Owner-Controlled Insurance Program Feasibility Study. The Wisconsin Department of Transportation

Transcription

1 Owner-Controlled Insurance Program Feasibility Study High Speed Passenger Rail Madison-Watertown Infrastructure Improvements Prepared For: The Wisconsin Department of Transportation February 26, 2010 Prepared By: Aon Risk Services

2 WisDOT HSR OCIP Feasibility Study Table of Contents Executive Summary 2 I. OCIP as a Risk Management Tool 3 II. Use of OCIP on Transportation Construction Projects 6 III. Wisconsin OCIP Regulations 8 IV. Project Descriptions 10 V. OCIP Financial Pro-Forma 11 VI. Additional Considerations & Issues 18 VII. Total Project Insurance Budget Estimate 22 February 26, 2010 Page 1

3 Executive Summary WisDOT OCIP Feasibility Study Aon Risk Services was commissioned by Manager of Risk Management for the Wisconsin Department of Transportation, to evaluate the feasibility of an Owner- Controlled Insurance Program (OCIP) on the Watertown-to-Madison section of the Milwaukee-Watertown Infrastructure Improvements project. This report was prepared by Tim Walsh, Senior Vice President, Regional Director, Aon National Wrap-up Group. The purpose of the report is to address the risk management issues relating to the use of an OCIP program on this project and outline an insurance budget for coverage s being considered for the project. This report defines the OCIP product and discusses how a number of risk management issues are addressed through the utilization of an owner-controlled insurance program. This report also cites the utilization of OCIP s on other large transportation projects, including rail projects. It is widely documented that an OCIP program has numerous risk management benefits including improved safety of the traveling public and workers, enhanced DBE participation in the bid process, improved claims management and financial savings. The report will also address other risks associated with the projects and highlights administrative issues in implementing an OCIP on this project. WisDOT is a leader in the use of OCIP programs, having successfully utilized an OCIP on the Marquette Interchange project and currently on the I-94 and US-41 Corridor projects. The OCIP approach on the high speed rail project is a natural fit, given the need for consistent and high levels of insurance required for a project with inherent catastrophic hazards. February 26, 2010 Page 2

4 I. OCIP as a Risk Management Tool Wrap-Up Insurance Program Approach In order to address the disadvantages of the traditional approach to insurance large construction projects, the insurance industry created an insurance product, known as a wrap-up insurance program. The term wrap-up is derived from the concept of pooling or wrapping the risks of several parties into a single insurance program. Thus, a wrap-up is defined as a single insurance program that insures specified risks of the owner and all contractors and subcontractors for a particular project. Wrap-up programs can be purchased, or sponsored, by either the owner or construction manager/general contractor. An owner-purchased program is referred to as an Owner- Controlled Insurance Program (OCIP). The wrap-up concept has been utilized over the past 40 years; however, over the past decade, the wrap-up approach has evolved into the most widely-used risk management technique for insuring large construction projects. In fact, most projects in excess of $100M utilize a wrap-up insurance program to insure some of the project risks. There are a number of several reasons why the wrap-up approach is used on most large projects today: Cost Savings - There is significant pressure today to drive down project costs. Pooling the insurance purchase for all contractors reduces the total insurance cost. Workers compensation coverage is the most expensive line of insurance. Wrap-up insurance programs can reduce the cost of workers compensation coverage by as much as 25-50%. A wrap-up program also locks in the insurance rates for the duration of the project; thereby, protecting the owner against future insurance rate increases. Widespread Use - The wrap-up concept is now widely understood by many owners, contractors, risk managers, and insurance brokers and insurers. Better Insurance Protection - A wrap-up program affords the owner better insurance protection by naming the owner as a named insured to the policy (thereby guaranteeing protection for insured losses), broad insurance terms, limits of insurance dedicated solely to the owner s project, and completed operations coverage which provides protection from claims which occur up to five years after the project is complete. Improved Safety Program - Most wrap-up programs implement a project-specific safety program in order to maximize the savings potential of the program. This significantly improves the coordination of safety among all of the contractors and reduces the potential for losses to workers and the public. February 26, 2010 Page 3

