Risk Allocation / Surety / Insurance Issues

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Guthner Knox & Elliott, LLP. All Rights Reserved.

1 Risk Allocation / Surety / Insurance Issues Nancy C. Smith Nossaman Guthner Knox & Elliott LLP TRB January 23, 2006 Copyright, 2007 Nossaman Guthner Knox & Elliott, LLP. All Rights Reserved. The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice.

2 Overview Risk Allocation Surety Bonds 1

3 What If.? 2

4 Risk Management Identify Project Goals Identify Risks Take steps to reduce risks Decide who will bear risk 3

5 Project Goals Price Schedule/Inconvenience to Public Quality Stakeholders 4

6 Risk Assessment Workshop RISK Likelihood of Occurrence Severity Rating Differing site conditions Permits/ Design Approvals Utilities 5

7 Steps to Reduce Risk What can the owner do, in advance of contracting, to reduce the likelihood of the risk or magnitude of impact? 6

8 Risk/Responsibility Matrix Coordinating with Railroads Entering into Master Utility Agreements; Entering into Individual Agreements Identifying Utilities; Verifying Location of Utilities Coordinating With Utility Owners Utilities Requiring Relocation Because of Design Changes Performance of Utility Design and Construction Work CONSTRUCTION Quality Control and Quality Assurance Construction Survey Control Survey Supply of Equipment, Materials and labor Owner-Provided Items Coordination of Construction Coordination with other work Coordination with outside work Design Changes Affecting Construction Already Underway Differing Subsurface Conditions 7

9 Risks and Responsibilities Responsibility for constructability and efficacy of design Designer accountability for cost Responsibility for QA/QC 8

10 Risk allocation questions Who can best control the risk? Who can best manage the risk? Are contractors willing to assume the risk? How much will it cost? Differing site conditions Force majeure Hazardous materials Paleo/archaeo/bio Permits Railroads Right of way Utility relocations 9

11 Difficult/impossible to shift certain risks to contractors Owner-directed changes Owner-caused delays Major environmental permits Major force majeure (including injunctions and changes in law) Unknown hazardous waste 10

12 Differing Site Conditions/ Hazardous Materials Differing Site Conditions Expensive risk to shift to contractors Hazardous materials Who does the work? If Owner retains responsibility to perform remediation work, can it avoid liability for any resulting delays and delay damages? If Owner pays for remediation performed by Contractor, what incentives promote performance efficiently and in best interests of project? 11

13 ROW/Utilities ROW/utilities are a major risk for horizontal projects CM approach allows ROW to be acquired and utility risk to be quantified prior to pricing Unidentified main and trunkline utilities Misidentified facilities 12

14 Permitting Permitting responsibility and risk Discretionary permits Permit application costs Failure to obtain permit Impacts on project costs of permit conditions 13

15 Coordination Other prime contracts Owner-provided materials, equipment and systems Utility poles Ticket vending machines Revenue collection systems 14

16 Force Majeure Events FM = events beyond the parties control, including acts of God, changes in law, etc. Price increase for change in work (not delay damage or events affecting only cost) Under standard contracts the contractor often bears force majeure cost risk including delay damages and gas/sales tax increases Note: builder s risk insurance covers some costs 15

17 Insurance Overview Type of Policy Builder s risk CGI Auto/RR/aircraft What is covered property damage third party liability property damage, third party liability Professional liability faulty design Worker s comp. Pollution liability Efficacy injury to workers third party liability liquidated damages, debt obligations 16

18 Surety Bond Trends Bonding capacity: Ideally all qualified contractors should be able to provide bonds Market limits are affecting contractor bonding capacity 17

19 Surety Bond Trends Extent of bond coverage: Ideally should be commensurate with CM s obligations Available coverage: Coverage for long-term obligations not available Limitations on types of obligations covered 18

20 Other Surety Issues Rising cost of surety bonds Shorter Surety Commitments Previously, sureties would commit to provide bonds a year in advance Currently, surety commitments expire within 180 days or even less Problematic for projects where work involves multiple NTPs Problem may be compounded by proposal bond term limitations 19

21 Other Surety Issues Potential Solutions and Alternatives Default Insurance Parent Guarantee Letter of Credit Other forms of security Solutions may require legislation 20

22 Contact Nancy C. Smith Nossaman Guthner Knox & Elliott LLP 445 S. Figueroa St., 31 st Fl Los Angeles, CA NOSSAMAN.COM 21

TRANSPORTATION RESEARCH BOARD. CONCESSIONS: A NEW FRONTIER? July 18, 2005 Portland, Oregon GEOFFREY S. YAREMA NOSSAMAN GUTHNER KNOX & ELLIOTT LLP

TRANSPORTATION RESEARCH BOARD. CONCESSIONS: A NEW FRONTIER? July 18, 2005 Portland, Oregon GEOFFREY S. YAREMA NOSSAMAN GUTHNER KNOX & ELLIOTT LLP TRANSPORTATION RESEARCH BOARD 44th ANNUAL WORKSHOP ON TRANSPORTATION LAW CONCESSIONS: A NEW FRONTIER? July 18, 2005 Portland, Oregon GEOFFREY S. YAREMA NOSSAMAN GUTHNER KNOX & ELLIOTT LLP The information