Blog Question – Advanced Loss of Profits
I received a question from a reader seeking some information around Advanced Loss of Profits cover for a construction project, I share my answer to the reader below with you all too.
Advance loss of profit (“ALOP”) insurance provides coverage for financial losses due to delays in construction and infrastructure projects caused by an insured peril(s).
ALOP also called delayed completion coverage or delay in start-up (“DSU”) insurance. There can be both an increase in cost of working component, for example extra interest payments or anticipated lost profits due to the construction project takes longer than expected to complete.
I often recommend that insureds involved in a construction project to considers ALOP where they face a financial exposure due to a delay in a project’s completion.
For example, a fire during construction may delay the date on which the project was to be completed.
The possible causes for delays are numerous and to be insured need to be unexpected.
ALOP insurance only covers the actual loss of gross profit stemming from a delayed project. The types of events that trigger coverage are like any other policy set out in the policy wording. Again like every other policy it will not cover all event types.
You can also have claims resulting from a delay in the arrival of materials eg a marine loss triggering the ALOP coverage.
In practice, say a project was to be completed for 31 December 2020. There was a massive storm event which caused delay in the pouring of the foundations by a month while it was all pumped out and dried out. If the builders can make up the time and the project still is completed on time there is no claim. If it flows through the entire project and the project opens say 4 weeks later, if this is caused by the insured peril, ie the storm, then the claim would be payable. It gets complicated where you have insured and uninsured events causing delays. Say industrial action if this is not insured.
Typically the cover is taken out as part of the construction insurance program and from my understanding you need to purchase the coverage before any works starts on the project but as I am not a broker, I would ask you check with the proposed construction insurer.