5 Reduced Litigation - There is reduced litigation between the contractors as all of the contractors are insured with the same insurer. Review of Project Risks - Often, an owner purchasing a wrap-up program will evaluate the particular risks and exposures associated with the project and tailor the insurance article in the construction contract accordingly. Increased Contractor Participation in Project - The wrap-up is used as a means of increasing disadvantaged business enterprises participation on the project as the wrap-up satisfies most of the insurance requirements. Improved Public Relations - The wrap-up can improve public relations by adjusting claims involving members of the public on a prompt and fair manner. Risk Insured in a Wrap-Up Insurance Program A wrap-up program can insure one or multiple risks under a single project insurance program. The types of insurance coverage s: Builder s Risk Insurance against physical loss of buildings or structures during the course of construction. Workers Compensation Pays for medical expenses and lost wages to employees which are injured on the job. General Liability Insures tort (third party) liability for bodily injury and property damage arising out of the construction operations. Umbrella or Excess Liability Provides additional limits of insurance above a general liability policy (e.g., $25,000,000 limits above the general liability policy limit of $2,000,000 per Occurrence and $4,000,000 General Aggregate and $4,000,000 Products/Completed Operations Aggregate Limit). Architects & Engineers Professional Liability Insures against negligent acts, errors or omissions by an architect or engineer in the performance or failure to perform professional services. Contractors Pollution Liability Insures against tort liability for bodily injury, property damage, or environmental damage arising from pollution conditions caused in the performance of the contractors operations. Railroad Protective Liability Insures a railroad against damages suffered by the railroad arising out of the work of a contractor on or about the railroad right-of-way. February 26, 2010 Page 4

6 A graphical representation of a sample wrap-up insurance program is as follows: Sample Wrap-Up Coverage Structure Workers Compensation (Statutory Limits) Excess Liability $100,000,000 x/s Primary Employer s Liability $1,000,000 General Liability $2,000,000/ $4,000,000 Builder s Risk Construction Value Contractors Pollution Liability $25,000,000 Professional Liability $25,000,000 Railroad Protective Liability $2,000,000/ $6,000,000 February 26, 2010 Page 5

7 II. Use of OCIP on Transportation Construction Projects Federal Guidance & Studies Owner-Controlled Insurance Programs have been used to insure a number of large transportation infrastructure projects over the past decade. In 1999, the Subcommittee on Transportation of the Committee on Appropriations, U.S. Senate commissioned a study by the U.S. General Accounting Office (GAO) to study the advantages and disadvantages of utilizing wrap-up insurance on transportation projects. The study, entitled Transportation Infrastructure Advantages and Disadvantages of Wrap-Up Insurance for Large Construction Projects, evaluated six federally funded highway and mass transit projects that insured project risks under a wrap-up insurance program. The findings of the study concluded: Owners of transportation projects, such as transit agencies and state departments of transportation, experience a number of advantages and disadvantages when they use wrap-up insurance. Major advantages include savings from buying in bulk, eliminating duplication of coverage, handling claims more efficiently, reducing potential litigation, and enhancing workplace safety The potential disadvantages of wrap-up insurance include requiring project owners to invest more time and resources in administration In addition, project owners could also have to pay large premiums at the beginning of the project. However, transportation officials said these costs were reasonable (p. 1). The GAO report also cited a survey conducted in 1988 by the Transit Construction Roundtable, a partnership between the Federal Transit Administration and local public transportation agencies that was formed to exchange information related to the construction of mass transit systems. Of the 18 members that responded to the survey, Thirteen of these project owners estimated that, on average, wrap-up insurance costs 28 percent less than traditional insurance. The report went further to state The six projects we (GAO) reviewed provided similar savings (p. 5). The insurance costs and wrap-up savings for six projects studied in the GAO report are summarized in the financial pro-forma section of this study. A separate study was conducted by the Transportation Research Board of the National Academies in a report entitled National Cooperative Highway Research Program Synthesis 308, Owner Controlled Insurance Programs: A Synthesis of Highway Practice. This study offers the following conclusions: Because of the complex relationships between the parties involved in large highway projects and the openended nature of construction liability, departments of transportation (DOTs) are facing new and significant construction risk challenges. The project owner, as the party ultimately responsible for the construction work, is consequently looking to enhance control over project safety and risk management. Controlled insurance programs (CIPs), if implemented correctly and used on appropriate projects, are highly efficient risk-control mechanisms (p. 58). February 26, 2010 Page 6

