Modular and prefabricated construction has the potential to transform the construction business. While traditional construction methods remain predominant, modular construction can result in faster builds, more reliable schedules and better quality than “stick build” construction.

The global market for modular and prefabricated construction could reach more than $173 billion by 2027, up 70% from 2020.1 One reason for such growth is excellent quality control, as critical components such as plumbing, electrical subsystems, wall panel systems, and (in certain cases) entire room modules are assembled in a controlled factory environment.

In addition, modular construction promises improved safety and productivity on construction sites. Modular construction can also reduce labor as much as 50% compared with traditional construction. And in places with harsh winter climates, modular construction can continue without weather-related disruptions.

However, modular construction can complicate liability exposures and how construction firms insure them. As the shift continues from field construction to field assembly, defect risks in traditional construction may become product liability risks, with implications on risk allocation between contractors and manufacturing partners, and how projects are insured.

Where modular fits with construction liability risks

General liability insurance in construction generally provides coverage for premises and operations risks (Prem/Ops) and completed operations risks (Comp/Ops). Prem/Ops coverage insures property damage and bodily injury claims arising from all onsite construction activities during the course of construction.

Comp/Ops coverage insures against defective workmanship claims discovered post-construction, such as new homes suffering leaking roofs, cracked foundations or improperly installed doors. Contractors remain legally liable for their defective work and any resulting property damage for several years (often 12) after construction.

However, modular construction components are manufactured in a factory. As a result, defects may be treated as a product liability risk rather than a construction defect risk — components typically ship to the job site disassembled. This separates manufacturing from assembly, raising questions related to risk allocation, legal liability and insurance program design.

These issues are amplified for large, complex projects that may be insured under so-called wrap-up insurance programs. Under most state product liability laws, modular units are considered products and subject to claims of unsafe design or manufacture, or a failure to warn or instruct. These may differ from laws regulating traditional construction defect claims.

Modular elements may be excluded from wrap-up programs

Wrap-up insurance is popular for large construction projects. Under wrap-up coverage, the owner or general contractor buys insurance for all the contractors working on a project site. This aligns project risks with the insurance program structure, reducing coverage overlap, closing coverage gaps and reducing overall insurance costs.

However, since wrap-up insurance traditionally extends only to work performed on or near the project site, wrap-up policies may not cover modular elements manufactured offsite without specific policy modifications. Insurers are responding with policy language modifications; construction operations must be careful and ensure that wrap-ups account for this shift in exposure.

To properly insure modular construction, contractors and their brokers must clearly identify modular construction components in budget and modify wrap-up policies to avoid gaps in coverage and uninsured losses. Modular construction use should be highly documented and include details related to modular construction manufacturing partners.

Additional risk considerations arising from modular construction include design, engineering, procurement and construction management, all of which need to be fully accounted for in an insurance program.

Contractors should not assume that traditional wrap-up programs automatically cover offsite risks. They should consult with their broker to ensure that risks associated with all aspects of the project — including offsite-manufactured modular components — are fairly allocated and properly insured.

HUB International’s construction industry consultants can help you cope with the trends affecting your risk posture — today and in the future.

1 GlobeNewswire, “Global Modular & Prefabricated Construction Market Is Expected to Reach USD 173.44 Billion by 2028 : Fior Markets,” February 4, 2021.