A New Dawn in Civil Construction Underwriting
Pennsylvania school children know the tunnels on the Pennsylvania Turnpike by name — Blue Mountain, Kittatinny, Tuscarora, and Allegheny.
San Francisco owes much of its allure to the Golden Gate Bridge. The Delaware Memorial Bridge commemorates our fallen soldiers.
Our public sector infrastructure is much more than its function as a path for trucks and automobiles. It is part of our national and regional identity.
Yet it’s widely known that much of our infrastructure is inadequate. Given the number of structures designated as substandard, the task ahead is substantial.
The Civil Construction projects that can meet these challenges, however, carry a unique set of risks compared to other forms of construction.
“The bottom line is that there is always risk in a Civil Construction project. If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance.”
– Paul Hampshire, Vice President – Civil Construction, LIU
The good news is that recent developments in construction standards and risk management techniques provide a solid foundation for the type and risk allocation of Civil Construction projects they are underwriting. Carriers need to be able to adequately assess the client and design and construction teams that are involved.
For Builder’s Risk Programs, a successful approach prioritizes a focus on four key factors. These factors are looked at not only during the underwriting phase of the project but also in the all-important site construction phase, under the umbrella of a Risk Management Program, or RMP.
Four key factors
Four key factors that LIU focuses on in underwriting and providing risk management services on a Civil Construction project include:
1. Resource knowledge and experience: When creating a coverage plan, carriers work to understand who is delivering the project and how well suited key staff members are to addressing the project’s technical and management challenges. Research has shown that the knowledge and experience of those key players, combined with their ability to communicate effectively, is a big factor in the project’s success.
“We look to understand who is delivering a project, their expertise and experience in delivering projects of similar technical complexity in similar working conditions, even down to looking at the resumés of people in key positions,” said Paul Hampshire, Houston-based Vice President with Liberty International Underwriters.
2. Ground conditions and water: Soil and rock composition, the influence of ground and surface water, and foundation stability are key additional considerations in the construction of bridges, tunnels, and transit systems. If a suitable level of relevant ground (geotechnical) investigation and study has not been undertaken, or the results of such work not clearly interpreted, then it’s a red flag to underwriters, who would then question whether the project risk profile has been adequately evaluated and risks clearly and transparently allocated via suitable contract conditions.
“As we all know, ground is very rarely a homogenous element within Civil Construction projects,” LIU’s Hampshire said.
“It tends to vary from any proposed geotechnical baseline specification with the consequential potential for changes in behavior during construction. We need to understand who has assessed the condition of the ground, its behavior and design parameters when compared with a particular method of construction, and all importantly, who has been allocated the ground risk in a project and the upfront mechanisms for contractual ground risk sharing, if applicable,” he said.
Knowing how much water is associated with the in-situ ground conditions as well as the intensity, distribution and adequate accommodation (both in the temporary as well as in the permanent project configurations) of rainfall for a site location and topography are also key. Tunneling projects, for example, can be hampered by the presence of too much or unforeseen quantities of groundwater.
“In major tunneling infrastructure projects, the influence of in-situ groundwater pressures and /or water inflows is a major factor when considering the choice of excavation method and sequence as well as tunnel lining design requirements,” LIU’s Hampshire said.
According to a recent article in Risk & Insurance, tunneling under a body of water is one of the most challenging risk engineering feats. Adequate drainage layouts and their installation sequence for highway projects and, in particular, the protection of sub-grade works are also important. “But under all circumstances, we need to understand how the water conditions have been evaluated,” Hampshire said.
3. Technical Challenges: This risk factor encompasses the assessment of the technical novelty or prototypical nature of the project (or more often, specific elements of it) and how well the previously demonstrated experience of both the design and construction teams aligns with the project’s technical requirements and the form of contract determined for the project. The client can choose the team, but savvy underwriters will conduct their own assessment to see how well-suited the team is to technical demands of the project.
