David J. Hatem, PC

1
INSURANCE PRACTICE CODES FOR MAJOR SUBSURFACE
PROJECTS HELP OR HINDRANCE FOR PRIMARY PROJECT
PARTICIPANTSRISK MANAGEMENT AND CONTRACTING
ISSUES IN TUNNELINGApril 18, 2006
2
Issues

• What factors are influencing (Influencing
  Factors) insurers to promulgate and mandate use
  of practice codes on major subsurface projects?
• How do these Influencing Factors relate to
  traditional and constant risk management concerns
  for Primary Project Participants (Owner,
  Engineer, Constructor) in major subsurface
  projects?
• Are insurer practice codes a step in right
  direction or a negative development?
• What should be the proper role of the Insurance
  Industry in addressing the Influencing Factors
  that underlie promulgation of practice codes?

3
Issue What factors are influencing (Influencing
Factors) insurers to promulgate and mandate use
of practice codes on major subsurface projects?

• Insurer claim payment experience (frequency and
  severity) exceeds underwriting expectation (loss
  ratio).
• Major insurance risk and claim drivers on
  subsurface projects-sorted and allocated by
  Primary Project Participant (PPP)
• Owner
• Cost/Schedule Serious disappointment in
  expectations due to lack of realism in project
  risk assessment, budget estimating, (inadequate
  contingency), and planning decisions.
• Subsurface Investigation and Information
  Inadequacies and disclosure problems.
• Third-Party Considerations Inadequate
  pre-construction surveys and existing condition
  research and inadequate instrumentation
  monitoring during construction activities.
• Roles and Responsibilities of PPP Lack of
  clarity and ineffective assignments.
• Risk Allocation Fairness or clarity issues.
• Project Management Issues relating to Owner
  independence, competence and experience.
• Delivery Method Approaches Uninformed/inappropri
  ate decisions.

4
Issue What factors are influencing
(Influencing Factors) insurers to promulgate
and mandate use of practice codes on major
subsurface projects?

• Owner Representation During Construction
  Inadequate site/submittal involvement of
  Engineer.
• Payment Failure to pay legitimate claims.
• Dispute Resolution Inadequate process to
  anticipate and timely/efficiently resolve
  disputes.
• Engineer
• Advice to Owner Failure to adequately identify,
  evaluate and advise Owner regarding design and
  construction options and relative risk exposures.
• Subsurface Information and Preparation Report
  Deficiencies in evaluation and application of
  available data and in communication/report
  preparation
• Innovative Design Inadequate assessment and
  risk evaluation.
• Design Coordination and Interface Inadequate
  attention.

5
Issue What factors are influencing (Influencing
Factors) insurers to promulgate and mandate use
of practice codes on major subsurface projects?

• Constructability Failure to adequately consider
  constructability in design development process.
• Final Design Deficiencies Errors and omissions
  failure to meet professional standard of care.
• Construction Process Inadequate involvement of
  Engineer during construction to review site
  conditions relative to design assumptions, review
  submittals, timely address field issues, and
  evaluate differing site condition claims.
• Constructor
• Qualification and Experience Specialized work
  done by unqualified/inexperienced labor.
• Bidding Unrealistic assumptions and estimating
  inadequate contingency.

6
Issue What factors are influencing (influencing
factors) insurers to promulgate and mandate use
of practice codes on major subsurface projects?

• Project Management Inadequacies due to lack of
  experience, supervision and quality control.
• Safety Inadequate safety precautions and
  programs construction means/methods.
• All PPPs
• Inadequacies in communication, coordination and
  alignment of respective roles and
  responsibilities.
• Insurers
• Inadequate understanding and underwriting of
  project-specific risk associated with major
  subsurface projects.

7
Issue How do these Influencing Factors relate
to traditional and constant risk management
concerns for Primary Project Participants in
major subsurface projects?

• Based upon preceding review of Influencing
  Factors, in several important respects insurer
  practice codes strive to address many of the same
  predominant risk concerns and risk management
  challenges of the PPPs involved in major
  subsurface projects.
• For example, PPPs are vitally and continuously
  focused on risk and consequences associated with
• Unrealistic and/or inadequate project risk
  identification and assessment, unrealistic budget
  and schedule expectations.
• Inadequate subsurface investigation and
  information disclosure
• Unfair/unclear definition and allocation of PPP
  roles, responsibilities and risk.
• Inadequate, inefficient and untimely dispute
  resolution processes.
• Design and construction dysfunctionality.

