Delay in Start-Up

I. Definitions and Basic Concepts

Delay in Start-Up (DSU), often referred to in the London insurance market as Advance Loss of Profits (ALOP), is an additional coverage under Contractors' All Risks (CAR)/Erection All Risks (EAR) insurance. It covers economic losses suffered by the project owner due to delays in project completion caused by insured events, including anticipated profit losses, increased loan interest, and fixed cost amortization.

Its core logic is: Engineering insurance pays for "the cost of repairing the project," while DSU pays for "the cost of finishing late."

An intuitive example: A Chinese enterprise invests in building a 2×150MW coal-fired power plant in Indonesia, with a total investment of USD 320 million. The original plan was to connect to the grid in June 2025, with annual electricity sales revenue of approximately USD 42 million. If a fire at the construction site causes an 8-month delay, CAR insurance would cover the replacement cost of the burned equipment, but the USD 28 million in lost electricity sales revenue during those 8 months, plus approximately USD 16 million in loan interest that still must be paid, would need to be covered by DSU.

DSU differs from traditional Loss of Profits insurance in that the latter covers business interruption of already-operating assets, while DSU covers delay losses of projects not yet in operation. The risk window extends from project commencement (or the agreed inception date) all the way to the Commercial Operation Date (COD) or Taking Over.

In international engineering practice, DSU typically coexists with Liquidated Damages (LD), but their legal natures are completely different: LD is the contractor's contractual liability to the owner, with a liability cap (typically 5%–10% of the contract value); DSU is insurance protection purchased by the owner, with a coverage limit of up to 100% of anticipated profits. A sophisticated owner will use both simultaneously—LD covers the contractor's negligence, while DSU covers force majeure and other insured events.

II. Core Elements

Element	Description	Typical Values/Practices
**Sum Insured**	Based on "anticipated gross profit + fixed costs + loan interest," typically calculated from annual budgets or financial models	15%–30% of engineering contract value; power projects often 1–2× annual electricity sales revenue
**Indemnity Period**	The period from the assumed completion date to actual resumption of operations; the "maximum indemnity period" must be specified in the policy	6–24 months; 12–18 months common for large overseas EPC projects
**Deductible/Time Excess**	The number of days borne by the owner after the delay begins	7–30 days, depending on project risk level
**Premium Rate**	Packaged with the main engineering policy or priced separately, depending on project type, construction period, region, and contractor qualifications	0.05%–0.30% of engineering insurance sum insured; standalone DSU annual rate 0.15%–0.50%
**Inception Point**	The "scheduled completion date" or "scheduled commissioning date" agreed in the policy	Typically the contractual COD, which must be locked in at the time of underwriting
**Claims Trigger**	Must result from an insured event already indemnified under the main policy (CAR/EAR)	Fire, explosion, natural disasters, accidents, etc.
**Applicable Scenarios**	Projects with high investment, long construction periods, and immediate cash flow upon commissioning	Power plants, mines, petrochemicals, toll roads, data centers, desalination plants
**Exclusions**	War, civil unrest, exchange rate fluctuations, design defects (partial), contractor bankruptcy, administrative approval delays	Must be reviewed clause by clause, with particular attention to whether "political risk" is separately insured
**Currency**	Typically consistent with the loan currency or power purchase agreement currency	Primarily USD, EUR; local currency may be used for local currency projects
**Major Insurers**	London market (Lloyd's), Munich Re, Swiss Re, China Re, Sinosure (political risk portion)	Large projects often use co-insurance or reinsurance arrangements

It is particularly important to note that the DSU sum insured is not determined "arbitrarily." In project finance, banks will require the borrower to provide a calculation report issued by an independent engineer or financial advisor, specifying the composition of "anticipated profits." If the sum insured is below the level required by the loan agreement, it may constitute an event of default under the financing documents.

III. Operational Process

DSU insurance is not an isolated action but rather a component embedded in the project finance and EPC contract structure. The typical process is as follows:

1. Initiating Party: Typically the project owner (SPV company) or borrower. In project finance structures, lending banks will mandate DSU insurance through the Insurance Advisor's Report. EPC contractors generally do not proactively purchase DSU, as DSU protects the owner's profits, not the contractor's interests.

2. Who to Engage:

• <strong>Insurance Brokers</strong>: Such as Marsh, Aon, WTW, and Zhongyi, responsible for policy design, market inquiries, and claims assistance.
• <strong>Insurers</strong>: Lloyd's syndicates, Munich Re, Swiss Re, China Property & Casualty Reinsurance, Sinosure (when political risk is involved).
• <strong>Bank Insurance Advisors</strong>: Such as Standard Chartered, HSBC, and CDB's insurance advisory teams, responsible for reviewing whether policies meet financing requirements.