4. Evaluation of Time and Cost: With limited information generally provided, we need to be able to verify as best as possible the adequacy of both the time and cost elements of the project. Our belief is simply that projects that are insufficient in either one or both of these elements potentially pose an increased risk, as the construction consortium tries to compensate for these deficiencies during construction.
Small diameter Tunnel Boring Machine designed for mixed ground conditions and water pressures in excess of 2.5 bar.
In the 1990s and early years of this millennium, a series of high-profile tunnel failures across the globe resulted in major losses for Civil Construction underwriters and their insureds.
In the early 2000s, both the tunnel and insurance industries worked together to create new standards for high-risk tunneling projects.
A Code of Practice for the Risk Management of Tunnel Works (TCoP) is increasingly relied on by project managers and underwriters to define the best practices in tunnel construction projects. This process ideally starts at project inception (conceptual design stage or equivalent) and continues to the hand-over of the completed project.
LIU’s Hampshire said alongside TCoP, the project-specific Geotechnical Baseline Report and its interpretation and reference within the project contract conditions gives the underwriter greater clarity as to who recognizes and carries the ground risk and how it’s allocated.
“The bottom line is that there is always risk in a Civil Construction project,” Hampshire said. “Is the risk transparently allocated or is it buried? If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance,” Hampshire said.
Paul Hampshire can be reached at Paul.Hampshire@libertyiu.com.
To learn more about how Liberty International Underwriters can help you conduct a Civil Construction risk assessment before your next project, contact your broker.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.
In September 2008, the state of Indiana was ordered to reimburse the consortium that operates the Indiana Toll Road $447,000 for tolls waived for travelers evacuated during a severe flood.
The trigger was a compensation clause in the 2006 leasing agreement between the state and the private group that provided the state with an upfront payment of $3.8 billion in exchange for the consortium’s right to operate the 157-mile toll road for 75 years.
Such clauses guarantee that governmental entities compensate private operators when there’s an event affecting the leased asset’s revenue.
That 2008 cost to the state government of Indiana is just one of the risks that may crop up as public-private partnerships — or P3s — are used more by cash-strapped governments as a means to shore up or operate aging U.S. infrastructure.
More recently, the consortium that paid Indiana for the right to run the highway encountered liquidity problems, leading to even more uncertainty over the highway’s future management.
The consortium’s timing was bad. It paid billions to take over the toll road right before the onset of the Great Recession.
P3s are fairly common in Europe and Canada, especially as a way to design, construct, and fund social infrastructure such as courthouses and hospitals.
But here in the United States, P3s are still in their infancy, and some surety carriers look at them skeptically.
“I have not seen a single project recently where the surety industry has not been able to provide a 100 percent performance and 100 percent payment bond.”
— Drew Brach, a Marsh managing director and U.S. surety practice leader
The arrangements permit governments to contract with private financiers and lending institutions to build, finance, operate and maintain major infrastructure development, with private entities covering the upfront costs in exchange for the ability to run the facilities and to collect tolls or other payments for long periods of time.
The “operating and maintaining” phase of an infrastructure project often ranges from 25 to 40 years.
Carriers are particularly concerned that many states using P3s have yet to enact enabling legislation calling for the payment and performance guarantees that surety underwriters typically provide on infrastructure development.
Although a total of 34 states have laws enabling P3s, only 26 of those states require payment and performance bonds on P3 projects, said Mary Alice McNamara, second vice president and counsel with surety provider Travelers Bond & Financial Products.
Examples of some recent P3 projects that have surety bond requirements include California’s Presidio Parkway program, Ohio’s River Bridges East End Crossing program and the Indiana and Illinois Illiana toll-road project, McNamara said.
When surety bonds aren’t required to guarantee project completion and payment to subcontractors, suppliers, and laborers for work performed on P3 infrastructure projects, lenders may call for letters of credit (LOCs) instead, as performance security.
However LOCs “don’t offer any payment protection to subcontractors, suppliers and laborers who have worked on the job,” said McNamara, who also stressed that “LOC beneficiaries will be the ‘concessionaire’ ” or private investors providing the financing for the P3.
