‘Delay in Start Up’ Insurance

• United Kingdom

• Insurance and reinsurance
• Litigation and dispute management

27-05-2021

What is ‘Delay in Start Up’ insurance?

‘Delay in Start Up’ insurance (commonly known as ‘DSU’ insurance or Advanced Loss of Profit insurance) provides an indemnity against financial loss incurred should the completion of an insured construction project be delayed beyond the scheduled completion date as a result of the perils insureds. Typically, cover will be triggered due to a delay caused by physical damage, for instance, where a fire or a flood has damaged the construction works such that completion is delayed, and that physical damage is insured under a Contractors All Risk policy.

Prior to the impact of the COVID-19 pandemic, non-damage extensions to DSU insurance policies were widely available in the insurance market which provided for cover in the event of a delay being caused by something other than physical damage.

Most notably, non-damage extensions include the ‘Notifiable Diseases’ and ‘Denial of Access’ extensions considered by the Supreme Court  in the test case of The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd & Ors [2020] EWHC 2448 (Comm). The FCA test case was concerned with whether policyholders were entitled to cover under business interruption policies in circumstances where their premises had been closed due to Government lockdown measures or where normal use of premises was hindered by such measures.  In that case, the Supreme Court ruled decisively in favour of policyholders, broadening the circumstances in which coverage was available (see link to Eversheds Sutherland briefing on the test case here).

In response to the impact of COVID-19, from March 2020, most insurers have been unwilling to issue new policies which provide coverage in relation to pandemic related losses. Business interruption policies renewed after March 2020 will therefore contain exclusions in relation to COVID-19 or similar diseases. Likewise, DSU policies issued after this date will contain similar exclusions, although coverage will still be triggered in certain scenarios where physical damage has not occurred.

However, delays to projects caused by COVID-19, which are insured under policies which incepted prior to March 2020, which are ongoing may still be insured and policyholders should consider whether they are able to claim.

Who is covered under a DSU insurance policy?

DSU insurance will usually provide cover for the employer’s financial losses should completion be delayed. However, frequently lenders will insist on the employer taking out DSU cover and on being named insured and first loss payee so that any monies payable are paid directly to the lender.

DSU insurance is commonplace in project finance developments because the revenue generating ability of the completed project is a critical factor in the lenders’ decision to lend and lenders will want to review carefully with their advisers the insurance proposed against the requirements of the facilities agreement. We are starting to see some lenders show interest in DSU insurance in a real estate finance context also.

Scope of loss covered

DSU insurance provides cover for specified types of loss. Typically, this may include the loss of ‘anticipated income’ due to not being able to use the asset from completion, loss caused by a delay in the sale of completed premises, or other costs reasonably incurred to avoid or minimise loss.

Losses covered may include:

• shortfall in income (less any savings in charges and expenses);

• additional interest incurred on capital borrowed to finance the development;

• investment interest lost should the employer be required to use their own funds to fund the cost of the development (and if such funds were intended to be used to finance other developments, the interest incurred on capital borrowers to offset the loss of such funds);

• the viability of certain projects may be contingent upon completion taking place by a specified deadline, for example, an entitlement to subsidies;

• costs necessarily and reasonably incurred to seek to avoid or minimise loss which would otherwise be indemnified under the policy, for example, the costs incurred to reduce the amount of delay; and

• additional costs arising out of such a delay (such as alternative accommodation costs, additional legal fees, marketing, letting, selling and administration costs).

In each case, as with any insurance policy, the amount recoverable will be subject to an indemnity period within which losses will be covered and the limits specified in the policy. The cover will also be subject to the usual policy, deductibles, exclusions and extensions.

Claims

The assessment of DSU claims can be very complicated. In simple terms, the indemnifiable loss will be calculated by assessing the number of days delay caused by the insured peril, minus any applicable deductible (or waiting period).

The reality is that assessment of claims will involve engineering delay expert evidence which will assess the extent to which any periods of delay are insured, or whether they are caused by a peril not insured or excluded under the policy.