design which is likely to be untested
and unproven
 Munich Re Design Clauses
Munich Re CAR Policy with
endorsement 115

 This covers faulty design equivalent to DE 4

(all except “faulty part”)
 Additional premium required
 Example
 A marble column fails because its inner steel
supporting rod (the faulty part) is defective
 Case 1: Defect due to faulty
material/workmanship
◦ Covers everything except the faulty part
 Case 2: Defect due to faulty design
◦ Basic policy pays for nothing
◦ Policy with endorsement covers everything
except faulty part
 Munich Re Design Clauses
Munich Re Erection All Risk (EAR) Policy
 Defective material, workmanship and
design are excluded – equivalent to DE 1
 They can be covered by an endorsement

Reasoning
 EAR policy covers erection of heavy
machinery and industrial facilities
 They mostly use new materials that may be
inadequately tested
 Materials pose same risk as design in this case
 Munich Re Design Clauses
Munich Re EAR Policy with Endorsement
200
 END 200 covers faulty design, workmanship and
material – equivalent to DE 4

Difference between END 200 and DE 4:

 END 200 excludes costs the insured would
have incurred for rectifying the fault if it had
been found before the loss occurred
 DE 4 covers such costs
 Example
 If a single blade of a gas turbine breaks because
of defective design or material, and causes
damage to the blades around it
◦ Basic policy does not cover anything
◦ Policy with endorsement covers surrounding blades

 Before repair can be done, turbine has to be

disassembled and reassembled at high cost. If
the defective blade had been discovered before
loss and fixed, these costs would have been the
same
◦ END 200 excludes such costs
◦ DE 4 would cover these costs (except only fault part)
THANK YOU