“A performance bond guarantees to the owner of the project that the project will be completed according to the underlying construction contract,” she said.
“A payment bond guarantees that subcontractors, suppliers, material, men, and laborers who have provided labor, services, or supplies to a project will be paid.”
Moreover, LOCs tend to be in an amount covering only a small portion of a project, often just 10 percent to 20 percent. Payment and performance bonds, on the other hand, “each provide up to the full amount of the construction contract,” McNamara said.
And yet P3s are a tempting concept at a time when national infrastructure needs and public sector budgetary challenges are so acute.
Deficient Roads and Bridges
Six years ago, the American Association of State Highway and Transportation Officials (AASHTO) warned that the country’s bridges would reach their average expected lifespan of 50 by 2015.
In 2013, the American Society of Civil Engineers’ (ASCE) “report card” grade for America’s infrastructure was a dismal D+.
“Deficient roads, bridges, and ports hurt our GDP, our ability to create jobs, our disposable income and our competitiveness with other nations,” ASCE President Randall Over said in April.
So little has been done to shore up the nation’s bridges and other infrastructure that ASCE estimated deficient and unreliable surface transportation will cost each American family $1,090 a year in disposable income by the year 2020.
At a time when there is serious pressure on public entities to stretch their infrastructure project capacity, many state and municipal officials are looking to P3s for assistance, said Dorothy Gjerdrum, senior managing director of Arthur J. Gallagher & Co.’s public sector practice.
However risk specialists and decision-makers need to know the potential pitfalls of these arrangements and consider the broad range of uncertainties, she said.
Risks and Responsibilities
Gjerdrum, who spent more than a decade as a risk manager for a pool of county governments in New Mexico, said that there are a myriad of risks and legal issues involved when implementing a P3, including the review of the contractual agreement and which parties will be responsible if there is a major loss.
“There needs to be a significant review as to who is in the best position to bear the consequences if something happens,” Gjerdrum said.
“Sometimes public entities will take on too much responsibility for the things that can go wrong,” she said. Alternatively, “they may be too trusting that the large private organizations with whom they have partnered with will bear responsibility.”
“In a P3 situation,” said Travelers’ McNamara, “risks that would have traditionally been kept or retained by the public entity project owner are being pushed entirely down to the concessionaire level.”
Design builders who once negotiated with public entities are now dealing with a private concessionaire entity instead, she said.
Beyond that, different coverage issues will arise once a building or renovation project moves from the “design-build” phase into the “maintain and operate” phase. These issues call for the involvement of multiple insurance experts and good risk management oversight, said Gjerdrum.
“One example is whether (and how) sovereign immunity will apply if a facility is owned by a public entity but operated by a private business,” she said.
Sovereign immunity in many circumstances means that the sovereign or government involved in a project is immune from lawsuits or other legal actions.
“What happens if the private business fails? What if revenue projections fall short? What if the environment changes and the service or facility is no longer viable?” Gjerdrum asked.
“P3 solutions can help public agencies solve a myriad of infrastructure problems, but managing the associated risks requires thorough review, long-term thinking and good oversight,” she said.
There are clear advantages to P3s too, of course.
Virginia pioneered the P3 concept more than 20 years ago with a prison that was privately designed and built, according to Governing the States and Localities magazine.
“The prison, which ended up costing $42 million to construct, had to be built to state specifications, but the private company had its own design ideas that arguably were more efficient and less expensive,” according to the magazine.
“The point they made was they could build it cheaper,” Michael Maul, associate director of the Virginia Department of Planning and Budget, said to the magazine.
“It was built more quickly and for less cost.”
Virginia officials estimated that using a P3 to build and operate the prison would generate savings of between 15 percent and 20 percent.
But some in the insurance industry are weighing in with their own concerns. Among the critics is the industry group, the Surety and Fidelity Association of America (SFAA).
In its 2012-2013 SFAA Annual Report, the organization stated its position that P3s are “just another method of project delivery” and that “the construction portion of the project needs to be bonded under the Little Miller Act.”
