Arbitration Panel Awards Utility $35M on Tunnel Builder's Risk Policy
Six re-insurers will pay out most of an additional $35 million under a claim by the Southern Nevada Water Authority on a builders’ risk policy covering damage suffered in 2010 and 2011 to a water tunnel project where flooding and fractured rock caused major delays, the water authority announced.
“We don't typically purchase insurance policies for construction projects,” says Erika P. Moonin, the water authority’s engineering project manager for its $817-million third intake project at Lake Mead. “But this was an underground job, so we handled it differently.”
The insurers had originally agreed to pay only $14.27 million under the claim.
The authority purchased the policy in 2008 from Lloyd’s of London through broker Marsh LLC, New York City, and based the coverage on 50 owner core samples taken along the alignment route and a year of research and discussion, according to the authority. Marsh is one of only eight companies providing insurance for large-sized tunnel projects, says the authority. Coverage, which was renewed in 2012, according to authority board meeting minutes, expires in January.
The policy covers losses up to $580 million on a $10 million premium with a $1 million deductible. It’s backed by a half dozen reinsurers, including Munich RE, Star Underwriting, Great Lake Reinsurance, SCOR Reinsurance, HDI Gerling and Zurich.
The project team has grappled with flooding delays, cost overruns and a worker fatality and the work still isn’t done.
The notice of claim was filed just after the flooding event that ended on July 1, 2010.
Exactly what costs, penalties or insurance policies were in force for the construction consortium isn’t clear.
Objections to Claim
The insurers objected to the scope of the claim, the authority said. Collecting required a two-year legal battle that included eight months of discovery, deposing 18 witnesses, and exchanging 33,500 documents. A 10-day arbitration hearing, set before a panel established in 2012, only occurred after settlement and mediation talks failed.
The award covers $46 million in expenses incurred from three flooding incidents that took place between 2010 and 2011, which resulted in tunnel realignment. The insurers had paid $14.27 million, leaving a disputed balance.
“The insurer argued for a narrow construction of the policy provisions and coverage, as you might expect,” said water authority general counsel Gregory J. Walch during a March 20 board hearing. That included differing site conditions and a coverage limit since the access shaft was undamaged.
There was also a dispute over $2 million in interest. The water authority eventually won-out receiving a total of $49.3 million; the insurer is not appealing the decision.
Exactly what costs, penalties or insurance policies were in force for the construction consortium isn’t clear.
The agency knew it would be a tough job, which is why a $40 million contingency cushion was built into the project budget. Those monies have yet to be exhausted. The undertaking calls for a three-mile-long tunnel that will draw water from 860 ft., deeper than the two existing Lake Mead intakes which could soon run dry amid a crippling drought ravaging the west. Southern Nevada has seen lake levels plummet 113-ft. since 2000, leaving the region’s main water source half full.
Project History and Future
Vegas Tunnel Constructors LLC began work on a deeper lake intake in 2008 to keep water flowing.
The design-build contractor, a joint venture of S.A. Healy Co., Lombard, Ill., and Impreglio S.p.A., Sesto San Giovanni, Italy, is using a custom-built $25-million Herrenknecht tunnel-boring-machine to carve-out a 20-ft-dia tunnel lined with 2,500 concrete rings. Each ring is made-up six 17-ton precast segments that form 6-ft. of tunnel.
The joint-venture team, which includes geotechnical consultants Brierley Associates LLC, Denver, and Arup, New York, spent months pumping out water and stabilizing rock fractures with grout between 2010 and 2011. It eventually abandoned a 200-ft-long starter tunnel and drilled a drier direction. Construction has since hit its stride, with the tunnel reaching 58% completion, Moonin says.
However, work is nearing a worrisome area of fractured rock, passing 50 ft. underneath the old Las Vegas Wash channel, now at the bottom of Lake Mead.
Barring any additional incidents, the project should finish in the summer 2015 or about two years later than initially planned. Other affiliated work, done under separate contracts, has progressed more smoothly.
