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

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42 restrain trade and commerce. The companies in- volved with Marsh included American Interna- tional Group, ACE Ltd., Hartford Financial Ser- vices Group, and Munich-America Risk Partners. It was alleged that these participants paid im- proper fees and rigged bids, including their agreement to pay Marsh a billion dollars in so- called “contingent commissions” to steer them business and shield them from competition.100 By way of background, insurance brokers re- ceive two types of commissions. The first is a flat commission calculated from a percentage of the premium amount an insured pays for the policy. Second, on top of these upfront commissions, in- surance companies pay an incentive commission, commonly referred to as a contingent or supple- mentary commission. Under this arrangement, the insurance company pays a bonus to the broker that is calculated based on business growth and profitability. In other words, the more business the broker places with an insurer and the fewer claims the policyholder successfully files, the more the broker collects.101 Brokers who participated in this arrangement had a clear direct conflict of interest between their clients’ interest in settling legitimate in- sured claims and the broker’s interest in the in- surance carrier being more profitable (in part be- cause it reduced its payout on claims). In the Marsh litigation, Spitzer alleged that this incentive commission contributed to a wide- spread practice of bid rigging, where brokers solic- ited fake bids for consumers with deliberately less favorable terms than the bid offered by the insur- ance company paying the highest commissions, resulting in billions of dollars of additional com- missions. The complaint further alleged that the Marsh business plan had been to increase the contingent commission by steering clients to fa- vored insurance companies that paid higher commissions. After commencement of the suit, Marsh re- placed its Chairman and Chief Executive, several employees were suspended, and a former Marsh broker pled guilty to criminal charges for his part in the alleged bid rigging of insurance contracts. In January 2004, Marsh agreed to pay $850 million to settle the investigation, and the firm issued a public apology, calling its conduct unlaw- 100 Complaint (copy on file with authors). 101 See ACE Insurance Contingent Commission Whitepaper, available at http://ace-insurance-litigation. com/ace-ina-bad-faith/contingent-commission- whitepaper (last accessed Mar. 2014). ful and shameful. The money was to serve as res- titution for clients of Marsh’s insurance brokerage firm who were allegedly cheated by Marsh bro- kers. The settlement included a commitment by March 2004 to a new business model that shunned contingent commissions and other pay- ment arrangements that created conflicts of inter- est.102 This litigation and resultant settlement with Marsh highlights the clear conflict-of-interest situations created by contingent or supplemental fee arrangements. Consumers rely on brokers as experts, and brokers can prey on this reliance by creating compensation structures that conflict with their duties to clients. London-based Willis was one of the first brokerages to reject contin- gent or supplemental commissions. Although some of the major insurance brokers no longer accept contingent commissions, the practice still exists for smaller agents and brokers. Full disclo- sure of these contingent fee arrangements, by whatever name they are known, to the insurance consumer is warranted. The lack of transparency in these fee arrangements is something that tran- sit lawyers should be aware of and explore when using brokers to place and manage insurance pro- grams. VII. CASE STUDIES A. Los Angeles County Metropolitan Transit Authority Case Study 1. Description of Los Angeles County Metropolitan Transit Authority Organization The Los Angeles County Metropolitan Transit Authority, commonly referred to as LA Metro, serves as the transportation planner and coordi- nator, designer, builder, and operator within a 1,433-sq-mi service area in California. Nearly 9.6 million or one-third of California residents live, work, or play within the geographic area.103 • Description of LA Metro Large Transit Projects. LA Metro’s construction program includes nu- merous billion dollar projects, including the Crenshaw/Los Angeles International Airport 102 MMC Settles Spitzer Charges for $850 Million, BUSINESS INSURANCE, Jan. 31, 2005, available at http://www.businessinsurance.com/apps/pbcs.dll/article? AID=999920004957 (last accessed Mar. 2014). 103 See http://www.metro.net/about/agency/mission/ (last accessed Mar. 2014).

43 Transit Project ($2.058 billion) to build an 8.5-mi light rail line, stations, fixed guideway, new rail cars, and rail maintenance yards, scheduled to open in 2019. Other major transit infrastructure include the B Metro Gold Line Foothill Extension, Metro Rail Exposition Corridor Phase 2, Purple Line Extension ($2.4 billion), Regional Corridor Connector ($1.3 billion), I-405 Sepulveda Pass Improvement Project ($1.1 billion), and Gold Line Foothill Extension ($741 million).104 2. LA Metro Project Delivery Systems LA Metro uses the traditional design–bid–build approach in its construction program, but it has also adopted DB, design–build–operate–maintain (DBOM), and P3. Under the traditional design– bid–build contract, LA Metro requires that the contractor provide standard insurance coverage meeting specified limits. For large DB transit pro- jects, the designer and contractor are linked to a single tower of limits that covers both parties for general liability exposure. In a DBOM or P3, pro- ject insurance limits are adjusted to reflect the time frame and operating exposure. 3. How Is Risk Administered? Contract risk is administered by obtaining req- uisite insurance coverage and by requiring LA Metro contractors to agree to indemnity provi- sions contained in the contract documents. 4. Who Writes the Provisions and Administers the Insurance Program? The risk allocation provisions are drafted by the risk manager and general counsel, but the Risk Manager is responsible for drafting the in- surance contract provisions. 5. Insurance Requirements and Coverages For a large transit project, LA Metro requires a contractor to develop a CCIP with project-specific limits. The CCIP wrap-up insurance covers the contractor’s subcontractors or other entities for which the contractor may be legally or contractu- ally responsible. The CCIP also provides that its insurance shall be available for the benefit of LA Metro and other contractually indemnified par- ties. It also requires that LA Metro and other in- demnified parties be included as named insured on all policies, except workers’ compensation and professional liability. 104 Program Management Project Budget and Sched- ule Status, Construction Committee, 9/113 (as of 2014). For the LA Metro project, CCIP is required to provide the following insurance coverages: 1. CGL coverage for the contractor and contrac- tor-related entities and indemnified parties, with a minimum limit of $2 million combined single limit105 per occurrence, $4 million general annual aggregate limit, and $4 million prod- ucts/completed operations aggregate. The insur- ance shall be written on an occurrence form and shall be no less comprehensive and no more restrictive than the coverage provided by ISO form CG 00 01 07 98 or equivalent, with exclu- sions only as are typical for a construction project of this magnitude. 2. Statutory Workers’ Compensation and Em- ployer’s Liability in conformance with the laws of the state with minimum Employer’s Liability lim- its of $1 million per accident for bodily injury by accident,106 $1 million per employee for bodily in- jury by disease and $1 million policy limit for bod- ily injury by disease, and auto liability insurance limits of $10 million combined single limit. 3. Contractor Pollution Liability (CPL) insur- ance of no less than $40 million per occurrence and $40-million aggregate dedicated to the pro- ject, inclusive for the entire period of construction. The CPL policy shall provide coverage for cleanup costs, third-party bodily injury, and property damage resulting from pollution caused by con- tracting operations. The indemnified parties shall be named insureds on the CPL policy. 4. Environmental Impairment (Pollution) Liability Site Coverage Insurance. Upon LA Metro’s completion of appropriate environmental documents and within 60 days of LA Metro’s issu- ance of a change order, the contractor shall bind an Environmental Impairment Liability Site Cov- erage policy covering the environmental risks, including the clean up and remediation of unex- pected hazardous substances from the project. The term of the policy shall be not less than 15 years, and the indemnified parties shall be named 105 A combined single limit applies a single dollar limit to any combination of bodily injury and property damage claims arising out of a single accident or occur- rence, in contrast to so-called split limits where a policy provides separate limits for bodily injury claims and property damage claims in a single accident. 106 An idiosyncrasy of workers’ compensation cover- age language is that the employer’s liability coverage grant affords limits that are specific and aggregate for “bodily injury by accident” and “bodily injury by dis- ease.” These refer to the cause of the injury to the claimant.

