The UK government set a target of building 300,000 homes every year by 2025. According to the NHBC, the figure for 2019 was just over 161,000, leaving a substantial gap to bridge. With modern methods of construction hailed as the answer to the problem, how does the insurance market view these from a risk perspective?
Build Homes, Build Jobs, Build Innovation was both the name and the message of Mark Farmer and Mike De’Ath’s recent report into the housebuilding industry. The authors were exhorting the UK industry to embrace modern methods of construction (MMC) to drive improved supply and address the longstanding surfeit of demand. Greater adoption of MMC, they say, is the key to unlocking a virtuous circle of increased investment, innovation and consumer confidence.
Historically labelled with a reputation for failing to adopt new techniques and technologies, there has been a wave of new construction products and methodologies in recent years, which are revolutionising the sector. Modular construction is viewed as having particular application to housebuilding or residential projects.
Modular construction explained
The technique seen as most likely to drive significant change is modular construction; the process by which components are assembled into units off-site as opposed to in-situ. These prefabricated items can be as simple as a precast concrete member, or as complex as an entire house or residential unit.
The modular approach to construction has grown in popularity and is gradually being used for items of greater and greater complexity. It is not uncommon for residential property projects to involve the installation of individual modular dwelling units that have been prefabricated off-site and delivered ready to connect to building services. These are also popular in the hotel and student accommodation sectors.
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, which will ease the implementation of COVID-19 measures. But how are underwriters responding to such methods?
Considerations from the insurance market
As a specialist construction insurance broker, we speak regularly with underwriters to understand their appetites for risks and identify market trends. I was surprised to hear during recent discussions that some insurers are not interested in insuring modular projects.
Having suffered losses for several years, underwriters are looking to deploy less capacity on each risk, meaning the number of insurers required for a large project is increasing. Any limitations on available capacity should be a concern, as while we expect underwriters to be more selective for heavy civils risks, such as tunnelling or hydroelectric plants, modular residential projects should be a different story.
Why so, given the well-publicised benefits?
Underwriters are more than familiar with the advantages of modular construction. In theory, assembly in a controlled environment should lead to fewer defects, less exposure to the elements and a safer workplace. The carbon emissions benefits aren’t of immediate advantage but they do feed into a growing mind-set within the global market that insurers must stop supporting projects that will increase global warming. For instance, it is now much more difficult to insure projects involving thermal coal or oil sands.
Despite the above, there have been a number of interesting and significant claims highlighting concerns. These fall into two categories: risk of damage and remediation cost, and quality.
Risk of damage and remediation cost
A number of modular construction projects have experienced losses relating to damage, typically from water ingress prior to completion of the building envelope. A slightly ironic reason given it being one of the risks that modular construction is supposed to mitigate. Rain storms can lead to water penetration between modules and progress to different levels of the building.
Fire damage is another concern that has been reported, especially post completion. 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.
If damage does occur, remedial works must be carried out in situ and by a workforce that may be unfamiliar with the original construction of the units. Rectification costs can be considerably in excess of the original manufacturing cost, especially if the units originate from a low labour cost economy. Understandably, insurers must take this into consideration when setting premium rates.
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 modular residential is seen as a higher quality product with units manufactured in controlled environments. Some quality concerns persist, however, and these are often aimed at overseas manufacturers.
As an example, the Chinese modular industry has gone to great lengths to assuage these fears and some territories have introduced certification requirements with quality control steps, including:
- Certification of the factory quality programme
- Certification of the build product
- Auditing of the factory quality programme
- In-factory inspection of the build product
All key steps in a well risk managed project, the insurance market continues to see cases of widespread quality issues, some of which are only revealed following some other form of damage to modular components. There are also concerns that poor quality or design will simply be replicated in all prefabricated units 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, a separate marine DSU would be required to provide this protection.
- 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.
- 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 policy. A relatively recent case has, however, shone the 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 I do if I am looking to insure a project with modular components?
- Engage a specialist construction insurance broker who understand the risks issues and underwriter concerns. This will enable you to present the project in its best light to the right insurers.
- Ensure that insurers can see a clear explanation of the supply chain, QC/QA 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 in relation to these areas.
- Leave sufficient time to arrange project insurance as the market appetite for these risks is considerably reduced from its peak in mid-2019.
If you would like any more information, help or advice in relation to modular construction risks, please get in touch.