Meeting_Body
FINANCE, BUDGET AND AUDIT COMMITTEE
JUNE 17, 2020
Subject
SUBJECT: MAJOR CONSTRUCTION UMBRELLA INSURANCE PROGRAM
Action
ACTION: PURCHASE UMBRELLA INSURANCE
Heading
RECOMMENDATION
Title
AUTHORIZE the Chief Executive Officer to negotiate and purchase additional construction project umbrella liability insurance policies (also known as a super excess general liability insurance program) for construction of the Metro Westside Purple Line Extension Section 3 Project (Project) with up to $200 million in additional limits at a cost not to exceed $6.5 million for the period effective July 1, 2020 to July 1, 2027 (and products/completed operations coverage to July 1, 2037).
Issue
ISSUE
Metro is concerned about the financial implications of an unanticipated loss resulting from major damage to adjacent properties and/or loss of life/injury on our major transit construction projects. Such risk can be mitigated reasonably through the purchase of additional insurance.
Discussion
BACKGROUND
Existing Liability Insurance Coverage for the Metro Westside Purple Line Extension Section 3 Project
Dedicated limits of insurance coverage for the Project are provided by two Design Build (DB) contractors: Tutor Perini/O&G, Joint Venture (TPOG, JV) for the stations and Frontier-Kemper/Tutor Perini, Joint Venture (FKTP) for the tunnels. The liability insurance on the Project, which covers the negligent injury or death and/or property damage to others, is $350 million for each contract, which are mutually exclusive. The coverage that is the subject of this report will provide an additional $200 million for the project, for a total of $550 million in liability coverage. The coverage will also include products and completed operations insurance for ten years following the revenue service date and will respond to latent defects which cause injury or death, or real property damage to other people. The coverage limits take into account aspects such as concentration of property values near the Project, population density, tunneling risks, project duration, and other factors. The TPOG and FKTP JV’s combined contract award value of the Project for both tunnels and stations is $1,773,622,000.
Risk Exposure Above Existing Coverage
Despite using liability insurance limits toward the high end of industry practice in our major construction project contracts, these limits would be insufficient to respond to a catastrophic, unanticipated loss resulting in widespread property damage or loss of life.
Metro purchased additional construction project umbrella liability insurance policies for construction of the Metro Westside Purple Line Extension Section 1, Gold Line Foothill Extension Phase 2A, Crenshaw/LAX, Expo II Transit Corridor and Regional Connector Projects in October 2014 as authorized by the Board. The policies provide additional liability insurance limits up to $550 million over the contractor owned insurance programs. We also purchased additional construction project umbrella liability insurance policies for construction of the Metro Westside Purple Line Extension Section 2 Project in June 2018 as authorized by the Board. The policies provide additional liability insurance limits up to $300 million over the contractor owned insurance program. Purchase of the proposed policy will provide a consistent approach to mitigating our risk exposure as on the other major construction projects listed above.
DISCUSSION
Proposed Additional Liability Insurance Coverage for the Metro Westside Purple Line Extension Section 3 Project
Metro’s insurance broker USI Insurance Services (USI) approached insurance carriers in the major construction sector including some of Metro’s current super umbrella program participants. A $200 million limit will be provided by excess carriers in a layered program for a total coverage, including the DB provided coverage, of $550 million. This is the maximum limit that is currently available because the insurance market for major construction projects is tapped out. This action brings continuity of super umbrella coverage for all major Metro construction projects.
Attachment A identifies the insurance carriers and pricing for the proposed program.
Determination_Of_Safety_Impact
DETERMINATION OF SAFETY IMPACT
Approval of this recommendation will not impact the safety of Metro's patrons or employees.
Financial_Impact
FINANCIAL IMPACT
The funding for this action is included in the FY20 budget, under Project 865523 (Westside Purple Line Extension Section 3), Fund 6012, Cost Center 8510 (Construction Project Management), and Account Number 50602 (Insurance Premium for General Liability). The Life-of-Project Budget includes the excess liability insurance coverage.
Impact to Budget
The sources of funds for the recommended action are from Measure M, Federal New Starts and Local Funds. The approved FY20 budget is designated for the Westside Purple Line Extension Section 3 Project and does not have an impact to operations funding sources.
Implementation_of_Strategic_Plan_Goals
IMPLEMENTATION OF STRATEGIC PLAN GOALS
Recommendation supports strategic plan goal # 5 “Provide responsive, accountable and trustworthy governance within the LA Metro organization.” The responsible administration of Metro’s insurance programs includes the use of prudent risk management best practices and tools to mitigate large financial risks on Metro’s major construction projects.
Alternatives_Considered
ALTERNATIVES CONSIDERED
USI explored the possibility of deferring the insurance purchase for six to eight months. However, this is not recommended given the current hardening of the insurance marketplace. USI believes the action will result in significantly reduced capacity, perhaps only $160 million as the maximum available with a shorter term (five years). The premium costs could also go up by as much as $1.5 to $2 million for the reduced limit.
There are no other viable options as USI exhausted the marketplace to develop the limits recommended in this super excess liability program. There are no more available limits in the insurance industry.
Metro could self-insure this exposure and rely on its indemnities with the DB contractor; however, this approach would leave Metro with an unknown and unknowable risk of an unanticipated loss.
Next_Steps
NEXT STEPS
Upon Board approval of this action, we will advise Metro’s broker, USI Insurance Services, to proceed with placement of the excess liability insurance program outlined herein effective July 1, 2020.
Attachments
ATTACHMENTS
Attachment A - Recommended Program Pricing and Carriers
Prepared_by
Prepared by: Tim Rosevear, Manager, Risk Financing, (213) 922-6354
Reviewed_By
Reviewed by: Kenneth Hernandez, Chief Risk, Safety and Asset Management Officer, (213) 922-2990
Richard Clarke, Chief Program Management Officer, (213) 922-7557