3. Timeline:

• <strong>3–6 months before financial close</strong>: Initiate insurance program design and coordinate with bank insurance advisors.
• <strong>1–2 months before financial close</strong>: Complete market inquiries, terms negotiation, and policy issuance.
• <strong>After commencement</strong>: Policy takes effect, entering the risk window period.
• <strong>3 months before expected completion</strong>: If the construction period is significantly delayed, negotiate with insurers whether to adjust the "scheduled completion date."
• <strong>After actual completion</strong>: Process policy cancellation or conversion to operational-phase insurance.

4. Required Materials (Core Checklist):

• Project feasibility study report, financial model (including anticipated revenue, costs, and profit calculations)
• EPC contract, Power Purchase Agreement (PPA) or Offtake Agreement
• Loan agreement and bank insurance requirement letter
• Construction schedule (Primavera P6 or MS Project format)
• Contractor qualification documents and track record
• Geological survey reports, natural disaster risk assessments (e.g., earthquakes, floods, typhoons)
• Insurance broker's market submission
• Independent engineer's construction period assessment report

5. Key Action: The insured must clearly define the "scheduled completion date" with the insurer—is it Mechanical Completion, Taking Over, or Commercial Operation (COD)? Different definitions directly determine the claims inception point; a one-month difference could mean millions of dollars.

IV. Real Cases

Case 1: A Chinese Enterprise's Coal-Fired Power Plant Project in Pakistan

Background: A Chinese state-owned enterprise invested in building a 2×660MW coal-fired power plant in Sindh Province, Pakistan, with a total investment of approximately USD 1.8 billion, 70% of which was financed by loans from the Export-Import Bank of China and China Development Bank. The project was insured with CAR and DSU, with a DSU sum insured of approximately USD 240 million, an indemnity period of 18 months, and a deductible period of 15 days.

Event: In 2019, heavy rains at the project site caused flooding, washing away partially installed boiler steel structures and temporary roads, resulting in a construction delay of approximately 5 months. CAR insurance paid approximately USD 38 million in replacement costs.

DSU Claim: The owner filed a DSU claim with the insurer, asserting lost electricity sales revenue and increased loan interest due to the 5-month delay. After engaging an independent adjuster to verify, the insurer confirmed that the delay was caused by a natural disaster insured under the CAR policy, and ultimately paid approximately USD 42 million under the DSU (calculated based on actual delay days after deducting the 15-day deductible period).

Lesson: The key issue in this case was whether flooding fell within the definition of "natural disaster." If the policy limited "flood" to "once-in-a-century" or greater events, and actual rainfall did not meet that standard, the claim could have been denied. The project's policy adopted a more lenient "any flood" definition, which enabled a smooth recovery.

Case 2: A Chinese Enterprise's Nickel Smelting Project in Indonesia

Background: A private Chinese enterprise invested in building a nickel-iron smelting plant on Sulawesi Island, Indonesia, with a total investment of approximately USD 800 million, with products exclusively sold to Chinese stainless steel companies. The project was insured with DSU, with a sum insured of approximately USD 120 million and an indemnity period of 12 months.

Event: In 2021, a large rotary kiln at the project site caught fire due to an electrical fault, destroying core equipment and delaying commissioning by 7 months. CAR insurance paid approximately USD 26 million for equipment losses.

DSU Dispute: The insurer initially denied the DSU claim, arguing that "electrical fault constitutes an inherent equipment defect and is not an accident." The owner's lawyers invoked the "accident" clause in the policy and submitted a third-party fire investigation report proving that the fire was caused by an external short circuit rather than an equipment design defect. Ultimately, the insurer agreed to pay approximately USD 31 million.

Lesson: The boundary between "design defects" and "accidents" is a high-frequency point of dispute in DSU claims. When underwriting, one should strive for "Limited Design Defect Cover"; otherwise, once classified as a design issue, DSU may pay nothing.

Case 3: A Chinese Enterprise's Highway Project in Ethiopia

Background: A Chinese enterprise undertook the construction of a toll road in Ethiopia, with the owner being the local government and project financing involving the International Finance Corporation (IFC) under the World Bank. The project was insured with CAR and DSU, with a DSU sum insured of approximately USD 45 million.

Event: In 2020, armed conflict broke out in northern Ethiopia, forcing the project site to suspend work for 4 months. CAR insurance denied the claim due to the "war exclusion," and DSU also denied the claim.

Response: The owner had previously purchased Political Risk Insurance (PRI) through Sinosure, and ultimately received approximately USD 28 million in compensation through the "war and civil unrest" clause under the PRI.

Lesson: DSU does not cover political risk. In politically unstable regions, DSU must be packaged with political risk insurance and war risk insurance; otherwise, there will be a coverage gap where "neither engineering insurance nor DSU pays."

