To:   HONORABLE MAYOR AND                   From:   Scott P. Johnson

                        CITY COUNCIL                                                        Ralph G. Tonseth

 

   Subject:   SEE BELOW                                               Date:   October 16, 2003  

 

 

 COUNCIL DISTRICT:  CITYWIDE

 SNI AREA:   N/A

 

 

SUBJECT:  AGREEMENT WITH LAMBERSON KOSTER & COMPANY, A WHOLLY OWNED SUBSIDIARY OF ARTHUR J. GALLAGHER & COMPANY, DBA GALLAGHER CONSTRUCTION SERVICES FOR OCIP BROKER INSURANCE SERVICES

 

 

RECOMMENDATION

 

Adoption of a resolution authorizing the City Manager to negotiate and execute an agreement with Lamberson Koster & Company a wholly owned subsidiary of Arthur J. Gallagher & Company, dba Gallagher Construction Services to provide insurance broker services for an Owner Controlled Insurance Program for Airport Master Plan projects, including security improvements to be constructed at the Norman Y. Mineta San José International Airport , in an amount not to exceed $1,575,000 for a period of three years with two one-year options for extension.

 

 

BACKGROUND

 

City staff in consultation with our risk management and OCIP consultant, Ron Rakich and Associates (“OCIP Consultant”) has undertaken a review of alternative risk management programs for the construction of Airport Master Plan projects, including security improvements to be constructed over the next three to five years (“Airport Projects”) at the Norman Y. Mineta San José International Airport (the “Airport”).  Together, this inter-departmental City team consisting of representatives from the departments of Finance, Airport and Public Works, along with our OCIP Consultant evaluated whether an Owner Controlled Insurance Program (“OCIP”) was feasible for the Airport Projects verses the use of a traditional insurance program.  These two types of insurance are briefly described below.   

 

Traditional Insurance Programs

 

Under traditional insurance programs, project participants (City, construction contractors, and subcontractors) separately negotiate individual insurance polices to mitigate risks associated with specific project roles.  The City specifies minimum acceptable coverages, terms, limits and monitors compliance through the contract process.

 

Premium and losses are handled by the individual insurers of each entity, and no single party collects insurance and loss data in the aggregate.  Since each contracting party procures separate insurance policies, the possibility exists for overlapping coverage, gaps in coverage, coverage/claims disputes and unrealized economies of scale.  The cost of these coverage disparities is ultimately borne by the City in higher project costs. 

 

Owner Controlled Insurance Program

 

An OCIP is a single insurance program covering the construction job-site risks of the project owner, general contractors and all subcontractors associated with construction; specifically for coverages known as Commercial General Liability, Excess Liability, and Workers’ Compensation.  Under an OCIP, the City arranges a master program to protect the Airport participants’ interests by managing risks for all parties involved in the Airport Projects (contractors, subcontractors, etc.)  This consolidated insurance program provides many benefits to the project owner, including:

 

·        Better Coverage -- All parties are insured by a single program and policy limits are specific to the project.

·        Safer Work Site -- Uniform standards are set for all contractors with a coordinated safety efforts and oversight by the owner, construction manager, insurance company, broker and contractors.

·        Claims Management -- Workers’ Compensation and Liability claims are handled by one insurer which allows for proactive claims management and the development of programs to return injured employees to work as soon as possible.

·        Financial Management -- Reduces cross-liability claims and provides for volume discounts on insurance premiums.

 

Many local California public agencies have used OCIP’s for large public works projects in the recent past to save on insurance costs.  Normally, savings of 1% to 3% of the projected construction costs can be experienced on the projects with a total budget of $100 million or more.  Oakland International Airport Expansion and the San Francisco International Airport Master Plan Expansion Project have both selected to use an OCIP to provide construction insurance.  In addition, the Redevelopment Agency and the City have used OCIP programs for the Joint Library and Civic Center projects, respectively.

ANALYSIS

 

This section of the report is divided into the following sections:  OCIP Feasibility, RFQ Process, OCIP Procurement Process and Proposed Terms of Broker Agreement.

 

OCIP Feasibility

 

City staff retained Ron Rakich and Associates, to perform an OCIP feasibility study for the Airport Master Plan.  The feasibility study provided an analysis of the potential insurance costs savings of the project under an OCIP when compared to the traditional insurance approach.  Not all public construction projects are eligible for OCIP programs.  State law requires certain criteria be met in order for the City to utilize an OCIP.  A series of elements were analyzed to determine if an OCIP was warranted for the Airport Projects, various factors and outcomes are summarized below. 

 

The primary threshold for consideration of an OCIP is that the construction cost for the project totals at least $50 million.  The Airport Projects meets this cost requirement.

 

In addition to the construction cost requirement, State law requires that the City determine that the implementation of an OCIP will minimize the expenditure of public funds on the project in conjunction with appropriate risk management. The feasibility study analyzed several criteria for determining whether an OCIP was reasonable for the Airport Projects, including legal capability, project size and duration, type of construction, number of contractors, number of locations, commitment, management control, and timing of decisions, funding source and demonstrated savings.  The study concluded that use of an OCIP for construction of the Airport Projects would create insurance savings of approximately $2 million based on construction costs of $300 million.  With the addition of projects, these savings dollars could be increased. 

 

Finally, State law requires that potential bidders meet certain safety requirements and that the bid documents inform the potential bidders that an OCIP has been procured and minimum safety requirements must be met.  The Department of Public Works will include these requirements in the bid packages for the Airport Projects.

