Transportation Infrastructure: Advantages and Disadvantages of Wrap-Up
Insurance for Large Construction Projects (Letter Report, 06/01/99,
GAO/RCED-99-155).

Pursuant to a congressional request, GAO provided information on the
advantages and disadvantages of wrap-up insurance over traditional
insurance for large transportation projects and the factors that can
affect the broader use of wrap-up insurance.

GAO noted that: (1) 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; (2) major
advantages include savings from buying insurance in bulk, eliminating
duplication in coverage, handling claims more efficiently, reducing
potential litigation, and enhancing workplace safety; (3) according to
insurance industry officials, wrap-up insurance can save project owners
up to 50 percent on the cost of traditional insurance, or from 1 to 3
percent of a project's construction cost, depending on its size; (4) the
potential disadvantages of wrap-up insurance include requiring project
owners to invest more time and resources in administration; (5) project
owners must hire additional personnel or pay to contract out the
management of the wrap-up insurance; (6) in addition, project owners
could also have to pay large premiums at the beginning of the project;
(7) however, transportation officials said these costs were reasonable;
(8) a number of factors can affect the broader use of wrap-up insurance;
(9) perhaps the most significant barriers are state systems for workers'
compensation that, in some states, effectively prevent wrap-up insurance
by greatly reducing its potential cost savings; (10) another limitation
is that a project must be sufficiently large, or contain at least a
sufficient amount of labor costs, to make wrap-up insurance financially
viable; and (11) some contractors dislike wrap-up insurance because it
reduces a contractor's profits from insurance rebates.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-155
     TITLE:  Transportation Infrastructure: Advantages and
	     Disadvantages of Wrap-Up Insurance for Large Construction
	     Projects
      DATE:  06/01/99
   SUBJECT:  Insurance cost control
	     Comparative analysis
	     Insurance regulation
	     Insurance premiums
	     Liability insurance
	     Road construction
	     Workers compensation
	     Construction contracts

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Cover
================================================================ COVER

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

GAO/RCED-99-155

Transportation Infrastructure

(348134)

Abbreviations
=============================================================== ABBREV

  CA/T - Central Artery/Tunnel
  CTA - Chicago Transit Authority
  FHWA - Federal Highway Administration
  GAO - General Accounting Office
  MDOT - Michigan Department of Transportation
  UDOT - Utah Department of Transportation

Letter
=============================================================== LETTER

B-281480

June 1, 1999

The Honorable Richard C.  Shelby
Chairman, Subcommittee on Transportation,
Committee on Appropriations
United States Senate

Dear Mr.  Chairman: 

Traditionally, for large construction projects, project owners (such
as state departments of transportation and transit agencies),
contractors, and subcontractors have purchased insurance
independently to protect themselves from financial losses.  In
contrast, with wrap-up insurance, the project owner can cover all the
parties involved in the project--the owner, the construction manager,
the general contractor, and the subcontractors.  Over the past
decade, wrap-up insurance has been used increasingly on large
construction projects because of the potential for cost savings.  In
1998, wrap-up insurance covered about 300 construction projects
nationwide.  However, wrap-up insurance has been used infrequently on
highway construction projects because they often are too small.  As
part of your Committee's continuing oversight of federally funded
transportation projects, you asked us to identify the advantages and
the disadvantages of wrap-up insurance over traditional insurance and
the factors that can affect the broader use of wrap-up insurance.  As
part of our methodology, we reviewed the justification for, the costs
of, and the potential benefits or problems with wrap-up insurance on
six federally funded highway and mass transit projects.  These
projects varied in cost, geographic location, and type of
construction and included highway, bridge, tunnel, and rail transit
construction.  We also interviewed officials in the insurance and
construction industry and reviewed reports and analyses of wrap-up
insurance in order to gain an understanding of the broad issues in
using wrap-up insurance. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

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 insurance ï¿½in bulk,ï¿½ eliminating
duplication in coverage, handling claims more efficiently, reducing
potential litigation, and enhancing workplace safety.  According to
insurance industry officials, wrap-up insurance can save project
owners up to 50 percent on the cost of traditional insurance, or from
1 to 3 percent of a project's construction cost, depending on its
size.  The potential disadvantages of wrap-up insurance include
requiring project owners to invest more time and resources in
administration.  Project owners must hire additional personnel or pay
to contract out the management of the wrap-up insurance.  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. 

A number of factors can affect the broader use of wrap-up insurance. 
Perhaps the most significant barriers are state systems for workers'
compensation that, in some states, effectively prevent wrap-up
insurance by greatly reducing its potential cost savings.  Another
limitation is that a project must be sufficiently large, or contain
at least a sufficient amount of labor costs, to make wrap-up
insurance financially viable.  Finally, some contractors dislike
wrap-up insurance because it reduces a contractor's profits from
insurance rebates. 

   BACKGROUND
------------------------------------------------------------ Letter :2

Contractors and project owners purchase insurance to protect their
business assets from potential claims and losses.  Under both
traditional and wrap-up insurance, the project owner and construction
contractors must buy the same kinds of policies.  The basic types of
insurance for construction projects include workers' compensation,
general liability, architects' and engineers' professional liability,
builders' risk, excess liability, and pollution liability.\1 For some
projects, more specialized insurance policies are needed.  For
example, construction projects on or near water must have
longshoremen's and harborworkers' insurance, while projects on or
near a railroad must have railroad protective liability insurance. 
Wrap-up insurance can provide all of these types of coverage but does
not provide for automobile liability or insurance on the contractors'
tools and equipment. 

In general, a project owner may choose from two basic types of
wrap-up insurance.  The simplest form of coverage is the payment of a
flat premium, also known as a guaranteed cost plan.  With this plan,
the premiums stay the same during the term of the policy, even if a
high amount of claims is paid out.  The guaranteed cost plan is the
more common form of coverage for small to medium-sized businesses. 
With the second type of plan, known as a loss-sensitive plan, the
premiums depend on the policyholder's claims that are actually paid,
called ï¿½losses.ï¿½ A loss-sensitive plan generally returns a refund for
low losses and charges additional premiums for high losses, giving
the owner an incentive to run a safe operation.  In either a
guaranteed cost or loss-sensitive plan, a policyholder can assume a
deductible limit (as with automobile insurance) before the insurance
carrier contributes to the claim settlement.  Deductible limits make
owners assume some of the insurance risk, which helps to lower
insurance costs.  Five of the six agencies we contacted chose
loss-sensitive insurance plans; one used a guaranteed cost plan.  All
six agencies used deductible limits to lower their insurance costs. 

--------------------
\1 See app.  I for a description of these types of policies. 

