Advance Loss of Profit / Delay in Start-up Insurance (ALOP / DSU)

Principals and contractors alike are being confronted with escalating financial risk exposure in the wake of the increasing industrialization.

Principals now often collateralize loans with project assets and repay them purely on the basis of projected earnings (i.e. Non-recourse Financing - debt financing provided for projects with no or very limited recourse to the assets of the project sponsor. The financier relies on the technical, commercial and financial viability of the project and its earnings as the sole source for debt servicing).

The revenue generating capability of a project has thus become a critical financing factor.

Any delay in the start up of a project would immediately cause a loss in anticipated revenue.

Therefore, stringent conditions regarding delays in scheduled project completion are now commonplace in contracts between financiers and principals, and particularly to those between principals and contractors.

Principals are, therefore, under pressure to ensure the economic viability of the projects by generating revenue immediately following the scheduled completion date.

The traditional Storage Cum Erection Insurance (SCE) does not cover loss of anticipated revenue / gross profit in the event of a delay in the scheduled start up date of any project, even though the same may have arisen due to a peril insured by the SCE Insurance.

Oriental's Delay in Start up Insurance (also known as Advance Loss of Profits Insurance) provides the broadest possible insurance cover available in the market to meet such contingencies. In fact, we were the first insurance company in India to offer Delay in Start up Insurance to our valuable customers.

The DSU insurance is recommended to be purchased as an extension to the Storage Cum Erection Insurance / Marine Cum Erection Insurance (SCE / MCE)

Delay in start-up
Delay in start-up (DSU) cover is designed to secure the portion of revenue which the principal requires to service debt and realize anticipated profit.

For the principal / investor group, a major incident / a large number of smaller incidents of damage to the works during the construction phase (or) is likely to result in a delay in the commencement of commercial operation of the project and consequently the ability to earn revenue

The works contract between the principal and the EPC contractor stipulates that, as a rule, the contractor is accountable the principal for any project startup delay arising through any fault on the part of himself or his subcontractors.

Whilst some of these losses may be recoverable from the contractor's delay penalties under the construction contract, others may not give rise to penalties because the contract provisions relieve the contractor of this obligation for any risk explicitly assumed by the principal.

While these risks may vary from contract to contract, the usual exclusions are with regard to Force Majeure events (earthquake, flood or windstorm etc.) as well as other physical destruction or damage by any cause beyond the control of the contractor, subcontractor or supplier.

Furthermore the recovery of the full amount of revenue loss from the Contractors is often limited by a cap on liquidated damages, thus leaving the Principal / Investor Group exposed to losses in excess of this limit.

The Advance Loss of Profits Insurance, covers the interest of the principal only, provided that the delay in start up of the project from the scheduled business commencement date and the resultant loss of revenue is due to physical damage covered under the underlying:
Storage cum Erection Insurance and

by the same set of perils as covered under the parallel Advance Loss of Profit Insurance

Who can take the policy?
The policy is taken by the Principal as he stands to lose in case of any delay in the commissioning of a new project under installation / construction

Quite often the interests of the project financiers is also included as additional insured

Contractors / sub-contractors cannot be included as the joint insured as they have no insurable interest (unlike in an EAR / CAR Policy)

ALOP / DSU covers are to be purchased in conjunction with:
Marine Cargo Insurance for critical items of the project

Erection All Risks Insurance / Construction All Risk Insurance

Irrespective of whether the delay results from damage covered under the marine or the erection policy, the trigger date remains the same.
Hence, it is recommended that a single DSU policy in conjunction with the Marine Cum Erection Insurance be purchased which would cover:
All (insured) physical damage

Loss of Gross Profit arising out of a delay in project, due losses covered by the underlying storage cum erection insurance.
Indemnification
The indemnity provided by the Advance Loss of Profit Policy shall be in respect of:

Loss of gross profit (Hyperlink) sustained during the indemnity period (Hyperlink) resulting from a reduction in turnover(Hyperlink) including any increased cost of working

Significant Exclusions
The following shall be excluded from the cover provided by this section:
Unless also expressly covered in the Delay in Start Up Insurance Loss or damage:

Covered under underlying Storage Cum Erection Insurance by way of endorsement (if any).

Earthquake, volcanic eruption or tsunami

Loss of or damage to fuel or feedstock or any materials necessary for the business insured, unless also covered in the underlying Storage Cum Erection Insurance loss of or damage to items of a prototype nature,

Redesigning, altering, adding to or improving the property insured or rectifying defects or faults;

Non-availability of funds;

Any fines or damages for breach of contract, for late or non completion of orders or for penalties of whatever nature

Loss or damage to surrounding property, construction plant and machinery

Loss resulting from suspension, lapse or cancellation of a lease, licence, order, contract or agreement

Add on covers
In addition to the perils/ expenses covered, the proposer can opt to seek cover in respect of the following perils on payment of additional premium:

Premises of Customers

Public Utilities

Prevention of Access Damage at the Premises of Suppliers

Damage at the

Denial of Access