Over the past two decades, there has been a noticeable shift in the way major projects are funded, with private investors increasingly backing schemes that would once have been sponsored by the public sector.
These projects often include lengthy debt repayment structures, funded entirely by the project’s expected future earnings.
It is no surprise, therefore, that lenders often insist that project owners take out Delay in Start-Up (DSU) insurance to mitigate the risk that a project could be delayed as a result of a physical damage event.
However, DSU has given rise to a number of common myths and misconceptions, particularly around claims and their investigation.
Some of the misunderstandings that persist are around fundamental questions, such as: what is a DSU indemnity for? When will a DSU policy be triggered? And when will it pay out?
Although a project needs to be delayed for there to be a basis for a claim, DSU policies will only provide an indemnity for losses incurred as a result of a delay due to a physical damage event covered by the policy.
There are many other potential circumstances in which a project could be delayed and a DSU would not provide an indemnity, such as:
- Industrial action or a labour force shortage;
- Changes to architectural designs or drawings;
- Financial mismanagement/insolvency;
- Poor project management.
DSU claims are convoluted, because insurers have to establish:
- That the project has in fact been delayed (by a damage event);
- The financial impact of that delay;
- The extent to which the delay can be attributed to a physical damage event or events covered by the policy, and the extent to which it has been caused by other factors not covered by the policy.
To investigate a claim, loss adjusters will consider the project schedule and seek to verify precisely where it was at immediately prior to the loss. If the project was already delayed at that point, there might be an adjustment to the settlement.
Mind the gaps
One reason misunderstandings persist in relation to DSU cover is that there is often a disconnect between those working on site on a project and those responsible for buying insurance for that project.
There can also sometimes be gaps in understanding between the insured, the broker and the insurer; the latter two could do more to help construction companies understand how DSU policies work and what information they would be required to present in the event of a claim.
Claims need to show the cause and effect of a delay. A common problem is when an insured simply says, ‘We have had an event that has caused a delay and we are now this far behind.’
DSU claims and issues are invariably complex. As such, we would recommend engaging with your insurer or broker from the project outset. Should you like to discuss this topic in more detail, please do get in touch.
Bernadette Hackett is head of the construction industry community at Zurich and can be reached at email@example.com