Builders Risk Issues with Modular Construction: Navigating the Challenges of Moisture, Transportation, and More

Modular buildings are the most exciting construction innovation since the cowboy hard hat.  They provide a quick, efficient, cost-effective way to construct new buildings.  While the industry’s appeal is evident, many contractors and developers have faced significant drawbacks as new claims issues continue to emerge. In the meantime, the builders’ risk market has been inconsistent in its underwriting approach and as the challenges of this portfolio class develop, policy terms and conditions are expected to evolve.

Understanding the Risks of Modular Construction

Modular construction involves assembling prefabricated units, or “boxes,” on-site. Since each box is typically designed separately, discrepancies can arise in the overall HVAC system, insulation, and sealing, creating potential entry points for moisture.

The highest risk of modular construction failures is typically seen in residential or multi-family buildings such as hotels, student housing, and senior living facilities. These buildings often share similar needs, including individual heating/cooling units, bathroom exhaust systems, and some central HVAC make-up air systems. With more modular “boxes” involved, increased interior cavities heighten the risk.

When water or mold damage occurs, modular construction is very difficult to repair. In severe cases, the building may need to be partially deconstructed to remove damaged materials, then redesigned and rebuilt using conventional construction methods. This switch to traditional building techniques often results in costly project overruns and significant delays.

The Marriage Wall: A Hidden Vulnerability

One of the most challenging aspects of modular construction is the “marriage wall” (a terrible name), which is the space where two modular units meet. Essentially, it’s two walls pressed together to form a thicker interior barrier. Ideally, this area should be tightly sealed to keep moisture out, but it often becomes a hotspot for condensation and mold. The gaps between the walls trap warm, humid air, leading to surface condensation. Over time, this moisture can lead to mold growth, which can seriously weaken the building’s structural integrity. In multi-unit structures, each “marriage line” creates multiple marriage walls, increasing the potential for mold issues in various spots.

HVAC and Pressurization Challenges

The HVAC system is important for any building but is crucial in modular construction. Maintaining the right pressure balance is key to preventing moisture infiltration. However, consistency in airflow and pressurization across the building can arise when each modular unit has its own individual HVAC setup. This can create weak points where outside air sneaks in, bringing moisture that condenses on cooler surfaces, ultimately leading to mold growth.

Additional Risks in Modular Construction

Modular construction isn’t just about dealing with moisture problems; it also involves managing several other heightened risks.

Manufacturing Defects: Quality control is crucial during module manufacturing. Any defects in the factory can have severe implications for the construction schedule and the final structure’s integrity. Regular inspections before and after delivery are necessary to catch any issues early.

Transportation Risks: Transporting large, prefabricated modules from the factory to the construction site is a complex and challenging process. The constant movement during transit can lead to cracks or other damage to the modules, potentially compromising the building’s structural integrity. Since these are often oversized shipments, the risk of transportation-related losses is even greater. Any mishap during transportation can result in severe damage, leading to expensive repairs and delays.

Off-Site Coverage:

Since modular units are often stored off-site, additional off-site storage limits are required. The property can be especially vulnerable to wind, hail, flood, or wildfire while temporarily stored. Underwriters typically need additional information to ensure the off-site location matches the same assumed exposures as the final project job site. Theft and vandalism risks increase when storing units before installation, potentially causing project timeline disruptions.

Fast Track Schedules:

Fast-track construction typically leads to condensed construction schedules, drastically altering the builders’ risk pricing methodology. The value curve increases substantially, exposing more values much earlier in the project. Builder risk pricing must reflect the increased exposure experienced earlier in the project timeline.

The Impact of Weather on Modular Construction

Weather, especially rain, can pose significant challenges to modular construction. Modules constructed in dry climates and transported to wetter environments may experience moisture intrusion during assembly. This can occur due to sealant cracks from transportation or gaps between modules, allowing rain to seep in and leading to costly water damage.

Even well-protected modules can suffer from moisture issues, as evidenced during one of Seattle’s wettest seasons. Water may accumulate in unexpected areas like gaps between temporary roofing or within steel tube frames, creating conditions leading to mold and structural damage. These weather-related challenges can result in project delays & extensive repairs.

Inspection and Compliance: A Fragmented Process

Inspection and code compliance can also be more complicated in modular construction. Different parts of the building—such as the modular boxes and the base structure—might be inspected by separate entities, leading to potential gaps in oversight. Without a coordinated inspection process that considers the building, issues like air leakage and improper sealing can go unnoticed until they become significant problems.

Real Life Losses

In the dry climate of Arizona, modular wood-frame units were manufactured for an apartment building being constructed in the Pacific Northwest.  The modules were designed to arrive at the job site fully furnished and ready for quick assembly. These units were then transported to the not-dry climate of Seattle, where small cracks developed in the sealant applied to the tops of the modules during transportation. Upon arrival at the construction site, the cracks in the sealant allowed rainwater to penetrate areas meant to remain protected. This led to widespread moisture intrusion, requiring replacing up to 75 percent of the building’s finishes.

In California, a similar modular project faced significant water-related issues.  Despite the modular units being wrapped in heavy-duty Tyvek to protect them from the elements, water was discovered in the window assemblies, ceilings, and beneath the Tyvek wrap. During assembly, water that had accumulated on the temporary roofing cascaded down onto the floors below. Since many of the units already contained furniture, fixtures, and appliances, the damage was significantly compounded. The majority of each module had to be gutted entirely, resulting in a sizable builders’ risk claim and further project delays.

The Bottom Line

When underwriting modular construction, it is essential to modify the traditional 4-wall builder’s risk approach to address the unique challenges of this rapidly growing industry. Due to a higher vulnerability to water damage, more comprehensive protections are necessary to guard against potential losses. Therefore, builder’s risk markets are considering stronger deductible structures to manage this increased risk better. In addition, standard rating practices must evolve to account for tighter construction timelines, increased exposure during transit and storage, and the risks from defects in both manufacturing and construction.