44 as insureds on the policy. The change order will reimburse the contractor only for insurance pre- miums. 5. Umbrella or Excess Liability Insurance lim- its shall be not less than $250 million, which will provide coverage at least as broad as the primary coverage set forth above, including employer’s liability, CGL, and comprehensive auto liability in excess of the amounts set forth previously. The indemnified parties shall be named additional insureds on the umbrella excess policy. 6. Professional Liability Insurance shall in- clude project-specific liability coverage of not less than $35 million per claim and aggregate. The professional liability coverage shall provide cover- age on a primary basis and shall protect against any negligent act, error, or omission arising out of the design, engineering, project/construction man- agement, or oversight activities with respect to the project. The policy shall have a 10-year extended reporting period, and the total term of the policy shall not be less than 10 years. It shall also provide an indemnified party endorsement or vicarious liability endorsement for the indemni- fied parties. 7. Builders Risk Insurance must be a blanket policy on an “all risk” and flood basis for the pro- ject and include maximum coverage for the replacement values thereof for all risks, with a minimum limit of $250 million, plus “soft cost ex- pense cover.” LA Metro may elect to purchase bona fide earthquake coverage at its option and expense of not less than $50 million per occur- rence. The deductible and self-insured retention shall be no greater than 5 percent or $250,000, whichever is less. 6. How Are Insurance Services Procured? Insurance is not generally procured by LA Metro, but it relies on its contractors to meet and provide the insurance requirements set forth in their contracts. 7. Unique Features of LA Metro Insurance Approach LA Metro prefers CCIP insurance programs instead of OCIPs. LA Metro has determined that due to documented savings, CCIPs are the preferred approach for DB, DBOM, or P3 projects in excess of $100 million. LA Metro prefers CCIPs, because it believes that contractors are best suited for loss control since they are directly in- volved and have the legal liability for injuries on the project. Contractors are in a better position to administer the insurance program, control their safety program, and to handle claims and loss control since they have a vested interest in the outcome. It also enables contractors with good safety programs and records to gain competitive advantages in the procurement, resulting in lower bids. In LA Metro’s experience, CCIP premiums tend to be 10 percent less expensive than OCIP premiums. Further, large transit projects attract large contractors who have ongoing rolling CCIP capability, thus eliminating the need for LA Metro to create an OCIP from scratch and avoid- ing the attendant OCIP administrative costs and lengthy close-out requirements. LA Metro had a difficult experience with ter- mination of a prior OCIP. 107 LA Metro is convinced that CCIP programs eliminate coverage disputes and complaints. They also enable small contractors and DBEs to gain insurance and coverage. LA Metro indicates that an OCIP would be considered for smaller projects involving multiple prime contractors that are co-located on the project site. 8. LA Metro Legal Issues Section 7105 of the California Civil Code pre- vents public agencies from requiring their con- tractors to repair or restore damages in excess of 5 percent of the contract amount if they are deter- mined to be caused by Acts of God. An Act of God is defined as an earthquake in excess of 3.5 on the Richter scale or tidal waves. Thus, LA Metro re- tains the risk of earthquake damages and has the option to pay the premium for an earthquake damage insurance policy. In addition, Section 2792 of the California Civil Code also prohibits construction contract clauses that indemnify the public owner from the sole negligence or willful misconduct of the owner. 107 During tunneling construction of the Red Line, portions of Hollywood Boulevard subsided and created house-size sink holes, which led to hundreds of home- owner’s lawsuits. LA Metro hired outside counsel to defend itself against the damage claims. LA Metro- insured Argonaut contended that LA Metro drove up litigation and claim costs and terminated the MTA in- surance policy. In 1996 LA Metro filed suit against Ar- gonaut seeking $100 million in damages and accusing Argonaut of fraud, bad faith, and extortion for canceling its policy covering Red Line construction. Argonaut counterclaimed, seeking reimbursement from the un- paid deductible and other costs. In 2006 the MTA agreed to pay Argonaut $45 million, ending 9 years of litigation. See MTA Agrees to Pay $45 Million to Settle Suit over Subway at http://articles.latimes.com/2005/ aug/25/local/me-mta25 (last accessed Mar. 2014).

