Insurance challenges for clients and contractors in residential modular construction
We have previously discussed the rise in popularity of modular construction methods in Australia. Modular construction can improve efficiency of construction and reduce construction time on site. Fabrication of modular segments in a factory and transportation and connection on site differ greatly from traditional construction methods. Whilst our previous article focused on commercial and industrial modular construction, this article will focus on some of the insurance issues facing both modular home builders and clients.
The Home building Act in NSW does not consider pre-fabricated modular buildings as new single dwelling constructions. As such home warranty insurance only applies to the “on site” component of the works – that is the construction of the foundations, connection of services and any associated landscaping.
What does this mean for a client who has defects in the building following construction where the builder is no longer trading? It would be suggested that only the on-site works would be covered by Home Warranty Insurance, and the building itself would be excluded. This is a poignant example of legislation not keeping up with construction trends as they evolve.
Considerations for clients
For prospective clients thinking about buying a modular home, they will usually have to engage the services of an architect to design the building within the parameters of the segment size which can be constructed in a factory and then transported to site. As such this usually sees segment widths limited to 3.5m (the width of a truck). Following this design the client will enter into either one or separate contracts for the construction and installation of the segments.
Given the nature of modular buildings, finance can be difficult to obtain. Financial institutions are often not comfortable making progress payments on segments which are not in the possession (i.e. on-site) of the borrower, and which may not be able to be recovered in the event of the builder’s insolvency (noting again that Home Building Compensation Fund (HBCF) cover would not apply). As such, owners are often required to fund the fabrication phase without bank support. Banks will often only provide finance once the modular building has been installed on site – creating a financial burden on prospective homeowners.
Considerations for contractors
For Contractors, traditional insurance (Contract Works and is designed for works to be undertaken on a project site, and for the value of works to rise incrementally over the period of the project. Modular buildings present a much different risk profile for insurers. Whilst the fabrication in an enclosed workshop reduces some risk of loss or damage (particularly weather perils), the transit and installation risk are significantly higher. Completed segments being transported on trucks can cause vibration and damage to installed components, traffic incidents can damage the segments, and the craning of segments (which could be valued in excess of $400,000 each) are not risks ordinarily faced by traditional construction contractors.
It is important for insurers to understand the nature of the risk being insured to avoid conflict in the event of loss or damage occurring during transit and installation.
At present, insurers have little appetite in providing coverage for loading and unloading activities. It is common practice among crane operators to incorporate waivers of liabilities or limitation of liability clauses in their standard contracts, favouring their own protection. This leaves contractors to bear the financial responsibility for any potential losses or liabilities arising from loading and unloading activities, without the protection of an insurance policy.
Modular building contractors also often design the segments using computer aided design software, rather than outsourcing this to a third party. Each design is usually bespoke, and as such this presents a significant professional liability exposure for the contractor. In the event a completed building does not meet certain design parameters, the contractor is much more exposed to claims from owners relating to issues with design.
There are many risk considerations for prospective purchasers of modular buildings, and constructors. Managing the risk of loss or damage to the segments, and potential liability associated with same, is critical. This ensures that all parties are protected during the course of constructing modular buildings.
If you have any queries, please contact Bellrock to discuss.