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Legal Notes: Modular construction growth will alter the insurance risk scenario

John Bleasby
Legal Notes: Modular construction growth will alter the insurance risk scenario

The shift towards increased prefabrication and modularization is vital to improving the construction industry’s lacklustre productivity growth. The potential for tighter cost controls, increased onsite efficiency and safety, higher quality and reduced waste means a more streamlined project from start to finish.

At the same time, offsite prefabrication and modularization brings new risk considerations affecting traditional contractor insurance coverage.

Consider Commercial General Liability (CGL) policies, for example. Megan George and Aaron Klein of U.S. law firm Stites & Harbison PLLC suggest a modular build, “can protect against complex CGL coverage, resulting in lower premiums and less headaches for contractors.”

They reason that contractors are, in most cases, only installing someone else’s modules. Therefore, responsibilities transfer to those off-site facilities and suppliers.

This cuts to the heart of the modular/prefab insurance issue: the difference between “work” and “product.”

U.S. attorney Stella Szantova Giordano explains.

“Before such an element is incorporated into a building, it is considered a product. Once the element becomes part of the structure, it is considered the ‘installer’s work.’”

This could affect whether or not that element is covered in a CGL’s list of exclusions.

Similarly, under Builders Risk policies, the question may arise whether the modular/prefab manufacturer is also the installer. This further relates to the transportation of elements from source to site, increasing the importance for both insurers and contractors to look closely at the risks associated with the delivery process.

“Transporting modules from a manufacturing facility to the job site is one of the riskiest elements of modular construction,” write George and Klein. “Large modules are often transported over long distances resulting in significant risk of loss and/or delay. As a result, insurers should recognize the need for multifunctional risk assessment approaches using elements of transportation and logistics when writing modular construction policies.” 

Insurance issues also arise when modules and prefabricated elements arrive onsite prematurely or out of sync with other work underway.

Giordano offers the real-life example of apartment modules, delivered with electrical wiring, drywall and carpeting, and assembled prior to the completion of the roof. The modules were left exposed to the elements, resulting in extensive mould growth that was not detected for days. The building had to be gutted and rebuilt, leading to a massive claim and, of course, significant delays.

This introduces the crucial element of time, she says.

“In the process of installation of modular/prefabricated elements, (when) the loss occurs is crucial — under one set of facts, there will be coverage; under a different set, there may not.”

Ray Allen, an underwriting manager with the P&C and specialty risk division of French multinational insurer AXA, draws attention to other risks that need consideration.

“One exposure that’s relatively unique in modular and prefabricated construction is the potential for an error in design or manufacturing to repeat itself in every module or component used on a single project, or multiple projects,” he says. “This could drive claims costs up significantly depending upon the number of units manufactured and used in different projects.”

An open question, says Allen, is whether modularization risks impact professional liability.

“It depends on how well or poorly the project process is managed and controlled,” he says. “On one hand, exposures can increase due to repetitive defects, limited manufacturing capacity impacting supply chain, and transit related incidents.  But on the other hand, modular and prefabricated products are subject to additional layers of QA/QC in the manufacturing process and are typically built indoors inside of a manufacturing facility in a more controlled environment by a specialized workforce highly trained to perform this work.  This can lead to better quality components with tighter tolerances.”

Modularization and prefabrication is certain to thrive over the next few years, writes Giordano. However, she adds, “For projects utilizing these technologies, careful risk assessment and insurance planning is crucial to avoid claims or uninsured exposures.”

Note: The points raised here are from U.S. legal sources. Canadian legal advice is suggested before drawing any conclusions.

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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