45 Such provisions are against public policy and void and unenforceable. The code mandates that an owner cannot be indemnified for the owner’s active negligence. B. New York Metropolitan Transportation Authority Case Study 1. Description of Organization The New York Metropolitan Transportation Authority (NYMTA) manages public transporta- tion in the New York City metropolitan area, including New York City subways and public bus systems. The NYMTA is a public benefit corpora- tion of the State of New York and is composed of transit agencies that include the Long Island Rail- road, Metro North Commuter Rail Company, Staten Island Rapid Transit Operating Authority, Metropolitan Suburban Bus Authority, First Mutual Transportation Assurance Company, MTA Bus Company, and MTA Capital Construc- tion. Affiliates of the NYMTA include New York City Transit Authority, its subsidiaries, and the Triborough Bridge and Tunnel Authority.108 2. Description of Large Transit Projects Major expansion projects include the East Side Access, which will provide a new eight-track sta- tion beneath Grand Central Terminal ($8.24 billion); Second Avenue Subway ($4.4 billion), which will reduce congestion and provide better access to mass transit for residents of the East Side of Manhattan; and Number 7 Line Extension ($2.4 billion), which will provide a 1.5-mi exten- sion and new station in one of Manhattan’s new- est neighborhoods. The $1.4-billion Fulton Transit Center will serve 300,000 daily customers and provide access to 12 subway lines and 25,000 ft of retail space.109 3. Project Delivery Systems MTA currently uses the traditional design–bid– build and DB delivery systems. 4. How Is Risk Administered? Contract risk is administered by requiring insurance coverage and requiring its contractors to provide indemnity protection provisions con- tained in the contract documents. On certain larger transit projects, MTA has instituted an 108 Report of Examination of the First Mutual Trans- portation Assurance Company as of 12/31/10, at 14. 109 MTA Capital Program available at http://web. mta.info/capital/esa_alt.html (last accessed Apr. 2014). OCIP program, which will be discussed later in this case study section. 5. Who Writes the Provisions and Administers the Insurance Program? The risk manager and lawyer are responsible for the drafting of the contract risk provisions. The risk manager has the primary responsibility for drafting insurance contract provisions. 6. Insurance Requirements and Coverages The MTA requires its contractors to maintain, at a minimum, workers’ compensation, CGL, and commercial automobile liability insurance. Rou- tine construction projects also mandate that the MTA and the contracting agency be named as additional insureds on the policies. In general, coverage requirements range from $1 million to $5 million combined single limit for injuries to persons (including death) and damages to property. For mega projects, MTA subsidiary First Mutual Transportation Assurance Company (FMTAC) provides an OCIP, which provides cov- erage for general liability, workers’ compensation, railroad protective, and builder’s risk.110 FMTAC, a captive insurance company, is also able to provide insurance coverage for flood and earthquake damage, which became critical due to the damages caused by Hurricane Sandy. The company insures property damage claims with respect to the perils of flood and earthquake in excess of a $25 million per occurrence self-insured retention, subject to an annual $75-million aggre- gate. The total program limit has been main- tained at $1.075 billion for any one peril. All losses resulting from acts of terrorism are excluded from this policy. With respect to terror- ism, FMTAC is reinsured by the United States Government for 85 percent of the “certified” losses as covered by the Terrorism Act of 2007 (TRIA). The remaining 15 percent is covered by an addi- tional reinsurance policy with Lexington Insur- ance Company.111 C. Construction-Related Insurance Coverage FMTAC provides an OCIP program for the $6- billion East Side Access Project through an 110 N.Y. INS. LAW § 2504 (McKinney 2000) generally prohibits wrap-up insurance for public construction in New York unless certain exceptions are met. NYMTA rail projects are exempted from this prohibition. 111 First Mutual Transportation Assurance Company 2011 Annual Board Meeting, May 25, 2011, at 15–16.

46 agreement with Liberty Mutual. The agreement insures third-party contractors and NYMTA and all of its subsidiaries up to $300 million for workers’ compensation and general liability. The insurers required FMTAC to hold the collateral and loss funding for the first $500,000 per occurrence.112 A similar OCIP is in effect for the $2.5-billion Second Avenue Subway Project, insuring workers’ compensation and general liability for third-party contractors of the MTA and subsidiaries, up to $500 million per occurrence, subject to a $1-million deductible. The OCIP requires FMTAC to post collateral for all losses and related work- ers’ injuries. In 2011 and 2012, $23 million was set aside.113 In addition, FMTAC entered into a Builders’ Risk insurance program for various MTA 2012– 2014 combined capital program OCIPs with limits of $50 million per occurrence and a $25,000 con- tractor deductible. FMTAC also purchases from ACE a Builder’s Risk policy with limits of $50 mil- lion per occurrence, with a $250,000 deductible. Kemper Insurance Company issued excess and professional/environment liability policies with respect to work performed on the East Side Access Project. The MTA has two such policies: the first policy has limits of $4 million in excess of $2 mil- lion for liability on an occurrence basis, and the second policy is for professional and environ- mental coverage with a limit of $50 million on a claims made basis.114 1. How Are Insurance Services Procured? FMTAC utilizes a best value selection process to select the administrator of the OCIP program. Evaluation of the proposer’s safety program and its safety consultant are integral parts of the se- lection process. Administrative costs range from 7 percent to 9 percent.115 2. How Is Insurance Purchased? For routine construction projects, insurance is not generally procured by the NYMTA, as it relies 112 First Mutual Transportation Assurance Company 2013 Annual Board Meeting, Sept. 18, 2013, at 18; Re- port of Examination of the First Mutual Assurance Company, at 4–5, http://web.mta.info/mta/news/books/ docs/FMTAC.pdf. 113 First Mutual Transportation Assurance Company 2013 Annual Board Meeting, Sept. 18, 2013, at 18. 