Connecting Delay Damages, Business Interruption, and Project Risk Coverage in Construction
Introduction
Delays in construction are inevitable — but who bears the cost when things go wrong?
Whether it’s a global supply chain disruption, a design defect, extreme weather, or a failure by a subcontractor, interruptions to a construction timeline can have serious financial consequences. Delay damages, lost revenue, and pressure from funders or end users can quickly turn a minor setback into a major dispute.
This is where project risk insurance should play a vital role. Yet, in practice, there’s often a significant mismatch between what stakeholders expect insurance to cover and what the policy actually responds to.
As an insurance lawyer working in the construction industry, I’ve seen this disconnect surface time and time again. So, let’s take a closer look at how insurance interacts with project delays and why it needs to be better aligned with legal and contractual frameworks.
The Reality of Construction Delays
Construction project delays are not just frustrating, they’re financially punitive. Employers often seek to enforce delay or liquidated damages. Contractors may seek extensions of time or argue force majeure. Meanwhile, critical path disruptions can trigger disputes across multiple parties.
And while stakeholders may assume there’s insurance in place to protect against these risks, the reality is more nuanced.
What Cover Is Actually Available?
Several types of construction insurance can be relevant to managing the fallout from construction delays, but they don’t all respond in the same way, and many don’t respond at all if not properly structured.
- Contractors All Risk (CAR) Insurance:
CAR policies typically cover physical damage to the works, but not financial loss from delays unless they’re the result of a covered event. For example, if a fire damages the site and causes delay, CAR may respond, but only to the cost of repairs, not to loss of revenue or penalties. - Delay in Start-Up (DSU) / Advance Loss of Profits (ALOP):
These policies are designed for project owners to recover anticipated revenue or profit lost due to delayed completion, but only where the delay results from physical damage covered under the CAR policy. - Business Interruption (BI):
BI insurance is typically available during the operational phase of a facility, not during construction. Confusing the two can leave developers with a false sense of security. - Professional Indemnity (PI) Insurance:
Where delay is caused by defective design or negligent professional services, PI may respond, but it depends on whether the financial loss claimed is within the scope of cover. - Political Risk / Force Majeure Cover:
On international construction projects, events such as political unrest, embargoes, or expropriation may cause delay. Specific insurance products can respond, but they require careful tailoring.
The Gaps That Lead to Disputes
Here’s where things typically go wrong:
- DSU claims fail because there was no insured physical damage.
- Delay damages exceed insurance limits or aren’t covered at all.
- Policy periods don’t match project timelines.
- Definitions in policies and contracts don’t align — for example, what counts as “completion” or “physical loss”.
- No legal review of the insurance program before execution.
In many cases, stakeholders assume that if a project is “insured,” then any losses flowing from delay will be covered. This is simply not the case and leads to expensive surprises when things go wrong.
Aligning Contracts, Risk, and Cover
The solution lies in proper alignment between the project contract and the insurance programme. A few key recommendations:
- Define risk clearly in the construction contract: What triggers delay damages? What events entitle the contractor to relief? These provisions need to be synced with the language of the policy.
- Involve legal and insurance specialists early: Brokers, lawyers, and risk managers should be speaking to each other during contract negotiation, not after a claim arises.
- Tailor your DSU / ALOP cover: Make sure it responds to the real financial risks of your project. Ask: what needs to happen for this policy to pay?
- Consider a pre-construction insurance legal review: This can uncover misalignments before they become disputes.
Final Thoughts
Delays in construction are, in many cases, unavoidable. But unmanaged, they can destroy project value, relationships, and reputations.
Insurance can and should help manage the impact, but only if it’s properly understood, correctly structured, and legally integrated into the broader contractual ecosystem.
If you’re a project owner, contractor, broker, or insurer operating in the construction space, let’s talk about how we can better align our tools to manage interruption risk.
I’d welcome your thoughts — what has your experience been with delay-related claims in construction projects?