Legal Issues with Obtaining Insurance for Large Transit Projects (2014)

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20 ment. The basic form includes the following com- ponents:62 Part A Coverage (Referred to as Workers’ Com- pensation) Coverage to the employer for an employee’s bodily injury by accident or by disease (including death) provided 1) that the injury occurs during the policy period, 2) the injury is caused or aggra- vated by the conditions of employment, and 3) benefits are required to be paid pursuant to state workers’ compensation law. Part B Coverage (Referred to as Employer’s Li- ability) Part B provides coverage for injury that is not covered by workers’ compensation law if the in- jury arises in the course of employment during the policy period and is caused or aggravated by the conditions of employment or arose out of the course of employment. A claimant need not establish fault or negli- gence, provided he or she can establish an em- ployer and employee relationship and that the injury arose out of the course of employment. In general terms, these benefits are the worker’s ex- clusive remedy against the employer for his or her injuries. Compensation benefits include medical benefits and indemnity payments to compensate the employee for lost earnings or earning capac- ity. In the majority of states, employer tort liabil- ity is also subject to a judicially created exception from workers’ compensation immunity in cases that involve intentional harm. If it can be demon- strated that the injury resulted from intentional, willful, or deliberate acts or omissions, a common law tort action may be maintained.63 Employee liability coverage, known as Part B coverage, normally is written in combination with a workers’ compensation policy. It is “gap filler” that insures an employer’s liability for a worker injury where the standard workers’ compensation requirements do not apply. Part B coverage is triggered by bodily injury caused by accident or disease. Unlike Part A coverage, Part B employee liability coverage requires proof of fault in a tort action. The accident must typically take place during the policy period or the disease must be the result of exposure during the policy period.64 62 CONSTRUCTION INSURANCE, supra note 8, at 119. 63 Id. at 126. 64 Id. at 128–29. IV. INTRODUCTION TO INSURANCE AND RISK FINANCING SOURCES FOR TRANSIT AGENCIES In this section of the digest we have used lan- guage and terminology that is insurance- and risk management-specific. We recommend that read- ers refer to one of the many glossaries and techni- cal resources available on the Internet.65 A. Preliminary Considerations Before we survey the various exposures to loss and the possible insurance treatments that apply to them, it is important to place the role of insur- ance (whether contractually required or discre- tionary) in context relative to managing construc- tion project risk. Insurance is just one of the tactics used in a construction risk management strategy. Compli- cating the role of insurance is the diversity of sources for the coverage—some will be purchased by the owner (transit agency) and some will be provided by the various contracting parties (de- signer, contractor, etc.). Some insurance will be purchased specifically for the contemplated pro- ject, and some will be provided as part of an ongo- ing or operational insurance program. There are some other preliminary considera- tions for transit lawyers. • Ultimately, the owner pays for the cost of in- surance directly or indirectly. These costs are sometimes buried in overhead and sometimes charged as a separate reimbursable expense. So, the decision to require unnecessary, redundant, or excessive coverage has a financial impact on the owner even though, on its face, insurance appears to be “furnished by others” if so required by con- tract. • As mentioned above, insurance alone is not a panacea for construction risk and exposures. The hierarchy of construction risk management can be viewed as including 1) a primary reliance on good provider selection; 2) the secondary strategy of appropriate, integrated, and consistent contrac- tual risk allocation provisions; 3) proactive risk control (pre-loss loss prevention and post-loss claims management); and 4) an appropriate and 65 Specifically, we recommend the IRMI (Interna- tional Risk Management Institute, Inc.) Glossary of Insurance and Risk Management Terms found at http://www.irmi.com/forms/online/insurance- glossary/terms.aspx. Transit lawyers and other readers should find the resources there very helpful in defining and understanding the terms used in this digest.

21 economically efficient risk financing plan, includ- ing, as one element, the right insurance compo- nents. Construction risk management starts in the planning stage and needs to be a part of every phase thereafter, through project closeout. • A corollary to the last point is that insurance availability or the willingness to provide higher limits should not influence the selection process. The fundamental criterion should be selecting the best qualified and responsible party. • The types and limits of insurance coverage may be constrained by state and federal statutes and regulations, as previously discussed. A thor- ough appreciation of public procurement, public construction, and related statutory and regulatory requirements is fundamental. • Consistent and logical risk allocation is im- portant in both the indemnity and insurance re- quirements in those contracts. One of the com- plexities of a public construction project is the interplay among the various contracts (e.g., owner’s project manager, design professionals and their consultants, construction manager, and various subcontractors). The complexity is com- pounded by the application of the various statu- tory requirements. Added to the mix is the likeli- hood that the actual terms and conditions of the various insurance components will vary from par- ticipant to participant and not dovetail exactly with the contractual requirements.66 • Finally, safety and loss prevention are essen- tial to a successful construction project, irrespec- tive of the level of insurance. Owners should as- sign the responsibility for construction risk management to the party or parties with control over the risk as part of the risk allocation in the underlying contracts. B. Overview of Exposures to Loss Transit agencies face five major categories of insurable loss exposure typical of any public in- frastructure construction project: • Physical damage to project and owner’s prop- erty, including some consequential or time ele- 66 For example, indemnity agreements often cover a broad range of liabilities, while industry-standard CGL policies respond to bodily injury, property damage, and personal injury arising out of an accident or an occur- rence. Similarly, design professionals are often asked to indemnify owners or other parties for a broader range of liabilities than those insured in a design professional liability policy that respond to negligent errors or omis- sions. See discussion supra § II.B for some additional examples. ment losses. This includes the project itself, as well as existing properties in the case of renova- tions, repairs, additions, or new construction in proximity to other structures. • Injury to third parties, including injuries to workers and employees, and bodily injury or prop- erty damage sustained by third parties arising out of the project or its site. This includes damage to property owned by others and injuries sustained by the public. • Increased costs or damages due to breaches of professional duty, or professional errors or omis- sions. This could include errors or omissions on the part of the owner’s project managers, archi- tects, engineers, other design or engineering con- sultants, and DB entities. • Increased costs or damages due to contractor or subcontractor default or inability to perform. • Increased costs or damages due to the dis- charge or existence of contaminants or pollutants. The source of the contaminants may be preexist- ing site conditions (known or unknown) or acci- dental discharges during construction. Insurance and Risk Financing Resources. Risk financing relates to the activities a transit agency undertakes to provide funding in the event of loss. Risk financing is concerned with providing funds to cover the financial or economic consequences of unexpected losses affecting a transit agency. For many, the concept of risk financing begins and ends with insurance. However, in reality, for tran- sit agencies and the parties with whom they con- tract, the scope of available and appropriate risk financing techniques is very broad, encompassing both external and internal financing and service resources. Another way of categorizing the approaches in- volves 1) risk transfer (insurance); 2) risk reten- tion67 (e.g., retentions or deductibles under insur- ance policies, “self-insurance,” or captive insurance companies); or 3) risk pooling (e.g., group captives, joint purchasing authorities). Most sophisticated organizations employ a variety of techniques customized to their particular expo- sures, financial resources, and external or legal requirements. Traditionally, transit agencies have handled risk by transferring it to commercial insurance companies through the purchase of an insurance 67 See GEORGE L. HEAD, ESSENTIALS OF RISK MANAGEMENT, Vol. 1 and 2 (Insurance Institute of America, 1997), as well as his writing on IRMI, www.irmi.com (use search engine).