   ADVANTAGES AND DISADVANTAGES OF
   WRAP-UP INSURANCE
------------------------------------------------------------ Letter :3

Owners of construction projects have cited a number of advantages
from using wrap-up insurance, including potential cost savings and
enhanced workplace safety.  The six projects we reviewed all claimed
cost savings as a result of using wrap-up insurance.  According to
project owners, the fewer injuries resulting from centralized safety
programs contributed to these savings.  Two potential disadvantages
include greater administrative costs to manage the wrap-up insurance
and the potential for higher up-front insurance premiums.  However,
the project owners believe that these additional costs were
reasonable. 

      POTENTIAL COST SAVINGS ARE
      AVAILABLE FROM WRAP-UP
      INSURANCE
---------------------------------------------------------- Letter :3.1

According to insurance industry officials, wrap-up insurance can save
project owners up to 50 percent on the cost of traditional insurance,
or from 1 to 3 percent of a project's construction cost.  Officials
from the six transportation projects we reviewed estimated insurance
savings of from $2.9 million to $265 million by using wrap-up
insurance.  Wrap-up insurance generates these savings by using bulk
buying power, avoiding duplicate insurance coverage, using more
efficient ways to process claims, and reducing litigation. 

         PURCHASING INSURANCE IN
         BULK
-------------------------------------------------------- Letter :3.1.1

Insurance industry officials we interviewed said that the initial
savings from wrap-up insurance are due to an owner's bulk buying
power and economies of scale.  A project's owner can purchase
coverage at a lower premium than the contractors would pay if they
purchased insurance individually.  The owner can obtain coverage
designed for the specific needs of the project and provide primary
coverage, such as that for general liability and workers'
compensation, for all the contractors and subcontractors involved in
the project.  However, the size of the construction project will
affect how much buying power the owner will have; insurance companies
can provide a better rate for larger projects.  Large labor-intensive
projects with construction costs between $50 million and $100 million
would be in a better position to obtain wrap-up insurance. 

         AVOIDING DUPLICATION AND
         GAPS IN COVERAGE
-------------------------------------------------------- Letter :3.1.2

As table 1 shows, under traditional insurance, every contractor and
subcontractor buys separate insurance policies.  The result can be
duplication and overlap of coverage because the contractors and the
subcontractors are insuring themselves against the same accidents,
even though they all may not be liable for the resulting claims. 
This kind of duplication can also result in litigation between
insurance companies over claims.  Under wrap-up insurance, the
project's owner can ensure that there are no gaps or duplication in
coverage because only one insurance company is used.  This is an
important factor for the owner because contractors using different
insurance companies could have variations in their policies or lower
coverage than required, thereby exposing the owner to uninsured
claims.  By purchasing insurance directly, the owner can ensure
sufficient coverage for the general liability and workers'
compensation aspects of the policy as well as sufficient coverage for
the general contractor and the subcontractors.\2

                                Table 1
                
                Traditional Insurance Coverage Compared
                          to Wrap-Up Insurance

Traditional insurance                     Wrap-up insurance
----------------------------------------  ----------------------------
The project owner purchases policies to   The project owner purchases
cover the following: workers'             insurance policies that
compensation, general liability,          cover the owner, the general
automotive liability, excess liability,   contractor, and the
and builders' risk insurance.             subcontractors for the
                                          following: workers'
                                          compensation, general
                                          liability, excess liability,
                                          and builders' risk
                                          insurance.

The general contractor purchases
policies to cover the following:
workers' compensation, general
liability, automotive liability, excess
liability, and builders' risk insurance.

The subcontractors purchase policies
from multiple insurance companies to
cover the following: workers'
compensation, general liability,
automotive liability, excess liability,
and builders' risk insurance.
----------------------------------------------------------------------

--------------------
\2 General liability insurance protects owners and contractors from
the financial consequences of various risks such as accidents,
hazardous operations, or accidents after work is completed.  The
policy pays for a variety of benefits including legal expenses,
injuries to people, and damage to property. 

         MORE EFFICIENT CLAIMS
         PROCESSING AND LESS
         LITIGATION
-------------------------------------------------------- Letter :3.1.3

According to insurance brokers and project management officials,
wrap-up insurance facilitates more efficient and simplified claims
processing.  A single insurer is the control point for reporting
claims, conducting the investigations, and making payments.  In
addition, a single insurer can prepare the loss data for the owner to
identify current claims and costs.  With one insurer, claim
settlement procedures are more consistent. 

Wrap-up insurance reduces potential litigation and disputes between
insurance companies.  For instance, the more insurers that are
involved in a construction project, the greater the chance of
lawsuits to settle accident and injury claims.  This is especially
true with traditional insurance because each contractor purchases
policies through separate insurance companies.  The subsequent
disputes and litigation can be costly, as the various insurance
companies seek to determine responsibility and reduce their
liability.  The liability and the litigation costs can be passed on
to each policyholder in the form of higher premiums.  Wrap-up
insurance, on the other hand, can reduce the incidence of insurance
companies' disputes and litigation and the associated costs because
the policies are with a single carrier that is responsible for
claims. 

         PROJECTS' ESTIMATED COST
         SAVINGS
-------------------------------------------------------- Letter :3.1.4

To test the cost savings associated with wrap-up insurance, we
reviewed six large transportation infrastructure projects that used
this insurance.  Table 2 shows the projects we reviewed, the
projects' total costs, and the owners' estimated insurance costs for
wrap-up insurance and traditional insurance.  All the project owners
provided estimates of their costs to use wrap-up or traditional
insurance and their estimated savings.  Estimated savings for these
projects ranged from about $3 million to $265 million.  On the basis
of the owners' estimates, using wrap-up insurance could save between
1 and 3 percent of each project's total costs. 

The estimated savings for these transportation projects are
consistent with study results and industry estimates.  In 1998, the
Transit Construction Roundtable conducted a survey of its members and
had similar findings.\3 Of the 18 members who responded to the
survey, 14 had experience with wrap-up insurance, and all of them
responded that wrap-up insurance costs less than traditional
contractor-provided insurance.  Thirteen of these project owners
estimated that, on average, wrap-up insurance costs 28 percent less
than traditional insurance.  The six projects we reviewed provided
similar findings.  Data from these six show that, on average, their
wrap-up insurance costs about 38 percent less than traditional
insurance would have cost. 

