Key Considerations & FAQs of Offsite Construction Insurance w/ Maslon LLP[podcast transcript]

John McMullen

Hello and welcome to Inside Modular: The Podcast of Commercial Modular Construction, brought to you by the Modular Building Institute. Welcome everyone. My name is John McMullen and I'm the Marketing Director here at MBI. Today I'm talking with Jevon Bindman, partner in Minneapolis-based Maslon LLP. Jevon is here to talk about the ins and outs of properly insuring offsite construction projects. Jevon, thanks for being here.

 

Jevon Bindman

Thank you for having me, John.

 

John McMullen

It's my pleasure. Tell me about yourself, Jevon. What's your background and what got you interested in the offsite construction industry?

 

Jevon Bindman

I've been an attorney at the Maslon law firm in Minneapolis for about 10 years, and I have a general litigation practice helping businesses with their disputes, and lawsuits. As part of that practice, I focused on construction and in particular insurance coverage issues. So, our firm helps clients to file claims for insurance coverage, and then file lawsuits against insurance companies if necessary. In the construction industry, insurance is such an essential component because there's so many different moving parts. So, unlike insuring a painting on your wall, which just sits there, you have all sorts of activities going on in the construction site. Modular and offsite construction adds another wave of complexity. A lot of the work is done outside of the project site in areas that may or may not have insurance coverage. So, we've been seeing the numbers and the extent to which modular construction is becoming a bigger and bigger part of the overall construction scene. Insurance is still catching up to that and trying to figure out what products make sense. So, it's a really exciting and new area for insurance coverage litigators like myself.

 

John McMullen

Before we get any deeper into this, I was hoping you could give me a quick primer on a couple of terms. I've been reading the materials you gave me before the show, which we can link to of course later on to MBI’s website. For those who haven't read that, or anything else pertaining really to insurance, and for people who struggle with insurance terms like myself, I was wondering if we could go through a couple of things. You could tell me what they mean, specifically, when it comes to offsite construction. So covered property, how is covered property and offsite construction different than traditional construction projects?

 

Jevon Bindman

So, in your typical insurance policy for construction projects, you're going to have a definition of the covered property. That's essentially the property that applies to the insurance policy. So, if the loss occurs at the covered property, then the loss will be covered, assuming that it meets the other requirements. Typically, that's going to be the project site and maybe some surrounding areas. You might have a laydown yard or some other ancillary spots. The difficulty that comes with offsite construction is that you have entire units that are being constructed potentially hundreds of miles away, maybe even in a different state. Absent some manuscript edits to the policy, those are not going to be covered by your traditional insurance policies, such as a builder's risk policy or a general liability policy, until those products arrive at the site. The cost of those products before they arrive at the site creates a significant risk for the owner and the general contractor that they would have a loss before those items arrive on site and are covered by their insurance.

 

John McMullen

Okay, so I got another one for you, goods and services. There seems to be some confusion about these given the nature of offsite construction and project delivery. How do you typically explain this?

 

Jevon Bindman

Essentially, goods are something that a person makes and services are something that a person does. So, in terms of construction goods might be two by fours and drywall. Services are the framing contractor building a wall. Offsite construction blurs the lines between goods and services because what is ultimately delivered is an entire unit. So, for example, for building an apartment complex, you might deliver an entire apartment that is ready to be hooked up to gas, water, electricity, etc. Is that a good or a service? Well, certainly it's a product that was made by a company, but a lot of services went into that as well. It can be unclear as to whether it's a good or service and that can make a big impact on how insurance covers the good or the service because there are policy exclusions that can apply for example, there are often policy exclusions that exclude the work performed by a contractor. So, if offsite construction is considered a service, that could in some cases preclude coverage, even though there are a lot of goods that are a part of that unit. It's important to try to define those terms and make sure that it's clear in the policy as to whether these are considered goods and services. It’s important to have that discussion ahead of time.

 

John McMullen

Are there any other terms or aspects to insuring an offsite construction project that tend to confuse people? I know I just named two, but I'm sure there's a lot.

 

Jevon Bindman

Yeah. One that comes up pretty often is the difference between design work and installation work. On an offsite construction project, you're going to have design components, designing the units, and you're going to have installation components, putting it together off site, and then also installing it when once you get on site. The insurance products that respond to issues of installation versus design are two different policies. So, you have a general liability policy, or maybe a property policy that would deal with installation issues, but then you have a professional liability policy that applies to design issues. So again, being very clear about which aspects of the project apply to which activities is very important, so that you don't end up in a situation where the general liability and professional insurers are pointing fingers at each other, and you're the one who's left holding the bag.