114 Id. 115 Interview with Laureen Coyne, Director of Risk Management, NYMTA (Aug. 2013). on its contractors to meet and provide the insur- ance requirements set forth in their contracts. For the Metropolitan Transportation Authority Capi- tal Construction (MTACC) mega projects, FMTAC provides the OCIP program and has a CCIP pro- gram for the Seven Line Expansion. • Unique Feature of NYMTA Insurance Ap- proach FMTAC was created to engage in the business of acting as a pure captive insurance company under Section 7005, Article 70 of the New York Insurance Law. Its mission was to continue to meet, develop, and improve the insurance and risk management needs as required by NYMTA. It should be noted that NYMTA is a huge transit operation, having more than $360 billion in assets and incurring more than $70 million in insurance premiums in 2013, and is able to structure its in- surance program to secure the necessary cover- age. NYMTA and FMTAC are component units of the State of New York. FMTAC is approved to insure the risks of NYMTA and its family agen- cies. A captive insurance company is a special purpose insurance company formed primarily to underwrite the risks of NYMTA. A captive cannot sell insurance to the general public and can only underwrite the risks of its parent organization and related entities. FMTAC engages in an underwriting process whereby it reviews and evaluates risk for potential coverages, sets pre- mium rates, and writes insurance policies. It operates a claims management system to handle claims that result from the policies written, and does its own financial management and compli- ance reporting. For underwriting, it operates as an insurance company and sets its rates for the insurance risks it chooses to underwrite. FMTAC gives NYMTA significantly greater control over its risk management program by developing tai- lored coverage and stabilizing insurance budgets through its own underwriting, and provides direct access to wholesale reinsurance markets. NYMTA, through FMTAC, is able to keep premi- ums level and predictable by entering into long- term insurance transactions and thus reduces the influence of insurance market fluctuations. FMTAC is managed by a Board of Directors. The captive is managed by Marsh Management

47 Services, licensed by the New York Department of Financial Services.116 Recently, FMTAC played a vital role in recover- ing from damage caused by Hurricane Sandy. Hurricane Sandy made landfall with a record storm surge of nearly 14 ft, which produced flood- ing in low-lying areas near the East River. The Brooklyn Battery Tunnel and seven East River subway tunnels were flooded, putting a halt to New York City commuter rail service and causing $5 billion in damages. Through FMTAC, NYMTA had insurance to cover $1.05 billion in damages,117 with the remaining damages to be paid through assistance from the federal government. Further, in July 2013, FMTAC secured $200 million in re- insurance protection to help pay for future repairs for damages to its infrastructure in the event of future destructive storm surges similar to those experienced with Hurricane Sandy.118 3. Legal Issues Section 5-322.1 of New York General Obliga- tion Law declares that any agreement exempting owners and contractors, or holding them harmless from liability for negligence, are void and unen- forceable. As discussed previously in Section III.E.2 of this digest, New York’s strict liability Scaffold Law requires another layer of general liability for contractors and taxpayers and adds millions of dollars to the cost of public projects. Some governmental agencies and contractors maintain that the cost of the insurance can often be double that of other states. By way of example, there are estimates that the insurance cost added $200 million to $400 million to the cost of the $5 billion replacement of the Tappan Zee Bridge. The legal exposure issues that increase insurance costs are estimated at 50 percent more than in New Jersey.119 116 Report of Examination of the First Mutual Trans- portation Assurance Company as of 12/31/10, June 29, 2012, at 6–7. 117 Bestwire, blog posted on Dec. 14, 2012, MTA: In- surances to Cover $1.075 Billion in Hurricane Sandy Damage, http://www.programbusiness.com/News/MTA- Insurance-to-Cover-1075-Billion-in-Hurricane-Sandy- Damage. 118 MTA Secures 200 Million Insurance Protection, MTA Web site, available at http://new.mta.info/press- release/mta-headquarters/mta-secures-200-million- insurance-protection-future-sandy-storms (last accessed Mar. 2014). 119 Interview with Laureen Coyne, Director of Risk Management, NYMTA (Aug. 2013). New York law generally prohibits the adoption of OCIPs for public construction projects, but ex- empts transit agencies120 from this prohibition. D. Massachusetts Bay Transportation Authority 1. Description of Organization In terms of daily ridership, the Massachusetts Bay Transportation Authority (MBTA) remains the nation's fifth largest mass transit system. It serves a population of 4,817,014 (2010 census) in 176 cities and towns with an area of 3,249 sq mi in the Boston area and Eastern Massachusetts. It maintains 183 bus routes, 2 of which are Bus Rapid Transit lines; 3 rapid transit lines; 5 light rail (Central Subway/Green Line) routes; 4 track- less trolley lines; and 13 commuter rail routes. The average weekday ridership for the entire sys- tem is approximately 1.3 million passenger trips. The Board of Directors has seven members, appointed by the Governor and serving cotermi- nous with him or her. One member is the Secre- tary of Transportation, who serves as the Chair- man of the Board. The two additional members are from outside the MBTA district. An advisory board, consisting of one official or his or her des- ignee from each of the communities in the MBTA district, reviews the program for mass transporta- tion, which is the MBTA’s long-range planning document. The advisory board also reviews the authority's annual operating budget. In addition, the advisory board reviews and provides com- ments on the authority’ s draft capital improve- ment plans and fare increases. The cities and towns pay an “assessment” consisting of their pro- portionate share of the MBTA's net deficit. The state government pays the largest share of the annual deficit. Fare box revenues currently cover about 31 percent of the authority's total annual operating expenses. 2. Description of MBTA’s Largest Transit Projects The largest capital projects that the MBTA is currently undertaking include the following: • The Government Center Station Project includes improvements to the Green Line Station and Blue Line Station. Project scope includes redundant elevators, new escalators, raised 120 N.Y. INS. LAW, § 2504 (McKinney 2000) prohibits wrap-up insurance contracts for public construction contracts with certain exceptions. MTACC railroad pro- jects are exempted from this prohibition.

