Insurance Implications of Modern ConstructionJune 2019
Geraghty Taylor is pleased to present our first guest article by Shaun Grainger of PIB Insurance Brokers, picking up on the vital insurance issue covered in our earlier MMC article.
The UK national housing crisis and ongoing pressure to provide new housing is showing no sign of abating. More housing is required to ease the strain on the housing market and hit the proposed government targets. The natural solution is to build cost-effective new homes, rather than conversion or alternative housing arrangements. Furthermore, the demand in rental sectors such as student accommodation, build to rent and retirement living, is also seeing an increase in building activity for developments with purpose-built solutions. Modern Methods of Construction (MMC) and modular construction are being utilised throughout the industry as efficient and quicker ways of building to meet the ongoing demand, with its predominant use in the development of high-rise apartment blocks.
While modular and other forms of MMCs for residential and commercial property are nothing new, having been part of the industry in various forms for many decades, they do present some important insurance considerations for those insuring their pre-build and construction.
Insuring the ‘product’ – Warranties and Indemnities
As technology, and the building methods that follow, improve then naturally so should the quality in design and manufacture of modular units. This leads to a primary focus of inspecting the build off-site and reducing the time spent on-site reducing defects, which have been known to delay completion on a large-scale project and use the time and resources of multiple contractors.
For the insurance sector, the units finished offsite are now being viewed as ‘products’ in themselves, from a design, build and installation perspective. Therefore, placing increasing importance on having the correct insurance warranties and contractual obligations. Current insurance warranties would provide protection for up to 12 years from practical completion, notwithstanding the usual contractual requirements. Within the residential market, these warranties are a requisite particularly by funders, especially if the properties are being sold/financed. However, the same benefits can also apply to commercial units.
Does using modular construction mean higher claims?
As a ‘product’, there is greater clarity of control and therefore better control of the delivery, which may, in turn, reduce the number of claims brought about in construction. However, due to the type of construction, these claims would likely be greater than in traditional construction as the whole unit may need to be replaced in a problem occurs.
Other insurance considerations and risks to be considered which may lead to increased claims costs include:
- Buildings using MMCs will often only be designed to satisfy local Buildings Regulations which typically only cover life safety issues, not fire resistance. Using lightweight and combustible materials also mean there will be less resistance to fire spread.
- Timber framed buildings are of concern to insurers and will require fire suppression measures.
- External cladding panels with foam fillings have excellent insulation properties but are highly combustible.
- Fire/smoke and water can get into the voids between modular units leading to much larger claims than would otherwise be the case.
- Connection of services to pod units may be made by non-specialist tradesmen which can lead to problems over time.
- Accessibility for repairs and maintenance may be difficult, repairs are potentially less straightforward if a whole pod has to be removed, especially if at the bottom of a high-rise building.
- The fire break integrity of the building is easily compromised by drilling into panels to install new services.
- Many MMCs are new and innovative, their resistance to damage and performance over time is unknown.
- There may be problems in obtaining replacement parts in future, particularly if the manufacturer has gone out of business.
Insuring the modular developer
The advantage for developers lies in the fact the modular companies have improved supply access and stock capacity than those with specific onsite construction. Modular companies can plan the build more efficiently without reliance on multiple parties or contractors. Further benefits include faster construction times, less people on site and less wastage. Quality control is improved as works are carried out in a controlled environment and less prone to human error and services (plumbing & electrics) can be pre-installed so that the only connections are required are to the external supplies once in situ. The modular constructions are also are highly energy efficient.
Modular buildings can be cheaper to insure as the industry is still in its infancy for the insurance market. In future, this could lead to less complicated placement, which in turn could also result in lower premiums although there is little evidence for this in the current market.
Modular construction – what are the pitfalls?
Although MMCs do have many benefits, the risk of the completed modules themselves can be damaged or destroyed in transit is possible, which results in longer delays to the programme. These may not be covered under a Delay in Start up (DSU) section of a Developers Project insurance programme, especially if responsibilities for storage or delivery have not been clearly defined.
Also, if a contractor or supplier becomes insolvent in a traditional build contract, the developer can obtain alternatives. If a modular producer goes insolvent or the units are damaged beyond repair before reaching the site, it would prove more difficult to obtain replacements in a suitable timescale.
The insurance broker and BOPAS
Working with your insurance broker and MMC insurers can address the concern of using modular construction during the design phase. It is also worth considering the Buildoffsite Property Assurance Scheme (BOPAS) Scheme, which provides an assurance of the integrity of offsite construction systems delivered in a consistent and competent manner conforming to contract specifications.
The BOPAS assessment involves all aspects of the business operation including systems, processes and procedures, together with handover interfaces from design through offsite manufacture and construction/assembly to client handover. These are all being tested against the arrangements for sustaining quality delivery, dealing with environmental and project changes and the control measures that are applied to mitigate delivery risks.
Set up by BLP insurance, the BOPAS scheme provides industry wide accreditation for the modular products used in construction. Using BOPAS approved contractors gives your insurer confidence in the quality of the product and relinquishing the need for additional surveys and inspections by the insurer. In time, this may also result in lower premiums and the market confidence increases, however this has not yet been evident.
The importance of disclosure
The use of MMCs is an important feature which should be disclosed to insurers who may require additional precautions to be undertaken. If you are buying a property, the use of MMCs may not be immediately obvious.
The Insurance Act of 2015 introduced a duty of fair presentation, meaning that the insured must make the insurer aware of all the risks of insuring the building or home. Therefore, if you have any doubts as to the construction of a property it is important that you investigate and establish if this is the case. If an MMC has not been disclosed to the insurer, they are within their rights to impose a rateable settlement in the event of a claim or, even worse, avoid the policy which could potentially leave Property Owners or Developers many £1000s out of pocket.
Geraghty Taylor. Create differently
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To discuss with a property specialist about insuring your property, where built with MMC or traditional methods, please contact – Shaun Grainger, PIB Insurance Brokers – Sales Manager, Property and Construction on 07496980612 or email@example.com.