                                Table 2
                
                 Transportation Projects Using Wrap-Up
                 Insurance and Owners' Estimated Costs
                              and Savings

                         (Dollars in millions)

                                       Insurance costs
                                    ----------------------
                             Total
Project name and           project  Traditiona               Insurance
location                      cost           l     Wrap-up     savings
----------------------  ----------  ----------  ----------  ----------
Blue Water Bridge,           $97.2         $10        $7.1        $2.9
 Michigan
Boston Central Artery      $10,800      $1,030        $765        $265
 Tunnel, Massachusetts
I-15, Salt Lake City,       $1,600       $52.2       $22.3       $29.9
 Utah
CTA Green Line              $408.7       $32.5       $21.0       $11.5
 Rehabilitation,
 Chicago, Illinois
Hudson-Bergen Light           $992         $20         $11          $9
 Rail (initial
 segment)
Tri-Met, Westside             $952       $27.1       $17.2        $9.9
 Light Rail, Portland,
 Oregon
----------------------------------------------------------------------
Note:  We did not independently audit the accuracy of the project
owners' cost estimates.  In the process of choosing to use wrap-up
insurance, each owner developed cost information by one of three
methods:  (1) obtaining two bids--one with insurance included and one
with insurance excluded, (2) removing insurance costs from existing
contracts, or (3) relying on brokers' estimates of traditional
insurance. 

Source:  Various state highway and mass transit authorities. 

--------------------
\3 The Transit Construction Roundtable is a partnership between the
Federal Transit Administration and local public transportation
agencies that was formed to share information and discuss issues
related to the construction of mass transit systems. 

   CENTRALIZED SAFETY PROGRAMS ARE
   IMPORTANT TO ACHIEVING SAVINGS
------------------------------------------------------------ Letter :4

Much of the potential savings from wrap-up insurance derives from a
well-managed centralized safety program that results in fewer
injuries.  Under traditional insurance, each contractor, along with
its insurance broker and insurance company, may be involved in
safety, but typically there is no single coordinated safety program. 
While some contractors budget for safety and make every effort to run
a safe operation under traditional insurance, coordination can be
difficult because there are many insurance companies and contractors,
each with its own safety program.  In contrast, wrap-up insurance can
provide a greater emphasis on and level of control over safety
because the project owner controls the safety program and can ensure
that there is an effective, comprehensive safety program in place. 
Each of the six projects we reviewed had centralized safety programs
and safety records that were better than the national average. 
Officials from each project stated that the project's safety program
contributed to its actual or projected insurance savings. 

      WRAP-UP INSURANCE
      FACILITATES COMPREHENSIVE
      SAFETY PROGRAMS
---------------------------------------------------------- Letter :4.1

According to insurance industry officials, wrap-up insurance can
improve safety because one safety team can oversee all aspects of
safety at a job site.  Project owners said that using wrap-up
insuranceallowed for the development of a centralized safety program
covering all the operations of the contractor and the subcontractors. 
Owners, insurance brokers, and insurance companies have a compelling
financial interest to keep claims to a minimum.  Owners can save by
having to pay less in deductibles, while insurance brokers and
companies pay out less when there are fewer claims.  Therefore, the
safety representatives of the project owner, the insurance broker,
the insurance companies, and the contractors oversee the procedures
outlined in the comprehensive safety plan.  A project's safety team
provides an ongoing on-site presence to improve safety and can
provide innovative safety improvements.  For example, in constructing
the Blue Water Bridge in Michigan, the project's management team
faced the problem of providing safety netting for its bridge workers
to protect them from a fatal fall.  Traditionally, safety netting is
strung to an existing structure, and the workers that string the
safety netting have to work without the protection that they are
installing.  Because of this emphasis on safety, the general
contractor developed the idea of attaching the nets to the bridge
before the sections were put in place, thus eliminating the need for
the dangerous work involved in stringing the nets and reducing the
risk of a fall. 

In contrast, under traditional insurance, a coordinated approach to
project safety is difficult because the contractors and the
subcontractors oversee safety for only their segment of the work.  In
addition, there is some variability in how much emphasis individual
contractors place on safety; while some contractors make every effort
to achieve safety, others may not.  Also, with traditional insurance,
insurance brokers and companies with minimal involvement in a project
cannot justify a continuous safety presence at the construction site. 
As a result, some contractors and subcontractors may not be closely
monitored.  Finally, lower insurance rates are a safety incentive for
general contractors and subcontractors under traditional insurance. 
However, as one insurance industry official noted, other incentives,
such as bonuses for early completion, can make completing a project
within a certain time frame an overriding objective for them. 

      PROJECT OWNERS BELIEVE A
      CENTRALIZED SAFETY PROGRAM
      SAVED COSTS
---------------------------------------------------------- Letter :4.2

Each of the six project owners we contacted emphasized the importance
of a centralized safety program as the basis for the success of their
wrap-up insurance.  According to officials from the six
transportation projects, improved safety at a construction site has
the positive effect of reducing general liability and workers'
compensation claims, thus producing cost savings for the owner.  All
six project owners cited injury losses lower than the national
average and lower than had been initially anticipated.  For example,
officials from the Boston Central Artery project identified reduced
injuries as the main basis for cost savings on their project and
cited a loss ratio of 23 percent compared to a historic national
average of about 65 percent for that type of construction project.\4
Officials from the Michigan Blue Water Bridge project cited a loss
ratio of 10 percent compared to a national average of 50 percent for
that type of project.  Moreover, project owners said that even
without the cost reductions resulting from the lower claims,
improving safety on large construction projects is a worthy goal in
itself.  In the case of the Portland Tri-Met project, the primary
reason for using wrap-up insurance was not cost savings but improved
safety, according to agency officials.  They said that using wrap-up
insurance allowed them to establish the type of well-controlled
safety program they believed was essential to the project. 

--------------------
\4 A loss ratio is the dollar amount paid out for claims as a
percentage of premiums paid. 

      PROJECT OWNERS FACE
      INCREASED ADMINISTRATIVE
      COSTS WITH WRAP-UP INSURANCE
---------------------------------------------------------- Letter :4.3

One of the disadvantages to using wrap-up insurance is the additional
administrative and up-front insurance costs that the project owners
can incur.  Project owners are responsible for administering the
wrap-up insurance and must either out source this function or assign
additional administrative staff to plan and implement it.  Depending
on how it is structured, wrap-up insurance can also have large
premium costs at the start of a construction project.  In addition,
wrap-up insurance presents project owners with greater risks than
with traditional insurance.  However, these increased risks can be
mitigated somewhat by the type of insurance policies that owners
purchase and by an effective safety program. 

Wrap-up insurance can impose additional administrative burdens on
project owners.  They become responsible for supplying the resources
to help design and implement its administration.  Wrap-up insurance
emphasizes job site safety, controlling losses, and effective claims
management--activities that require additional resources for internal
audits and risk management.  For the projects we reviewed, some
owners chose to out source some of these administrative functions to
insurance brokers or agents, while others performed some or all of
these functions with their staff.  For example, the Chicago Transit
Authority relied on its broker to administer the wrap-up insurance
for the Green Line Reconstruction project.  The Michigan Department
of Transportation (MDOT) and the New Jersey Transit Corporation also
delegated administrative responsibilities to their insurance agents
and brokers.  On the other hand, the Tri-County Metropolitan
Transportation District of Oregon used its staff to administer the
wrap-up insurance program for its Westside Light Rail project.  Most
owners hired safety engineers for their projects to supplement their
insurance brokers' and general contractors' safety teams.  However,
all of the agencies we contacted relied on their insurance companies
to investigate and settle claims. 