48 platforms, new power systems, a unit substation, improved egress, Americans with Disabilities Act (ADA) compliance, and code and safety updates. The current total budget is approximately $130 million, with a projected schedule of approxi- mately 3 years. • The Green Line Extension Project includes an extension of the Green Line to Tufts Univer- sity. It includes track and signal upgrades, new stations, new light rail cars, and a maintenance and operations facility. The current total budget is approximately $1.3 billion, with a projected schedule of approximately 6 years. • The Fitchburg Track and Signal Replacement Project, Fitchburg Line Bridges Project, and the South Acton Commuter Rail Station Project in- clude improvements to the existing track, addition of new track and interlockings, upgrading of track and signal systems and other elements of the ex- isting line, improvement or replacement of bridges, and improvements to an existing com- muter rail station. The total budget for the project is approximately $172 million, and the projected schedule for all Fitchburg Line elements to be completed is approximately 3 years. 3. Description of Project Delivery System Used The majority of the MBTA’s capital projects use the design–bid–build method of project delivery. The MBTA has used DB on two projects, Wonder- land Parking Garage and Revere Transit, and is currently using DB on the Merrimack River Project. The MBTA is using its first CM/GC project delivery approach on the Green Line Extension Project. 4. How Risk Is Assessed and Managed Contract provisions related to insurance are reviewed by the MBTA risk manager, with mini- mum insurance limits determined as it relates to scope of work. Standard minimum requirements are set for a majority of contracts. Indemnity pro- visions are reviewed and revised in conjunction with the MBTA legal department. 5. Who Writes Contract Provisions Regarding Allocation of Risk? Construction contracts are written by MBTA Design and Construction in conjunction with MBTA Legal. 6. Who Administers the Risk Management Program? The MBTA risk manager is responsible for the MBTA insurance program. MBTA Design and Construction handles the risk management analy- sis for construction projects. In its standard specifications, the MBTA re- quires that the contractor furnish the following types of minimum insurance and minimum limits: • Comprehensive general liability (GL) with limits of not less than $1 million per occurrence and $1 million per aggregate, including contrac- tual liability covering the subject contract, and completed operations coverage for at least 2 years following MBTA acceptance. • Automobile liability with limits of not less than $1 million. • Workers’ compensation, including employer’s liability, as required by Massachusetts General Laws Chapter 152, including a waiver of subroga- tion as to the MBTA. • Umbrella liability with limits of not less than $10 million per occurrence and per aggregate, covering “all works and services under the Con- tract.” The exact amount is determined on a project by project basis. • Pollution liability insurance with limits not less than $1 million per occurrence and $5-million aggregate. • Railroad protective with limits of not less than $5 million per occurrence and $10-million aggregate. • Builder’s risk on a 100 percent completed value basis. The MBTA also carries a statutorily required general excess liability policy with limits of $75 million (with a $7.5-million self-insured reten- tion), covering bodily injury and property damage and accidental death. On one project, the MBTA revised its RFP and contract wording to allow for options for the MBTA to provide builders’ risk coverage and OCIPs in the future. The MBTA has not used an OCIP since 2002, because the MBTA did not find that it clearly generated sufficient cost savings. 7. How Are Insurance Services Procured? The MBTA conducts an RFP for broker services for its property program and liability program. A broker selection committee (three to five mem- bers), approved by the Chief Financial Officer (CFO) and General Manager (GM), makes the final selection decision. The broker services agree- ment is for 3 years, with a 1-year option for an additional year. Current brokers receive an annual flat fee approved by the MBTA board.

49 8. How Is the MBTA’s Insurance Purchased? At the direction of the MBTA’s risk manager, the insurance broker approaches all viable mar- kets for policy renewal quotes. The treasurer- controller, CFO, or GM makes the final decision on policy procurement based on a recommenda- tion by the risk manager. 9. MBTA Legal Issues The MBTA did not identify any particular legal issues affecting its insurance program. E. Central Puget Sound Regional Transit Authority 1. Description of Organization Central Puget Sound Regional Transit Author- ity, a public corporation acting under the service name Sound Transit (ST), is a regional transpor- tation authority providing a high-capacity trans- portation system throughout parts of King, Pierce, and Snohomish counties through commuter rail (Sounder), light rail (Link), and a regional bus system (ST Express). The implementation of the initial phase of the voter-approved regional mass transit system (Sound Move) is scheduled for a 20-year period, ending in 2016. In November 2008, the voters approved a second phase of ex- pansion of the mass transit system, a 15-year pro- gram called ST2. 2. Description of ST’s Largest Transit Projects The largest capital projects that ST is currently undertaking include the following: • The University Link Light Rail Project has a total project budget of $1.614 billion, hard construction cost estimate of $900 million ($973 million with contingency), and a scheduled construction duration of 6 years (2009–2015). Construction will be followed by 6 months of sys- tems testing, with a projected project completion date of 2016. Eleven primary contract packages are proposed for U-Link construction as follows: • Three early work contracts—U210 (Utility re- location), U211 (Demolition and site remediation), and U215 (I-5 undercrossing construction pits). • Two tunnel contracts—U220 (University of Washington Station (UWS) to Capitol Hill Station (CHS)) and U230 (CHS to Pine Street Stub Tun- nel (PSST)). • Two station contracts—U240 (CHS) and U250 (UWS). • Three system-wide contracts—U260 (Track work), U820 (Yard expansion), and U830 (Sys- tems design, furnish, and install). • One vehicle contract—U821 (Light rail vehi- cle procurement). • The Northgate Link Extension Project con- sists of a 4.3-mi extension of the light rail from the UWS to Northgate, Seattle, Washington. The project includes twin bored tunnels, transition to an aerial guideway, and an elevated station. The Northgate Link Light Rail Project has a total pro- ject budget of $1.354 billion. The duration for con- struction is approximately 9 years (2012–2020), followed by 6 months of systems testing, which results in a projected project completion date in 2021. There are eight primary contract packages proposed for the Northgate Link construction pro- ject: • Two early work contracts: N112—Brooklyn Utilities/Site Prep and Roosevelt Utilities/Site Prep, and N114—North Portal Site Prep. • One tunnel and station excavation contract: N120—Excavation of Roosevelt and Brooklyn sta- tions and tunnels from Roosevelt to UWS. • One tunnel contract: N130—Tunnels from North Portal to Roosevelt. • Two underground station contracts: N140— Brooklyn and N150—Roosevelt. • One aerial guideway and elevated station contract: N160—Northgate. • One system-wide contract: N180—Track work and systems. 3. Description of Project Delivery System Used ST generally uses the design–bid–build method of contract delivery. However, more recently it has started to use General Contractor Construction Manager (GCCM, the equivalent of CM/GC or CM at Risk) on its station projects. 4. How Is Risk Assessed and Managed? ST has an in-house Director of Risk Manage- ment who handles all risk management and in- surance issues for the ST capital projects. Based on the Director of Risk Management’s assessment of the specific risks and exposures of the project under consideration and the project delivery mechanism proposed, the insurance requirements are tailored for the specific project. This can in- clude the use of a traditional insurance program,