The other term that I would mention is additional insured. An additional insured is an entity that is added to somebody else's insurance policy. Typically, you'll see this where an owner or general contractor is added to a subcontractors’ insurance policy as an additional insured. We always highly recommend that owners and contractors get added to the lower tier insurance policies. But when you're dealing with an offsite insurer who's building their products off site, it can become a little bit murkier as to whether that type of coverage is available.

 

John McMullen

When it comes to insuring an offsite construction project, what tends to be the biggest sticking point for insurance companies? You mentioned that offsite construction blurs the line, which it certainly does. How can manufacturers and stakeholders help alleviate some of that confusion on the front end?

 

Jevon Bindman

Well, the first thing I'll mention is that offsite construction is a benefit to insurance companies in a lot of ways. You have a climate-controlled site where the construction is occurring, you tend to have highly skilled workers who are working in a safer environment, there's no weather delays, there's no safety issues associated with weather, insurance companies should love all of that because it's making the job less risky. That being said, there are a few risks that tend to be greater on an offsite construction project. The first one is obviously transportation. Rather than transporting goods, like two by fours to the construction site, or maybe even some prefabricated components, you have entire units that are being loaded onto a train or a truck and shipped sometimes several 100 miles to the construction site. The risk of loss of those items is going to be much greater than losing a shipment of two by fours. So that's an important consideration. The other additional risk that we see is the increased use of cranes on the job site once the units have been delivered. Oftentimes, these projects require more crane work or cranes that can lift heavier loads. That is another aspect that you'd want to have a discussion with the insurance company to make sure that they are aware of the differing nature of this type of project.

 

John McMullen

What are some best practices for offsite manufacturers and project stakeholders when it comes to arranging for project insurance or perhaps modifying the plans that they have?

 

Jevon Bindman

The first one, and most important I think, is to make sure you engage your brokers and insurers early in the process, explain the differences between a traditional project and this one. This is particularly important for a general contractor who does some modular or offsite work, but it's not their entire practice. They might have a general liability policy that covers for all sorts of different projects, and you want to make sure that you're not going to get caught up in one of those exclusions that may or may not apply because of the unique nature of offsite construction.

My next recommendation is to extend coverage to the manufacturing facility if that's possible. Sometimes for very large projects you'll have an insurance policy that is specific to that project site. It's often called the owner-controlled insurance product. It would be worth a discussion to see if that policy can be extended to include loss or damage that occurs at the manufacturing facility as well. Third recommendation is, if you are the offsite manufacturer, make sure that you have sufficient insurance not only for building the product itself, but for transportation and any damage or injury that those products may cause throughout the lifecycle of the project. Finally, if you're the general contractor, or owner or developer, make sure that the offsite manufacturer has sufficient coverage for those same losses. And if possible, that you can be named as an additional insured on their policies.

 

John McMullen

Is there anything else that MBI members might need to consider when looking for projects’ insurance coverage?

 

Jevon Bindman

I would say to keep abreast of changes in the insurance marketplace. This is why it's important to engage with your broker. There are more and more products that are specific to modular construction that are available every year. So, keep up to date as to what's available in the marketplace. Then also just have a plan for when things go wrong. If there is a loss, who are the people that are going to be helping you through that process, putting together a team that is aware of risk analysis and making sure that claims are brought properly and timely.

 

John McMullen

Lastly, you mentioned that there are more products available for modular construction, offsite construction. Is it your opinion that insurance companies are getting a little bit more hip to the offsite industry? They're understanding a bit more the ins and outs of how it works?

 

Jevon Bindman

Yeah, I think so. It will take time, but they will only grow as the offsite construction footprint gets larger. The products that are currently available tend to be for smaller projects, such as residential or small multifamily projects. As we get farther and farther along, I think we'll see more larger projects that have tailored insurance products available for offsite construction as well.

 

John McMullen

So, any manufacturer or developer looking at a hotel project or large multifamily project, definitely should check with their insurance providers first if I understand you correctly.

 

Jevon Bindman

Yes. If products aren't available at this point, maybe in a couple of years something will be available. That makes sense.

 

John McMullen

It does. Very good. Thank you, Jevon. I really appreciate your time today. If anyone's interested in reaching out with questions, is that something they are able to do?

 

Jevon Bindman

Yes, definitely. My email address is jevon.bindman@maslon.com. I'm also very active on LinkedIn. I'd love to connect with you there. I keep up with issues regarding offsite construction insurance, as well as just general litigation issues. I'm very active on my account there.

 

John McMullen

Excellent. Well, I will reach out and connect after this episode. My name is John McMullen, and this has been another episode of Inside Modular: The Podcast for Commercial Modular Construction. Until next time.