V. Common Pitfalls and Risks

1. Contract Clause Pitfalls:

• <strong>Vague "scheduled completion date" definition</strong>: If the policy only states "expected June 2025" without specifying the exact date and definition criteria, the insurer may argue during claims that "the actual completion date should be based on the owner's acceptance," causing the inception point to shift later.
• <strong>Confusion between "indemnity period" and "maximum indemnity period"</strong>: The former is the actual delay days; the latter is the policy cap. If the actual delay exceeds the maximum indemnity period, the excess is not covered.
• <strong>Whether the "deductible period" is calculated in calendar days or working days</strong>: A one-day difference could mean hundreds of thousands of dollars.

2. Legal Differences Pitfalls:

• <strong>Common law vs. civil law</strong>: London market policies are governed by English law, and claims logic differs from civil law systems. For example, the application of the "Proximate Cause" principle under English law may be stricter than under civil law systems.
• <strong>Local compulsory insurance requirements</strong>: Some countries (e.g., Saudi Arabia, Algeria) require engineering insurance to be underwritten by local insurance companies, and DSU may only be available as an add-on, with terms subject to local legal restrictions.
• <strong>Foreign exchange controls</strong>: If DSU claims are paid in USD but project revenue is in local currency, exchange losses may be incurred. Some countries (e.g., Argentina, Nigeria) have strict restrictions on foreign exchange remittance.

3. Exchange Rate Risk:

• DSU sums insured are typically denominated in USD, but actual project revenue may be in local currency. If the local currency depreciates significantly, the USD sum insured may be insufficient to cover actual losses.
• During claims, the insurer may convert at the "exchange rate on the date of the incident" rather than the "exchange rate on the actual payment date," causing the owner to bear the exchange rate difference.

4. Cultural Differences Pitfalls:

• <strong>Middle East</strong>: Owners may rely more on LD than DSU, believing that "the contractor paying compensation is enough," neglecting their own profit losses.
• <strong>Africa</strong>: Some government owners lack insurance awareness and are unwilling to cooperate in providing claims materials, causing DSU claims to be delayed.
• <strong>Latin America</strong>: Local insurance regulations are strict, and DSU terms may require Spanish-language versions; translation errors may trigger disputes.

5. Other High-Frequency Pitfalls:

• <strong>Failure to notify insurers of construction delays in a timely manner</strong>: Most policies require notification "within 30 days of becoming aware of a possible delay"; late notification may affect claims.
• <strong>Failure to retain construction period evidence</strong>: Such as construction logs, supervision reports, and meteorological records; without them, it may be impossible to prove the number of delay days and causes during claims.
• <strong>Double recovery from DSU and LD</strong>: Some policies stipulate that if the owner has already received LD compensation from the contractor, the DSU payout must be reduced by the corresponding amount to avoid "double recovery."

VI. Solution Comparison

Solution	Protected Party	Trigger	Compensation Cap	Applicable Scenarios	Main Limitations
**DSU/ALOP**	Owner's anticipated profits, loan interest	Insured events under CAR/EAR	100% of sum insured	High-investment, long-construction projects	Does not cover political risk or design defects
**Liquidated Damages (LD)**	Owner's contractual rights	Contractor breach	5%–10% of contract value	All EPC contracts	Contractor may be unable to pay
**Political Risk Insurance (PRI)**	Investor's rights	War, expropriation, exchange restrictions	90%–95% of investment	Politically unstable regions	Does not cover commercial risk
**Business Interruption (BI)**	Operational-phase profits	Property damage causing production stoppage	100% of annual profit	Projects already in operation	Does not cover construction period
**Performance Bond**	Owner's contractual rights	Contractor breach	10%–30% of contract value	All EPC contracts	Must be provided by contractor; high cost
**Parent Company Guarantee**	Owner's contractual rights	Contractor's parent company breach	Depends on guarantee letter	When contractor creditworthiness is insufficient	Consumes parent company's credit line

Selection Logic:

• If the project is in a politically stable region with a creditworthy contractor: <strong>DSU + LD</strong> combination is sufficient.
• If the project is in a politically unstable region: <strong>DSU + PRI + War Risk</strong> trilogy.
• If the project's financiers have strict requirements: <strong>DSU + BI (operational phase)</strong> for seamless transition.
• If the contractor is an SME: <strong>LD + Performance Bond + Parent Company Guarantee</strong> triple protection.

VII. FAQ

Q1: Are DSU and ALOP the same thing?

A: Essentially the same. DSU is a newer term, while ALOP is the traditional London market terminology. Some policies will write "Delay in Start-Up (Advance Loss of Profits)."

Q2: What is the approximate premium for DSU?

A: It depends on project risk. Power projects typically range from 0.05%–0.15% of the engineering insurance sum insured, mining projects 0.10%–0.25%, and petrochemical projects 0.15%–0.30%. If purchased standalone, the annual rate can reach 0.5%.

