When loss delays start-ups, insurance can help
If News 4/2015 Property. The principal can cover him or herself against a loss in several ways. Principals can be careful when choosing contractors and suppliers to realize the project. They can require all parties of the project to ensure a high level of risk management during the project phases.
The principal can also take out insurance against physical losses during the project phase to ensure his or her profit starts to flow as planned in the specification stage of the project. This insurance is called Delay in Start-Up.
Who will take Delay in Start-Up insurance?
Delay in Start-Up insurance can only be taken out by a company that has a financial interest in the loss of profit in case the project confronts a physical indemnifiable loss during the realization. Contractual penalties or liquidated damages are not covered by Delay in Start-Up insurance.
The object of Delay in Start-Up 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 principals where the basis of the sum insured and the maximum indemnity is, at the same time, the gross profit.
The insurance period of Delay in Start-Up coincides with the project works and testing period and terminates with the commencement of the operational phase.
Delay in Start-Up insurance does not include the maintenance or defect liability period, due to the operational phase already having normal business interruption or loss of profit insurance cover applying to losses during normal operation. The principal can extend the Delay in Start-Up coverage to include losses during the transportation of the supplies to the construction and erection site.
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 that commercial operation starts and at the latest at the end of the maximum period of indemnity agreed with the principal and insurer beforehand.
In the case the physical loss has delayed the commercial start day, the principal still has a deductible period as his/her own retention per loss. The Deductible Period is agreed in the negotiations between the principal and the insurer.
Sum insured and amount of indemnity
The normal calculation of the sum insured adds the fixed costs to the net profit, meaning gross profit. Another way of calculating it, which gives the same result, is to deduct it from the variable costs of the 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 starting operation 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. They focus on the project works part to prevent possible losses. Insurers can also demand that the principal provide information on a regular basis regarding actual work progress including different parts 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 and progress of the site. Insurers very often involve external experts or consultant to follow up what happens on the insured site and the progress.
Delay in Start-Up (DSU) also goes by other 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 Profit or Earnings and the definition of the principal’s self-retention.
Pekka Miettinen Head of Property Underwriting, Finland