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

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The Problem and Its Solution The nation’s 6,000 plus transit agencies need to have access to a program that can provide authoritatively researched, specific, limited-scope studies of legal issues and problems having national significance and applica- tion to their business. Some transit programs involve legal problems and issues that are not shared with other modes; as, for example, compliance with transit- equipment and operations guidelines, FTA financing ini- tiatives, private-sector programs, and labor or environ- mental standards relating to transit operations. Also, much of the information that is needed by transit attorneys to address legal concerns is scattered and fragmented. Con- sequently, it would be helpful to the transit lawyer to have well-resourced and well-documented reports on specific legal topics available to the transit legal community. The Legal Research Digests (LRDs) are developed to assist transit attorneys in dealing with the myriad of initia- tives and problems associated with transit start-up and operations, as well as with day-to-day legal work. The LRDs address such issues as eminent domain, civil rights, constitutional rights, contracting, environmental con- cerns, labor, procurement, risk management, security, tort liability, and zoning. The transit legal research, when con- ducted through the TRB’s legal studies process, either collects primary data that generally are not available else- where or performs analysis of existing literature. Applications The insurance market for large transportation projects is complex. Risk management plays a vital role in the planning, design, and construction of today’s complex transit systems. Transit owners are more proactively ex- ploring ways to manage risk and reduce corresponding costs and exposures. Some public transit owners are Legal Research Digest 47 TRansiT CoopeRaTive ReseaRCh pRogRam sponsored by the Federal Transit administration september 2014 legAl ISSueS wITh obTAInIng InSurAnce on lArge TrAnSIT ProjecTS This report was prepared under TCRp project J-5, “Legal aspects of Transit and intermodal Transportation programs,” for which the Transportation Research Board is the agency coordinating the research. The report was prepared by eric Kerness, Kerness Consulting; Kurt Dettman, Constructive Dispute Resolutions; and James W. evans, Jr., albert Risk management Consultants. James B. mcDaniel, TRB Counsel for Legal Research projects, was the principal investigator and content editor. responsible Senior Program officer: gwen chisholm Smith exploring enterprise risk management approaches as a more complete way to control overall risk exposures. With respect to insuring against risk, new types of insur- ance programs, including Owner Controlled Insurance Programs (OCIP) and Contractor Controlled Insurance Programs (CCIP), are being implemented, resulting in cost savings, promotion of safety, and claim reduction in the face of a consolidating insurance market. This project identifies and discusses in detail the le- gal issues confronting transit agencies seeking to obtain insurance for large transit capital projects. Large proj- ects include Federal New Starts projects and alternative delivery projects (design-build, design-build-operate- maintain, construction manager at risk, etc.), and may include large rolling stock acquisitions. The report dis- cusses different types of insurance coverage required for large projects and the types of programs available, including OCIPs and owner’s protective professional indemnity insurance, and the benefits, advantages, and disadvantages of such programs as compared to con- sultant- or contractor-provided insurance programs. The digest examines how state law affects the ability to assign risk contractually; the current practices for drafting contract provisions to manage risk; competitive procurement and cost analysis issues; methods of obtain- ing comparative pricing for various insurance options; and the impacts of the various types of insurance pro- grams on owner liability, project and contractor safety, and disadvantaged and small business enterprise project participation. The importance of industry practice is con- sidered, as well as how best to design an insurance pro- gram to manage risks on specific types of projects. This digest should be useful to transit attorneys, ad- ministrators, risk managers, project engineers, financial officers, and other staff that need knowledge of basic insurance information and how the industry works. TRanspoRTaTion ReseaRCh BoaRD OF THE NATIONAL ACADEMIES

I. Introduction, 3 II. Legal Issues Surrounding Project Insurance, 4 A. Assessing and Allocating Risks, 4 B. Lack of Knowledge About, or Understanding of, Insurance Coverages, Limits, or Structuring Options, 6 C. Statutory or Regulatory Limitations that Affect Insurance Options, 6 D. Internal and Organizational Constraints, 7 E. External Limitations or Prescriptions, 7 III. Risk Management Approaches for Large Transit Projects, 8 A. Enterprise Risk Management, 8 B. Risk Allocation Approaches, 12 C. General Legal Issues that Impact Insurance Programs, 13 D. Federal Regulatory Constraints, 15 E. State and Regulatory Constraints Affecting Ability to Assign Risk Contractually, 16 IV. Introduction to Insurance and Risk Financing Sources for Transit Agencies, 20 A. Preliminary Considerations, 20 B. Overview of Exposures to Loss, 21 V. Types of Available Programs, Policies, and Coverages, 22 A. Lines of Coverage, 23 B. CIPs: A Detailed Review, 32 VI. Management and Procurement Issues, 36 A. Insurance Program Administration, 37 B. Procurement of Insurance, 38 VII. Case Studies, 42 A. Los Angeles County Metropolitan Transit Authority Case Study, 42 B. New York Metropolitan Transportation Authority Case Study, 45 C. Construction-Related Insurance Coverage, 45 D. Massachusetts Bay Transportation Authority, 47 E. Central Puget Sound Regional Transit Authority, 49 F. San Francisco Municipal Transportation Agency, 52 Appendix A: Survey, A-1 Appendix B: Typical Construction Project Insurable Exposures and Treatment Options, B-1 CONTENTS

