February 02, 2018 Articles

Avoiding Delayed or Diminished Recovery of Delay-in-Completion Loss under Builders’ Risk Policies

Insureds can maximize coverage and avoid double jeopardy by becoming familiar with key policy terms and anticipating the valuation and legal issues likely to arise in any given claim

by Brad Murlick, Kirsten Ambroze, and Micah Skidmore[1]

In most financing transactions, particularly project finance transactions, one crucial asset that sometimes does not get sufficient attention is insurance proceeds—particularly those available through “delay in completion” or “delay in start-up” (DIC/DSU)[2] coverage under a builders’ risk policy. Insured owners and developers need this coverage to obtain financing and to survive in the event of delays resulting from casualty loss or damage to the project. Lenders view DIC/DSU coverage as a critical part of their security package for a project. Contractors and subcontractors need this insurance to get paid for their completed work.

Yet, for all of the significance attached to DIC/DSU coverage by policyholders and others with a financial stake in its proceeds, the recovery of gross earnings, rental income, or soft costs under builders’ risk policies is fraught with computational complexity and even legal uncertainty. Establishing the future financial loss resulting from a delay in completion can require precise projections without the support of historical financial documentation. In addition to benchmarking challenges, DIC/DSU claims may present thorny analytical problems relating to cost structures and allocating between covered and uncovered delays.

Apart from the complications associated with accounting, policyholders seeking to recover DIC/DSU loss may also have to address a multitude of legal complications, including questions of causation and disputes over attribution of proceeds among those financially interested in the insured project. Becoming familiar with these valuation and coverage issues can help policyholders anticipate and avoid costly errors and the very delays in recovery that “delay in completion” and “delay in start-up” coverage is intended to guard against.

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