The Little Miller Act — which is based on the federal Miller Act — requires state contractors to post performance bonds.
“By issuing a bond, the surety provides the public entity and the taxpayers and subcontractors with assurance from an independent third party, backed by the surety’s own funds, that the contractor is capable of performing the construction contract. The other primary benefit of the bond is that the surety responds if the contractor defaults,” the SFAA stated.
Insurers are working with P3s, however. Stephen Rea, general counsel for Liberty Mutual Surety in Boston, said that Liberty “has written bonds for P3 projects in states where enabling legislation requires public work to be bonded under Miller or Little Miller Act legislation.”
Drew Brach, a Marsh managing director and U.S. surety practice leader, said that he has done work with several P3s, adding that surety bonds were obtained for each and every one of the deals.
Strain on Capacity
Surety industry capacity may also become more of an issue as P3s gain momentum.
Given that P3 projects are often valued at $500 million and up, project size could be a strain on a smaller surety provider’s ability to underwrite projects, said Roland Richter, vice president, marketing and analytics for Liberty Mutual Surety.
“Only a handful of sureties have sufficient capacity to bond P3 projects,” he said.
“Thus, as some of these P3s move forward, smaller surety companies may find an erosion in their premium base as their customer base may not be large enough to bid P3 projects,” Richter said.
On the other hand, Rick Ciullo, chief operating officer at Chubb Surety, said that surety underwriting capacity has been on the rise since 2007.
“Contractors became better risks during the construction boom of 2002 to 2006, though they may have had trouble getting surety capacity because the surety industry was losing money during this construction boom.”
Ciullo said he has seen many more projects within the industry valued at over $500 million bound by surety insurers since 2008.
Marsh’s Brach has also seen surety industry capacity grow over time. Five years ago, Brach said, if you asked an underwriter to issue a $3 billion bond, the answer was generally “no,” said the brokerage executive.
But that’s changed, he said — even for larger projects.
“Some sureties say we’re going to analyze case by case what bonding is required [for a P3 program] and decide what the risk is.
“I have not seen a single project recently where the surety industry has not been able to provide a 100 percent performance and 100 percent payment bond,” said Brach.
The Re-Invention of American Healthcare
Consolidation among healthcare providers continues at a torrid pace.
A multitude of factors are driving this consolidation, including the Affordable Care Act compliance, growing costs and the ever-greater complexity of health insurance reimbursements. After several years of purchasing individual practices and regional hospital systems, the emergence of the mega-hospital system is now clear.
“Every month, one of our clients is either being bought or buying someone — and the M&A activity shows no signs of slowing down,” said Brenda Osborne, executive vice president at Lexington Insurance Co.
This dramatic change in the landscape of healthcare providers is soon to be matched by equally significant changes in patient behavior. Motivated by growing out-of-pocket costs and empowered with new sources of information, the emergence of a “healthcare consumer” is on the horizon.
Price, service, reputation and, ultimately, value are soon to be important factors for patients making healthcare decisions.
Such significant changes bring with them new and challenging risks.
Although physicians traditionally started their own practices or joined medical groups, the current climate is quite the opposite. Doctors are now seeking out employment by health systems. Wages are guaranteed, hours are more stable, vacations are easier to take, and the burdens of running a business are gone.
“It’s a lot more of a desirable lifestyle, particularly for the younger generation,” said Osborne.
Brenda Osborne discusses the changing healthcare environment and the risks and opportunities to come.
Given the strategic importance of successfully integrating acquired practices into a larger healthcare system, hospitals are rightfully focused on how best to keep doctors happy, motivated and focused on patient safety.
A key issue that many hospitals struggle with is how to provide effective liability insurance for their doctors. Physicians who previously owned their practice are accustomed to a certain type of coverage and they expect that coverage to continue.
Even when operators find comparable liability insurance solutions for their doctors, getting buy-in from their staff is often an additional hurdle to overcome.