Recognizing the increased interest in using wrap-up insurance for
public construction projects, the Transit Construction Roundtable in
1998 surveyed transit agencies on their use of wrap-up insurance. 
The survey asked them whether a wrap-up insurance program added an
additional administrative burden.  All the respondents affirmed that
wrap-up insurance added to their administrative workload but that the
burden was reasonable. 

In addition, some insurance companies may require owners to make
large premium payments at the start of a construction project.  The
policies may require that owners establish a special reserve to
ensure that funds are available to pay deductible requirements on
claims.  For example, the Chicago Transit Authority had to pay $21
million in premium costs at the beginning of the Green Line project. 
This was an additional burden to the owner because, under a
traditional insurance arrangement, the owner would not have to make a
lump sum payment.  The owner would make payments to contractors, who
would have to make premium payments and establish their own reserves
for deductibles. 

   FACTORS PREVENTING THE BROAD
   APPLICATION OF WRAP-UP
   INSURANCE
------------------------------------------------------------ Letter :5

State insurance laws, minimum project size, and contractors' concerns
may limit the broader use of wrap-up insurance.  Some states specify
that contractors must use the state fund for workers' compensation as
the primary insurance vehicle for construction projects.\5 Because
three-fourths of the total insurance cost on a construction project
can be for workers' compensation, removing it from the project
owner's control effectively eliminates most of the cost savings
derived from wrap-up insurance.  Projects must also have sufficiently
high labor costs to produce the level of premium payments that
insurance companies need to underwrite a wrap-up.  This normally
limits wrap-up programs to larger construction projects or projects
with high labor costs.  Finally, some construction contractors
dislike wrap-up insurance.  Contractors view insurance rebates as a
potential source of profits that they do not obtain with wrap-up
insurance because with wrap-up insurance such rebates go to the
project owner. 

--------------------
\5 Workers' compensation insurance pays claimants in case of injury,
disability, or death of employees resulting from work on the job. 

      STATE INSURANCE REGULATION
---------------------------------------------------------- Letter :5.1

Wrap-up insurance may not be viable in at least five states because
of the way the states structure their workers' compensation system. 
According to a 1997 General Services Administration study of wrap-up
insurance,\6 five states--North Dakota, Ohio, Washington, West
Virginia, and Wyoming--have a state workers' compensation fund into
which all contractors pay.  In these states, a project owner cannot
obtain separate workers' compensation insurance coverage, so most of
the insurance premiums for a project would be excluded from the
owner's wrap-up insurance.  This effectively eliminates the owner's
financial benefit from wrap-up insurance because the bulk of
insurance for a construction project--as much as 75 percent of the
cost--is related to workers' compensation.  Thus, wrap-up insurance
without workers' compensation eliminates most of the owner's
potential cost savings.  Insurance regulation is generally a state
function, and states have placed requirements on wrap-up insurance
that may limit but do not necessarily prevent its use.  For example,
some states, such as Michigan and Oregon, have specific laws that
limit wrap-up insurance.  Both states require that an owner obtain
prior approval for wrap-up insurance from the state insurance
regulator.  Michigan law also establishes a minimum project cost of
$65 million to be eligible for wrap-up insurance.  Oregon law sets a
$100 million minimum project cost to be eligible for wrap-up
insurance and prohibits rolling wrap-up insurance, that is, combining
several different projects under one insurance program. 

--------------------
\6 Wrap-Up Insurance Study, General Services Administration, Dec.,
1997. 

      PROJECT SIZE AND LABOR COSTS
---------------------------------------------------------- Letter :5.2

For an insurance company to issue policies for wrap-up insurance, a
project must be large enough to generate enough premiums to make it
worthwhile for the company.  For this reason, wrap-up insurance
generally has not been used on small projects.  Most of the insurance
premiums an owner pays under wrap-up insurance are to cover potential
workers' compensation claims.  The insurance premiums for workers'
compensation are based on the project's estimated payroll costs
multiplied by the workers' compensation rate set by the state.  As
the payroll costs for a project increase, the amount of workers'
compensation premiums also increases.  Likewise, if the state's
workers' compensation rate increases, the amount of workers'
compensation premiums increases.  The General Services
Administration's study of the use of wrap-up insurance for federal
buildings concluded that insurers usually require at least $1.25
million in annual premiums before they will assume the risk
associated with a wrap-up policy.  However, because workers'
compensation rates vary from state to state, the amount of payroll
required to generate the required premiums also varies.  For example,
Indiana, which has a low workers' compensation rate, might require a
project with $16.9 million in labor costs to reach the $1.25 million
annual premium level.  In contrast, a project in Minnesota, which has
a high workers' compensation rate, would need only $3.2 million in
labor costs to produce the same amount of premiums.  Because of these
variations among the states, an owner's decision to use wrap-up
insurance should be made on a project-by-project basis, according to
insurance industry officials. 

For small construction projects that cannot achieve the $1.25 million
premium threshold, some owners have used rolling wrap-up insurance
that combines several projects under one insurance program.  For
example, on the basis of its positive experience with wrap-up
insurance on the I-15 highway project, Utah established rolling
wrap-up insurance for its entire state highway program.  Utah
officials stated that it was too early to assess performance of this
insurance.  However, one insurance industry official cautioned that
combining multiple small projects that are spread over separate
locations could greatly diminish the safety enhancements and the
resulting cost savings that can come from wrap-up insurance.  The
official said it would be difficult to provide oversight and
implement a comprehensive safety program for many small projects
spread over separate locations.  Therefore, one question to be
answered is whether Utah can achieve the same safety program and
results on a statewide basis as it did with the I-15 highway project. 

      CONTRACTORS' VIEWS AND
      CONCERNS ABOUT WRAP-UP
      INSURANCE
---------------------------------------------------------- Letter :5.3

For several reasons, some construction contractors view the use of
wrap-up insurance unfavorably.  Under traditional insurance,
contractors can derive profits from their insurance programs.  The
contractors' costs of insurance are included in the bids and thus are
paid by the project owner.  Contractors with good safety records can
receive rebates on their premiums from their insurance carriers,
thereby generating profits.  In contrast, under wrap-up insurance the
owner pays the premiums and receives the rebates on the basis of a
project's good safety record.  However, some project owners provide
contractors with good safety records with additional payments.  For
example, contractors for Portland's Tri-Met Westside Project received
almost $1.3 million in safety incentives. 

