A late project produces two flows of money that go by the same name in conversation and have almost nothing in common. On one side delay penalties, owed by the contractor to the project owner under the construction contract, computed per day and often capped at a percentage of the contract value. On the other the delay in start-up indemnity, owed by an insurer to the project owner where covered physical damage has pushed back commissioning. Both trigger on the same day, are computed in days, and settle in euros. Confusing them is the most frequent error in the class, and it costs, because one of the two is not insurable.
The contractual penalty is a sanction, and it is that status that puts it outside the scope of property insurance. It is owed because the contractor failed to meet an undertaking, independently of any physical damage, independently of the cause of the delay under most wordings, and its amount is fixed in advance with no necessary relation to the loss actually suffered. A project owner receiving 12,000 euros a day in penalties while its real lost margin is 4,000 is not enriched by an indemnity, it is enforcing a clause. That is precisely what property insurance does not do: it makes good an established loss, it does not enforce a liquidated stipulation.
That indemnity principle, barring a loss from enriching anyone, also explains why delay cover is computed as it is. It does not pay a fixed daily amount, it reconstructs the gross margin the operation would have generated over the period it did not run, on the basis of a business plan fixed before the loss. The daily figure in the contract is a computation ceiling and not an amount owed: if the actual operation, once started, turns out less profitable than forecast, the indemnity follows reality and not the contract. The penalty follows nothing: it is what the contract says.
The point where the two meet is the one that decides files, and it is little known. Where one delay opens both rights, the project owner receives penalties from its contractor on one side and an indemnity from its insurer on the other, for the same period. Most delay cover wordings then treat penalties received as a recovery deducted from the indemnity, precisely to avoid making good the same loss twice. A project owner that omits to claim its penalties therefore believes it is protecting its commercial relationship with the contractor; it is often only moving the same amount from one pocket to another, gaining nothing, and sometimes losing, since some wordings deduct penalties due rather than penalties collected.
It must be added that the penalty, on the contractor's side this time, is no more insurable under its own liability cover. Liability insurance covers damage caused to others, not the non-performance of a contractual obligation of result undertaken by the insured itself. A contractor owing 700,000 euros in penalties owes them out of its own funds, and that is an exposure managed when the contract is negotiated, through caps and through the definition of relieving causes, never through an insurance contract bought afterwards. That boundary is not a gap in the market, it is a consequence of the very definition of property insurance.
Relieving causes deserve a reading of their own, because the same circumstance does not produce the same effect on both sides. Bad weather stopping the site may suspend penalties where the contract provides for an extension of time for weather, which is common in France. It opens no right to delay cover, however, if there has been no physical damage, and rain preventing a concrete pour is not physical damage. The project owner then finds itself with neither penalty nor indemnity, while the contractor is relieved: the delay exists, it costs, and nobody bears it contractually. That is the configuration described in the module on natural events, seen from the other end.
That leaves the reading that makes all this workable, and it comes down to three questions asked in order. Was there covered physical damage, yes or no: that is the entry door to delay cover, and without it nothing that follows exists. Does the contract provide an extension of time for this cause: that is the exit door from penalties, and it is independent of the first. Finally, how does the delay cover treat penalties received or due: that is what determines whether the two flows add up or cancel out. Three questions, three different texts, and none of them follows from the other two.
A production unit is due to be commissioned on March 1. A covered fire destroys a workshop on January 20 and pushes commissioning to June 12, that is 103 days. The contract places on the main contractor penalties of 9,000 euros per day of delay, capped at 5% of the contract value, that is 1,750,000 euros, with no relieving cause for fire. The delay in start-up cover carries a 30-day deductible, a daily indemnity ceiling of 21,000 euros, and a clause deducting from the indemnity the delay penalties due for the same delay. The adjuster assesses actual daily gross margin at 17,500 euros. What does the project owner receive, and from whom?
The two flows must be computed separately before being brought together, and the order matters. On the insurance side: 103 days less the 30-day deductible gives 73 indemnifiable days, at the actual margin of 17,500 and not at the 21,000 ceiling, since the indemnity makes good an established loss, that is 1,277,500 euros. On the contract side: 103 days at 9,000 euros gives 927,000 euros, below the 1,750,000 cap, therefore owed in full. The reflex is to add them and announce 2.2 million; that is wrong, and it is the very error the deduction clause exists to prevent. Penalties coming off, the insurer owes 1,277,500 less 927,000, that is 350,500 euros, and the project owner receives 1,277,500 in all, three quarters of it from its contractor and not from its insurer. The non-obvious point is in the word due. If the project owner waives the penalties to preserve the relationship, or trades them for a commercial discount on a later contract, the deduction applies all the same, because it bears on what was owed and not on what was collected. It would then have given up 927,000 euros for nothing at all, and that decision is usually taken without reading the policy, at a moment when the loss looks settled.
- 01A delay penalty is a contractual sanction, fixed in advance and with no necessary relation to actual loss: it is not insurable, neither for the party receiving it nor for the party owing it.
- 02Delay cover makes good an assessed margin on a business plan fixed before the loss: the daily figure in the contract is a computation ceiling, not a sum owed.
- 03The two flows do not add up: most wordings deduct penalties from the indemnity, to stop the same loss being made good twice.
- 04The deduction often bears on penalties DUE rather than collected: waiving them to preserve a relationship then means giving them up for nothing.
- 05Bad weather may relieve penalties without opening delay cover, for want of physical damage: the delay exists, it costs, and nobody bears it.