What Is Advance Loss of Profit (ALOP) Insurance?

What Is Advance Loss Of Profit (ALOP) Insurance?

Advance loss of profit (ALOP) insurance provides coverage for financial losses due to delays in construction and infrastructure projects.

ALOP will also provide a payout if companies face higher costs or lost profits when a project takes longer than expected to complete. ALOP is often called delayed completion coverage or delay in start-up (DSU) insurance as well.

Understanding Advance Loss Of Profit (ALOP) Insurance

Large construction projects purchase advance loss of profit insurance because they face several risks that could result in delayed project completion. A harsh winter, for example, may delay the start of a project and, thus, the completion date, or maybe the construction site soil is more unstable than engineers originally estimated. The possible causes for delays are numerous and often unexpected.

Such delays can severely impact the finances of companies relying on a construction project’s timely completion. In addition, companies that use debt financing may find it difficult to repay debts incurred for renting or purchasing construction equipment.

Companies that plan on moving into a new building may lose money because they are not able to open for business. Delays to some projects, such as harbors, airports, bridges, and tunnels, may negatively impact many companies over a wide geographic area.

Advance loss of profit insurance provides a hedge against losses associated with these kinds of risks, and the companies that purchase ALOP coverage can play a variety of roles on a construction project. Investors in the project may purchase ALOP insurance to cover the cost of not being able to earn rents from building tenants.

Building contractors may purchase the insurance to cover the cost of having to rent construction equipment and pay employees for longer than expected. Companies that are renting out equipment used in the construction may also use the insurance to cover the costs of not being able to rent the equipment for other projects.

Advance Loss of Profit Insurance and Gross Profit

Advance loss of profit insurance only covers the actual loss of gross profit stemming from a delayed project. The types of events that trigger coverage are outlined in the policy language, but it may not cover all event types. Problems can arise from ambiguity in defining gross profit.

Brokers and underwriters should test their proposed definition of gross profit by running various scenarios before the policy is underwritten. Doing so will ensure it reflects their intentions in the event of a loss. Time spent getting these points right will help minimize misunderstandings later and ensure expectations are met when a loss occurs.