50 with the contractor responsible for its own insurance and adding ST as an additional insured on its general liability and contractor’s pollution liability policies, as a risk-transfer mechanism, or the use of a CIP, preferably an OCIP. The project delivery approach used on certain projects is determined by the type of project. ST has typically used design–bid–build for its tunnel- ing contracts/projects, CM/GC for its station con- tracts/projects, and DB for other contracts/projects that require an accelerated scheduled completion or are holistic in composition, making the project a good candidate for the DB project delivery approach. ST treats each project as different, with its own unique risks and exposures that need to be evaluated in order to apply the appropriate risk-transfer and risk-financing mechanisms to that specific project under consideration. The insurance requirements used in the major- ity of ST contracts are a traditional insurance program, where the contractor is responsible for providing its own insurance with the ST coverage terms, limits, and certain endorsements satisfied, e.g., primary and noncontributory and waiver of subrogation, etc., as well as adding ST as an addi- tional insured on certain insurance policies, e.g., CGL and CPL. Typically, for contractor-provided insurance requirements, the contractor is respon- sible for the following lines of insurance coverage: general liability (and excess liability to meet required limits), builder’s risk, and CPL. If there is an exposure for working within 50 ft of an ST railroad right-of-way, then railroad protective liability insurance coverage is required. If there is an errors and omissions (E&O) exposure for design/engineering and/or agency construction management services, then professional liability insurance coverage is required. ST requires CPL insurance, either through contractor-provided insurance or through an OCIP, when there is an imminent or potential pollution condition by the nature of the specific contractor’s scope of work. ST requires professional liability insurance on all architectural and engineering (A&E) contracts. ST will sometimes require project-specific profes- sional liability insurance coverage to have dedi- cated limits for the specific project. When the A&E of a CM practice policy is suspect from the standpoint of having too many E&O claims on its loss runs and in development, that has the poten- tial of eroding the aggregate on its practice policy, which would render it useless in the event of an ST claim event. ST has not used OPPL insurance, but has considered its use for several projects. In ST’s view, the problem with an OPPL policy is that there are few insurers that have really good coverage forms, and it is difficult to recover any money in the event of an E&O claim by an owner. Sometimes ST purchases builder’s risk insur- ance for the benefit of the contractor through an OCIP, or it may purchase builder’s risk insurance à la carte on a project-specific basis if it is finan- cially viable and provides an economic benefit to ST, versus the contractor purchasing the builder’s risk insurance, which is typically marked up with insurance broker’s fees and contractor overhead and profit (OH&P) added to the cost. On smaller capital development projects, ST requires the con- tractor to purchase its own builder’s risk insur- ance coverage and include this cost as a line item in its detailed cost estimate. The builder’s risk insurance coverage required is an “all-risk” policy, with total replacement cost for property damage to the project, equipment, and materials in tran- sit, or equipment and materials stored at a de- fined secured location, e.g., staging or laydown storage areas, during the course of construction in accordance with the terms of the builder’s risk insurance policy. ST uses OCIPs on large capital development projects. Usually projects that have unique risks and exposures, meet the critical mass require- ments of projects over $100 million, and have nu- merous contractors and subcontractors are in highly concentrated populated areas and involve tunneling operations or other heavy civil and complex infrastructure projects. By way of exam- ple, the University Link Project OCIP CGL insur- ance coverage has an effective date of October 20, 2008, to September 30, 2016. This project OCIP was purchased based on a total duration of 8 1/2 years (8 years of construction and 6 months of testing). The CGL also has 6 years of completed operations coverage. The builder’s risk insurance and CPL have a policy period of October 20, 2008, to September 24, 2016. ST has found that a key component of any good OCIP is to start with a thorough and comprehen- sive OCIP feasibility study. ST’s OCIP feasibility study process includes a comprehensive review of risks on a particular project and a rigorous cost/benefit study of whether an OCIP makes sense from a risk management and financial point of view.121 ST Risk Management does not use 121 See OWNER CONTROLLED INSURANCE PROGRAM (OCIP) FEASIBILITY STUDY UNIVERSITY OF WASHINGTON LINK LIGHT RAIL (U-LINK) CONSTRUCTION PHASE (Mar. 2008) and NORTH LINK LIGHT RAIL PROJECT (NORTH- LINK) CONSTRUCTION PHASE OWNER CONTROLLED

51 CCIPs and does not advocate their use on ST pro- jects. The main reason is that ST chooses to main- tain control of the claims administration process for third-party CGL claims for alleged bodily in- jury or property damage by the general public. As a public agency, ST’s political risk is great, and historically contractors are neither diligent nor expedient in the management, administration, and settlement of third-party claims. In contrast, ST is very effective and efficient by handling such claims through an OCIP. 5. Who Writes Contract Provisions? Contract provisions are written by ST legal counsel. The ST Director of Risk Management provides advice on the insurance provisions in ST capital projects contracts. The ST Director of Risk Management consults with ST legal counsel on indemnification issues. 6. Who Administers the Risk Management Program? The ST insurance program is administered by the ST Director of Risk Management, who uses insurance brokers for some services, especially in connection with OCIPs. 7. How Are Insurance Services Procured? ST uses a qualifications-based selection process to procure brokerage services. 8. How Is Insurance Purchased? The ST Director of Risk Management prepares an insurance specification and underwriting sub- mission, in collaboration with the insurance bro- ker, who then goes to market for proposals/quotes. Based on the response and submittals from the global insurance and reinsurance markets, the Director of Risk Management then evaluates all proposals/quotes for which carrier can provide ST with the best and broadest coverage, at the lowest premium, with the least amount of subjectivities and/or conditions, and at the best value for ST for the risks and exposures under consideration. The ST Director of Risk Management makes a recom- mendation to the ST Executive Director, who authorizes the placement. 