Construction costs are spiraling and delays to completion of projects may be inevitable, write Caroline Woolley and Steven Horne
Restrictions in the availability of labour and construction materials, compounded by supply chain disruptions are having a profound inflationary impact on the construction sector.
Inflation is increasing restoration and construction periods and delays to completion of projects may be inevitable, along with the resulting penalties.
From an insurance perspective, values and limits for all construction policies need to be reviewed to avoid post loss issues, protracted claims resolutions and the potential onset of disputes.
Delay in Start Up insurance
Delay in Start Up (DSU) insurance for the construction industry deals with the business interruption (BI) risk of a delay – the loss of revenue/rental income and increased costs suffered as a result of an insured property damage event.
It works in much the same way as BI from traditional property damage insurance, but there are some key differences, including:
- The period of loss begins when the revenue would have commenced, not when the event actually occurred and those revenues might be way into the future;
- DSU therefore looks even further ahead than normal. The current market makes it even more difficult to make reliable predictions.
- You have no historic performance to use in establishing expected revenues.
One way to mitigate the impact of the current environment and achieve a successful outcome in DSU claims is to ensure collaboration of all parties and management of expectations from the outset.
This is the case for other business interruption claims too and the similarities don’t end there.
Working together with loss adjusters in DSU cases, the delay/scheduling experts and forensic accountants can have a significant impact on the results.
Recipe for success
The first step following any insured loss likely to lead to delay exposure is to assess the potential for reducing the delay. This means quantifying the benefit to check economic limits. That’s where early interaction with the forensic accountants is key.
Regular monitoring of the project delay will allow for all parties to keep track of critical path developments and therefore the potential DSU delay at any given point in time.
Upon project completion the project delay should be understood by all parties and the delay aspect of the claim quickly resolved. With so many intervening causes, it can be difficult to identify the Insured delay once the project is complete.
Of course, this all requires a fully transparent approach and collaboration from all parties.
Nigel Ward, technical lead for Construction, Power/renewables, Engineering and Cyber claims at Aviva has first-hand experience of the benefits derived from early introduction of experts in both construction claims as well as PD/BI [property damage and business interruption].
‘If we as the Insurer, along with the loss adjuster, can instruct the delay experts and forensic accountants early enough, they can help keep everyone on the same (most direct) path,” he explains.
“Issues are dealt with upfront, plus the accountants can quantify the impact of any options to ensure informed decisions can be made to establish the best solution for all parties. This is of massive benefit in DSU, but also in a major rebuild project after a PD event.”
What about restoration claims?
Major PD/BI incidents often result in full demolition and rebuild of premises. The principles of minimising cost and the delay period for business interruption are vital, just as they are in construction cases.
It is even more important to consider the reinstatement scope, plan, design and critical path after a major loss event; as no one has had the benefit of months of planning and design, which is the case in new construction projects.
But delay experts are not always instructed post loss in PD/BI claims, and there’s an argument they should be.
The business interruption aspect of a claim is often a surprise to most parties. The accuracy of values at placement of insurance can be an issue if historic values have been used (instead of future) and if interdependencies have not been properly considered.
This is absolutely the case during periods of high inflation. Reserving for the BI element of the claim can be difficult as a result.
Avoid nasty surprises
By getting the delay experts and forensic accountants in at an early stage, the information on the possible business interruption loss is given higher priority, the interruption period itself could be reduced, and it reduces the element of surprise.
Post loss, we are effectively dealing with distressed construction cases that haven’t had the benefit of months of planning and design (as is the case for new construction projects). The potential for savings is immense.
Collaboration and the management of expectations up front is vital, and this can be achieved if the right experts are engaged at an early stage.
Costs are reduced, the interruption period is decreased and unnecessary surprises are removed.
After a major property damage incident, it is unlikely that any parties are going to be completely happy, but there is an opportunity for everyone to be at least satisfied with the claim solution and result.
Caroline Woolley is director & Practice Leader, Investigative Accounting Group, Meaden & Moore and Steven Horne is managing director at CCi.
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