Under a traditional insurance approach, a contractor with a better
safety record has a competitive advantage over a contractor with a
safety record that is not as good.  The safer contractor has lower
insurance premiums, so this lower cost can be reflected in a lower
bid.  Under wrap-up insurance, this competitive advantage is lost
because insurance is not part of a contractor's bid.  On the other
hand, as a risk management consultant we interviewed pointed out,
many factors go into the bidding calculations of a construction
contractor, and insurance premiums can be less important than other
factors, such as labor productivity.  In addition, officials from
Portland Tri-Met and the Chicago Transit Authority stated that by
eliminating insurance from bids, more disadvantaged businesses,
minorities, and women contractors are able to bid on construction
contracts.  According to Chicago Transit Authority officials, using
wrap-up insurance on the Green Line project enabled the agency to
achieve its goal of having disadvantaged, minority, and women
contractors represent 30 percent of the project's costs.  Some
disadvantaged businesses, minorities, and women contractors have
difficulty obtaining sufficient insurance to bid on large
infrastructure projects. 

In addition, with wrap-up insurance, a contractor may bear additional
record-keeping costs.  For example, in reporting for workers'
compensation purposes, a contractor must carefully segregate the
payroll for a project using wrap-up insurance from the payrolls for
other projects.  When a project requires changes to the original
specifications, the contractor has to remove insurance costs from the
change order costs and again segregate the labor costs.  Thus, the
contractor incurs costs in a wrap-up insurance project that, under
traditional insurance, would not be necessary.  MDOT officials noted
that to be fair to contractors, project owners need to make
contractors aware of these added costs before contractors bid on a
project. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To obtain information on the advantages and the disadvantages and the
factors affecting the broader use of wrap-up insurance, we reviewed
related publications and contacted trade associations, insurance
brokers, representatives of insurance companies, contractors'
representatives, and a risk-management consultant.  In addition, we
interviewed officials from the Department of Transportation's Federal
Highway Administration and Federal Transit Administration about the
extent to which wrap-up insurance has been used on federally funded
highway and transit construction projects.  For further review, we
selected six transportation projects that had recent or ongoing
experience with wrap-up insurance.  We contacted managers and
reviewed project documents for three highway projects:  the Michigan
Department of Transportation's Blue Water Bridge Reconstruction, the
Utah Department of Transportation's I-15 Reconstruction, and the
Massachusetts Turnpike Authority's Boston Central Artery/Tunnel.  We
also reviewed three transit projects:  the Chicago Transit
Authority's Green Line Reconstruction, the New Jersey Transit
Corporation's Hudson-Bergen Line, and the Oregon Tri-County
Metropolitan Transportation District's Westside Line.  The projects
we selected provided variations in project cost, type of construction
(tunnel, bridge, highway, light rail, and heavy rail), and state
insurance regulatory environment and included design-build and
traditional construction approaches. 

We performed our review from September 1998 through April 1999 in
accordance with generally accepted government auditing standards. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided a draft of this report to the Department of
Transportation for review and comment.  We discussed the Department's
comments with officials from the Office of the Secretary and the
Federal Highway Administration.  The Department agreed with the
information presented, and the Federal Highway Administration
provided several technical comments that we incorporated into the
report, as appropriate. 

---------------------------------------------------------- Letter :7.1

We will send copies of this report to cognizant congressional
committees; Rodney E.  Slater, Secretary of Transportation; Kenneth
R.  Wykle, Administrator, Federal Highway Administration; Gordon J. 
Linton, Administrator, Federal Transit Administration; and other
interested parties.  We will make copies available to others upon
request.  Please call me at (202) 512-2834 if you or your staff have
any questions.  Major contributors to this report were Joseph
Christoff, Robert Ciszewski, Alexander Lawrence, and Frank
Taliaferro. 

Sincerely yours,

Phyllis F.  Scheinberg
Associate Director,
 Transportation Issues

TYPES OF CONSTRUCTION INSURANCE
=========================================================== Appendix I

The following is a brief description of the various types of
insurance coverage used for construction projects. 

         WORKERS' COMPENSATION
----------------------------------------------------- Appendix I:0.0.1

Pays claimant in case of injury, disability, or death of employees
resulting from work on the job. 

         GENERAL LIABILITY
----------------------------------------------------- Appendix I:0.0.2

Protects the owners and the contractors from the financial
consequences of various risks, such as accidents, hazardous
operations, or accidents, after work is completed.  The policy pays
for a variety of benefits, including legal defense expenses, injuries
to people, and damage to property. 

         BUILDERS' RISK
----------------------------------------------------- Appendix I:0.0.3

Pays for damages and losses to a project that occur while it is being
built. 

         EXCESS LIABILITY
----------------------------------------------------- Appendix I:0.0.4

An umbrella policy that pays for losses that exceed primary policies,
such as general liability. 

         POLLUTION LIABILITY
----------------------------------------------------- Appendix I:0.0.5

Pays for environmental losses associated with accidental chemical
spills and the leakage or disbursement of dangerous vapors. 

         PROFESSIONAL LIABILITY
----------------------------------------------------- Appendix I:0.0.6

Pays for architects' and engineers' professional liability for errors
and omissions.  This coverage is usually purchased by the
architectural and engineering firms but could be included under
wrap-up insurance for a design-build project. 

         RAILROAD PROTECTIVE
----------------------------------------------------- Appendix I:0.0.7

Liability insurance coverage for railroads, purchased by those who
conduct operations (construction) on or adjacent to railroad
property. 

         LONGSHOREMEN/MARITIME
----------------------------------------------------- Appendix I:0.0.8

Liability insurance similar to workers' compensation that provides
coverage for workers, including construction workers, on the water
(working on barges) or those working over water. 

         AUTOMOBILE LIABILITY
----------------------------------------------------- Appendix I:0.0.9

Pays for damage to one or more vehicles that occurs while they are
used in the course of business.  Also pays medical costs of persons
injured in or by an automobile.  This insurance is typically not
included in wrap-up insurance because vehicles are operated outside
the confines of the project. 

         TOOLS AND EQUIPMENT
---------------------------------------------------- Appendix I:0.0.10

Pays when a contractor's tools, equipment, field offices, or other
property are destroyed, damaged, or stolen.  This insurance is not
included in wrap-up insurance because these items are considered
mobile and therefore difficult to manage.  In addition, the premium
costs for these policies are not significant and would be difficult
to isolate from bids. 

