In the event of physical damage to the contract works, a construction all risks (CAR) policy will provide the parties (normally the main contractor and the owner) with an indemnity for the cost of loss or damage. If the damage delays practical completion, however, the owner can be left with an uninsured revenue loss. Furthermore, if the new construction is set to be generating revenue at a specific date, these losses can be significant especially for additional debt service costs. 

This is particularly applicable for PBSA providers because there is a requirement for students to be living in halls for the start of the academic year. If completion is delayed or the premises are unavailable, PBSA developers and investors will suffer a loss of revenue generated from rent and incur additional costs through having to provide alternative accommodation for students. 

For example, in September 2021, approximately 350 students at the University of Bristol were expecting to arrive to new halls at St Thomas Street, but instead were informed that their rooms would not be ready for the start of term due to unexpected delays of up to three weeks. The University, in partnership with Fresh Student Living, were required to find nearby hotels as temporary accommodation for the affected students. In this case, the incurred costs included loss of rental revenue, alternative hotel accommodation and compensation for additional living costs such as catering, laundry, and travel. 

How can Delay in Start Up (DSU) insurance help?

Delay in Start Up (DSU) insurance can protect a project owner against such financial impact described above. It is important to note however that DSU cover cannot be bought as a standalone policy, rather it must be attached to a CAR policy, and for the DSU cover to be triggered, the damage that causes the delay must be insured under that CAR policy. Delays caused by other events not considered to be physical damage, such as the inability of the insured to provide sufficient funds for the completion of the project, will not be covered.  The indemnity period for DSU insurance starts at the date when practical completion of the project was originally expected (i.e., prior to start of the academic year), at which point revenue is forecast to be earned and which could be lost due to a delay caused by an insured event. For PBSA owners and developers, it is critical that the indemnity period covers the entire period of delay, during which time the construction project is completed. 

The owner will decide the DSU sums insured to be included in the policy, however the amount of indemnity paid by insurers will be calculated based on the actual loss, which may include specific items such as the fixed cost, debt servicing paid, and the net profits the owner would have received from rental payments had practical completion been on time. 

DSU cover features a single time excess (deductible period) which, for a PBSA project, normally lasts between 30 to 60 days. Importantly, the time excess with a DSU policy is not triggered by an individual event, but rather by failure to reach practical completion by the start of the academic year. Even if there are numerous individual events that take place that could cause delay, DSU cover can only be triggered once, which in turn means that only one deductible can be applied. 

Also covered under a DSU policy is any increased cost of working (ICOW) to try and reduce the delay to project, such as the increased cost of paying overtime to workers on site, providing that the value is no more than the amount of revenue saved.  

In addition, the DSU policy can be extended by the project owner to insure against a delay caused by damage to the suppliers’ or manufacturers’ premises, as well as damage to the construction plant and equipment, provided that the items are also insured under the CAR contract. 

Insurer considerations

While market appetite generally remains broad, one complexity that has been particularly noticeable when placing recent projects within the PBSA sector is insurers’ appetites towards the additional costs extensions, which are separate to the loss of revenue and occur because of the delay in practical completion. For example, there is often resistance to covering the cost of alternative accommodation, especially if the project site is in London. Though such additional payments are driving premiums up, Miller’s specialist construction team are able to secure cover for these risks. 

Given that modular construction techniques have become the chosen construction method for student accommodation, insurers may require detailed information around the supplier’s facility. There could be ‘push-back’ from insurers if the premises seem susceptible to risk given the quick installation process of the modular pods. 

Underwriters, when issuing DSU cover, generally stick to the ‘one third’ rule where they prefer that the DSU sums insured do not exceed a third of the contract value. There is little flexibility available in the market when calculating DSU sums insured because insurers must assume the worst-case scenario; the student accommodation project is not completed on time and so revenue cannot be earned at the start of the academic year. The insured and their broker must therefore carefully consider the key factors that influence DSU calculations, with particular focus on the indemnity period and any costs that would not form part of a claim and so should be excluded. 

Miller’s specialist Construction team has extensive expertise in risk advisory and management for PBSA construction projects. Get in touch with our team below to discuss any active or upcoming projects.