Las Vegas Arena Contractors Say Insurance Program Cost Savings Never Materialized
Lawsuit claims Aon is at fault for expensive mistake in wrap-up program
The joint venture prime contractor that built the new $230-million T-Mobile Arena outside Las Vegas is suing over a construction insurance wrap-up program gone wrong, arguing that its broker promised cost savings and profits that never materialized.
Hunt Construction Group and Penta Building Group, which teamed up in a joint venture to build the 20,000-seat arena, have filed a lawsuit against Aon Risk Services South, charging their one-time broker with professional negligence and breach of contract, according to court documents filed in U.S. District Court in Las Vegas.
The contractors contend a contractor-controlled insurance program designed by Aon, instead of cutting costs and boosting profits, resulted in the loss of $1.3 million in revenue. The contractors claim Aon estimated "subcontractor deducts for the project would be $4,529,410" and that they would be "fixed savings to the owners."
The lawsuit is highly unusual, noted Jim Marquet, construction industry team leader at The Graham Co., a Philadelphia-based insurance brokerage.
“This is the first I have heard of a case like this of a general contractor … where they are suing for their lost profits on a job,” said Marquet.
During the last 10 to 15 years, wrap-up insurance programs similar to the contractor-controlled insurance program used by Hunt/Penta on the arena have been among the most popular risk-management and cost-containment methods. The programs are usually used on projects of at least $100 million.
But Aon, which was hired to administer the plan, allegedly overstated potential savings based on a misunderstanding of Nevada’s workers’ compensation rules, the contractors contend in their complaint, initially filed in state court. Hunt/Penta and their subcontractors, in turn, say they based their bid for work on the T-Mobile Arena on this ultimately faulty number.
Calculated Premiums at Issue
Most states calculate workers comp premiums based on formula that multiplies payroll numbers against risk factors associated with particular jobs. However, Nevada puts a cap of $36,000 per employee on the amount of payroll used in the calculations, a wrinkle Aon failed to take into account and which resulted in a major overstatement of potential savings, the contractors contend.
Hunt/Penta contend they relied on Aon’s expertise to structure the program and calculate their insurance costs, only to find out later that the company had no experience doing construction wraps in Nevada. Hunt/Penta paid Aon $240,000, in eight quarterly installments, for roughly two years to administer the project’s insurance program, according to court documents.
“Aon holds itself out as possessing specialized knowledge, experience and skill in regards to construction insurance programs," Hunt/Penta’s lawyers say in the company’s complaint. “It is because of this claimed specialized knowledge, experience and skill that Hunt/PENTA entered into a professional services agreement with Aon.”
A spokesperson for Aon said that per company policy, Aon does not comment on client matters.
Aon Seeks to Dismiss Lawsuit
However, attorneys representing Aon have filed a motion to dismiss the case.
The “economic loss doctrine” should bar Hunt/Penta’s professional negligence claim. In particular, barring personal injury or property damage, a plaintiff may not recover "in negligence for purely economic losses,” Aon’s attorneys’ write.
Aon’s lawyers also take aim at the contractors’ claim that Aon is guilty of a breach of contract, specifically for failing to disclose it was inexperienced in Nevada, as well as for not getting up to speed with Nevada regulations and not offering a “timely alert” once it discovered it had made an error in its calculations. In fact, none of these issues constituted a breach of contract because they were not conditions included in the agreement between the contractors and Aon, the company’s lawyers contend.
Hunt/Penta also failed to show that Aon acted in bad faith or that “Aon gained any undue advantage … based on a breach of trust,” Aon’s lawyers argue.
The dispute highlights the importance of getting a firm understanding of the numbers behind any projection.
“The estimates were too rosy,” The Graham Co.’s Marquet said in assessing what may have gone wrong. “It is incumbent on the professionals to lay it out for the clients so someone can understand easily the inputs and assumptions that are being made.”