As project hold-ups become an increasing concern for construction projects, delay in start-up insurance (DSU) provides an option for managing the risk, but the terms can be complex and tricky to negotiate. Here's how it works.
In the context of recent extreme weather and other events that could be considered acts of God, DSU is a safeguard for capital works, including infrastructure, property development and mining projects, that protects stakeholders from the financial effects of delays. DSU can also be a mandatory requirement by banks or other providers of equity or debt.
While a contractor may be responsible for liquidated damages for delay under the contract, typically this is capped at a modest percentage of contract value for delays and, in any event, liquidated damages don’t typically apply to force majeure perils like storm, bushfire, earthquake, flood, etc. In these cases the financial consequences of delay fall on the project owner or principal, even though they have minimal control over the risk.
"DSU cover for construction projects is an important consideration for project owners or principals in helping to manage the risks under contract, but it’s an area that requires some skilled navigation and active advocacy in the event of a claim," advises Gallagher Construction Practice Leader ‒ Australia & Asia Roger Irvine.
Devil in the detail
Delay in start-up insurance is activated consequent on a material loss insurance cover under a contract works policy, but this can only be claimed on once the project has been delayed beyond its original operational deadline, even if the contract works loss happens some time prior.
While the delayed completion may be caused by a number of indemnifiable events occurring during construction, only a single claim can be made for delay in the original project time frame and only one deductible should apply.
Typically DSU doesn’t cover
- fines and penalties
- non-damage delays such as late deliveries
- periods of insured delay that are concurrent with uninsured causes
- redesigns, additions or improvements
- lack of funding to pay for completion.
To be considered valid, a DSU loss must
- be based on an event that causes material damage and is covered, or would be covered, but for the applicable excess under the relevant material damage policy
- cause a delay to completion of the project that exceeds the time deductible in the DSU policy
- involve a resultant financial loss to the project owner or principal, such as loss of gross profit or revenue, fixed or debt servicing costs, or increased costs of working. A loss also could involve the project owner having an obligation to recompense a third party under a power to purchase agreement or an agreement to lease.
"Because the impact of a delay may only become fully apparent as the project nears completion, insurers usually take a post-loss approach to analysing claims," Irvine says.
“It is not possible to identify the DSU loss while the material damage is being reinstated. For example, I handled a flood loss that triggered the DSU insurance on a building project in Brisbane. The delay in completion was 6 months but the financial loss to the building owner was 2 years+ as committed tenants terminated their leases and uncommitted tenants didn’t sign up as a result of the delay.”
Talk to an expert
Gallagher’s specialist construction brokers have the expertise and industry knowledge to formulate insurance solutions for complex construction projects and assist stakeholders with managing their risk exposures.