9. Legal Issues Washington is monopolistic, and the workers’ compensation insurance is regulated and admin- istered through a state fund. Unlike other states INSURANCE PROGRAM (OCIP) FEASIBILITY STUDY (Sept. 2011), on file with authors. where the workers’ compensation insurance is bundled with the employer’s liability insurance coverage, in Washington the workers’ compensa- tion insurance is statutory and the employer’s li- ability insurance is typically endorsed to the CGL for through endorsement to the CGL as “stop-gap coverage.” The Washington Code was specifically amended to permit public agency OCIPs122 and states as follows: An Act relating to the acquisition of insurance for re- gional transit authority projects over one hundred million dollars; and amending RCW 81.112.060. Be It Enacted by the Legislature of the State of Washington: Sec. 1. RCW 81.112.060 and 2000 2nd sp.s. c 4 s 32 is each amended to read as follows: An authority shall have the following powers: (1) To establish offices, departments, boards, and com- missions that are necessary to carry out the purposes of the authority, and to prescribe the functions, powers, and duties thereof. (2) To appoint or provide for the appointment of, and to remove or to provide for the removal of, all officers and employees of the authority. (3) To fix the salaries, wages, and other compensation of all officers and employees of the authority. (4) To employ such engineering, legal, financial, or other specialized personnel as may be necessary to accomplish the purposes of the authority. (5) To determine risks, hazards, and liabilities in order to obtain insurance consistent with these determinations. This insurance may include any types of insurance cover- ing, and for the benefit of, one or more parties with whom the authority contracts for any purpose, and insurance for the benefit of its board members, authority officers, and employees to insure against liability for acts or omissions while performing or in good faith purporting to perform their official duties. All insurance obtained for construc- tion of authority projects with a total project cost exceed- ing one hundred million dollars may be acquired by bid or by negotiation. In order to allow the authority flexibility to secure appropriate insurance by negotiation, the au- thority is exempt from RCW 48.30.270. ST has numerous inter-local agreements with partner agencies that may include insurance re- quirements for ST capital projects. For example, for the U-Link Project, ST had a Memorandum of Agreement with the University of Washington that contained a broad indemnification agreement and a corresponding requirement that ST pur- chase and maintain an OCIP that would include project-specific professional liability and pollution 122 Amended by H.B. 1747 (A.B. 1859 (Representa- tives Simpson and Rodne), signed by the Governor and enacted into legislation Apr. 21, 2007).

52 environmental coverage.123 In addition, for ST to operate its Sounder commuter rail trains on BNSF Railway’s right-of-way, ST has a stringent agreement with BNSF, which includes maintain- ing a minimum rail liability insurance limit of $200 million. F. San Francisco Municipal Transportation Agency 1. Description of Organization The San Francisco Municipal Transportation Agency (SFMTA) is a department of the City and County of San Francisco responsible for the man- agement of all transportation in the City. The SFMTA operates the San Francisco Municipal Railway (Muni), the nation’s seventh largest pub- lic transit system. The SFMTA has a staff of 4,700 and is governed by a Board of Directors responsi- ble for approval of budgets and contracts. The agency manages five types of public transit in San Francisco, including trolley motor coach, light rail, historic street cars, and cable cars. The agency serves an average of 700,000 weekday travelers, involving 75 transit lines and 217 mi of overhead wire systems.124 2. Description of Large Transit Projects The SFMTA is constructing the Central Sub- way Project, which is the second phase of the Third Street Light Rail Project. The project has an estimated cost of $1 billion in construction con- tracts, which includes two utility relocation con- tracts, one tunnel contract, and one surface level and three underground subway stations, tracks, and related systems. 3. Project Delivery Systems The SFMTA construction program utilizes the traditional design–bid–build approach and has also adopted DB delivery systems. 4. How Is Risk Administered Contract risk is administered by obtaining req- uisite insurance coverage and, for large projects, seeking higher insurance limits using an excess liability policy. 123 See U-LINK FEASIBILITY STUDY, supra note 121, at 37. 124 SFMTA 2013 Annual Report, at 6, available at http://www.sfmta.com/annualreport (last accessed Apr. 2014). 5. Who Writes the Contract Provisions and Administers the Program? The risk allocation provisions and the insur- ance contract provisions are drafted by the risk manager and legal counsel. 6. Insurance Requirements and Coverage The SFMTA requires general liability, workers’ compensation, and contractor-provided builder’s risk coverage. In addition, its contractors provide environmental pollution, E&O (design liability), completed operations, and automobile/vehicle li- ability coverage. For certain large projects, SFMTA obtains an Excess Liability (Umbrella) Program, which it calls an OCIP. No workers’ compensation coverage is included. The excess policy is purchased by SFMTA to provide the nec- essary coverage and to reduce the contractor’s coverage and bid costs. SFMTA provides excess liability coverage for a single contract or for the entire construction pro- ject. The excess policy sits above the contractor’s primary limits, wherein each contractor is re- quired to provide its own primary coverage with a noninsured deductible to ensure that the contrac- tor has “skin in the game.” The excess provides higher coverage and reduces the primary insur- ance requirements and insurance costs and can also cover owner errors and omissions and inte- grated design team errors and omissions. The ex- cess program applies to multiple primes, joint ventures, and subconsultants. The program does not undermine the competitive advantage of safe, experienced consultants and contractors, and eliminates cross claims above the primary cover- age levels. SFMTA has found the excess coverage to be expensive and requires the agency to obtain an insurance broker. SFMTA recognizes that there is a limited amount of underwriters and market for this program.125 The owner is an additional insured under the contractor-secured GL policy. The contractor GL policy can be a corporate policy or a project- specific policy (part of a CCIP). SFMTA has studied varying approaches to in- surance, including OCIPs and CCIPs, and found great difficulty in obtaining a cost com- parison. Although brokers would provide some cost/overhead information, a full and reasonable cost/price analysis was not possible, since under- writers would not cooperate. In particular, a com- parison of products was not possible, since 125 Interview with Robert Stone, Deputy City Attor- ney, San Francisco, Cal. (Mar. 5, 2014).

