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View allAs hold-ups become an increasing concern for construction projects, delay in start-up insurance (DSU) provides an option for managing the risk, but the terms can be complex and tricky to negotiate. Here's how it works.
In the context of recent extreme weather and other events that could be considered acts of God, DSU is a safeguard for capital works, including infrastructure, property development and mining projects, that protects stakeholders from the financial effects of delays. DSU can also be a mandatory requirement by banks or other providers of equity or debt.
While a contractor may be responsible for liquidated damages for delay under the contract, typically this is capped at a modest percentage of contract value for delays and, in any event, liquidated damages don’t typically apply to force majeure perils like storm, bushfire, earthquake, flood, etc. In these cases the financial consequences of delay fall on the project owner or principal, even though they have minimal control over the risk.
"DSU cover for construction projects is an important consideration for project owners or principals in helping to manage the risks under contract, but it’s an area that requires some skilled navigation and active advocacy in the event of a claim," advises Gallagher Construction Practice Leader ‒ Australia & Asia Roger Irvine.
Delay in start-up insurance is activated consequent on a material loss insurance cover under a contract works policy, but this can only be claimed on once the project has been delayed beyond its original operational deadline, even if the contract works loss happens some time prior.
While the delayed completion may be caused by a number of indemnifiable events occurring during construction, only a single claim can be made for delay in the original project time frameand only one deductible should apply.
"Because the impact of a delay may only become fully apparent as the project nears completion, insurers usually take a post-loss approach to analysing claims," Irvine says.
“It is not possible to identify the DSU loss while the material damage is being reinstated. For example, I handled a flood loss that triggered the DSU insurance on a building project in Brisbane. The delay in completion was 6 months but the financial loss to the building owner was 2 years+ as committed tenants terminated their leases and uncommitted tenants didn’t sign up as a result of the delay.”
Gallagher’s specialist construction brokers have the expertise and industry knowledge to formulate insurance solutions for complex construction projects and assist stakeholders with managing their risk exposures.
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.