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What’s modular construction? Modular or prefabrication construction is when a large portion of construction projected is done in a controlled environment such as a factory setting. Those modules or prefabricated elements are then shipped to the jobsite where they are installed and additional construction occurs. For example, a large, global hotel chain uses modular construction for its hotel rooms, right down to the television screen on the wall, and then ships the rooms to the construction site of the new hotel. This type of construction is more prevalent overseas and is becoming more and more popular in the U.S. due to workforce shortages and safety concerns.

Modern Day Modular Construction

Modular construction has been around for ages. In fact, Sears reported sales of 70,000 kit houses sold primarily through mail order between 1908 and 1940. There were several other firms that sold prefabricated buildings throughout the 1960s and 1970s, yet the majority were homes. There has been a shift towards modular construction in the commercial space including schools, apartment buildings, colleges, towers and more. Why this trend towards modular?

Safety

After the financial crisis of 2009-10, the construction industry saw a steady decline in its employee base. Now that the economy is growing at a rapid pace, these same firms are having a problem finding employees, and the ones they do find are younger and inexperienced. Inexperienced employees have a higher rate of injury. Employees under 24 have twice as many injuries as those over 25 according to the National Institute for Occupational Safety and Health. To further illustrate this point, 40 percent of all work-related injuries come from employees on the job for less than one year (Bureau of Labor Statistics). In the insurance industry, the adage is frequency leads to severity.  

In many cases, modular construction increases employee safety. It provides a controlled environment away from weather and the risk of people constantly coming and going. Employees working in this type of environment do not have to bend and lift like they do on a construction site and can avoid injuries associated with a multiple employer site, e.g. slipping, tripping, housekeeping and falling objects.

Emerging Risks

Modular construction is providing new challenges as it continues to grow. Prevailing wisdom says modular construction is construction, not manufacturing, and is subject to construction defect statutes governing construction contracts and projects. What happens when a modular unit is transported across state lines and is damaged along the way? When exactly did the damage occur? Which state’s statutes apply to the claim or does more than one? Is the transportation company liable? The courts will sort these questions out as they rule on any forthcoming claims.

Cranes become even more important now that companies are constructing modular units. These units need to be lifted and set in the building and, in some urban areas, with limited space for the cranes to operate. It’s important to remember that a Commercial General Liability policy does exclude property in the care, custody or control of the insured. Essentially, for modular construction, hoisting and moving property is not incidental; it’s part of the deal. Therefore, contractors should have a true, rigorous insurance policy with robust limits in order to conduct the work. Companies need to review the limits of the crane companies as well as ensure they’re providing the proper “on-hook” coverage.

Transporting these units present a new set of risks. Modules can only be so big in order to properly transport or ship them to their final destination. Construction companies will either transport these units utilizing their own fleets or hire commercial carriers. Some states only allow units to be shipped at night, while contiguous states only allow transportation during the day, which creates logistical issues.

Wide load escort vehicles must be considered as well. Companies will need to effectively transfer risk to shipping companies when transporting the modules from the manufacturing site to the job site. When looking to transfer risk onto the carrier, contractors must review the contracts to ensure they have additional insured status to the extent that's available, and that they are held harmless. Otherwise, contractors using their own trucks must be aware of any fleet operation exposures, high auto insurance rates, state-by-state rules, distracted driving, etc.  

Statutes of Limitation 

Statutes of limitation vary state-to-state. There are different trigger points as to what’s a claim. It should be researched and part of the planning process from the start. It’s likely that a construction statute will apply instead of product statutes. One thing to be aware of is if modular construction is taking place in one state and then transported to another, know which statutes will apply. 

Supply Chain 

Supply chain risks are actually minimized in terms of the offsite preconstruction of the module. Modular companies have substantial storage facilities and material on hand. So, in terms of purchasing, supply chain risks could be reduced. On the other hand, a potential supply chain issue is something as basic as an automobile accident or a part falling off the truck during transportation to the jobsite. It’s important these modular and prefabrication elements get to the jobsite for installation in the proper sequencing; otherwise, it can lead to backups. It’s wise for the end user to review the operations of the modular construction company. Is the company prepared to handle a major loss? Is all the property being installed stored in one location or multiple? If one location, what happens if a major loss occurs at this site? Companies could be at risk for delay costs or liquidated damages if the modular company cannot provide the product due to a major loss. Review the builders risk policy and make sure the proper business interruption protection is in place, in addition to soft costs.

Modular construction can provide a controlled environment, eliminating some setbacks such as weather and defects on the jobsite. As the modular construction space continues to expand and alter, it’s important to consult with an insurance broker to minimize risk and maximize the health and safety of the workforce.

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