Construction companies are increasingly using modern methods of construction (MMC) techniques as the industry embarks on the quest for greater sustainability. However, uptake in the UK could be hindered by insurance companies’ risk appetites despite the many advantages of MMC, including reduced construction costs, increased productivity, improved health and safety, and enhanced environmental, social, and governance (ESG) performance.
This article examines a number of factors that UK contractors and developers may wish to consider in order to reap the myriad rewards of MMC and bring comfort to insurers in a tough market:
- State of the construction insurance market. In 2018, construction insurance started transitioning out of a soft market globally due to a series of major losses and an unprecedented number of carriers withdrawing from underwriting construction business. Rates increased and capacity reduced, as did insurers’ risk appetites. At the same time, policy wordings tightened, and exclusions widened. During the past year, however, the market has stabilized in certain areas. For the right type of risk, there is some moderation in terms of price rises.
- How insurable are modern methods of construction? MMC techniques have been split into seven categories by the UK government. The associated regulatory complexities are exacerbated by the fact that UK construction insurers have less experience with MMC compared to their counterparts in other countries, resulting in a cautious, conservative approach to underwriting projects utilizing modern methods. Yet, the increasing prevalence of such techniques in the construction industry means there is an expectation for insurers to offer greater collaboration and better understanding to generate comfort with insuring such risks, in the absence of years of data.
- How MMC risks are placed with construction insurance companies. There are varying appetites across the MMC spectrum. For example, some markets will consider CLT and/or timber elements, while others will not entertain them at all. Ultimately, construction firms and their brokers will need to accurately demonstrate to insurers that the benefits in the project utilising MMC significantly outweigh the inherent additional risks, such as QA and QC, transit risks, series loss risk, supply chain concerns, and the ability to rectify and investigate damage on site.
- The benefits and challenges of placing MMC risks. The benefits of MMC compared to more traditional construction methods/materials are manifold, which may result in improved terms from insurers. But they will also lead to increased information requirements from insurers, including clear policy language on deductible application, the definition of offsite storage and manufacture, and assignment of risk of loss during manufacture, delivery, fabrication, and on-site erection. Clients should also be aware that sudden changes in government legislation could lead to challenging delays, estimated contract value increases, and period extensions to projects.
- Coverage considerations for construction projects utilising MMC. There needs to be clear understanding from all parties as to where the manufacturing, transit, and contractor’s all risks (CAR) policies incept and cease in order to avoid confusion in the event of damage. It is possible that CAR insurers might not wish to cover higher storage and transit exposures, meaning separate cargo/transit coverage may need to be sought. Further, the uniformity of modular building brings an increased inherent defects risk; if the project insurance contains a series loss clause, cover could be limited. Professional indemnity risks and the limit of indemnity, in the context of modern methods of construction risk exposures, should also be considered.
- Covering risk in the operational phase. Real estate insurers lag about two years behind construction insurers in terms of their experience with MMC risks and, like most insurers, are more wary of MMC risks than those associated with standard materials and processes. Consequently, cover for projects incorporating MMC risks will be harder to place during the operational phase.
- Modern methods of construction claims landscape. There has been a relatively small number of claims related to MMC, but they are expected to increase as new materials and processes become more popular. Many claims will not be specific to modern methods and will be dealt with in the traditional way. However, modular building brings implications around the DE4, or defects, exclusion in a policy; thus, wordings need to be carefully examined, and a counter-clause perhaps added for the purposes of DE4.
This technical paper was first published by Marsh.