8 The Federal Transit Administration s Best Practices Procurement Manual offers the following guidance: Grantees may want to consider some type of wrap up program for their larger construction projects (those over $10M) and concludes with This approach has been used with excellent results. 1 Additionally, The Federal Highway Authority published a Guide to FHWA Funded Wrap- Up Projects which highlights the benefits of wrap-ups to the DBE community: A wrapup is both a race-neutral and race conscious program to increase DBE participation on DOT Projects. Wrap-ups help to level the playing field by eliminating or reducing conventional insurance expenses that for DBE s tend to be higher than those expenses for large contractors. In addition to the opportunity to work on construction projects, wrap-ups also provide these firms with work experience references, recordkeeping experience and project safety training (pg. 4). Finally, in a memorandum prepared on October 7, 2002 by the U.S. Department of Transportation Federal Highway Administration on its Owner Controlled Insurance Program (wrap-up) Policy, the FHA affirmed that federal-aid funds can be used to participate in OCIPs on Federal-aid projects. It goes further to state that the OMB Circular A-87 provides guidance and establishes limits on Federal reimbursement of insurance costs (p. 2). 1 Federal Transit Administration Best Practices Procurement Manual, Section 6.6 February 26, 2010 Page 7

9 III. Wisconsin Wrap-Up Regulations The State of Wisconsin regulates the use of wrap-up insurance programs for workers compensation. There are no regulations as respects to the other lines of insurance. The regulations are found in section DWD Divided-Insurance and Partial Insurance Requirements in the Wisconsin Administrative Code (Register, October, 2007, No. 622). The code limits the use of wrap-up insurance to owners of projects, versus programs sponsored by contractors. It is required that an application be submitted on form WKCA-19.5 W-U to the Department of Workforce Development before a workers compensation wrap-up can be implemented. The department review information concerning the scope of the project, safety program and qualification of the claims adjuster (insurer) in its evaluation process. If the applicant is a political subdivision of the state, it must submit a certified statement by an officer or attorney for the political subdivision that cites the legal authority for executing the application and agreement. In the application, the employer (sponsor) agrees to assume full responsibility to immediately make all payments of compensation and medical expense as the department may require, pending a final determination as to liability between the insurance carriers under divided-insurance. In order to qualify for wrap-up insurance, the project must meet the following minimum requirements: 1. The estimated project cost must be at least $25M. 2. The estimated workers compensation manual premium must be at least $250, The project must be confined to a single location or in the case of road, bridge, pipeline, tunnel, waterway, or 2 or more concurrent wrap-up projects involving the same owner and the same insurance carrier the entire job or the concurrent projects are considered as a single project location. 4. The project must have a defined completion dates 5. All contractors and subcontractors must be included in the program. 6. All material suppliers shall be included in the safety program while unloading and handling material and performing other work, although the material suppliers shall be excluded from the rest of the program. 7. The submission of bids from contractors shall be on an ex-insurance basis. The owner s responsibilities under the program include: 1. The owner must submit an application on the appropriate form. 2. Reimburse the departments costs incurred because of the wrap-up. 3. Select a licensed and qualified wrap-up insurer. February 26, 2010 Page 8

10 4. Inform each contractor s and subcontractor s insurance company either directly or through the insurance bureau of their responsibilities and the need to attach a proper endorsement to the regular insurers policy to exclude coverage for the wrap-up site. 5. Submit form WKC A-19.4 W-U for each contractor and subcontractor prior to them beginning work on the site. 6. Notify the department and bureau of any entity status change resulting from ensuing reorganization. 7. Assume responsibility for immediately making direct compensation payments if a dispute arises over coverage. 8. Payment of employee s attorney s fees and lost wages resulting from a dispute. February 26, 2010 Page 9

11 IV. Project Description WisDOT OCIP Feasibility Study The following assumptions about the project were used for this feasibility study: Watertown to Madison Infrastructure Improvements Project consists of 32 miles of construction of track structures, placement of track, site utilities, signaling equipment and a maintenance building. The track structures mostly undergrade bridges, but will also include limited at-grade and cut and fill structures. New track construction and rehabilitated track is conventional ballasted construction. The OCIP financial pro-forma s are based on the latest estimate of $377M total construction cost, of which $47M represents a maintenance facility. The project delivery method is design, bid, build and there are an estimated bid packages expected with a construction duration of approximately 36 months. February 26, 2010 Page 10

