Managing the Double-Edged Sword: Inflation, Tariffs, and the Risk of Underreported Delay in Start-Up

Inflation: The Constant Climb

Inflation has been making headlines around the world. Material prices, cost of labor, and equipment are steadily increasing, and this isn’t just a headline issue, it impacts the real costs of building and operating projects. Every percentage point of inflation means that the project could cost more than originally planned, affecting everything from budget to risk profile.

 

Inadequate Automatic Increases: When Coverage Falls Behind

Many insurance policies include automatic increases, a mechanism to adjust the insured value in line with inflation or rising costs. With a premium to be applied to the increase of value. But if these automatic increases are set too low, or if they aren’t reviewed regularly, there’s a risk that insurable values won’t keep up with reality and limits and capacity deployed on the construction policy would not be sufficient. If the automatic increase in the policy is inadequate and actual costs surpass this, a gap opens. This leaves the project(s) exposed, as the insured value lags behind actual replacement or construction costs. In case of a claim, this could lead to an under-insurance situation with severe financial implications as a consequence.

 

Tariffs: The Unseen Impact on Capex

Tariffs and government-imposed duties on imported goods can swing project costs dramatically and with little warning. A sudden tariff hike on steel, electronics, or machinery can send the capex soaring. These rapid changes are hard to predict and even harder to budget for, often resulting in project overruns that weren’t accounted for in the original insurance coverage. And not all projects and clients hedge metal prices as well as currencies.

 

The Domino Effect: Underreported DSU

Delay in Start-Up (DSU) coverage is designed to protect your business from lost income if a project is delayed due to an insured event. The value of this insurance should be based on accurate, up-to-date capex and expected revenues reported per month. But when inflation and tariffs push costs higher, and automatic increases don’t keep pace, the true DSU exposure can be underreported. This means that if your project is delayed, your insurance payout may not fully cover your actual losses, leaving you to absorb the difference.

 

What Can You Do?

Here are some practical steps to protect your business from these risks:

• Review your project capex as well as your project time schedule regularly since this can have a direct effect on your cover as well as if the automatic increases clause on your policy is sufficient or not regularly: Don’t assume your policy’s built-in increases are enough. Work with your insurer to ensure coverage reflects current market conditions.
• Monitor inflation and tariffs: Stay informed about economic trends including fluctuations in currency and regulatory changes that could affect project costs.
• Update your DSU exposure: Communicate any major cost changes or project delays to your insurer promptly to ensure your DSU coverage is adequate.
• Partner with experts: It is important to choose an underwriter and risk carrier who is in it for the long run. This is to avoid possibly ending up in a situation where the risk carrier cannot approve an extension or make amendments for a project after it has been underwritten.
• Ensure correct values during the entire life cycle of a project. A project needs to be adequately insured even through the extended maintenance period post-handover to the purchaser, to avoid an under-insurance situation.

 

Looking Ahead: Building Resilience Together

Inflation and tariffs aren’t going away any time soon, but with a proactive approach, you can keep your insurance coverage aligned with reality. At Zurich Nordic, we’re committed to helping you navigate these challenges so you can focus on what’s next—with confidence.

 

For further information on how Zurich Nordic can help your company build resilience, please contact Marcus Magnusson, Underwriter Construction & Property.