It is a well-recognised fact that for project works, DSU insurance cannot be purchased in isolation. Underwriters insist on providing coverage in conjunction with construction all risks (CAR) or erection all risks (EAR) insurance. Establishing a sum insured for CAR or EAR is normally straight forward, with contracts generally requiring that the works be insured for their full value. This can be estimated at the start of a project with a final contract value adjustment made on completion. However, understanding the sum insured for DSU can be more complex. 

Factors influencing DSU calculations

The insured and their broker must be careful not to include costs that would not form part of a claim in the event of a delay, as this will generate excessive premium. Focusing on fixed as opposed to variable costs is critical where loss of profit is being used as the basis of the DSU sum insured. There are, however, scenarios where loss of sale proceeds or additional debt service costs may be a more appropriate basis for indemnification.

The indemnity period is also an important consideration when determining the DSU sum insured. This is the period of time in which the insurer will indemnify the insured’s loss. For a construction project, this period should be assessed bearing in mind the anticipated timescale for carrying out remedial works should a substantial loss occur immediately prior to completion. As this includes time for emergency shoring up or debris removal, for example, the timescale could theoretically be longer than the original construction period. Insurance market conditions may dictate that a long indemnity period is not available and the insured may need to accept a maximum of 12 or 18-month period of indemnity.

Sums insured - contract works vs DSU 

In most cases, the sum insured for the contract works will be higher than that for DSU. However, not always and such situations invariably cause consternation amongst competing insurers. 

A key part of the underwriting process is to understand the “probable maximum loss” or PML. This is more often lower for the contract works sum insured as there may be, for example, geographic separation between structures or phased handovers resulting in the maximum exposed risk at any one time being lower than the full value. Underwriters will be able to use this information for their premium calculations as opposed to the entire contract works value.

Unfortunately, there is less flexibility available in relation to DSU sums insured. Underwriters have to assume that unless the entire project is delivered on time, revenue cannot be earned. On this basis, it is impossible to take a PML based approach to a DSU sum insured. This invariably increases the disparity between the contract works and DSU sums insured.

Clearly, this situation represents a heightened risk profile for insurers in that the (relatively) small value of contract works has a much larger financial risk riding on it. This may create concerns and result in some insurers refusing to provide terms. A less attractive risk equals a less competitive marketplace, which then results in higher premium and reduced coverage.

What you can do when faced with an imbalance

If faced with such a situation, there are some things you can do:

• Engage with a specialist broker that fully understands your risk and the market 
  
• Ensure that the DSU sum insured is correctly calculated and that it does not include elements that will not be considered when a claim is due to be paid
• Make sure your broker seeks lead terms from reputable underwriters, as these terms will be easier to support with follow market capacity
  
• Budget for a higher premium rate or consider retaining more risk by using a time based excess to manage the upfront cost to the project

If you would like any more information, help or advice in relation to project risks, please get in touch.