12 V. OCIP Financial Pro-Forma WisDOT OCIP Feasibility Study The qualitative reasons for considering an OCIP for these projects are detailed on pages 3 and 4 of this report. This section addresses the financial impact of implementing an OCIP for workers compensation, general liability and excess/umbrella liability. Pro-Forma Estimate of Savings One primary driver in the decision for an owner to sponsor a wrap-up program is the expectation that the wrap-up coverage will cost less than the cost of each contractor providing the insurance. The decision to proceed with the wrap-up is based on a financial pro-forma which estimates the costs of the contractors insurance compared to the cost of providing wrap-up insurance. Quite often the decision to proceed with a wrap-up is made before some or all of the bids are collected. Consequentially, the owner is basing its decision to sponsor a wrapup based on the assumptions presented in the pro-forma. Therefore, the soundness of the assumptions in the pro-forma is paramount to estimating the potential savings. The pro-forma is often produced by the agent/broker. Their ability to accurately anticipate these costs are a function of their: a) experience with contractors and the rates that contractors are currently paying in the market place, and b) their experience with wrap-up programs and how much the insurers will charge for the coverage. The cost savings is determined by comparing the cost of the contractors providing the insurance versus the cost of the owner to purchase the coverage. The estimated reductions in the contractor s bids can be inaccurate if the agent/broker uses incorrect assumptions in the amount and distribution of payroll (as each classification of payroll carries a different rate). Also, contractors, even who do the same type of work, have different rates based on their historical loss experience, size, etc. Therefore, while an average rate is used in the pro-forma, the successful contractor s rates can be higher or lower than the average rate. The second component is the cost of the wrap-up insurance. An agent/broker experienced in wrap-ups should be able to anticipate the costs the insurers will charge for premium. However, because most wrap-up programs are written on a loss sensitive basis (i.e., contain a deductible similar to auto insurance), the ultimate cost of the program is a combination of premiums and losses. Aggressive assumptions in the anticipated losses can produce an inaccurate assumption of program costs. Therefore, the owner must understand the basis for the pro-forma assumptions and ensure that they realistically estimate both contractor costs and anticipated losses. February 26, 2010 Page 11

13 Methodology for the OCIP Pro-Forma s A financial pro-forma was created based on the following methodology. As each step of the methodology process is detailed, items highlighted in yellow have a corresponding narrative explanation. The amount of savings in cost by utilizing an OCIP is determined by subtracting the cost of the OCIP from the expected reduction in the contractors bids ( insurance credits ) in exchange for WisDOT providing the insurance. Because the ultimate cost of the OCIP coverage is determined by the amount of loss dollars incurred on the project, each pro-forma provides several cost calculations at differing loss scenarios. Statement of Pro-Forma Assumptions The top of each pro-forma will identify the following assumptions: a) The OCIP Program Assumption b) The Project Construction Value c) The total amount of workers compensation payroll. The total amount of workers compensation payroll is based on a percentage of the construction value. In each pro-forma, the assumption is based on the ratio of worker s compensation payroll to construction value, based on data from Aon s OCIP software from rail/light rail projects. d) Estimated Start and Completion Dates for Construction. Because the duration influences several cost factors, these assumptions are specified. Construction Costs $377,000,000 Contingency Included Total $377,000,000 Estimated 15% $56,550,000 Duration in Months 36 February 26, 2010 Page 12

14 Step 1 Estimated Subcontractor Insurance Credits The insurance credits, or reductions in the contractors bids in consideration of WisDOT providing the coverage, is determined for both workers compensation and commercial general liability/excess liability insurance. Since workers compensation premium is based on workers compensation remuneration (payroll as defined in the workers compensation rating rules), we begin by allocating payroll amongst the respective workers compensation codes. Each workers compensation code has a different rate. We utilized payroll data from other Aon-managed OCIP s for rail and light rail projects to estimate the distribution of payroll amongst the various classification codes. Once the payroll has been assigned to each code, we compute the manual workers compensation premium by applying the most-recent published rate for the State of Wisconsin. Manual rates are the actuarial estimate of what premium should be charged for contractors of average risk factors within each classification code. The premium based on manual rates is summarized in yellow. WORKER'S COMPENSATION DEDUCTIONS Manual Class Descriptions Class Code Payroll % Payroll Rate* Manual Prem Machinery/Equipment Repair % $ 1,131, $ 112,195 Iron & Steel Erection % $ 1,131, $ 120,225 Electrical % $ 1,131, $ 72,271 Concrete NOC % $ 1,131, $ 130,631 Concrete/Cement Work % $ 1,696, $ 144,372 Bridge Work % $ 16,965, $ 1,618,461 Street Paving % $ 1,131, $ 109,481 Executive Supervisor % $ 3,393, $ 101,451 Excavation % $ 4,524, $ 369,611 Conduit % $ 1,131, $ 82,902 Railroad Work % $ 19,792, $ 2,268,221 Engineering % $ 2,262, $ 40,264 Clerical % $ 1,131, $ 3,167 Total % $56,550, $ 5,173,251 WC Discounts / Modifiers = $ 3,879,938 *10/1/09 WI Published Rates It is important to note that, while each insurer computes the manual premium, this premium is typically modified to reflect the current Experience Modifier (EMR) for the contractor, application of Premium Discounts (a sliding-scale discount given to reflect the administrative expense savings for larger policies), Contractor Discount Programs (these are credits given to contractors that meet specified safety requirements) and Scheduled Credits (discounts given by underwriters to drive down the market price of February 26, 2010 Page 13

