Advance loss of profits, or pricing revenue that never existed

A delayed project costs two very different things, and confusing them is the most common error on a large scheme. The first is the construction overrun: repairing, re-erecting, keeping crews on site longer. The second is the revenue the asset would have produced had it entered service on the planned date, and never will. The damage policy covers the first. Advance loss of profits cover, usually known by its acronym, covers the second, and it follows a logic that is not that of ordinary business interruption.

The difference fits in one sentence: there is no track record. Classic business interruption is computed from the insured company's accounts over the months preceding the loss, and the difficulty concerns the corrections to apply to a known trend. Here the asset has never operated, no reference year exists, and the amount is built entirely on what should have happened. One insures a hypothesis, which means fixing it in writing before a loss gives everyone good reasons to reread it differently.

Hence the central place of the scheduled commissioning date, which is the pivot of the whole cover. The loss is measured as the gap between that date and actual commissioning, retaining only the delay attributable to covered damage. That restriction is the source of nearly all disputes, because a large project is almost always already late when the loss occurs. If the site was running four months behind for supply reasons and a fire adds six months, the cover bears on the six months only. One must therefore build a counterfactual schedule, that is, determine what would have become of an already troubled project had the fire not happened, and that schedule is disputed all the more because neither party can prove it.

The daily indemnity then rests on a forecast gross margin, itself drawn from the project's business plan. The same questions arise as in any business interruption, with a higher degree of uncertainty: what sale price to retain, what ramp-up, what availability rate for a brand-new installation? Wordings handle this in two opposite ways. Some refer to the business plan filed at placement, which fixes everything and makes the computation mechanical, at the cost of an indemnity disconnected from the real market at the time of loss. Others retain the economic conditions actually prevailing, which is fairer and opens an endless debate. A power producer whose market price has doubled between placement and fire will not defend the same clause depending on which one it signed.

Three mechanisms then bound the indemnity, and they stack. The deductible is in time rather than money: it is expressed in days of delay, often thirty to ninety, and it removes the first days, the cheapest ones. The indemnity period caps how long the loss is counted, twelve or eighteen months from scheduled commissioning. And the monetary limit applies on top. The interaction of those three bounds produces a counterintuitive effect: on a loss delaying by forty days a project whose deductible is thirty, the indemnity bears on ten days only, even though the physical damage may be considerable. Many construction losses open no delay indemnity at all, not because they are light, but because they can be caught up.

One substantive condition is quieter and declines more files than all the bounds combined: the lost revenue must result from physical damage itself covered by the policy. A delay caused by a supplier failure, a strike, a refused permit or a component shortage opens nothing, because there is no physical damage at its origin. It is the same principle that governs business interruption generally, and it bites harder here, since the causes of delay on a large project are mostly immaterial. The cover is therefore narrow by construction, and a project owner reading it as insurance against delay will be disappointed at the first event.

That leaves the question of who is insured, and it is anything but incidental. The lost revenue belongs to the project owner, whereas the construction policy is often placed by the main contractor, whose delay loss is of a wholly different nature: contractual penalties, paid to the project owner, which are not a business interruption. Two distinct losses therefore arise from one delay, one at the builder, one at the future operator, and they are not covered by the same clause. On a debt-financed project a third party joins in, the lender, which ordinarily requires to be named beneficiary of the delay indemnity, since that is what services the debt while nothing is producing. The drafting of the beneficiary clause then decides who collects, and that question is settled before the loss or not at all.