TRANSIT AND HIGHWAY CONSTRUCTION
PROJECTS USING WRAP-UP INSURANCE
========================================================== Appendix II

   TRI-MET WESTSIDE LIGHT RAIL
   LINE
-------------------------------------------------------- Appendix II:1

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:1.1

The Westside Light Rail line is an 18-mile extension of the existing
light rail line and runs west from downtown Portland to Hillsboro,
Oregon.  The project included a 3-mile double tunnel, a station 260
feet below the surface, and 19 other stations.  In addition to the
tunnel, project engineers encountered other difficulties in building
the line, including obtaining rights-of-way through some heavily
populated areas of central Portland.  Construction started in July
1993 and was completed in September 1998.  The project's total
estimated cost was about $952 million, as of February 1999.  The
project's construction costs included purchasing 36 low-floor, light
rail cars and building a 74,000-square-foot maintenance facility. 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:1.2

Johnson and Higgins, Marsh and McLennan was the insurance broker for
this project.  Marsh and McLennan hired the brokerage firm of DH
Lloyd to provide administrative support for the workers' compensation
portion of the wrap-up insurance.  However, according to Tri-Met
officials, Oregon law prohibits the use of deductibles for workers'
compensation insurance.  The officials said they could have saved
more money if they had been able to purchase a workers' compensation
policy that had deductibles. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:1.3

Tri-Met officials stated that they used wrap-up insurance to increase
their control over the project, enhance safety, and improve
efficiency with which claims are settled.  Officials noted that
wrap-up insurance is particularly suitable for large, complex
projects like the Westside Light Rail line and that they would use it
again on another large project. 

Oregon passed specific legislation to allow wrap-up insurance.  Prior
approval by the state director of insurance is required, but wrap-up
insurance can be used only for a construction project costing over
$100 million and scheduled to be completed in 5 years.  Project
owners also have to demonstrate that wrap-up insurance would
substantially improve safety and claims handling.  The state
prohibits wrap-up insurance to be used for unrelated projects that
are combined only to meet the $100 million requirement.  In addition,
the broker handling the wrap-up insurance is required to protect
small insurance agents who could suffer from the loss of income that
threatens to put them out of business.  This protection took the form
of a special fund of $25,000 for every $100 million in project costs
to be deposited with the state of Oregon. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:1.4

Tri-Met officials estimated savings of about $10 million from using
wrap-up insurance.  Tri-Met officials estimated that traditional
insurance would cost about $27.1 million, whereas their final wrap-up
insurance costs, including reserves, were about $17.2 million. 
Tri-Met officials required bidders to remove insurance from their
bids, but directed them to include an estimate for traditional
insurance should the agency decide not to use wrap-up insurance. 
Bidders were also directed to include an estimate of subcontractors'
insurance.  Tri-Met provided contractors with safety incentives
totaling about $1.3 million. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:1.5

Overall, Tri-Met officials were pleased with the results of the
project's safety program.  However, they had to adjust the program
midway through the project.  To improve safety, Tri-Met officials
began monthly safety meetings, added more safety engineers, and
authorized safety engineers to halt construction when they observed
unsafe conditions.  The safety program was difficult to administer,
in part, because it was spread over a wide area.  Agency officials
said that compared to the federal average for all construction, the
project had a good safety record because it included a twin-tunnel,
which involved greater risk than other types of construction. 
Tri-Met officials had a target loss ratio of 40 percent and finished
the project with a loss ratio of 36.7 percent.  Three fatalities on
the project contributed to the loss ratio. 

   NEW JERSEY TRANSIT CORPORATION
   HUDSON-BERGEN RAIL LINE
-------------------------------------------------------- Appendix II:2

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:2.1

According to the New Jersey Transit Corporation, the Hudson-Bergen
Light Rail Transit System will alleviate traffic congestion and
pollution and allow people to move more efficiently between densely
populated areas of northern New Jersey.  The initial 9.6-mile segment
will have 16 stations and will run along the Hudson River from
Hoboken to Bayonne.  When completed, the entire 20-mile project will
connect to ferries and other rail lines to take passengers to New
York City.  Construction began in December 1996, and the initial
9.6-mile segment is scheduled to open for service in March 2000.  New
Jersey Transit estimates the segment will cost $992 million,
including the low-floor, light-rail cars and a new maintenance
facility. 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:2.2

Johnson and Higgins, Marsh and McLennan were the insurance brokers
for this project.  The Hudson-Bergen line's construction is being
done under a design, build, operate, and maintain contract.  Because
one construction firm is responsible for all of these functions,
additional insurance was needed to cover the design, operations, and
maintenance activities that would not normally be included under
wrap-up insurance.  As a result, in addition to the workers'
compensation, general and excess liability policies, the wrap-up
insurance includes a professional liability policy to cover
engineering errors and omissions, an environmental liability policy,
and builders' risk coverage. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:2.3

New Jersey Transit officials decided to use wrap-up insurance for
several reasons, including cost savings and improved safety.  Wrap-up
insurance also ensured that all contractors and subcontractors had
the same type and limits of coverage.  Furthermore, New Jersey
Transit officials said that covering every contractor with one
insurance carrier eliminated lawsuits among insurance carriers.  New
Jersey Transit staff and the insurance broker were also able to
reduce the administrative costs associated with receiving,
documenting, and verifying separate insurance certificates for each
contractor and subcontractor.  New Jersey Transit officials also said
that using wrap-up insurance helped disadvantaged and minority
business enterprises because under traditional insurance, high
insurance costs or requirements might preclude their participation. 

New Jersey Transit officials stated that, because of their positive
experience with wrap-up insurance, they may use it for other planned
construction projects.  They noted that no state laws limit the use
of wrap-up insurance and they are currently using it on another
transit project.  New Jersey Transit officials said that $20 million
is the lowest amount in labor costs that a project needs for wrap-up
insurance to be cost-effective. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:2.4

New Jersey Transit officials estimated that they saved $9 million
using wrap-up insurance on the Hudson-Bergen project.  They budgeted
$11 million for wrap-up insurance for the project but estimated that
traditional insurance would have cost $20 million.  Prior to
implementing wrap-up insurance, they solicited proposals from various
insurance companies to estimate the costs of traditional insurance. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:2.5

According to New Jersey Transit officials, by using wrap-up
insurance, they planned, organized, and implemented a common set of
safety procedures under a centralized safety program.  Officials said
that the insurance broker, New Jersey Transit, and the contractors
all have representatives in the field to help ensure that safety is
maintained.  In addition, the insurance broker processes and monitors
claims and identifies lapses in safety.  As a result of their safety
program, the officials noted that the project received safety awards
from one of the insurance carriers. 