15 the coverage due to favorable risk characteristics of the contractor and to compete with current market conditions). Therefore, a discount factor is applied to the manual premium to reflect these market discounts and determine a realistic expectation of the actual insurance credits. The estimated worker s compensation insurance credits after applying the discount is summarized in the bottom line in green. Computing the contractors insurance cost for general liability and umbrella/excess liability insurance is also more art than science. A recent study of our contractor data reveals that approximately half of the contractors are charged insurance premiums for general liability insurance based on workers compensation payroll; the other half are based on receipts. Further, consideration must be given for contractors which have varying deductibles, limits and coverage terms. However, because Aon has such a robust data base of actual insurance credits from other projects, we can predict with a high degree of credibility the estimated general liability and excess liability insurance costs based on the average costs the contractors have documented on other OCIP s. In the Midwest, the current insurance credit is $2.75/$100 We separately estimate the general liability and excess liability insurance costs for the general contractors/construction managers. They pay premiums based on the total cost of the project, versus individual scopes of work within a given project. Again, based on our data, we estimate this cost at a rate of $7.50/$1,000 of Construction Hard Cost. Finally, we calculate the total anticipated insurance credits as highlighted in yellow. Insurance Deduction Subcontractor Insurance Deductions Rate Subcontractor Worker's Compensation Deducts (Rate / $100 Payroll) 6.86 $ 3,879,938 Subcontractor General Liability Deducts (Rate / $100 Payroll) 2.75 $ 777,563* Total Subcontractor Deductions $ 4,657,500 Prime Contractor Deduct (Rate / $1,000 CV) 7.50 $ 2,827,500 Total WC & GL Insurance Deductions $ 7,485,000 Rate as % of Construction Value 1.99% Step 2 Determine the OCIP Costs The OCIP workers compensation and general liability coverage s are based on rates applied against workers compensation payroll. The OCIP premiums are estimated based on Aon s experience with current market conditions. February 26, 2010 Page 14

16 The first line represents the premium in excess of the amount of retained losses by WisDOT ($250,000 for each occurrence for workers compensation and $500,000 for commercial general liability). These premiums also include the estimated costs for the broker to administer the OCIP. The third line represents the amount of claims paid under the program under different scenarios. The fourth line represents the costs the insurer charges separately to manage the claims. Finally, the fifth line is the estimated premium for $100M in excess liability. Thus, in the following example, if the program incurred $1,470,300 in claims (40% of Max. Loss scenario), the total cost of the WC/GL/XS insurance would be $3,839,115. Loss Ratios No 20% Max 40% Max 60% Max Max Losses OCIP Premiums WC Ded. Prem. (Rate / $100 Payroll) 2.91 $ 1,646,175 $ 1,646,175 $ 1,646,175 $ 1,646,175 $ 1,646,175 $2/4/4M GL Ded. Prem. (Rate / $100 Payroll) 1.15 $ 649,125 $ 649,125 $ 649,125 $ 649,125 $ 649,125 Deductible Claims ($250,000 WC / $500,000 GL) 6.50 $ - $ 735,150 $ 1,470,300 $ 2,205,450 $ 3,675,750 Loss Handling Costs (% x Est. Claims) 5.00% $ - $ 36,758 $ 73,515 $ 110,273 $ 183,788 Excess Liability Premium ($100 Million) $ 700,000 $ 700,000 $ 700,000 $ 700,000 $ 700,000 Total Primary WC/GL/XS Premium $ 2,295,300 $3,067,208 $ 3,839,115 $ 4,611,023 $ 6,154,838 It s important to note that WisDOT s financial obligation is capped on the program. This amount is reflected on the far right hand of the sheet. In this example, based on the payroll assumptions, the maximum cost to WisDOT for the worker s compensation and primary Commercial General Liability insurance is $ Lastly, the other program expenses associated with safety and drug testing administration for the program. The safety is estimated at $125/hour for two safety professionals. The drug testing is estimated at 500 tests. Other Program Expenses Safety (2 3 Years) $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Drug Testing (Est. 500 Tests) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 Broker Administration Fee (Included in WC/GL Deductible Premium) Total Other Program Expenses $ 1,530,000 $ 1,530,000 $ 1,530,000 $ 1,530,000 $ 1,530,000 February 26, 2010 Page 15