“Physicians listen to two things — physician leaders and data,” said Osborne. “That’s why Lexington provides assessments that utilize deep data analysis, combined with providing insights from leading doctors to help explain trends and best practices.
“In addition, utilizing benchmarks against peers helps to identify gaps in best practices. It’s a very powerful approach that speaks to doctors in a way that will help them improve their risk.”
Focusing on the “continuum of care”
There’s been a fundamental shift in how healthcare providers care for patients: Treatment is becoming more focused on a patient’s overall health status and related needs.
A cancer patient, for example, should have doctors in a number of specialties communicating and working together toward a positive patient outcome. But that means a change in thinking: Physicians need to work collaboratively with one another — not easy for individuals or groups that are used to being independent. Healthcare is a team sport.
“If there isn’t strong communication, strong leadership, and the recognition of proper treatment procedures between physicians, healthcare providers can increase the risk of error,” said Osborne. “The provider has got to treat the whole patient rather than each individual condition.”
That coordination must extend from inpatient to outpatient, especially since the ACA has led to a rapid increase in patients being treated at outpatient clinics, or via home health or telehealth to reduce the cost of inpatient care
“Home health is going be a growing area in the future,” Osborne continued. “Telehealth will become an effective and efficient way of managing and treating patients in their home. A patient might have a nurse come in and help the healthcare provider communicate with a physician through an iPad or computer. The nurse can also convey assessment findings to the physician.”
Metrics matter more than ever
Patients have not always thought of themselves as healthcare consumers, but that’s changing dramatically as they pay more out of pocket for their own healthcare. At the same time, there’s an increase in metrics and data available to the public — and healthcare consumers are drawing upon those metrics more and more when making choices that affect their health.
“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems. That competition will force everyone to improve the quality of care.”
– Brenda Osborne, Executive Vice President, Lexington Insurance
Think about all the research a consumer does before buying a car. Which dealership has the best price? Who provides the best service? Who’s offering the best financing deal?
“Do patients do that with physicians? No,” said Osborne. “Patients choose physicians through referrals from friends or health plans with minimal information. Patients may be putting their lives in the physicians’ hands and not know their track record.
That’s all going to change as patients’ use of data becomes more widespread. There are many web based resources to find information on physicians.
“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems,” said Osborne. “That competition will force everyone to improve the quality of care.”
Effective solutions are driven by expertise and vision
The rapidly evolving healthcare space requires all healthcare providers to find ways to cut costs and focus on patient safety. Lexington Insurance, long known as the leading innovative and nimble specialty insurer, is at the forefront in providing clients cutting-edge tools to help reduce costs and healthcare exposures.
These tools include:
- Office Practice Risk Assessment: To support clients as they acquire physician practices, Lexington developed an office practice assessment tool which provides a broad, comprehensive evaluation of operational practices that may impact risk. The resulting report, complete with charts, graphs and insights, includes recommendations that can help physicians reduce risk related to such issues as telephone triage, lab results follow-up and medication management. .
- Best Practice Assessments: High risk clinical areas such as emergency departments (ED) and obstetrics (OB) can benefit significantly from external, objective, evidence-based assessments to identify gaps and assure compliance with best practices. In addition to ED and OB, Lexington can provide a BPA for peri-operative care, prevention of healthcare-acquired infections, and nursing homes. All assessments result in a comprehensive report with recommendations for improvement and resources along with consultative assistance and support. .
- Continuing Education: In an effort to improve knowledge, decrease potential risk and support healthcare providers in the use the most current tools and techniques, Lexington provides Continuing Medical Education credits at no cost to hospitals or their physicians.
- Targeting the Healthcare Consumer: With Medicare reimbursement impacted by patient-satisfaction surveys, assuring a positive patient experience is more critical than ever. Lexington helps hospitals understand and improve the patient experience so they can continue to earn the trust of healthcare consumers while preserving their good reputation. .
To learn more about Lexington Insurance’s scope and depth of the patient safety consulting products and services healthcare solutions, interested brokers may visit their website.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.