3 LEGAL ISSUES WITH OBTAINING INSURANCE ON LARGE TRANSIT PROJECTS By Eric Kerness, Kerness Consulting; Kurt Dettman, Constructive Dispute Resolutions; and James W. Evans, Jr., Albert Risk Management Consultants I. INTRODUCTION Today’s modern transit systems are confronted with renewed financial challenges to meet the ever expanding need for public transportation. Transit systems must live within constrained budgets and are reluctant or unable to raise fares and other revenue. This has forced transit sys- tems to face the economic realities of delivering good service to their customers while keeping ag- ing systems functional and safe, and at the same time expanding existing systems to meet increas- ing demand. On the positive side, transit agencies now have a much broader menu of project delivery systems to deliver complex transit projects, coupled with the willingness of the Federal Transit Admini- stration (FTA)1 to support new project delivery approaches. For example, construction man- ager/general contractor (CM/GC), design–build (DB), and public–private partnership (P3) ap- proaches are all actively being considered, subject of course to applicable federal and state procure- ment laws, rules, and regulations. Risk management plays a vital role in the planning, design, and construction of today’s com- plex transit systems. Transit owners are more proactively exploring ways to manage risk and reduce corresponding costs and exposures. Some public transit owners are exploring enterprise risk management approaches as a more holistic way to control overall risk exposures. With respect to in- suring against risk, new types of insurance pro- grams, including Owner Controlled Insurance 1 This willingness to try new project delivery ap- proaches is also reflected in federally funded highway projects through the Federal Highway Administration (FHWA). See 23 U.S.C. § 635.309, 23 C.F.R. § 627 and UNITED STATES DEPARTMENT OF TRANSPORTATION, REPORT TO CONGRESS ON PUBLIC-PRIVATE PARTNERSHIPS (Dec. 2004) (available online at http://www.fhwa.dot.gov /reports/pppdec2004/, last accessed Mar. 2014) (herein- after referred to as “U.S. DOT REPORT TO CONGRESS”), The Safe, Accountable, Flexible, Efficient Transporta- tion Equity Act: A Legacy for Users (SAFETEA-LU), Pub. L. No. 109-59, 119 Stat. 1144 (2005). Programs2 (OCIP) and Contractor Controlled In- surance Programs (CCIP), are being implemented, resulting in cost savings, promotion of safety, and claim reductions in the face of a consolidating in- surance market. To be effectively implemented, risk manage- ment and risk financing require a thorough un- derstanding of both the risks to be transferred and applicable risk financing options. More spe- cifically, understanding insurance products—one of the means of risk financing—impacts the man- ner that risk is allocated, contracts are drafted, and projects are managed. This digest will provide an analytical guide for understanding legal issues affecting insurance for large transit capital projects. Although the focus of this digest is directed at large transit projects having construction value in excess of $100 mil- lion, it provides construction insurance informa- tion useful to the transit lawyer on any transit capital project.3 This digest will explore the general types of is- sues that transit lawyers will encounter, includ- ing risk assessment, appropriate risk allocation, and internal and external constraints that affect the allocation of risk. It will explore risk man- 2 A centralized insurance program under which one party procures insurance on behalf of most parties per- forming work on a construction project or on a specific site. Sometimes referred to as "wrap-ups," Controlled Insurance Programs (CIPs) are most commonly used on single projects, but other uses include contract mainte- nance on a large plant or facility or on an ongoing basis for multiple construction projects (sometimes referred to as a "rolling wrap-up"). Typically, the coverages pro- vided under a CIP include commercial general liability (CGL), workers’ compensation, and umbrella liability. CIPs offer a number of benefits, including greater con- trol of the scope of coverage, potentially lower project insurance costs, and reduced litigation. CIPs can be purchased by the owner (Owner Controlled Insurance Programs or OCIP) or contractor (Contractor Controlled Insurance Programs or CCIP), or a combination of par- ticipating parties. We refer to these Controlled Insur- ance Programs as OCIPs, CCIPs, or the generic CIP in the balance of the digest. 3 Operational, employee, and property insurance is- sues are beyond the scope of this digest.