17 Finally, a comparison of the total insurance credits ($7,485,000) can be compared to the total OCIP costs at various loss levels. In the following example, there are two scenarios highlighted. The first is at 40% of maximum costs in which the total anticipated OCIP cost is $5,369,115, which generates a savings of $2,115,885. The second scenario is the maximum cost to WisDOT which generates an OCIP cost of $7,684,838 which generates an additional cost over contractor-supplied insurance of $199,837. The following page summarizes all of the elements of the OCIP pro-forma. As a benchmark, the following is an excerpt of the estimated OCIP savings from various transportation projects as cited in the 1999 GAO report 2 : Dollars in Millions Project Name And Location Total Project Cost Traditional Insurance Cost Wrap-Up Insurance Cost Insurance Savings Blue Water Bridge, MI $97.2 $10 $7.1 $2.9 Boston Central Artery Tunnel, MA $10,800 $1,030 $765 $265 I-15, Salt Lake City, UT $1,600 $52.2 $22.3 $29.9 CTA Green Line Rehabilitation, IL $408.7 $32.5 $21 $11.5 Hudson-Bergen Light Rail $992 $20 $11 $9 Tri-Met, Westside Light Rail, OR $952 $27.1 $17.2 $9.9 2 United States General Accounting Office Report to the Chairman, Subcommittee on Transportation, Committee on Appropriations, U.S. Senate, June 1999, Transportation Infrastructure Advantages and Disadvantages of Wrap-Up Insurance for Large Construction Projects P.6 February 26, 2010 Page 16

18 Wisconsin Department of Transportation High Speed Passenger Rail Infrastructure Improvements Madison - Watertown Owner Controlled Insurance Program Construction Costs $377,000,000 Contingency Included Total $377,000,000 Estimated 15% $56,550,000 Duration in Months 36 Insurance Deduction Rate Subcontractor Insurance Deductions Subcontractor Worker's Compensation Deducts (Rate / $100 Payroll) 6.86 $ 3,879,938 Subcontractor General Liability Deducts (Rate / $100 Payroll) 2.75 $ 777,563 Total Subcontractor Deductions $ 4,657,500 Prime Contractor Deduct (Rate / $1,000 CV) 7.50 $ 2,827,500 Total WC & GL Insurance Deductions $ 7,485,000 Rate as % of Construction Value 1.99% (Based on 50% Subcontracted Labor / 50% Self-Perf. By Prime Contractors) Loss Ratios No 20% Max 40% Max 60% Max Max Losses OCIP Premiums WC Ded. Prem. (Rate / $100 Payroll) 2.91 $ 1,646,175 $ 1,646,175 $ 1,646,175 $ 1,646,175 $ 1,646,175 $2/4/4M GL Ded. Prem. (Rate / $100 Payroll) 1.15 $ 649,125 $ 649,125 $ 649,125 $ 649,125 $ 649,125 Deductible Claims ($250,000 WC / $500,000 GL) 6.50 $ - $ 735,150 $ 1,470,300 $ 2,205,450 $ 3,675,750 Loss Handling Costs (% x Est. Claims) 5.00% $ - $ 36,758 $ 73,515 $ 110,273 $ 183,788 Excess Liability Premium ($100 Million) $ 700,000 $ 700,000 $ 700,000 $ 700,000 $ 700,000 Total Primary WC/GL/XS Premium $ 2,295,300 $ 3,067,208 $ 3,839,115 $ 4,611,023 $ 6,154,838 Other Program Expenses Safety (2 3 Years) $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 $ 1,500,000 Drug Testing (Est. 500 Tests) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 Broker Administration Fee (Included in WC/GL Deductible Premium) Total Other Program Expenses $ 1,530,000 $ 1,530,000 $ 1,530,000 $ 1,530,000 $ 1,530,000 Total OCIP Cost $ 3,825,300 $ 4,597,208 $ 5,369,115 $ 6,141,023 $ 7,684,838 OCIP Savings (Excl. Broker Admin. Fee) $ 3,659,700 $ 2,887,793 $ 2,115,885 $ 1,343,978 $ (199,837) Savings As % CV 1.0% 0.8% 0.6% 0.4% -0.1% WORKER'S COMPENSATION DEDUCTIONS Class Descriptions Class Code Payroll % Payroll Stnd Rate* Stnd Prem Machinery/Equipment Repair % $ 1,131, $ 112,195 Iron & Steel Erection % $ 1,131, $ 120,225 Electrical % $ 1,131, $ 72,271 Concrete NOC % $ 1,131, $ 130,631 Concrete/Cement Work % $ 1,696, $ 144,372 Bridge Work % $ 16,965, $ 1,618,461 Street Paving % $ 1,131, $ 109,481 Executive Supervisor % $ 3,393, $ 101,451 Excavation % $ 4,524, $ 369,611 Conduit % $ 1,131, $ 82,902 Railroad Work % $ 19,792, $ 2,268,221 Engineering % $ 2,262, $ 40,264 Clerical % $ 1,131, $ 3,167 Total % $56,550, $ 5,173,251 WC Discounts / Modifiers $ 3,879,938 February 26, 2010 Page 17

