Constructive Conversations: Modular and prefabricated construction, an answer to today’s construction issues
Insuring Modular Construction – Casualty Considerations
While modular and prefabricated construction has been around for decades, renewed interest in this delivery approach is gaining more attention. According to some market trend reports, North America is the second-largest region for the modular construction market following the Asia-Pacific region. It accounted for 27.6% of the market in 2016, with a market value of USD 28.7 million. Because the modular and prefabricated construction approach is still considered quite unique, it also raises some unique liability issues and, accordingly, insurance needs, according to Bob Haskell, XL Catlin’s executive underwriter for Construction Primary Casualty. Here he explains more.
Why is insuring modular construction so different than other construction delivery methods?
Haskell: Modular or prefabricated construction is often referred to as offsite construction, which highlights the key difference. Rather than using the traditional, vertical jobsite process that can involve coordinating the sequencing of multiple trades, a significant amount of modular construction is conducted at off-site manufacturing locations. What this means is that construction activities that would ordinarily have to be sequenced can be performed simultaneously. Also, by conducting construction activities in a more controlled environment, greater attention can be paid to quality control and worker safety. On the other hand, modular or offsite construction introduces some new challenges such as transportation risk and the increased use of cranes.
Since skilled construction labor is not doing the work, it seems to become more of a manufacturing process. How does this change worker’s compensation codes?
Haskell: According to the National Council on Compensation Insurance (NCCI) the appropriate classifications for all modular/prefabricated operations are:
- Manufactured, Modular, or Prefabricated Home Manufacturing - Shop Work - All Operations & Drivers 2797 (for manufacturing or fabricating as well as delivery by the manufacturer)
Setup, hookup, installation or finish work at the job site must be separately classified
- Manufactured, Modular or Prefabricated Home Setup, Hookup, or Installation at Job Site 2799 (for delivery and on-site placement by specialty contractors or dealers)
Code 2799 does not contemplate delivery without making connections or performing additional work. That’s “drop shipping,” and should be assigned to the appropriate trucking classification.
Is the modular work considered "product" or "work"?
Haskell: Both. In the event of a claim, the product v. work determination would be a question of fact to be resolved by a judge or jury. Was the loss precipitated by a failure or deficiency of the manufactured product, or were the installation and/or related construction operations at fault? Since modular construction involves both goods and services, the emerging legal implications will concern both common law and Article 9 of the Uniform Commercial Code (UCC). In disputes involving these competing laws, courts have generally applied the “Predominant Factor” test, which seeks to determine if the modular contractor is engaged in provision of goods or provision of services. While all claims are highly dependent on the specific circumstances of the occurrence, to date provision of services appears to be the prevailing view in the courts, which means modular builders will likely be viewed as subcontractors. That will put the emphasis on “work.”
Do the state statutes of limitations or repose apply? For example, would it be considered a construction defect or product defect?
Haskell: Statutes of limitation or repose are state statutes that limit how long a claimant has to file a claim. They are very state specific. Which statute would apply to a given situation will depend upon the facts of the case. Modular builders with manufacturing facilities in a different state than the ultimate construction site could trigger differing statutes. Modular subcontracts should be carefully drafted to recognize these differences.
How will "occurrence" be determined? How do you determine proximate cause?
Haskell: An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Subsequently, the location of the accident that precipitates the bodily injury or property damage will be a crucial factor.
Proximate cause requires foreseeability. In order to be a proximate cause, it needs to be proven that it was foreseeable that an injury could happen as a result of a negligent act. It is conceivable that grossly negligent manufacturing processes could be found—under the law—to have rendered the damages foreseeable, although such a finding would depend upon the circumstances of the claim and the jurisdiction in which legal proceedings were conducted.
I hear there is better QA/QC process in place so better quality output. I'm worried that this will also open up the likelihood that if something goes wrong, you can't stop and correct it. It could be done hundreds of times because of the repeat process.
Haskell: All modular manufacturing has in-house quality control and onsite code officials to test and approve the construction of the modules during construction. Both structural and mechanical inspections are more consistent and thorough in the plant than on a job site. Subsequently, problems are more likely to occur in a conventional construction setting than in a modular environment.
How will modular construction impact project-specific insurance policies? There will be off-site fabrication that may be servicing multiple project sites. There wouldn't be dedicated offsite locations anymore.
Haskell: If a project’s fabrication operations are co-mingled with other manufacturing operations at a centralized plant then incorporating those operations into project-specific insurance would be very difficult. However, if manufacturing employees were to be dedicated to each project and if a dedicated section of the plant could be identified, then you might be able to simulate the conditions necessary to carve out the exposures. As a practical matter, the manufacturing plant would likely be covered by the modular contractor’s master/practice policy, and project policies would shrink significantly since a substantial exposure would be eliminated from the job site.
Does modular and prefabricated construction carry greater supply chain risk?
Haskell: Material supply chain risk for the off-site preconstruction would be the same or less than conventional construction. Modular companies could in fact have better supply access and stocking capacity than site-specific construction. On the other hand, the completed modules themselves can be damaged or destroyed in transit, which would cause major construction delays.
The tradeoff inherent in modular construction is substituting increased in-transit risks for reduced on-site risks.
What about professional liability considerations, especially if construction firms are involved in designing the components?
Haskell: Yes, there are definitely professional liability concerns. Often the modular designer is providing the structural design needed for the individual modules and for the overall structure that the modules will ultimately be incorporated into. This exposure goes well beyond the usual “means and methods” of construction. Therefore, construction firms are wise to consider their professional liability exposures when building their insurance program.
How does modular construction impact hold harmless and additional insured requirements? Who needs to indemnify who?
Haskell: As with a traditional construction project, the modular builder should be incorporating hold harmless clauses and additional insured requirements in their favor into their contracts with their subs. In addition, the modular builder will likely be providing similar indemnification upstream to the owner, if any. Some new considerations will be introduced if the modular builder is outsourcing the transportation of the modular units (likely) and the crane operations. Reputable firms and significant limits of liability should be the rule.