Modular and Prefabricated Construction: Insurance and Surety Questions and Concerns
Key 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 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 Factors Forcing Change:
. More and better technical resources
. Chronic manpower shortages 4 5 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 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 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 Low waste based on managed inventory of materials
Improved Safety
Reduced Construction Costs 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? 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 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 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 classified 2799 – 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 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 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 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 Practically, manufacturing plant likely covered by modular contractor’s Master / practice policy
Project policies would shrink significantly due to reduced payroll 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 Bond Time Limitations:
. Typical Bond time limitations for manufactured products may not apply to modular builder/prefabricator 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 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 The Commercial General Liability policy excludes property in the care, custody or control of the insured
For modular construction, hoisting and moving property is not incidental
True rigger’s insurance is appropriate 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 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 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) Bob Haskell Product Line Manager AXA XL (312) 444-6548 [email protected]
Ronald D. Ciotti, Esq. Partner Hinckley Allen (603) 545-6142 [email protected]
Melissa Lesmes Partner Pillsbury Winthrop Shaw Pittman LLP (202) 663-9385 [email protected]