17 December 2020

DSU and Increased Cost of Working – A Stitch in Time

BY: Steven Horne | IN: Articles


From a Delay Analysis perspective, increased Cost of Work (ICoW) is a bit of an insurance policy outlier. Generally speaking, as a matter of indemnity we would be looking to reinstate the insured to the position they would have been in had the Damage not occurred, or ‘but for’ Damage. To achieve this objective requires us to look at the delay period retrospectively.

However, ICoW bucks this trend and an equitable ICoW review requires us to assess the Delay prospectively.

ICoW represents additional expenditure that is incurred by the Insured for the sole purpose of avoiding or diminishing Delay, and the consequent DSU claim, but must not exceed the DSU claim amount that otherwise would have been incurred.

To avoid or diminish a Delay the project team will have to take a reasonable approach based on the information available at the time. This means that mitigation measures implemented may not turn out to be as successful as originally expected, however, this does not mean that the insured should not be indemnified for what turn out to be unsuccessful measures.

The luxury of hindsight is not available to the project team at the time mitigation measures are implemented, and importantly when the associated costs of which are committed to, therefore it would only appear fair and equitable that the adjustment team assess such mitigation measures on the same premise.  

This would prescribe a prospective delay analysis and to assess the reasonableness of ICoW expenditure, confirm that it has been expended solely as a result of damage and assist with the economic test a three step prospective delay analysis is required.

The delay analyst needs to assess the following three positions.

1 – The Project’s Pre-Incident Position

What was the expected commencement date of the insured business immediately prior to the insured event(s)? Does the project schedule accurately reflect the project’s status and intended work sequence as at the date of loss?

2 – The Project’s Unmitigated Position

What was the unmitigated amount of delay being faced by the project?

3 – The Project’s Mitigated Position

What are the time savings that can be expected to be delivered by the mitigation measure(s) being proposed?

The difference between positions (1) and (2) provides the base exposure to a potential DSU Delay. Together with the difference between positions (2) and (3) this provides the information required to understand the limit of the ICoW measures’ liability and to understand whether the measures implemented will cost less than the potential DSU claim they are seeking to avoid.

Position (1) in itself and the difference between positions (3) and (1) will help the adjustment team understand whether the measures implemented have been done so solely as a result of Damage or whether they would likely have been implemented anyway.

Should position (1) be a date later than the project’s contractual completion date, enquiries should be made with the project team as to whether the measure implemented would have been done so anyway, absent the Damage.

Similarly, should position (3) be a date earlier than position (1) it might suggest that the implemented mitigation measures are not only expected to be successful in avoiding delay as a result of damage, but that they might also have been successful in diminishing or avoiding pre-existing non-Damage related delay. In this scenario, it might prove necessary for these mitigation measures to be apportioned relative to the benefits derived by Insurers from the benefit derived by the Insured and their contractors.

Like most issues that arise during the assessment of DSU claims all parties will ultimately benefit from a proactive, transparent and collaborative approach to reviewing ICoW expenditure and dispute avoidance. A stitch in time…