8
Issue Are Insurer Practice Codes A Step in
Right Direction or a Negative Development?

• Based upon the preceding discussion, there is
  substantial alignment and convergence between
  objectives of (a) insurers in addressing the
  Influencing Factors that account for practice
  code promulgation and (b) the PPPs in addressing
  traditional risk concerns on subsurface projects.
• In substance, insurer practice codes are intended
  to achieve what the improved contracting
  practices are intended to achieve.
• Can we align the objectives of improved
  contracting practices with improved
  underwriting practices for subsurface projects?
• There should be significant opportunity for
  dialogue and collaboration given substantial
  alignment and convergence of objectives.
• So why the controversy and debate over insurer
  practice codes?
• In essence, the controversy and debate appears to
  be more focused on means and methods of the
  Insurance Industry in addressing the Influencing
  Factors than fundamental and substantive
  differences in objectives.

9
Issue Are Insurer Practice Codes A Step in Right
Direction or a Negative Development?

• PPPs on subsurface projects need to work with the
  Insurance Industry
• PPPs need adequate insurance coverage to manage
  and transfer substantial risk on major subsurface
  projects.
• The Insurance Industry should make that coverage
  available on reasonable terms and pricing, and
  for specified policy period durations.
• Project-specific or wrap-up (OCIP or CCIP)
  insurance is a critically important component of
  effective risk management for PPPs on a major
  subsurface project.
• Corporate Insurance for the substantial risk
  exposures inherent in major subsurface projects
  is inadequate and often is not the preferred
  source of claim payments
• Self-insurance is not a viable option given the
  substantial project-specific risk exposures and
  capitalization/funding requirements.
• This situation militates in favor of more
  dialogue and collaboration about how we
  accomplish our substantially common objectives
  and what the role of the Insurance Industry
  should be in that process.

10
Issues What Should be the Proper Role of the
Insurance Industry in Addressing the Influencing
Factors that Underlie Promulgation of Practice
Codes?

• Understand the risk associated with the planning,
  design and construction of major subsurface
  projects.
• Underwrite coverage based on that understanding
  and the applicable project-specific risk
  exposures.
• Promote and encourage but not legislate,
  prescribe or mandate improved project planning,
  management, design and construction approaches,
  and contracting practices.
• Respect and defer to Owner planning and
  management decisions, the design judgments of
  Engineers, and the construction methods chosen by
  the Constructors and acknowledge the need for
  flexibility, adaptability, contractual autonomy,
  diversity and innovation in the roles of the
  PPPs.
• Define reasonable underwriting measurements to
  periodically evaluate risk and sustainability of
  underwriting assumptions/expectations.
• Restrict coverage consequences for material
  variations in underwriting assumptions/expectation
  s to additional premium not premature coverage
  cancellation.
• Underwriting and coverage decisions should be
  made on the front end not the back.

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• Material variation in baseline approach see
  D.J. Hatem, Developing Risk Indicators for
  Evaluating Professional Liability Exposure on
  Major Public Projects A Broader Dimensional
  Approach, Design and Construction Management
  Reporter, Donovan Hatem LLP (February-March 2004).

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Observations

• Project-specific (OCIP, CCIP, wrap-up) insurance
  on major subsurface projects is an essential
  component of an effective risk transfer/management
  program for PPPs.
• The availability, terms, scope and premium cost
  of such insurance are critical factors
  influencing, if not determining, a number of go,
  no go decisions on major subsurface projects,
  such as
• Whether the project will proceed at all
• Whether Engineers and Constructors will be
  willing to participate in the project and, if so,
  the degrees of risk assumption/allocation they
  will accept.
• Insurer withdrawal from underwriting and
  providing coverage for subsurface project risk is
  not acceptable.

13
Observations

• Many of the Influencing Factors underlying
  insurer practice code promulgation also represent
  risk concerns for PPPs involved in major
  subsurface projects.
• PPPs and the Insurance Industry have a
  substantial amount in common in their risk
  concerns associated with major subsurface
  projects.
• The salutary objectives of the improved
  contracting practices designed to achieve the
  timely, effective realistic and fair
  identification, assessment and allocation of risk
  need to be understood, translated and effectively
  applied in the context of Insurance Industry
  underwriting and coverage for major subsurface
  projects.

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• The role of the Insurance Industry should be to
  promote and support these objectives not to
  legislate, prescribe or mandate them.
• While we can legitimately debate whether the
  Insurance Industry, by practice codes or
  otherwise, should prescribe or otherwise attempt
  to influence the planning, management, design and
  construction of major subsurface projects, what
  is reasonably clear is that now and in the
  foreseeable future the Insurance Industry will be
  more focused on this subject and how to address
  the Influencing Factors.

15
Observations

• PPPs and the Insurance Industry need more
  informed dialogue and collaboration on these
  subjects.
• Now is the time for that dialogue and
  collaboration.

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