19 6. Additional Considerations & Issues Additional Coverage Considerations While traditionally, OCIP s contemplated the core insurance coverage s of workers compensation, general liability and excess liability insurance (due to specific underwriting units within the insurers that only concentrate on these lines of coverage for large construction project insurance), additional exposures can be procured by WisDOT. The reasons for WisDOT purchasing the insurance vary from improved quality, availability or uniformity of insurance coverage, better control of claims, and unavailability by contractors, architects or engineers. While each of the following coverage s was described on page 4 of this report, the following are indications of the various additional coverage s that WisDOT can use for budget purposes. Builder s Risk (All Rates Shown as Annual Rates Per $100 Values) Blended average rate of $.10 per $100 of annual values. 3 Years x.10 = $.30 x 377,000,000/100 = $1,131,000 for term. This pricing estimate contemplates the following deductibles and sublimits: $25,000 AOL Deductible $50,000 Bridges Deductible $50,000 Basic Flood and Earthquake; $50,000,000 Sublimits for Each, except as per below: $500,000 Minimum Flood Deductible - Flood Zone A $10,000,000 Maximum Sublimit for Zone A Flood Should WisDOT wish to consider loss limits (vs. full project value), the $.10 annual rate would be discounted as follows: First $100,000,000 values - 75% of Rate $200,000,000 Loss Limit - 92% of Rate February 26, 2010 Page 18

20 Professional Liability Many owners face an issue with their architects and design consultants not being able to provide adequate limits under their practice policy. When reviewing this risk, special considerations should also be taken in reviewing the size of the self-insured retentions carried by the architect and its ability to fund that retention. The FTA Best Practices Procurement Manual, Section 6.5, gives the following guidance regarding professional liability insurance: It is the customary practice of Architect-Engineer firms to buy errors and omissions insurance to protect against design errors which they may make in the course of their design work. However, there may be situations where the cost of insurance for a particular project is very high. This could occur, for example, when the A-E firm is designing elements of a system, such as a rapid rail system, which will carry large numbers of passengers. This situation carries with it the potential for very high liability in the event of an accident caused by a faulty design of a system element. An owner can require the design professionals to purchase additional coverage or the owner can procure additional coverage to either replace the practice policy of the design professional ( Project Policy ) or it can purchase a policy to provide limits which insure above the limits carried in the design professionals practice policy (Owner s Protective Professional Indemnity Insurance - OPPI ). Because the OPPI policy is excess over the available insurance on the A&E s practice policy, this coverage can be purchased at a discount to the Project Policy. Project Policy SIR: $1,000,000 Form: Project A/E Maximum policy term is 10 years for term including ERP. Premium Limits $525,000 - $600,000 $10,000,000/$10,000,000 $675,000 - $750,000 $15,000,000/$15,000,000 Owner s Protective Project Indemnity Insurance (OPPI) SIR: $1,000,000 MIR: $2,000,000 Maximum policy term is 10 years for term including ERP. Premium Limits $350,000 - $400,000* $10,000,000/$10,000,000 $450,000 - $500,000* $15,000,000/$15,000,000 *To add the CPL coverage an additional 20% of the premium would apply. February 26, 2010 Page 19

