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Delay in start up insurance: the impact of COVID-19

Risk & Analytics
COVID 19 Coronavirus

By Andy Kirby and James Driscoll | July 3, 2020

This article revisits delay in start up insurance (DSU) for construction projects; exploring the impact that the pandemic has had on policies and future considerations given the current construction market conditions.

The COVID-19 pandemic has resulted in the temporary closure of many construction sites.  As we begin to move out of lockdown many sites in England and Wales have now reopened, and in the case of Scotland, are planning to reopen shortly.  The temporary closures, followed by the introduction of new working practices to maintain social distancing, and difficulties with sourcing some materials and specialist labour due to problems with supply chains, means that many projects will not now reach practical completion on the date originally intended.  As a result, owners will not receive the income they were expecting, and potentially will incur additional unexpected costs e.g. additional borrowing costs to continue to finance the projects for longer than originally expected.

Where the contract entered into is standard Joint Contract Tribunal (JCT) or similar, it is unlikely that the owner will be entitled to recover liquidated damages to in-part offset the loss of income.  Although contractors may not have to pay out liquidated damages, they are also likely to incur additional costs as a result of COVID-19 in terms of their time related costs, where they won’t have recourse to any project insurance.

If owners had previously taken out Delay in Start Up (DSU) insurance, then depending on the specific policy wording, they may be entitled to recover some of these losses from insurers.

We refer to this article posted earlier this year that provided details of DSU insurance. In the article we mentioned that although cover usually only operates following physical damage to contract works covered under the relevant contractors all risks policy, many DSU policies have a number of extensions, so that in addition they may also provide cover where there is no physical damage to the contract works. For example, many policies will also respond following damage to the premises of a critical supplier that in turn is the proximate cause of a delay in the project achieving practical completion.

Prior to the current pandemic taking hold, many DSU insurers were also prepared to extend the policy to provide protection for delays in projects achieving practical completion resulting from the outbreak of a notifiable disease and/or actions taken by authorities (including potentially ordering the temporary closure of sites) to prevent danger in the vicinity of a construction site.

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If owners have purchased DSU insurance and practical completion either has been delayed or is likely to be delayed as a direct result of COVID-19 itself and/or measures imposed by either the UK government or devolved governments/assemblies in response to the pandemic, then they should carefully review the wording of the policy. They may be entitled to a recovery under the policy for their loss.

Our prior article provided an insight into how multiple issues (some insured and some not insured) can cause delay to projects and the importance of the record keeping and concurrency clauses in policy wordings.  In the new working environment where social distancing and other measures have potentially added additional time into carrying out even the most mundane of operations, it is even more important to maintain accurate record keeping. This will ensure that programming experts respectively appointed by owners and insurers can establish an exact impact on the project programme and the extent to which they will erode both the policy excess and indemnity period.

We are aware that a number of insureds have already lodged claims and potential claims with insurers.  As we are still attempting to work through these and establish the impact of COVID-19 on live projects, this represents an ideal opportunity for insurers (and their expert advisers), the owners (and their expert advisers) and the contractors, to all work together to re-programme the works. This includes insurers potentially agreeing to incur some additional upfront costs in order to reduce the overall cost of the DSU claim. Collaboration should result in an overall best outcome for all concerned, i.e. owners, insurers and the contractors.

Insurers are in response substantially restricting the cover that they are prepared to provide on new policies for claims resulting from the outbreak of future pandemics

Alarmed by the prospect of multiple, very significant claims arising in a single pandemic, insurers are in response substantially restricting the cover that they are prepared to provide on new policies for claims resulting from the outbreak of future pandemics and are also restricting the cover that they are prepared to provide in relation to actions taken by authorities.

For guidance on the above and for any information, please get in contact with the team, who’s details can be found below.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

COVID-19 is a rapidly evolving situation and changes are occurring frequently. The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded and should not be relied upon to be accurate or suitable after this date.

Authors

Executive Director, UK Construction Practice

Construction and Project Risk Claims, UK Construction and Project Risk Practice