Modern Methods of Construction (MMC) is now cited as one of the key solutions to the housing problem. However, due to their unique risk characteristics, traditional insurance policies may not adequately cover these projects and protect the owners. In this article, Head of Construction Client Development, Jason Baston explains how to navigate the changing risks and insurance challenges attributable to MMC.
In an economy facing numerous headwinds including inflationary pressures, rising mortgage rates, falling house prices - and now a drop off in sales - recent press attention is once again focussed on the continued delivery of new housing and associated challenges.
Homes England recently reported it had exceeded its target for delivery of modular housing; whilst Barrett, Persimmon and Vistry are amongst those committed to new ‘mega-factory’ investments. Conversely, many existing modular factories have hit financial difficulties, or become insolvent, in the wake of the tough operating environment and inability to adapt.
To survive and flourish, all players in construction must now understand the changing risk profile of MMC and adapt their risk strategy accordingly.
The MMC technique driving significant change in housing is modular construction; the process by which components are assembled into units off-site, rather than in-situ. With advantages including speed, quality, safety, sustainability and reduced cost, modular construction appears to be a win all round. In addition, the use of off-site manufacture has the potential to provide a more controlled working environment.
Prefabricated items can be as complex as an entire house or residential unit. It is not uncommon for complete residential, hotel and student accommodation projects to be prefabricated off-site and erected on site. But how are underwriters of the insurance responding to Modular methods?
As a specialist construction insurance risk advisor and broker, Miller continually probe underwriters to understand their appetites for risks and identify market trends.
Insurers understand the advantages of modular construction. In theory, assembly in a controlled environment should lead to fewer defects, less weather exposure, shorter build-period, and a safer workplace. Carbon emission reductions also support the ongoing net-zero momentum.
Despite this, insurer appetite for modular developments continues to be limited and typically confined to specialty insurers. Those insurers who are willing to participate normally require a thorough presentation of the risk strategy from the insured’s broker, including robust risk management and mitigation measures. Those underwriters who are still interested in covering modular risks now want a smaller share of each project - thus the number of insurers required for a large project is greater.
Insurers' justification for their restricted appetite is connected to the historic claims and losses they incurred. These fall into two categories: risk of damage and remediation cost, and quality.
Risk of damage and remediation cost
Modular construction projects have experienced damage or total losses – commonly from water, fire and from defects. Storm events for example have led to water penetration between modules, progressing to different levels of the building.
Fire damage is a concern that has been reported. Traditional construction uses cavities and fire resistant materials to prevent or slow the spread of fire through structures, and we have seen the tragic consequences when systems do not operate as expected. Preventing a fire from spreading once it has entered the void spaces that inevitably arise when units are assembled must be one of the foremost design objectives with modular construction. The use of timber as a structural material will only exacerbate these concerns, unless mitigated.
If damage does occur, remedial works must be carried out in situ. The workforce may be unfamiliar with the original construction of the units, there may have been (sub)contractor insolvency events and the growing insolvency levels of manufacturers also exacerbates the difficulties in re-supply and rectification of damaged components. Rectification costs can now often be considerably above of the original manufacturing cost, especially where the units may have originally been constructed in a low labour cost economy.
Prefabrication in the context of residential projects was, until recently, a very dirty word. Post-WWII “prefab” housing was of poor quality and had a bad reputation. Similarly, the Ronan Point collapse in the late 1960s raised legitimate safety concerns. Nowadays the modular industry has gone to great lengths to assuage quality fears and modular residential is seen as a higher quality product with units manufactured in controlled environments.
Nonetheless the insurance market continues to see cases of widespread quality issues, such as mould outbreaks. Where issues are identified, these are commonly replicated in multiple or all modules, as opposed to isolated instances for in-situ construction.
Are there any other issues to consider?
Once an underwriter has agreed to participate in a project, there are other important issues to consider, including optimising the insurance programme for modular projects. This can be achieved in a number of areas:
- Overseas transits – shipping modular components from overseas can present a significant risk to completing the project on time. Whilst delay in start-up (DSU) insurance normally protects the project against the risk of delay caused by insured damage to the works, a separate marine DSU would may be required to provide this protection during transit.
- Defective work exclusions – damage caused by defective work can range from being fully excluded within a policy, to just the cost of improving the defective component. One of these options draws a distinction between the defective component part, which is excluded, and any other damaged items, which are not. Underwriters normally view a modular element as a discrete component. If it is defective in one respect, even minor, it would lead to exclusion of the entire module, which could be extremely disadvantageous in the case of significant modular units, such as individual dwellings. This can only be avoided with very careful drafting of the policy wording.
- Series losses - replication of quality issues across multiple modules can lead to significant claims that are multiplied many times. Careful attention to the application of any policy deductible or condition is needed to understand the implication and uninsured exposure. Very careful drafting of the policy wording here is a must.
- Partial handovers and post completion liabilities - once handed over, the physical risk passes to the employer or owner. The contractor can still be liable for losses arising from defective work and some of these, such as injury or damage, should be insured against under a third party liability (TPL) policy. A relatively recent case has, however, shone a spotlight on the importance of having a properly drafted TPL policy. In Aspen Insurance v Adana Construction (2015), the court was asked to decide whether a concrete tower crane base was a “product” and therefore triggered the products liability extension under Adana’s TPL policy. It was ruled that as it was cast in-situ it could not be regarded as a product, as this was a definition applied to something manufactured elsewhere and brought to the site for installation. This judgement has created a clear distinction between products (such as modular units) and completed contract works (such as in-situ cast components). A TPL policy must be carefully drafted so as to provide cover for liabilities arising from both these areas.
What should you do if you are looking to insure a project with modular components
- Engage a specialist construction insurance broker, such as Miller, who understands the risk issues and underwriter concerns. This will enable you to present the project in its best light to the right insurers, and achieve optimum terms.
- Ensure that insurers can see a clear explanation of the supply chain, Quality Check/Quality Assurance processes and weather/water ingress protections during construction.
- Be prepared to enter into dialogue with the insurance market to explain how the project is risk managed – particularly in respect of fire and water escape risks.
- Leave sufficient time to arrange project insurance.
If you would like any more information, help or advice in relation to modular construction risks, please get in touch.