When crunching the numbers on the construction wrap-up program for the T-Mobile Arena project outside Las Vegas, insurance broker Aon Risk Services South allegedly failed to take into account a Nevada workers’ compensation rule, one of many intricate features of the state’s workers’ compensation regulations. Others had apparently missed this aspect of the rule, too. “Many business owners and executives are unaware of this regulation and … are paying more premium to their workers’ compensation carriers than they should be,” warned Bradley Rowe, a commercial insurance broker in Las Vegas, in a blog post in 2014. Two years later, the prime contractor joint venture on the completed $230-million arena is battling in court with Aon, charging the broker with professional negligence and breach of contract, according to court documents filed in U.S. District Court in Nevada.
The lawsuit is highly unusual, noted Jim Marquet, construction-industry team leader at The Graham Co., a Philadelphia-based insurance brokerage. He said, “This is the first I have heard of a case like this,” in which a general contractor sued for lost profit.
The contractor, a joint venture of Hunt Construction Group and Penta Building Group, contends that, instead of cutting costs and boosting profits on the project, an Aon-designed contractor-controlled insurance program resulted in the loss of $1.3 million in revenue. The contractor claims Aon estimated the subcontractor deducts for the project at $4,529,410.
Many states cap the amount of compensation that is used to calculate the per-employee premium in order to limit what is paid for higher-paid staff, bonuses and fringe benefits. However, for more than a decade, Nevada law has capped payment in the calculation at $36,000 per employee per year—well below what many workers earn—and that amount includes sick pay, bonuses, overtime and vacation pay. The cap limits the insurance premium a contractor will pay and the amount it can save if the price it charges an owner is not adjusted to reflect the cap. In court papers, lawyers for the contractors pointed out that annual salaries and pay on the project were above the $36,000 level. “Overstating the subcontractor deducts” puts the general contractor at risk of losing money “because the program would be designed with expectations that the deducts would be higher,” according to the contractor’s court complaint.
A spokesperson for Aon said the company does not comment on client matters. However, attorneys representing Aon have filed a motion to dismiss the case, stating that the “economic-loss doctrine” should bar Hunt-Penta’s professional negligence claim. The motion argues that, once it discovered it had made an error in its calculations, Aon made a “timely alert.”
In fact, the error and others like it are not uncommon in construction wrap-up insurance programs, argues Michael Stoop, president of Metropolitan Risk Advisory, Irvington, N.Y. “What makes this one unique is the size and scale.”
The information about Nevada’s cap is publicly available—at least one blog post refers to it, as does an insurance industry publication. “There should have been checks and balances to make sure the calcs are done properly,” Stoop said.
During the past 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 insurance cost-containment methods. The programs usually are used on projects of at least $100 million.
The arena dispute highlights the importance for contractors of understanding the numbers behind the projections.
“The estimates were too rosy,” said the Graham Co.’s Marquet. “It is incumbent on the professionals to lay it out for the clients so someone can understand easily the inputs and assumptions.”
The question that now remains is how the state of Nevada has been able to keep its cap so low for so long—yet still have it overlooked.