21 Railroad Protective Liability Insurance WisDOT OCIP Feasibility Study Contractors that perform work within 50 of a railroad are required by the railroad entity to provide railroad protective liability insurance to protect the railroad against lawsuits which arise from the operations of the contractor. This coverage can be provided by each contractor, or a consolidated purchase can be made by WisDOT to insure all contractors. This coverage can be provided by the OCIP insurer or an insurance underwriter that specializes in RPL insurance coverage. Subpart A, Part 646, Subchapter G of the FHWA Federal-Aid Policy Guide (12/9/91) states that: In connection with highway projects for the elimination of hazards of railroad-highway crossings and other highway construction projects located in whole or in part within railroad right-of-way, railroad protective liability insurance shall be purchased on behalf of the railroad by the contractor. The standards for railroad protective insurance established by Secs through shall be adhered to insofar as the insurance laws of the State will permit. It states further under Sec : (a) The maximum dollar amounts of coverage to be reimbursed from Federal funds with respect to bodily injury, death and property damage is limited to a combined amount fo $2 million per occurrence with an aggregate of $6 million applying separately to each annual period except as provided in paragraph (b) of this section. (b) In cases involving real and demonstrable danger of appreciably higher risks, higher dollar amounts of coverage for which premiums will be reimbursable from Federal funds shall be allowed. These larger amounts will depend on circumstances and shall be written for the individual project in accordance with standard underwriting practices upon approval of the FHWA. The cost of the coverage is based on a variety of factors including the limits of liability, number of conveyances, adjacent exposures to work, cost of construction within the right-of-way. Not having specific information relative to this project, the following is a budget estimate for this coverage at various policy limits: Premium Limits $750,000 - $1,000,000 $2,000,000 CSL/Occurrence / $6,000,000 Aggregate $1,000,000 - $1,250,000 $5,000,000 CSL/Occurrence / $10,000,000 Aggregate $1,350,000 - $1, $10,000,000 CSL/Occurrence / $10,000,000 Aggregate February 26, 2010 Page 20

22 Coordination of Safety & Claims on Corridor Projects The High Speed Rail project is similar to the I-94 and US 41 Corridor projects in that both safety and drug testing need to be managed effectively across a large geographical spread. The strategies of the Corridor projects have proven effective and are recommended for this project. Safety One great advantage of an OCIP is the ability to implement consistent safety standards across projects involving multiple general contractors. However, given the geographic spread of the corridor projects, coordination and oversight must be accomplished with safety staff that continuously surveys the project at the various locations to ensure the minimum project safety standards are being met. While the safety manpower will fluctuate with peaks in construction, the insurance budget is based on an average of two full-time safety professionals on the project. A full-time safety director is also required by the DWD in order to insure the project under an OCIP. The I-94/US 41 projects have worked successfully to-date with the safety staff housed out of a WisDOT office location and the safety personnel travel the corridor during the day. This provides effective interaction between the safety personnel and WisDOT project staff and enables the contractors to know where they can find the safety staff. Drug Testing/Medical Another successful element of the Marquette Interchange/I-94 and US 41 Corridor projects is the administration of a mandatory drug testing program. This has not only resulted in more competitive pricing from the OCIP insurers, but is viewed as a significant contributor to the favorable results of the OCIP on those three projects. We recommend WisDOT designate medical facilities along the project route that could administer the drug testing program, as well as serve as the designated medical facility. Ideally, these facilities would be spaced every ten miles, where practical. Alternatively, WisDOT could contract for services of a provider to administer tests in the safety office location. Finally, WisDOT could contract for services to be administered in the field, but this is challenging as there are specific protocols that must be in place to ensure the accuracy of the test. February 26, 2010 Page 21

23 VII. Total Project Insurance Budget Estimate The following table estimates 3 the cost of project insurance for this project. The project budget does not include the cost for the OCIP administration of the program. Coverage Low Est. High Est. Builder s Risk Total Builder s Risk 4 $948,250 $1,231,000 OCIP OCIP (WC/GL/XS) 5 $3,839,115 $6,154,838 Other Program Expenses $1,530,000 $1,530,000 Total OCIP $5,369,115 $7,684,838 Other Coverage s Professional Liability w/cpl Endorsement 6 $420,000 $600,000 Railroad Protective Liability 7 $750,000 $1,500,000 Total Other Coverage s $1,170,000 $2,100,000 Total Project Budget $7,487,365 $11,015,838 3 Based on Aon s best estimate of the cost of coverage and not based on actual quotes from insurers. 4 Low Based on $100M Loss Limit, High Based on Full Value (Both include $100,000 loss fund) 5 Low Estimate based on 40% loss ratio and High Estimate based on max. loss ration from OCIP pro-forma. 6 OPPI Option Shown included CPL endorsement. 7 Railroad Protective Low Est. Based on $2M/$6M and High Est. Based on $10M/$10M February 26, 2010 Page 22