53 underwriters would not provide bids for alternate insurance coverage on the same projects. SFMTA is still evaluating the benefits of an OCIP program compared to the cost of the tradi- tional insurance programs. The costs and benefits are not clear, require additional agency resources, and limit the pool of contractors and market com- petitions, since contractors are not open to non- traditional insurance programs. In some cases, SFMTA has purchased Owners Protective Professional Indemnity (OPPI) cover- age for design errors. The OPPI coverage sits on top of the limits provided by the design consult- ants through their practice policies. 7. How Are Insurance Services Procured? Insurance is procured through an insurance broker who is selected though an open competitive RFP or RFQ process. 8. How Is Insurance Purchased? The selected broker selects the insurance using competitive proposals based upon terms and price. 9. Unique Feature of SFMTA Insurance Approaches The San Francisco Third Street Rail Project represents an excellent example of how a public agency developed and modified its insurance re- quirements in response to changing insurance market challenges to provide the necessary cover- age limits. As a result of its risk assessment, SFMTA wanted $500 million in coverage for the Central Subway Project. This billion dollar project consists of one tunnel contract and several contracts for stations, tracks, and related systems. The tunnel involved utilization of a tunnel boring machine in close proximity to the Bay Area Rapid Transit (BART) system and pile-supported buildings. Fur- ther, SFMTA desired to demonstrate to the FTA that insurance costs were fair and reasonable and sought a price analysis and price comparison for the Central Subway Project.126 Initially SFMTA, through its selected broker, sought to compare firm, bindable costs of a CCIP and OCIP to determine fair and reasonable cost. SFMTA was unable to obtain realistic cost esti- mates from the insurance underwriters, since they were unwilling to provide cost estimates for different insurance products (CCIP and OCIPs) for the same project and at the same time. The 126 Budget and Legislative Analyst, City and County of San Francisco, Board of Supervisors, Jan. 4, 2013, at 7-1, 7-4. underwriters had two issues with both approaches being marketed simultaneously. The first was market capacity and being able to commit $500 million in limits to an OCIP while committing a like amount to existing and potentially competing CCIP programs for the bidding contractors. Given the limited number of insurers with an appetite for tunneling and below grade heavy construction work, the market had limited capacity and little price elasticity. The second was a widely held re- luctance to compete against themselves. After much discussion with the industry, SFMTA was ultimately provided a price of 18.5 percent of construction costs, which exceeded SFMTA cost estimates. Thereafter, SFMTA de- cided to develop a hybrid process, which involved suspending the procurement of an OCIP; confirm- ing a CCIP as the primary vehicle for workers’ compensation, general liability, and umbrella li- ability; and placing an Excess Liability policy through its broker to obtain the required $500 million in coverage. The initial tunnel contract was awarded to Barnard, Impregilo, Healy, Joint Venture Part- nership (BIH) and required BIH to provide $350 million in liability insurance limits, made up of two tiers of insurance coverage: $200 million in primary liability and $150 million in excess liabil- ity provided through the contractor’s CCIP. The SFMTA would also provide $150-million excess liability to secure the desired $500-million total coverage. After award, BIH was unable to obtain the full $350 million in limits due to changing in- surance market conditions caused by underwriter concerns and reduced capacity resulting from hur- ricanes and typhoons.127 Thereafter, SFMTA obtained through its bro- ker an excess liability policy of $150 million, while BIH obtained a $250-million project-specific policy and a $100-million corporate policy from Barnard to make up the $500 million in coverage. SFMTA took a credit for the additional premiums cost and subsequently, by agreement with the contractor, SFMTA deducted the $10-million premium for the greater excess policy from the project cost. Utiliz- ing this innovative approach of combining the con- tractor CCIP of $250 million, the $100-million corporate policy, and the $150-million excess li- ability policy obtained by the SFMTA, they were able to obtain the $500 million in coverage. The station contracts also created similar insurance coverage issues, since the first bid 127 Interview with Robert Stone, Deputy City Attor- ney, San Francisco, Cal. (Mar. 5, 2014).

54 exceeded the estimate due to insurance quotes. The initial station bids were rejected, and the SFMTA combined the station contract work and rebid the project. To resolve the insurance cover- age issues, the contractor-provided insurance cov- erage was reduced from $200 million to $50 mil- lion, and the difference was made up with an SFMTA-provided excess liability policy of $150 million. The SFMTA was able to increase the cov- erage of the $150 million-excess liability policy to $300 million in order to provide the $500 million in coverage. 10. Legal Issues In California, under the peculiar risk doctrine, a person who hires an independent contractor to perform work that is inherently dangerous can be held liable for tort damages when the contractor’s negligent performance causes injuries to others.128 However, when the injury is subject to workers’ compensation coverage, the doctrine of peculiar risk provides no basis for the employee to seek recovery of tort damages from the person who hired the contractor and who did not cause the injuries. This holding, known as the “Privette Doctrine,”129 insulates the owner from contractor employee liability injuries that are covered under California’s workers’ compensation. Under Cali- fornia case law, delegation of control of the work site protects the agency from contractor employee liability. In addition, a significant California case held that a hirer would only be liable to the contractor’s employee if it retained the ability to control safety and that retention of control affirmatively contributed to the employee’s injury.130 SFMTA expressed concern that an OCIP program, which includes a safety components pro- gram, might undermine the agency liability shield. In addition, the public agency can be held responsible for damages under an inverse con- demnation action to landowners that result from excavations and the settling of land due to with- drawal of lateral support.131 The agency- purchased insurance coverage covers this “negli- gence gap” and the public owner’s strict liability. 128 Privette v. Superior Court, 5 Cal. 4th 689, 854 P.2d 721, 21 Cal. Rptr. 2d 72 (1993). 129 Id. 130 Kinney v. CSB Construction, Inc., 87 Cal. App. 4th 28, 103 Cal. Rptr. 2d 594 (2001). 131 Holtz v. San Francisco Bay Area Rapid Transit Dist., 117 Cal. 3d 648, 552 P.2d 430, 131 Cal. Rptr. 646 (1976). Further, Section 2782 of the California Civil Code also prohibits construction contract clauses that indemnify the public owner from the sole negli- gence or willful misconduct of the owner. Such provisions are against public policy and void and unenforceable. The code mandates that owners cannot be indemnified for active negligence.