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Modular and Prefabricated Construction: Insurance and Surety
Questions and ConcernsKey Questions that Modular and Prefabricated
Construction Raise about the Insurance Policies and Surety Bonds
Intended to Manage the Risks Inherent in the Construction
Process
January 29, 2019
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Industry’s tepid productivity growth rate: 1% over the past 20
years By contrast: the world economy’s productivity growth as a
whole is 2.8%, and
manufacturing in particular is 3.6%
Modern Concerns Thin operating margins + inherent construction
risks = few incentives to
implement major changes
Slow integration of technical innovation and difficulty making
necessary investments
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Factors Forcing Change:
More and better technical resources
Chronic manpower shortages
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Prefabricated Construction: Construction components that are
preassembled (on some level) prior to arriving on site e.g.,
Modular buildings
Expanding into the commercial space (including retail)
Significant investments are being made into Modular and
Prefabricated technologies Possible solution to issues of
productivity
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National Institute of Building Sciences Off-Site Construction
Council (2018)
More than 87% of construction managers, general contractors,
engineers, trade contractors, architects, owners and developers
used some form of prefabrication in the past 12 months
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Helps address shortage of qualified workforce by: Reducing
number of workers required on site Allowing for full-time workforce
at manufacturing facility
Speeds up construction providing for faster return on
investment
Improved quality because indoor environment is more
controlled
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Low waste based on managed inventory of materials
Improved Safety
Reduced Construction Costs
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Answer: Depends.
In the event of a claim, the product v. work determination would
be a question of fact to be resolved by a judge or jury
Was the loss precipitated by a failure or deficiency of the
manufactured product, or was the installation and/or related
construction operation at fault?
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Article 2 of the Uniform Commercial Code UCC applies only to
transactions in goods
UCC defines “goods” as “all things (including specifically
manufactured goods) which are movable at the time of identification
to the contract for sale . . .,”
The UCC does not apply to contracts that are purely for
services
The prevailing view of the courts has been that modular builders
are engaged in a “provision of services” and are therefore
subcontractors
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Answer: Statutes of limitation and repose are
state-specific.
Which statute to apply depends upon case facts
Out-of-state modular builders/prefabricators may trigger
statutes of limitation and/or repose in the state of manufacture
and the state where final installation was completed
Modular/Prefabrication subcontracts should be drafted to account
for these differences and for the possibility of changes in the
statutes
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Answer: National Council on Compensation Insurance (NCCI)
identifies the appropriate classifications for all modular /
prefabricated operations as:2797 – Setup, hookup, installation, or
finish work at the job site must be
separately classified2799 – Should not be used to classify “drop
shipping” deliveries to site (use
trucking classifications instead)
Some Non-NCCI states have their own classifications i.e., NY,
MI, MN and NY currently use 2802 and PA uses 451
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Answer: The contractor will be required to maintain records
splitting the payrolls in accordance with the work being
conducted
In the absence of payroll splits, Rule 2G stipulates that all of
the payroll will be applied to the highest rated
classifications
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Answer: An “Occurrence” is defined as “an accident, including
continuous or repeated exposure to substantially the same general
harmful conditions.”
Crucial factor is the accident location
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Answer: If a project’s fabrication operations are co-mingled
with other manufacturing operations at a centralized plant,
incorporating those operations into project-specific insurance
would be very difficult.
Carving out exposures: Dedicate a section of the plant and
manufacturing employees to each project, with a defined time-frame,
to simulate necessary conditions
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Practically, manufacturing plant likely covered by modular
contractor’s Master / practice policy
Project policies would shrink significantly due to reduced
payroll
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Modular/Prefab subcontractors are highly specialized and
difficult to replace
Contract Provisions concerning liquidated damages and bonding
requirements must be properly carried down to modular/prefab
subcontracts
UCC remedy allows for Specific Performance for unique goods
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Bond Time Limitations:
Typical Bond time limitations for manufactured products may not
apply to modular builder/prefabricator
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Trucking of modular units represents a unique risk. Contract out
shipping to commercial carriers with wide load escort vehicles and
specialized insurance.
Proper indemnification and documentation critical
Transportation regulations are on a state-by-state basis
Shipping out-of-state from the manufacturing state to the site
location involves
different codes, permits, escort vehicles and fees
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Elements often lifted into place by crane, commonly truck
mounted hydraulic cranes, crawler cranes or tower cranes.
Location of the crane is critical
Modular construction allows for a smaller site e.g., parking a
truck with a tower crane close to the building
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The Commercial General Liability policy excludes property in the
care, custody or control of the insured
For modular construction, hoisting and moving property is
notincidental
True rigger’s insurance is appropriate
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Construction culture's reliance on traditional methods
Aesthetic considerations “A prefabricated building can’t look as
though it’s prefabricated”
Identifying and Validating Cost Efficiencies
Building Codes
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Emphasis on sophisticated planning and design technologies
Last-minute design changes
Perception that Modular / Prefabricated buildings won’t be as
valuable
Reduced predicted lifespans of some prefabricated buildings Mass
Timber’s involvement
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The National Institute of Building Sciences Off-Site
Construction Council (2018) > 81% of construction managers,
general contractors, engineers, trade
contractors, architects, owners and developers plan to use
offsite construction in the future
Amazon and others recently invested a total of $6.7 million in
Plant Prefab, a design and prefabrication company with a 62,000-sf
factory in Rialto, CA
SoftBank Vision Fund led investment in Katerra, a modular
construction start-up raising $865 million in a series D funding
round (valued at just over $3 billion)
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Bob Haskell Product Line Manager AXA XL(312)
[email protected]
Ronald D. Ciotti, Esq. Partner Hinckley Allen(603)
[email protected]
Melissa Lesmes Partner Pillsbury Winthrop Shaw Pittman LLP(202)
663-9385 [email protected]
mailto:[email protected]:[email protected]
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Construction�Modular / Prefabricated Construction�What Are the
Advantages of Modular / �Prefabricated Construction?��What Are the
Advantages of Modular / �Prefabricated Construction?���Is Modular
construction considered �“your product" or “your work"?����Is
Modular construction considered �“your product" or “your
work"?��What Statutes of Limitation Would Apply?�Will there be
changes in WC class codes since the work is being done
differently?��What if the modular builder does both the in-house
manufacturing and the on-site installation / construction?��How
will "occurrence" be determined? Parts will be done offsite
and then installed.��How will Modular Construction �impact
project-specific insurance, including Wrap-Ups?��How will Modular
Construction �impact project-specific insurance, including
Wrap-Ups?��Concerns For Sureties / Subcontractor Default��Concerns
For Sureties / Subcontractor Default�Transportation
Issues�Installation of Modular and Prefabricated
Units��Installation of Modular and Prefabricated Units��Barriers to
the Growth of Modular / Prefabricated Construction����Barriers to
the Growth of Modular / Prefabricated Construction����The Future of
Modular / Prefabricated Construction�Contact Information
