How Delay in Start Up insurance can help reduce loss of profit

When your project is sidelined by an insurable incident, delayed start up insurance can cover profits lost because of the delay, as well as increased expenses such as interest on financing.

It's a builders worst nightmare: your major projects run over schedule and now you can only think about the money you're going to miss out on. Situations like this have the potential to shrink the bottom line. What some leaders in the construction industry don't know is that you can purchase insurance that helps to mitigate the impacts of project overruns.

What is Delay in Start Up insurance?

Delay in Start Up (DSU insurance) coverage can protect the principals of a capital or construction project from the loss of anticipated or potential income, on projects across the real estate and construction industry. Like business interruption insurance, DSU is designed to cover the loss of income as well as the loss of recoveries from the end users of the project.

Generally, this includes a financial loss of income that would have been earned if the project had been completed on schedule, such as rental or sales income. DSU coverage can also cover so-called ‘soft' costs such as an increase in carrying costs. The key to filing a successful DSU insurance claim is knowing what you are covered for and being able to quantify the losses and costs as accurately as possible.

How does it work?

Coverage from Delay in Start Up insurance is meant to help the policyholder realize anticipated profits while a project start-up is delayed. It's similar to business interruption policies that are designed to bridge the gaps when a business is hit by an unexpected event.

The first steps to quantifying losses for a claim involve reviewing the actual amounts spent to date along with a projection of anticipated income. This figure is then compared to the actual loss sustained to date.

By having these figures available as near to the outset as possible, insurance companies may be able to quickly provide an advance of funds to help the principal continue the project. The initial submission is not going to be perfectly accurate, as many of the final costs cannot be known at the outset and direct physical loss can take a significant period of time to measure out. However, it will provide an initial starting point to keep the insurance company apprised of the anticipated losses.

Once the project has been completed, the submitted numbers can be updated to reflect the actual costs, and as the initial submission is already in the insurance company's hands, it can help shorten the settlement time.

An example of DSU insurance in action

For example, a townhome developer on a large project had to replace all the drywall on the first floor of a townhouse project because of a leak, delaying occupancy for a number of months. The developer's Delay in Start Up policy provided coverage for interest costs on their financing, as well as the incremental increase in labour costs needed to manage tenants' warranty claims, and project management after the delay.

Check your policies

DSU insurance coverage at its most basic level is for the loss of income that would have been earned. The policy may also include coverage for incurred expenses that would have been paid for by end users of the project, such as property taxes. Coverage is triggered by the insured event leading to the delay and continues until the project is complete.

For instance, a burst pipe flooded a commercial mall project, resulting in mold, and delaying the opening of the mall for a number of months. The property insurance covered physical damage, replacing flooring, electrical, walls, etc. The principal's DSU insurance, triggered by the insured event, covered the lost income it would have earned over that period of delay.

Additional soft costs to consider could include items such as interest on construction financing, professional fees, warranty costs, and even potentially the increase in staffing required to manage the project to completion.

Accuracy and timeliness are key factors

It is crucial to estimate income losses and increases in costs as soon as possible to submit a projection to your insurance company. Work with an experienced professional to help ensure all details are reviewed and substantiated, and incremental costs are accounted for. The advisor will focus on the insurance claim, leaving you to focus on getting the project back on schedule for completion and minimizing the impact on the construction project's overall financial results.

Without considering DSU coverage, you will incur additional expenses that could be quite material in aggregate. This could lead to unsatisfied investors in the project, as there are now unplanned funds required to continue the project on top of the existing delays, as well as creating an unfavourable appetite for new investors. Key performance indicators such as profit margin, working capital, and operating cash flows will all be affected, not just for the current project but on the ability to finance new operations and expansions as well.

What does your DSU insurance policy cover?

The next step is to identify what your DSU insurance policy covers. Insurance policies can be complex, and differ from provider to provider, and project to project. Some policies might cover specific types of damages, such as water from pipes only, while another policy could cover water damage from flooding as well as pipes. As well, different insurance policies may have different limits and deductibles and / or waiting periods before a delay is accepted.

The amount payable under DSU insurance will depend on losses that are substantiated, for example, by signed rental leases or sales contracts that cannot be collected because of the delay. Coverage is also determined by the amount of overall insurance needed and by the indemnity period, which should be as long as the time needed to repair or rebuild.

Delay in start up insurance is not necessarily a simple addition to property insurance policies. That is why it is important you work with advisors who know and have worked with DSU losses in the past.