   CHICAGO TRANSIT AUTHORITY GREEN
   LINE REHABILITATION PROJECT
-------------------------------------------------------- Appendix II:3

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:3.1

In February 1994, the Chicago Transit Authority (CTA) began
rehabilitating its 100-year-old Green Line system at a cost of about
$409 million.  Over the prior 20 years, the line's physical condition
had deteriorated, causing CTA to increase the amount of time and
resources to maintain it.  The deterioration resulted in longer
travel times because of the number of ï¿½slow zonesï¿½ established for
repairs and safe usage.  The travel time from one end of the line to
the other was 73 minutes, compared to the original design time of 45
minutes.  Renovation included making stations accessible to the
disabled, shoring up steel structures, and replacing all bridge ties
and track.  Construction began in February 1994 and was substantially
completed as of April 1999. 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:3.2

Near North Insurance Brokerage, Inc., designed and administered the
wrap-up insurance.  Several carriers provided insurance coverage for
the project.  CTA used a loss sensitive plan for its workers'
compensation and general liability coverage, and included umbrella
and excess liability, builders' risk and lead abatement liability
insurance.  Total wrap-up insurance costs were about $23.6 million. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:3.3

CTA officials said the agency had never used wrap-up insurance before
but used it on this project because of its size, the potential for
large losses, a desire to save money, and most importantly, to
enhance safety through a combined and coordinated safety program. 
Wrap-up insurance allowed the agency to avoid gaps in and inadequate
levels of coverage among the contractors as well as expired coverage. 
Officials also stated this type of insurance program would minimize
disputes among insurance carriers and guarantee effective claims
management by using one primary insurance carrier for claims
reporting, investigation, and payment.  In addition, CTA was able to
help minority and disadvantaged business enterprises participate in a
construction project they normally would not be able to afford. 
According to agency officials, minority and disadvantaged business
participation in this rehabilitation project was about 30 percent. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:3.4

The insurance broker estimated that premium costs for workers'
compensation and general liability under a traditional insurance plan
would have cost CTA about $32.5 million.  Under wrap-up insurance,
the cost for these two lines of coverage is $21 million, an estimated
savings of about $11.5 million.  However, CTA did not obtain
estimates of other types of insurance, including builders' risk,
railroad protective liability, and lead abatement.  These items added
about $2.6 million to the wrap-up insurance, raising the total
wrap-up insurance cost to about $23.6 million.  According to CTA
officials, because all claims have not been finalized, as of March
1999, they do not know the full amount of savings. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:3.5

CTA relied on its construction program manager and insurance company
staff to manage the operations of the project's safety program.  The
project had a safety incentive program that provided cash awards for
the prime contractor and the subcontractors.  The actual cash award
will be based on the specific loss experience for each individual
contractor and subcontractor as well as the overall project loss. 
According to the agency's broker, as of February 1999, about $2.9
million remains in the loss fund account.  If no additional workers'
compensation or general liability claims are made, CTA will share
this money with the contractors on a 70-percent/30-percent basis in
the form of safety incentive awards. 

   UTAH DEPARTMENT OF
   TRANSPORTATION INTERSTATE 15
   (I-15) RECONSTRUCTION PROJECT
-------------------------------------------------------- Appendix II:4

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:4.1

The Interstate 15 (I-15) project in Salt Lake City, Utah, is the
largest ï¿½design-buildï¿½ highway project ever undertaken in the United
States.\7 The Utah Department of Transportation (UDOT) is
reconstructing 17 miles of interstate highway in and around Salt Lake
City, Utah; replacing all existing pavement; widening the road from 6
to 12 lanes; reconstructing several major interstate highway
junctions; and replacing about 140 bridges and other structures.  The
project is part of the state's 10-year, $2.6 billion plan for
constructing and reconstructing highways throughout Utah.  According
to state and Federal Highway Administration (FHWA) officials, the
project is critical to both the transportation infrastructure of the
Salt Lake City area and the city's and state's ability to host the
Winter Olympic Games in 2002.  Construction began in April 1997 and
is scheduled for completion in July 2001 at an estimated cost of $1.6
billion.  As of April 1999, the project was 60-percent complete. 

--------------------
\7 A design-build contract combines, rather than separates,
responsibility for the design and construction phases of a project. 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:4.2

UDOT, with the assistance of Willis Corroon, insurance brokers for
the project, designed and implemented the wrap-up insurance.  The
project uses a guaranteed plan with a $9.8 million UDOT deductible. 
The total cost of the wrap-up insurance is about $22.3 million and
includes the following coverage:  workers' compensation and general
liability, umbrella liability, professional liability, contractors'
pollution liability, railroad protective liability, and builders'
risk. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:4.3

According to a UDOT official, using wrap-up insurance will save the
state money.  The state views these potential savings as significant,
particularly for the general liability and the workers' compensation
coverage.  UDOT considers the administrative demands of implementing
the safety program to be manageable.  Officials began using wrap-up
insurance for Utah's highway construction projects on a statewide
basis in 1999.  UDOT expects to realize economies of scale by using
rolling wrap-up insurance on all its highway programs.  Nevertheless,
the state acknowledges that using rolling wrap-up insurance will take
more administrative effort because of the larger number of
contractors involved. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:4.4

UDOT officials estimated that the agency saved about $30 million over
the cost of using a traditional form of insurance coverage for I-15
reconstruction.  Traditional coverage would have cost them as much as
$52.2 million compared to the maximum estimated wrap-up insurance
cost of $22.3 million.  Because the project is 60-percent complete
and out-of-pocket claims paid to date are about $900,000, the state
expects the final claims to be no more than $4 million.  This will
allow the state to save an additional $4 million in insurance costs. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:4.5

Safety oversight is a shared responsibility between the state, the
insurance company, and the contractors.  UDOT provides two to three
staff persons to the project to review safety procedures and to
ensure that contractors perform weekly site safety inspections.  UDOT
has developed a Safety Incentive Program for the project that
provides the contractor with monetary incentives for the successful
completion of the project's safety program.  Furthermore, these
incentives are specifically tied to loss-time accident rates. 
According to UDOT, the safety program has resulted in a loss-time
accident rate of 0.8 that is well below the national average of 5.0. 
There has been one fatality on the project, according to a UDOT
official. 

   BOSTON CENTRAL ARTERY/TUNNEL
   PROJECT
-------------------------------------------------------- Appendix II:5

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:5.1

The Central Artery/Tunnel (CA/T) project comprises building or
reconstructing about 7.5 miles of urban highways--about half of them
underground.  The project is designed to reduce traffic congestion in
downtown Boston through the construction of an 8- to 10-lane
underground Central Artery, a four-lane underwater tunnel that
crosses Boston Harbor, and a commercial traffic bypass road through
South Boston.  The project entails numerous and complex construction
challenges in tunneling under densely populated downtown Boston and
close to buildings and subway tunnels.  The current cost estimate for
the project is $10.8 billion.\8 Construction, which began in 1991, is
about 50-percent complete and is scheduled for completion in 2004. 

