Construction all risks insurance and cover against damage caused by defective work

Not surprisingly, the construction industry’s widely used General Conditions, AB/ABT 18, set certain minimum requirements for both the client’s and the contractors’ insurance cover. According to clause 11(1) of the AB/ABT 18, the client must take out usual fire and storm damage insurance for the contract works and any existing buildings, structures or facilities forming part of the contract works. The contractor and any subcontractors must take out usual professional and product liability insurance, see clause 11(3) of AB/ABT 18. 

However, it is a well-known fact that the insurance policies required under the AB conditions only cover a very limited part of the risks of damage associated with the performance of contract works. Therefore, and especially in case of major and complex construction projects, the parties often take out more comprehensive insurance than required by the AB conditions. A key insurance option on the market is the construction all risks insurance, which is intended to provide broad cover for a wide range of damage types.

In recent years, however, there has been considerable disagreement on the insurance market between insurers and insureds about the scope of cover under all risks insurance policies for damage caused by defects in the works and the design. These disagreements have given rise to several disputes – most recently in a case before the Danish Eastern High Court in which Bruun & Hjejle represented an insured subcontractor against an all risks insurance company. The judgment has been reported in both the Danish Weekly Law Reports (Ugeskrift for Retsvæsen 2025.2008) and the Danish Journal of Insurance and Tort Law (Forsikrings- og Erstatningsretlig Domsamling 2025.63).

This article provides an introduction to the current issues of cover under all risks insurance policies of damage caused by defects as well as an analysis of the scope and potential consequences of the judgment.

Construction all risks insurance

As the name suggests, all risks insurance covers, in principle, any damage to the insured objects regardless of the cause. However, this basic principle is modified in practice, as the insurance terms always include some key exclusions. 

The insurance is typically taken out by the client, but usually includes contractors and any subcontractors as additional insured parties. The insurance covers all contract works during the performance of such works and up until handover as well as during any subsequent rectification period. It includes the work object itself, the materials intended to be incorporated into the work object, and the temporary facilities used to carry out the contract works.

There are significant differences in the all risks insurance terms offered by the various insurance companies on the Danish market. But there are also many similarities as most insurance companies base their terms on the model conditions issued by the industry organisation SKAFOR (now Forsikring og Pension) in the 1990s. 

A typical insuring clause (“trigger clause”) in an all risks insurance policy reads as follows:

"The insurance covers physical loss and damage to the insured objects in case of an unforeseen event subject to the exclusions and conditions set out in the policy."

These are the criteria that must be met to activate the insurance. Consequently, physical loss or damage must have occurred, and must have occurred as a result of an “unforeseen event”.

In particular, this condition that the damage must be the result of an unforeseen event has in practice given rise to interpretation issues and disputes between insureds and insurers. The challenges arise especially in situations where the damage is a result of defects in the works performed or in the design. 

Cover of damage caused by defective work

All risks insurance policies usually include several exclusions which limit cover to some extent for damage caused by defective work. 

The standard exclusion in the SKAFOR model conditions reads as follows:

”The insurance does not cover damage caused by wear, rust and other gradual deterioration or defective workmanship, defective materials or defects in the design, calculation or construction. This exclusion applies only to the part of the work object which includes the worn, deteriorated or defective part which is directly affected by the damage, and not to other parts of the work object which are damaged as a secondary consequence of primary damage." 

Policies with the standard exclusion require a distinction between primary and secondary damage where only the latter – i.e. damage to non-defective parts of the contract works as a result of a primary defect – will be eligible for cover. In practice, this will often result in a significant limitation in coverage for damage caused by defective workmanship.

Recently, there has been an increasing tendency on the Danish market to agree on a less narrow scope of cover. This is mainly due to the use of international standard clauses that have gained ground in Denmark. The most widely used clauses are the LEG clauses issued by the British organisation the London Engineering Group. These clauses contain varying regulation of cover for damage caused by defective workmanship, with the LEG3 clause intended to provide the broadest coverage.

In theory, if an insurance contract includes a LEG3 clause, cover for damage due to defective workmanship is very broad, as the clause only excludes cover of costs incurred to improve the contract works. Consequently, there is no need to make the above-mentioned distinction between primary and secondary damage since – as a starting point – both types of damage are covered. 

In practice, however, insured clients and contractors have been met with opposition from the insurance companies when filing claims for coverage of damage caused by defective workmanship – also when the policy includes a clause intended to provide broad coverage such as LEG3. Insurance companies are increasingly refusing coverage on the grounds that the damage did not arise from an “unforeseen event” as required under the insuring clause in the insurance terms. The typical arguments made by the insurance companies include the view that the quality of the works carried out was so poor that the damage cannot qualify as an unforeseen consequence. 

This view on and interpretation of the concept of unforeseen events have given rise to questions from insured parties, who point out that the purpose of taking out such all risks insurance policies is specifically to cover damage caused by defective workmanship, which is why it is a fundamental requirement that such defects qualify as unforeseen within the meaning of the insurance terms. The insured parties have, among other things, argued that the purpose of the condition relating to unforeseen events must be solely to exclude damage that can be considered objectively foreseeable due to the nature and intended planning of the work. 

The interpretation of the foreseeability concept has been of fundamental importance in a number of recent cases about all risks insurance. So far, decisions on this issue have mainly been made by district courts and arbitral tribunals, with quite varying outcomes. The recent case before the Danish Eastern High Court therefore attracted considerable attention, as the understanding of the unforeseeability condition was one of the key issues.

The Danish Eastern High Court’s judgment of 20 March 2025

The case before the High Court was about cover under an all risks insurance policy with a LEG3 clause. The policy contained an ordinary insuring clause, which required physical damage (or loss) to have occurred as a result of an unforeseen event. The insurance terms defined unforeseen events as “events that could not be foreseen even with full knowledge of all basic conditions or assumptions”.

