Protecting your project from start-up delays
When does a project need Delay in Start-Up (DSU) cover? Are you prepared for unexpected delays in your project? Learn how you can protect your project and ensure that DSU risks are properly managed throughout the project.
Projects come in all sizes, and they carry various types of risks. For successful completion, principals need to carefully select their contractors and suppliers, but also buy the right insurance cover to mitigate losses. To help ensure that profit targets are met, clients can mitigate risks by purchasing insurance that protects them against physical losses during a project. This insurance is called Delay in Start-Up (DSU).
Why take out a DSU policy?
DSU insurance can be purchased by a company that has a financial interest in the loss of profit in case the project confronts a physical indemnifiable loss during the project due to a delay in completion. Contractual penalties or liquidated damages are not covered by DSU insurance.
The objective of DSU insurance is to indemnify the principal for the actual loss sustained due to a delay in the completion of the insured works. One condition of the indemnification is that all project works are also insured, and that the direct physical loss is covered according to the insurance conditions of the works cover.
The indemnity follows the normal loss of profit calculation principle, where the basis of the sum insured, and the maximum indemnity, is equal to the gross profit. The insurance period of DSU coincides with the project works and testing period, terminating with the commencement of the operational phase.
It is worth noting that DSU insurance does not include the maintenance or defect liability period, as the operational phase already has normal business interruption or loss of profit insurance cover which applies to losses during normal operation. The principal can extend the DSU coverage to include losses during the transportation of supplies to the construction and erection site.
The indemnity period
The indemnity period commences on the day the handing over would have taken place, had the loss not occurred and it ends on the day commercial operations begin; or at the latest at the end of the maximum period of indemnity agreed with the principal and insurer beforehand.
In cases where physical loss has delayed the commercial start day, the principal still has a deductible period as their own retention per loss. The Deductible Period is agreed in the negotiations between the principal and the insurer.
The normal calculation of the sum insured adds the fixed costs to the net profit, meaning gross profit. Another way of calculating the sum insured, which gives the same result, is to deduct variable costs from turnover. The sum insured also has to reflect the gross profit value of the indemnity period. In some cases, the sum insured as well as the fixed daily value can be calculated, when the start of operations has the nature to produce steady and constant output, without seasonal variations.
DSU indemnity and loss settlement are based on the principal’s actual loss sustained, not on the sum insured. However, the loss settlement should be based on the same kind of calculations as those on which the sum insured has been specified.
Progress reports and risk management
Active risk management measures are required from the principal who is insured, which must focus on the project work phases to prevent possible losses. Insurers can also demand that the principal provides information on a regular basis, regarding actual work progress including different phases of the project, updating the scheduled date of hand-over and information on material damages that may contribute to a delay.
Site visits can be performed to inspect the level of risk management at the site and progress of the project. Insurers oftentimes involve external experts or consultants to follow up on what is happening on the insured site and the progress of the project.
Protecting your project
Although DSU is known by many names, such as Delayed Start-Up, Delayed Earnings, Delayed Opening of Business and Advanced Loss of Profits, they all mean more or less the same thing. The differences between them are limited to the definition of the terms ‘Profit’ or ‘Earnings’ and the definition of the principal’s self-retention.
When it comes to any project, partnering with reliable contractors and suppliers is important. Similarly, principals need to be prepared for potential issues and delays. Having the appropriate cover helps mitigate losses when the project takes an unexpected turn. In the end, it is important for client’s to be aware of DSU cover and make sure their works site is protected and potential risks are managed in the best way possible.
Managing risks together
Did you know that If P&C offers it’s clients Risk Management services? As an example, when loading critical land or sea freight, If’s Cargo RM specialist can help you manage the risks involved with barge, off-shore or project shipments, as well as extraordinary shipments such as towing large pre-fabricated building parts.
Article by Pekka Miettinen /If