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Spotlight on: Delay in start-up (DSU) insurance

As major projects and schemes are increasingly being funded by private investors rather than sponsorship from the public sector.1 And with these projects being funded entirely by the project’s expected future earnings, resulting in lengthy debt repayment structures. Lenders often insist project owners take out Delay in Start-Up (DSU) insurance to help mitigate the risk of a projects possible delay.

DSU is an absolute necessity for complex construction and engineering projects. However, DSU is often misunderstood. We answer some of the frequently asked delay in start-up insurance questions.

What is delay in start-up insurance?

DSU looks to give developers added protection during the construction phase of a project. DSU protects project owners against financial consequences (such as loss of revenue or additional interest charges and/or refinancing fees) suffered following damage to the contract works that causes a delay in completion.

Why do you need delay in start-up insurance?

If damage occurs to the Contract Works, from an insured peril, the cost to repair the damage would be met under the Works section of the project policy. If the damage causes a delay in completing the contract, and therefore a delay in commercial operation the Principal/Employer will in consequence, not receive revenue.

The consequence of a delay in receiving revenue is that there will not be funds available from the date the principal/employer had expected to pay debt interest, capital repayment, normal profit or standing charges that would have been paid out of the revenue when commercial operation commenced.

The Delay in Start Up insurance is designed to provide for loss of revenue until commercial operation commences.

Who can take out a delay in start-up insurance policy?

Only the Employer/Owner is able to insure DSU as they alone have the insurable interest in post Practical Completion revenue, gross profit, refinancing costs etc. An Owner Controlled Insurance Programme (OCIP) approach enables the owner to arrange DSU insurance.

Can delay in start-up insurance be purchased on its own?

DSU insurance cannot be purchased in isolation. Insurance underwriters insist on providing coverage in conjunction with construction all risks (CAR) or erection all risks (EAR) insurance.

What are the indemnity periods associated with delay in start-up insurance?
The indemnity period, is the period commencing from the date commercial operations were due to commence, during which time revenue is planned to be earned and which could be affected by a delay in completion by an insured event.

The indemnity period needs to be sufficient to cover the loss of revenue, during the time it would take to rebuild the works in consequence of the most significant delay in completion, that could be reasonably contemplated, arising from damage to the works, at suppliers premises or in transit.

A key point to recognise under DSU insurance is that a number of insurable events can only cause one delay in completion and therefore only one claim to a project. Where one policy covers a number of independent facilities at different locations, each facility will have its own sum insured and indemnity period.

Does DSU cover increased cost of working?

Increased Cost of Working (ICoW) may be incurred to speed up remedial action, or the completion of the project, in an effort to reduce the delay to the project and in consequence reduce the amount of revenue lost. This expenditure would be met by the policy provided that it did not exceed the amount of revenue saved. ICoW during the time deductible period would not be covered by the policy.

What excesses are associated with DSU insurance?

The excess that applies to DSU is usually measured in time and not a fixed monetary amount. On the basis that there is one claim that could arise from multiple insured events, causing one delay to the project, equally only one excess applies to the claim.

For example a project suffers delay of 60 days in January due to a fire. In May there is a 20 day delay following storm damage. In September a further 7 day delay occurs when there is minor incident during testing. The project is therefore 87 days late when finally handed over. This will constitute one loss under the DSU policy. One excess, normally a minimum of 45 days, will be subtracted from the claims settlement figure.

The claim would therefore be calculated as 60+20+7=87-45=42 days loss of revenue. Another way of looking at this is that no loss of revenue is paid for delays until the total delay exceeds the time excess.

Thereafter all delays are paid in full.

Does DSU cover off-site delays?

Cover can be extended to include delay due to:

  • Failure of public water, gas or electricity supply
  • Denial of access
  • Suppliers’ extensions.

What are the notable DSU exclusions?

Delays can also occur to a project from events that are not covered by insurance, such as strikes, industrial action, slow progress or late supply of materials. The overall delay to the project may therefore be a combination of insured and uninsured delays. The DSU insurance will only respond to the insured element of the delay and therefore the uninsured element of the delay will be excluded from the claim.

Construction project insurance advice

We hope this article as given you a clearer understanding around delay in start-up insurance. As such are the complexities around insurance for a construction project. Whether it’s DSU, Owner Controlled Insurance Programmes (OCIP), Latent Defects Insurance or Joint Contracts Tribunal (JCT). Our construction insurance experts are here to help if you have any further questions.

 

Sources: 

1. constructionnews.co.uk/agenda/opinion/industry-pulse/understanding-delay-in-start-up-insurance-16-06-2017/

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