In the realm of construction projects, ensuring the timely completion of projects is crucial for both project owners and lenders, who are primarily interested in the future income streams these projects promise. However, unforeseen damage to contract works can significantly delay project completion, impacting these income streams. This article delves into the importance and functionality of Delay in Start-Up (DSU) insurance, a vital tool for mitigating such financial risks.
What is Delay in Start-Up Insurance?
Delay in Start-Up (DSU) Insurance, also known as Advanced Loss of Profits (ALOP) Insurance, is a type of cover designed to protect businesses against financial losses resulting from delays in the completion of construction or infrastructure projects, caused by an insured peril under the Contract Works policy.
The insurance typically covers the loss of anticipated revenue or profits that the business would have earned had the project been completed as scheduled. It can also cover additional expenses incurred to mitigate the delay, such as increased interest payments or additional costs to expedite the project.
Cover is arranged as an extension of the Contract Works cover, and cannot be purchased separately, or arranged after the Contract Works policy has been placed.
DSU Insurance is particularly important for projects with significant financial investments and tight timelines, as it helps ensure that the business can maintain its financial stability and meet its financial obligations despite unexpected delays.
“We often speak to clients when they have experienced a delay in construction projects. DSU insurance is not just a safety net; it’s a strategic component of risk management that allows project stakeholders to safeguard their financial interests and maintain confidence in project timelines.” Tracy Keep, National Construction Practice Group Leader
Who are the Insured Parties for DSU Insurance?
The policy is arranged by the Developer or Employer to protect their income stream, but can also include Financiers, Lenders and Investors as Joint Named Insureds where required. Cover cannot be arranged by the Contractor, as they would have no financial interest in a loss which causes delay to the project. Therefore, to be able to place cover for DSU, the Employer or Developer will need to arrange the contract works policy rather than specifying that the Contractor should arrange the cover.
What is Excluded Under DSU?
Delay in Start-Up (DSU) Insurance typically excludes certain types of risks and losses. Common exclusions under DSU policies may include:
- Contractual Penalties: Fines or penalties imposed due to contractual breaches are generally not covered.
- Design Defects: Delays caused by design errors or deficiencies are usually excluded.
- Financial Insolvency: Losses resulting from the financial insolvency or bankruptcy of the project owner, contractor, or any involved party.
- Non-Physical Causes: Delays due to non-physical causes, such as regulatory changes, labour strikes, or political risks.
- Pre-Existing Conditions: Issues or delays that were known before the policy was taken out.
- Normal Weather Conditions: Delays due to normal weather variations that could have been anticipated.
- Acts of Terrorism: Unless specifically included, acts of terrorism are often excluded.
- War and Nuclear Risks: Losses due to war, nuclear incidents, or similar large-scale events are typically excluded.
- Maintenance and Operational Delays: Delays occurring after the project is completed and operational.
What Constitutes a DSU Claim?
A Delay in Start-Up (DSU) claim arises when a project experiences a delay in its completion due to covered events, leading to financial losses. To constitute a DSU claim, the following elements are typically involved:
- Covered Delay: The delay must be caused by an event covered under the DSU extension by a peril which is covered under the Contract Works section of the policy.
- Impact on Completion: The delay must directly affect the project’s scheduled completion date, preventing it from becoming operational as planned.
- Financial Loss: The delay must result in a quantifiable financial loss, such as lost revenue or profits that the project would have generated if completed on time. For example, if the project is a speculative build, and the Employer anticipates that they will lease the property, there must be a known tenant with a formal commitment to rent. Cover cannot be arranged for the possibility that rental income will be lost, if there is no certainty at the time of arranging cover that a tenant has been secured.
- Documentation: The claim must be supported by thorough documentation, including evidence of the delay, its cause, and the financial impact. This may include project schedules, financial statements, and other relevant records.
- Mitigation Efforts: The policyholder may need to demonstrate efforts to mitigate the delay and minimise losses, such as expediting work or implementing alternative solutions.
How Gallagher can help.
Gallaghers team of experienced construction insurance specialists are available to discuss the best type of cover to suit your needs. Contact us today if you would like more information.