In the case, a flooring subcontractor had filed a claim due to damage resulting from defects in the execution of subfloors caused by the casting together of two concrete layers in the floor construction, which meant that the floor could not meet the sound-reduction requirements of the projects. The cause of the damage was undisputed and could be attributed to non-compliance with the specifications in the project material on how to install a sound-reducing membrane between the two concrete layers right up to the edge insulation in order to prevent any layers from being cast together. It was disputed whether the subcontractor had received the relevant project material prior to the performance of the work.

The insurance company denied coverage, first of all on the grounds that there was no physical damage, as the works had, according to the insurance company, simply been performed in a defective state. The insurance company also argued that the circumstances did not qualify as an unforeseen event as the flooring subcontractor had not followed the project instructions.

Based on the evidence, the High Court found that the subcontractor had been provided with the relevant project material and therefore held that no unforeseen event had occurred. Consequently, the conditions for insurance coverage had not been met: 

"Based on the evidence, the High Court finds that UUE had received relevant project material before casting the subfloors, and for that reason alone, UUE must therefore have been aware of the specific floor casting instructions . ...

The High Court therefore finds that no unforeseen event can be said to have occurred given the definition of this concept within the insurance terms which is consistent with the general principles of insurance law. Neither section 20 nor section 51 of the Danish Insurance Contracts Act can lead to a different conclusion.

For this reason alone, the conditions for insurance coverage are not met."

The High Court added, as a sort of side remark, that no physical damage had occurred:

"The High Court also finds that the incorrectly cast floors cannot be considered physical damage under the insurance terms."

The High Court’s reasoning is relatively brief, leaving several questions unanswered.

Apparently, the High Court did not base its judgment on how the works were intended to be carried out according to the project description, but rather how the works were actually carried out. One possible interpretation of the judgment is therefore that the court distanced itself from the view that the purpose of the unforeseeability condition is solely to exclude damage that is objectively foreseeable, given the nature and intended planning of the work. Such an interpretation is more in line with the argument typically advanced by the insurance companies.

The High Court also seems to have considered what the insured could subjectively have foreseen, as the Court expressly mentioned that the flooring contractor had been provided with project material containing specifications for installing sound-reducing membranes. This suggests that the High Court assessed the insured actual knowledge and based thereon decided whether the event was foreseeable. This seems to be inconsistent with the insurance companies' general view that the condition requires a purely objective assessment of the course of events.

The High Court also dismissed the argument that section 20 or section 51 of the Insurance Contracts Act could result in a different conclusion in the case. It is not entirely clear whether the Court thereby generally rejects that these provisions can have any significance in relation to the assessment to be made under the unforeseeability condition, or whether the Court just found that the provision could not yield a different result under the specific circumstances of the case.

On the whole, it is uncertain whether in fact the High Court takes a position as to when damage may be considered to be the result of an unforeseen event. As stated, the High Court also dismissed the contention that damage had occurred and have as such solely considered the foreseeability of a defect. The High Court’s conclusion therefore seems to be comparable with that of the district court in the first instance, which found that “defects cannot be considered unforeseen if you do not follow the project description”.

On the other hand, it is noteworthy that the High Court chose to address the concept of unforeseen events although the court held that no damage had occurred. The fundamental criterion for coverage under any all risks insurance policy is whether any physical damage (or loss) has occurred. Accordingly, the High Court could easily have decided the case on the basis that there was no damage, and it is surprising that this was instead included as a brief concluding remark. This may indicate that the High Court wanted to comment more generally on the understanding of the unforeseeability condition. 

The assumption that the High Court’s reasoning was intended to be of a general nature is supported by the statement that the definition in the insurance terms of an unforeseen event is “in accordance with the general principles of insurance law”. This may come as a surprise. The concept is not mentioned in the Insurance Contracts Act, nor in any other insurance law regulations, and is only very briefly addressed in legal literature. The insurance market also offers all risks insurance policies that do not include this criterion as a condition for coverage. It is therefore not evident that this is supposed to be a general principle of insurance law.

Even if the reasoning is considered to be of general importance, several questions remain unanswered. In particular, what perspective should be taken when assessing foreseeability and the identification issues this can raise.

Future outlook

If the High Court’s judgment is to be understood to the effect that the assessment of the concept of foreseeability is based on the actual performance of the work in order to make a specific assessment of the foreseeability (predictability) of the resulting damage, it must generally give rise to considerations when taking out all risks insurance. Given such an interpretation, it may be argued in almost every case that damage was foreseeable to some degree when it arises from defects in workmanship or design. This gives the insurance companies wide discretion to refuse coverage, which may undermine coverage for damage caused by defective work. Given current case law, there seems to be limited incentive to take out extended coverage such as LEG3 to an increased premium. 

However, there are all risks insurance policies on the market with an insuring clause that does not include any unforeseeability condition. Such terms will likely appeal to future policyholders – despite the higher premiums – as they offer more predictable and adequate cover.

However, the courts have hardly said the last word on the unforeseeability condition yet. The insured flooring contractor has applied to the Danish Appeals Permission Board for permission to appeal to a court of third instance. This potentially provides an opportunity for the Danish Supreme Court to rule on the issue. Moreover, several of the cases heard by the district courts have now been appealed to the High Court. This will hopefully help clarify the legal position – especially in cases where it is more evident that physical damage has occurred, and where the question of unforeseen events therefore becomes decisive for activating the insurance.

Bruun & Hjejle’s legal services

Bruun & Hjejle monitors the developments in construction insurance and is currently involved in several cases about insurance coverage. If your company needs any advice, or if you have any questions about this newsletter, please contact us.