Addressing insurer concerns regarding modular construction

An increasing number of construction companies are turning to modular construction to take advantage of potential efficiencies and cost savings. However, insurers do have some concerns about this technology that need to be addressed to ensure there is appropriate insurance cover in place for such projects. 

Modular construction allows for the assembly to the same codes and standards as traditional construction practices, but the units are pre-built in a controlled environment without the threat of adverse weather conditions. This can result in higher quality construction as applying specialised equipment on repetitive tasks can allow for higher precision and consistency. Modular construction can also offer shorter build times and require less manpower, potentially translating into significant cost savings.

Despite all these advantages, there are multiple considerations for insurers when deciding whether to cover these methods and upon what terms.  

Key insurer concerns 

  • Fire safety – following the tragic fire at Grenfell Tower, insurers initially focused their attention specifically on aluminium composite material cladding panels and the fire rating of the composite insulation used within. In recent years, this concern has been expanded more broadly into ‘fire safety’ in general, with insurers wanting to understand the types of insulation used within the modular units and the respective fire rating when they are considering the risk. 

  • Breaking out defective parts – in the event of a claim, accessing the defect can often be difficult in modular units. For example, if there was an escape of water within a bathroom pod, the defective pipe work is likely to be encased within the prefabricated unit, making accessing the pipework in question a potentially costly exercise that could affect the integrity of the unit itself. The worst-case scenario would be that the whole unit needs to be replaced rather than just the defective part. However, even the removing of just the pod itself is also likely to be challenging and costly depending on the stage of the build. 

  • Common defects – there have been cases where a defect within a modular unit is the cause of a manufacturing fault, with the same defect then being found in other modular units in the same batch. The concern for insurers here is the potential for repeat claims from a common cause on the same development. Understanding the identity of the contractor undertaking the pre-fabrication of the modular units and their experience within the sector will aide insurers when considering this risk. 

  • Timeframes for replacement units – one of the primary driving factors for using modular units is the reduction in time taken to complete the construction programme, but getting replacement units manufactured and delivered can take significantly longer. This is because the modular units are often being prefabricated for the specific build requirements of each individual project. Insurers will want to understand what the likely lead for replacement units in case of damage or defect. This is especially pertinent when the prefabrication is undertaken overseas, meaning that delivery times may be elongated. When insurers are looking at providing quotations for Loss of Revenue/Delay in Start Up (DSU) cover, this needs to be considered as the length of any delay in obtaining replacement units would impact the overall claim costs involved. 

  • Progression issues – although modular construction is quicker once the units are ready and on site, there have been reports of delays from factories that have held project progression. These factors can cause aggravated delays (fire in factories, flooding, as well as stress fractures and water ingress has been an issue when the pods/units are transported to the site) that significantly impact overall project delivery. 

  • Company insolvency – this creates an uncertainty amongst developers when selecting a modular partner and could steer them away from modular construction completely. 

Due to the specific risks associated with modular construction, it is key to ensure that insurance cover is bespoke, as many standard insurance policies will not provide the appropriate cover. Some of the nuances that should be considered and covered are items such as off-site production and storage, transit risk, access/break-out cover, repetitive loss risk, as well as the more complicated area of latent defects. Recommendations to secure appropriate cover: 

  • Explain to insurers the methods of transport to site and how units are going to be stored while awaiting transportation 

  • Demonstrate to insurers the experience and knowledge of who is building the modular units 

  • Spending time with the insurer and sharing information is likely to strengthen the relationship and result in better cover, rate, and terms and conditions  

  • If Delay in Start Up/Loss of Anticipated Revenue insurance is required, be prepared with a clear programme and understanding of the potential impact of delays 

  • Consider contingency plans for scenarios such as manufacturer insolvency, or a loss at a manufacturing site that impacts delivery of units onto site 

  • Ensure that the contractor has robust risk management processes for key risks such as fire and escape of water  

For further information, please visit the Lockton Real Estate and Construction page (opens a new window), or contact:  

Toby Jones, Junior Producer 

E. toby.jones@lockton.com

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