--------------------
\8 See Surface Infrastructure:  Costs, Financing, and Schedules for
Large-Dollar Transportation Projects (GAO/RCED-98-64, Feb.  12,
1998). 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:5.2

According to project officials, the total wrap-up insurance cost is
$764.9 million.  This covers general and excess liability and
accidental pollution ($234 million); workers' compensation ($481.5
million); architects' and engineers' professional liability ($11
million); builders' risk ($22.1 million); railroad protective
liability ($4.5 million); and airport contractors' liability for
Logan Airport ($11.8 million).  Coverage for general liability,
workers' compensation and airport contractors' liability is under a
loss-sensitive plan while coverage for professional liability,
builders' risk, and railroad protective liability is under a
fixed-price plan. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:5.3

Massachusetts had past experience with other wrap-up insurance when
the CA/T project began.  The state chose wrap-up insurance because it
would facilitate coordinated claims processing, improve overall
program administration, centralize data collection, and facilitate
efficient financial reporting and audits of the program and its
participants.  Wrap-up insurance also ensures that coverage for all
the contractors and the subcontractors is in effect and has not
lapsed or changed.  The project changed from traditional to wrap-up
insurance after the bidding of some initial contracts.  The
contractors had to go back and remove insurance costs from their
bids, which project officials found to be a difficult and cumbersome
process.  Subsequent contracts have been let with instructions
indicating that the owner would provide insurance. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:5.4

Officials said that if the project had used traditional insurance,
they estimated insurance costs at about $1.03 billion.  Wrap-up
insurance has reduced their costs to $765 millionï¿½a $265 million
savings.  Massachusetts Turnpike Authority officials said they used
wrap-up insurance because it would save the agency $200 million alone
in general liability and workers' compensation coverage due to higher
limits and broader coverage.  Project officials said wrap-up
insurance has already achieved savings due to coordinated loss
control, consolidated claims handling, and an integrated safety
program, and they expect savings to increase as the project
continues. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:5.5

The CA/T project has monetary incentives for improving safety.  Since
May 1998, over $2.7 million has been paid to the contractors.  Twenty
percent of the savings generated from the wrap-up insurance will go
to contractors in the form of safety incentive awards.  The project's
safety program and safety incentives were meant to reduce loss
ratios, produce zero accidents, reward contractors with good records,
lower the budgeted safety (loss ratio) number, and help individual
contractors.  Officials said that because of a better-than-expected
safety record, strong claims handling, and good claims
investigations, their safety program has resulted in
lower-than-expected loss ratios--the dollar amount of losses paid out
as a percentage of paid-in premiums.  In 1997, project officials
estimated a 50 percent loss ratio for financial forecasting.  As of
February 1999, actual losses for workers' compensation and general
liability were running at 23 percent and 15 percent, respectively. 
The largest claim against the project's general liability coverage
was a $2 million claim resulting from a heavy rain that caused
flooding into an active subway line at the North Station.  Also, the
project had a fatality last March 1998 that exposed it to other
potential liabilities. 

   MICHIGAN DEPARTMENT OF
   TRANSPORTATION BLUE WATER
   BRIDGE PROJECT
-------------------------------------------------------- Appendix II:6

      PROJECT DESCRIPTION
------------------------------------------------------ Appendix II:6.1

The Blue Water Bridge construction project rehabilitated the original
bridge, built in 1938, and built a second bridge over the St.  Clair
River at Port Huron, Michigan, and Point Edward, Ontario.  Because
ownership is divided between Michigan and Ontario, the construction
project is a joint venture between the Ontario Blue Water Bridge
Authority and the Michigan Department of Transportation (MDOT). 
Michigan's total cost of the project will be $97.2 million.  The new
bridge was finished in July 1997, and the rehabilitation of the
existing bridge will be completed in August 1999. 

      WRAP-UP INSURANCE COVERAGE
------------------------------------------------------ Appendix II:6.2

MDOT contracted with Johnson and Higgins, Marsh and McLennon, an
insurance agent, to administer the wrap-up insurance.  The agent
obtained quotes and selected a combination of carriers on the basis
of their qualifications, services offered, and cost.  While no work
was actually done on the water and no barges were used for
construction, because the project is a bridge, MDOT officials decided
to purchase insurance coverage for longshoremen and harbor workers. 

      RATIONALE FOR USING WRAP-UP
      INSURANCE
------------------------------------------------------ Appendix II:6.3

MDOT officials had no prior experience with wrap-up insurance, but
used it for the Blue Water Bridge project because the site was
confined to one area that managers could easily control.  They also
projected cost savings and saw wrap-up insurance as an opportunity to
obtain additional coverage, such as excess liability insurance, and
to process claims more efficiently with only one insurance carrier. 
However, MDOT officials said that wrap-up insurance increased their
administrative costs and that it exposed the project to greater
losses in the event of a catastrophic loss of lives or serious
injuries.  MDOT officials sought to lower that risk and achieve
additional cost savings by improving safety at the construction site. 
MDOT officials said they are using wrap-up insurance again but added
that it cannot be used on every construction project.  Michigan has a
statutory minimum of $65 million on the size of projects using
wrap-up insurance.  However, MDOT officials do not see the
legislative limit as an impediment because an analysis by the
insurance industry indicated that savings from wrap-up insurance
might come when a project's total costs are at least $65 million to
$70 million. 

      SAVINGS EXPERIENCE
------------------------------------------------------ Appendix II:6.4

Using wrap-up insurance, MDOT saved about $3 million over traditional
methods of insurance.  MDOT officials estimated that using small,
contractor-purchased policies would have cost about $10 million. 
Wrap-up insurance for the Blue Water Bridge cost $7.1 million,
including premiums, deductibles, and the administrative costs charged
by the insurance agent.  MDOT officials noted that the one drawback
of wrap-up insurance was that MDOT had to pay all of the premiums for
liability insurance, and $828,000 in premiums for workers'
compensation, at the start of the project.  MDOT officials said they
will save on deductibles if losses from claims are better than
expected and will get some of the premiums back from the agent. 

      SAFETY PROGRAM
------------------------------------------------------ Appendix II:6.5

MDOT officials found a greater emphasis on safety during the
construction of the Blue Water Bridge than other transportation
projects.  The safety plan was site-specific to the bridge, with a
full-time, on-site safety director at Blue Water Bridge, and a
comprehensive safety program that applied to all contractors.  The
insurance agent's risk management program tracked all of the claims,
grouped them by type of injury, and looked for trends.  If losses or
claims were too high in an area, the agent examined the safety
program with the safety engineer to address the problem.  According
to project officials, this has resulted in a better safety record
than that for most projects despite the inherent risks in bridge
construction.  Workers' compensation is the largest component of
insurance cost and the industry average for premiums paid out in
claims in Michigan is from 50 percent to 65 percent.  The national
average for projects under wrap-up insurance is 35 percent, but for
Blue Water Bridge, less than 10 percent of workers' compensation
premiums had been paid out as of April 1999. 

*** End of document. ***