Q3: Can DSU cover political risk?

A: No. DSU only covers insured events under CAR/EAR. Political risk must be covered through PRI or war risk insurance.

Q4: If the contractor has already paid LD, can DSU still pay?

A: Most policies will deduct the LD amount to avoid double recovery. However, if LD is insufficient to cover all losses, DSU can make up the difference.

Q5: How long is the DSU indemnity period typically?

A: 6–24 months; 12–18 months is common for large overseas projects. It should be determined based on the project construction period and loan term.

Q6: How long is the DSU deductible period typically?

A: 7–30 days. The longer the deductible period, the lower the premium. Owners need to balance retained risk against premium costs.

Q7: Can DSU cover delays caused by "design defects"?

A: Standard policies do not cover this. However, a "Limited Design Defect" extension clause can be negotiated for an additional premium.

Q8: How is the DSU sum insured determined?

A: It is calculated based on anticipated gross profit + fixed costs + loan interest, typically 15%–30% of the engineering contract value. Banks will require an independent advisor's report.

Q9: What materials are needed for a DSU claim?

A: Policy, CAR insurance claims documents, construction delay evidence (construction logs, supervision reports), financial loss calculation report, and independent adjuster's report.

Q10: Can the DSU "scheduled completion date" be adjusted?

A: Yes, but it must be negotiated with the insurer before the expected completion date, and additional premium may be payable. If adjusted after a delay has already occurred, the insurer may refuse.

Q11: Can DSU and BI be purchased simultaneously?

A: Yes. DSU covers the construction period, and BI covers the operational period, providing seamless transition. However, attention must be paid to the alignment of "inception point" and "termination point."

Q12: Who are the DSU insurers?

A: Lloyd's of London, Munich Re, Swiss Re, China Re, Sinosure (political risk portion), and local insurance companies (when compulsory).

Q13: How long does a DSU claim typically take?

A: Simple cases 3–6 months; complex cases 1–2 years. Longer when independent adjustment and construction period assessment are involved.

Q14: Can DSU cover "administrative approval delays"?

A: Standard policies do not cover this. However, a "government action" extension clause can be negotiated, requiring additional premium and strict conditions.

Q15: Which country's law governs DSU policies?

A: Typically governed by English law, with disputes submitted to London arbitration. Some projects may choose local law or Singapore law.

VIII. Related Terms

• <strong>CAR (Contractors' All Risks)</strong>: Contractors' All Risks Insurance
• <strong>EAR (Erection All Risks)</strong>: Erection All Risks Insurance
• <strong>ALOP (Advance Loss of Profits)</strong>: Advance Loss of Profits Insurance, the London market term for DSU
• <strong>COD (Commercial Operation Date)</strong>: Commercial Operation Date
• <strong>LD (Liquidated Damages)</strong>: Liquidated Damages for delayed completion
• <strong>PRI (Political Risk Insurance)</strong>: Political Risk Insurance
• <strong>BI (Business Interruption)</strong>: Business Interruption Insurance
• <strong>PPA (Power Purchase Agreement)</strong>: Power Purchase Agreement
• <strong>Offtake Agreement</strong>: Offtake Agreement
• <strong>Proximate Cause</strong>: A core concept in insurance law
• <strong>Time Excess</strong>: Time deductible period
• <strong>Indemnity Period</strong>: Indemnity Period

IX. Authoritative Sources

• <strong>FIDIC</strong>: Conditions of Contract for EPC/Turnkey Projects (Silver Book) Clause 17.4 (Employer's Risks), Clause 19 (Force Majeure), and relevant clauses of Conditions of Contract for Construction (Red Book).
• <strong>ICC</strong>: International Chamber of Commerce Insurance Clauses, ICC Uniform Rules for Contract Guarantees.
• <strong>Sinosure</strong>: Overseas Investment Insurance Clauses, Political Risk Insurance Guidelines, and Country Risk Analysis Reports published by Sinosure.
• <strong>World Bank</strong>: Project Finance Insurance Guidelines, MIGA (Multilateral Investment Guarantee Agency) political risk insurance product descriptions.
• <strong>Lloyd's of London</strong>: DSU/ALOP standard clause templates published by the Lloyd's Market Association (LMA).
• <strong>Munich Re</strong>: Engineering Insurance Underwriting Guidelines.
• <strong>Swiss Re</strong>: Sigma series reports, including engineering insurance and DSU claims data.
• <strong>China Banking and Insurance Regulatory Commission</strong>: Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance Companies, concerning regulatory requirements for engineering insurance and additional coverages.
• <strong>International Engineering Insurance Broker Associations</strong>: Annual engineering insurance market reports published by Marsh, Aon, and WTW.