There are good reasons modular and prefabricated construction has been undergoing a low-velocity explosion for the last decade.

Quality is boosted when components from plumbing to wall panels to entire rooms are assembled in a controlled environment versus onsite. Safety is improved as controlled conditions cut down on slips, falls and other risks on a jobsite exposed to the elements. Productivity gains of 30% to 50% are a factor too, given the greater output possible for the same man hour as traditional construction. And modular construction delivers on sustainability as there is less materials waste.

It’s a small wonder, then, that the global market for modular and prefabricated construction is expected to jump 70% from 2020 levels to $173.44 billion in 2027. Despite its expanding presence, though, modular construction also complicates the contractor’s potential risks and how they need to be insured. A major issue is that the shift from field construction to field assembly also shifts traditional construction’s defect risks to product liability risks.

In the process, it can affect how risk is allocated between contractors and their manufacturing partners—and how projects need to be insured.

Understanding How Modular Fits With Contractor’s Liability Protection

General liability insurance for construction projects provides coverage for premises and operations (prem-ops) and completed operations (comp-op) exposures:

• Prem-op insurance protects against claims of bodily injury or property damage related to onsite construction activities while operations are ongoing; and
• Comp-op coverage is protection against claims of defective workmanship that is discovered after work is completed. Whether faulty roofs, leaking foundations or improperly installed windows or doors, contractors are legally liable for defective work and any resulting damage for as long as 12 years after the project’s completion.

While product liability has always been a construction risk, the growing use of prefabricated components escalates it. Modular construction components are manufactured in a factory and usually ship unassembled. The manufacturer provides instructions for their reassembly and how they should be connected to other modular units on the jobsite.

Under most states’ product liability laws, such units are considered products and thus subject to claims of unsafe design and/or manufacture or a failure to warn or instruct. These laws may differ from those regulating traditional construction defect claims. The separation of manufacturing from assembly raises questions related to risk allocation, legal liability and insurance program design.

The issues are even greater when it comes to large and complex construction projects insured through wrap-up insurance programs.

The Modular Coverage Gap with Wrap-Up Policies

The wrap-up insurance model is increasingly used for large projects. It’s an approach where the owner or the general contractor buys insurance for all the firms working on the project so that coverage that is more closely aligned to the project risks. There’s less overlap in policies and insurance costs overall are reduced.

But wrap-up insurance traditionally only extends to work on or near the construction site and often excludes modular elements manufactured offsite, even as they account for increasingly bigger chunks of an overall project. In response, carriers may extend wrap-up coverage to those offsite modular fabrication activities, but only with specific policy language modifications.

It requires considerable due diligence by brokers to specifically identify modular components of a project in project budgets, modifying wrap-up policies accordingly to avoid gaps in coverage and uninsured losses so that the general contractor doesn’t come up short on problematic claims.

The extent of modular’s use must be documented in detail, including information on offsite manufacturing partners. Further, there are other risks arising from modular construction, including design and engineering, procurement and supply chain disruption, as well as sequencing and scheduling coordination. All must be fully accounted for and carefully coordinated as part of the broader risk management strategy.

Modular construction is positive development, but not without its own set of challenges. Assuming that traditional insurance strategies such as wrap-up programs will automatically extend coverage to offsite risks can be a mistake. It’s imperative to consult with an experienced broker to ensure that all risks associated with all aspects of a project are appropriately allocated and properly insured.