For a warehouse built to be let, a hotel or a production line, the handover date is not just a technical milestone: from that day on, the investment generates revenue, and up to that day the loan has to be financed. If a fire or a storm pushes the handover back by three months, the principal's loss is not the burnt-out floor slab – CAR (contractors' all risks) insurance pays for that – but three months of lost rent, the running loan interest and the liquidated damages (kötbér) payable to the tenant. As a broker, I see that Hungarian principals either try to shift this risk onto the contractor (through liquidated damages) or simply do not reckon with it, even though an insurance solution exists: delay in start-up (DSU) / advance loss of profits (ALOP) cover. This article is about what CAR covers in this chain, where liquidated damages end, and what DSU can do – as a continuation of the exclusions map, from the principal's point of view.
- CAR/EAR (contractors' all risks / erection all risks) policy conditions expressly exclude consequential loss – delay, loss of profit, liquidated damages, fines – even if the physical damage underlying them is otherwise payable.
- Liquidated damages (kötbér) are the contractor's contractual liability and are due only if the delay arises from a cause for which the contractor is responsible (Section 6:186 of the Hungarian Civil Code, Ptk.) – when a storm or fire causes the delay, the principal is often left without liquidated damages.
- Delay in start-up (DSU) / advance loss of profits (ALOP) cover is the principal's own cover: for the period of delay caused by physical damage payable under CAR/EAR, it pays fixed costs, loan repayments and lost profit, subject to a time deductible and an indemnity period – on the Hungarian market it is individually underwritten and rarely offered.
What CAR does not pay: the consequential loss exclusion
The property section of CAR pays for physical damage: the restoration of the damaged structure, materials and temporary works. Whatever follows from the damage stays outside the cover, and Hungarian policy conditions say so clearly. One publicly available Hungarian set of conditions (Groupama GB517, point VII.2.a) puts it this way among the property exclusions: the insurance does not extend to “any consequential loss, including liquidated damages, losses due to delay or termination of contract”, fines and financial losses, “even if the consequential losses can be traced back to a loss that is otherwise payable”. Alfa's CAR II conditions likewise exclude all consequential loss, “including liquidated damages, losses due to delay, non-performance or termination of contract”. The logic is international: CAR/EAR based on the Munich Re models insures physical damage; it does not measure the value of time.
This is equally true for the contractor and the principal. The contractor cannot cover its own liquidated damages from CAR, and its liability insurance does not pay them either, because liquidated damages are not compensation for damage but a contractual sanction. And the principal cannot claim its lost revenue from the contractor's CAR policy, even if the principal is an insured under the policy.
Liquidated damages and compensation: what they are good for, and where they end
The principal's first tool is the liquidated damages for delay in the construction contract. Under Section 6:186 of the Hungarian Civil Code (Ptk.), the obligor may undertake to pay a sum of money in the event that it breaches the contract for a reason for which it is responsible – and it is released if it exculpates itself for the breach. Under Section 6:187, paying liquidated damages for delay does not release the obligor from performance, and alongside the liquidated damages the obligee may also claim any damage exceeding their amount. Two limits follow from this. One: liquidated damages are tied to the contractor's liability, so if the delay is caused by a storm, flood or fire for which the contractor is not responsible, no liquidated damages are due, and a claim for damages may also fail because the contractor exculpates itself. The other: the amount of liquidated damages is capped in the contract (typically at a specified percentage of the contract price), and recovering it from an insolvent contractor is not simple either – the legal disputes on a project article deals with this. Liquidated damages are therefore a disciplinary tool towards the contractor, but they do not insure the principal's revenue.
What is DSU/ALOP, and who is it for?
Delay in start-up (DSU) cover, also known in Hungarian practice as advance loss of profits (ALOP) cover, was designed for this gap. According to a Swiss Re technical publication, only the principal can be the insured under DSU, not the contractor, because the revenue from the investment belongs to the principal alone; the financing bank is not an insured, but it can be the beneficiary of the payment. The trigger is twofold: physical damage payable under CAR/EAR occurs during the period of insurance, and this damage pushes back the planned date of commissioning (handover). If the cause of the delay is not an insured event – for example, a delay in obtaining permits, a subcontractor's bankruptcy or a shortfall in financing – DSU does not come into play.
According to Swiss Re's description, what is indemnified is the loss caused by the revenue arriving later: the fixed costs to be covered from revenue, loan repayments and interest, the lost net profit, and the additional costs reasonably incurred to reduce the delay. The sum insured is the gross profit expected for the indemnity period – the difference between the expected revenue and the variable costs – which the principal has to support with calculations; for this, insurers typically ask for a business plan. There are two time limits: the time deductible – typically 30–90 days according to the publication, sometimes more – which the principal bears itself, and the indemnity period, whose length is set in the contract to match the risk – according to the publication, the first one or two years of operation are the critical ones. An important principle: one project, one handover date, one delay – however many loss events caused it, the deductible applies once, and so does the indemnity.
What does DSU exclude, and what does the insurer ask for?
DSU does not pay the contractor's liquidated damages or fines, delay arising from an uninsured cause, delay due to a lack of funds, the time needed for redesign or extension decided on after the loss, or supplier delay, unless there is a separate extension for it. Delay caused by a design defect is covered only if the design risk itself is covered under the CAR policy.
To write the cover, the insurer asks for a detailed schedule, a critical path analysis for complex projects, the delivery deadlines of key equipment and regular progress reports, and it also assesses the contractor's competence. In practice DSU is taken out linked to CAR/EAR, typically with the same insurer and before construction begins: the two covers are built on the same loss event, and with separate insurers the claims settlement may drift apart. On the Hungarian market this is individually underwritten cover, typically offered only for larger, revenue-generating projects – whether insurers accept it, and on what terms, differs from insurer to insurer.
What should the principal do?
If the revenue from the investment depends on the handover date – letting, operation, production – the question is worth deciding when the structure of the cover is being designed, not after a loss. Work out what a delay of three to six months would cost: lost rent, loan interest, the liquidated damages you have undertaken towards your own tenants. Check which of these items the liquidated damages in the construction contract cover and which they do not – in force majeure cases, typically none of them. Make sure that you are an insured under the CAR policy; this is where the main contractor or principal question becomes a question of money, because DSU is built most cleanly on the principal's own CAR policy. Revenue protection after handover – business interruption insurance – is covered in the article on changing cover after handover: DSU is for the construction period, business interruption insurance for the operating period. The insurer pays only for what is an insured event under your contract – with DSU this sentence is especially true, because every element of the cover is tied to a CAR loss. If you let me know while the project is being planned, I compare the options and the quotes.
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Sources
- Swiss Re: Delay in start-up insurance (technical publishing, Engineering, 2003)
- Groupama GB517 construction and erection insurance conditions – VII.2.a) consequential loss exclusion
- Alfa Construction and Erection Insurance (CAR) II conditions (CARII-SZ-230801, in force from 1 August 2023) – property exclusions (consequential loss)
- Hungarian Civil Code (Ptk., Act V of 2013) Sections 6:186–6:187 – liquidated damages (kötbér), the relationship between liquidated damages and compensation