 

RFQ Process

 

On September 15, 2003, the City sent Request for Qualifications (“RFQ”) to five insurance brokerage firms and five responses were received.  The RFQ was additionally posted on the Airport’s website.  City staff along with the OCIP Consultant reviewed these proposals in response to the RFQ for an OCIP Insurance Broker.  Based on this review three firms were selected to move forward to the next stage of the process, a formal oral interview by the evaluation team.  The proposals were evaluated and oral interviews were held as an opportunity to probe various aspects of experience, service levels, fees and charges. 

 

 

The criteria used in the evaluation process included:

 

 

The inter-departmental team evaluation team consisting of representatives of the Finance and Airport Departments unanimously recommends Lamberson Koster & Company Division, a wholly owned subsidiary of Arthur J. Gallagher & Company, dba Gallagher Construction Services (“Gallagher”) to serve as the OCIP Broker for the Airport. 

 

Arthur J. Gallagher & Co.’s corporate office is headquartered in Illinois and is the third largest U.S. Insurance broker and the fourth largest in the world.  The national headquarters for Gallagher Construction Services is located in San Francisco with a full service office providing production, claims management, loss control and risk management services specifically related to construction.  Their construction services include both OCIP programs and CCIP (contractor controlled insurance programs) ranging from single-site new specific projects like the Joint Library to complex rolling wrap-ups for pools involving multiple entities.  Gallagher has a risk management system for OCIP/CCIP administration called CIPWORKS which enables through a secure website the ability for authorized users to verify in “real time” data such as, status of enrollment of various contractors and subcontractors in the OCIP program; generate certificates of insurance; provide tracking and reporting of construction payroll, job hours, and losses; and, generate reports specific to the Airport and the management of the OCIP. 

 

OCIP Procurement Process

 

Gallagher will assist the City in evaluating additional insurance options including the purchase of professional liability insurance, owner pollution and protection insurance and builder’s risk for the Airport Projects. As part of the development of the Airport OCIP program, staff will be evaluating the development of a safety management program which may include services provided by Gallagher, the insurance provider, the City and the construction manager.  It should be noted that as with any construction project the responsibility for ongoing safety resides both legally and contractually with the various project contractors.  It is anticipated that the safety management program will be brought forward for Council review and approval with the recommendation for the purchase of the OCIP insurance. 

 

It is currently anticipated that the recommended insurance package for the Airport Projects will be brought forward for City Council review and approval on December 16, 2003 with insurance coverage binding/effective on January 1, 2004.  The OCIP program for the Airport is anticipated to be a “rolling wrap-up” program, so as new construction projects are added they will be evaluated for their appropriateness for the Airport OCIP leading to additional saving opportunities.  The first project to be included in the OCIP is expected to be the North Concourse Project. 

 

Proposed Terms of Broker Agreement

 

The total compensation for broker services is an amount not to exceed $1,575,000 for a five-year period.  This amount includes an initial “set-up” fee of $75,000 and annual compensation based on a percentage of contract value with a minimum annual fee of $100,000 and maximum annual fee of $300,000.  The maximum compensation of $1,575,000 is for the entire three year term of the agreement and for the two one-year options for renewal.  Staff recommends that the City Manager be authorized to exercise each of these options for renewal, subject to appropriation of funds.  The proposed compensation is both the lowest cost to the City and provides the City with the most flexibility in terms of fees being paid as the scope of the program either expands or contrasts over the term of the Agreement. 

 

 

PUBLIC OUTREACH

 

Not applicable. 

 

 

COORDINATION

 

This report has been prepared by the Finance Department in coordination with the City Manager’s Office, Airport and Public Works Departments, City Manager’s Budget Office, and the City Attorney’s Office.

 

 

COST IMPLICATION  

 

Currently OCIP broker services are anticipated to be directly related to construction of the Airport’s North Concourse Building project, approved by Council on June 17, 2003 as part of the Airport’s Fiscal-Year 2003-2004 Adopted Capital Budget and 5-Year Capital Improvement Program (CIP).  As additional projects are identified for OCIP inclusion, the funding for broker services will be identified in various Airport Projects in the 2003-2004 Adopted Capital Budget and the 2004-2008 Airport Capital Improvement Program (CIP). Broker service costs, as well as direct insurance costs, will be allocated to projects relative to actual construction costs included in the OCIP.

 

Consistent with the Budget Strategy memo approved by Council (February 4, 2003), this Project has a neutral impact on the General Fund, and spurs construction spending to help local economic recovery.

 

BUDGET REFERENCE  

 

Fund

#

Appn

#

Appn Name

RC#

Total Appn.

Amt. for Contract

 

2003-2004 Adopted Budget Page

 

Last Budget Action (Date, Ord. No.)

526

4657

North Concourse Building

 

TBD

$242,309,000

$1,443,960

Page 65

10/14/03

No. 26997

520

4657

North Concourse Building

 

TBD

$21,989,000

  $131,040

Page 65

10/14/03

No. 26997

 

 

 

Total

$264,298,000

$1,575,000

 

 

 

 

CEQA

 

CEQA:  Resolution Nos. 67380 and 71451, PP 03-10-317.

 

 

SCOTT P. JOHNSON                                                RALPH G. TONSETH

Director, Finance Department                                       Director, Airport