Bidding irregularity and delays imperil rail insurance program [The Honolulu Star-Advertiser]

Dec. 18--A program that was supposed to reduce insurance costs for the Honolulu rail transit project by $20 million has been indefinitely delayed after irregularities in the city purchasing process forced the city to cancel a key contract award.

Now the Honolulu Authority for Rapid Transportation is re-evaluating whether the city should even implement the Owner Controlled Insurance Program (OCIP), which was supposed to manage more than $110 million in insurance costs related to the rail project.

An internal investigation by the city Department of Budget and Fiscal Services discovered "irregularities in the evaluation process" that selected Marsh USA Inc. for a $1.68 million contract to serve as broker for the OCIP program.

Those irregularities prompted the city to terminate the contract award to Marsh in November 2009. Two years later, the city and HART have yet to re-bid that contract or launch the OCIP effort.

Toru Hamayasu, interim executive director of HART, acknowledged that the delays are reducing any potential savings from the OCIP initiative, but Hamayasu said the city is now unsure whether OCIP will actually save any money at all. That is why the OCIP plan is being re-evaluated, he said.

OCIP is supposed to provide overall insurance coverage for contractors working on the 20-mile, $5.27 billion rail transit project. That coverage would likely include general liability, workers' compensation, builders' risk and possibly other coverage for various components of the rail project.

A study done for the city in 2009 by consultant CALTROP predicted that using OCIP on the rail project would be $20 million cheaper than using the traditional approach in which each contractor on the construction project purchases insurance independently. The city paid CALTROP $26,950 for the feasibility study.

Theoretically, OCIP would allow the city to negotiate a better bulk price for coverage of the overall rail project than the prices the contractors can negotiate on their own to insure pieces of the project.

Another potential benefit of OCIP is it would allow the city to control the insurance risk management and claims management programs for the entire rail construction project.

That can reduce administrative expenses, including the cost of disagreements that may result when different insurance companies on the same project quarrel over which company is responsible for a claim.

OCIP has generally been shown to save one quarter to half of the contractors' insurance costs, according to the study done for the city by CALTROP.

However, the delays in implementing the OCIP program for the Honolulu rail project are eroding any potential benefits. The reason is that as HART presses ahead with rail construction, the individual contractors that are building the 20-mile rail line might need to purchase their own insurance.

For example, the city recently authorized a $4 million change order to allow Kiewit Infrastructure West Co. to purchase its own insurance for the West Oahu-Farrington Highway segment of the elevated rail guideway.

That change order was approved for Kiewit's construction of the $487 million guideway segment because the OCIP program was not in place to provide the necessary insurance coverage for the contractor, Hamayasu said.

If additional rail contractors continue to buy their own insurance coverage before OCIP is established, that will reduce the pool of projects that could be covered by an OCIP initiative. That would limit any potential savings from establishing OCIP, Hamayasu said.

The delays in establishing OCIP for the rail project began with a botched 2009 procurement that was handled by the city Department of Budget and Fiscal Services.

Marsh USA was selected on July 28, 2009, as the winning bidder to serve as broker for the OCIP effort under what was supposed to be a $1.68 million contract. However, losing bidder Aon Risk Services Inc. challenged the contract award.

A city investigation concluded that Beverly J. Braun, who has been risk manager for the city for 20 years and was the chairwoman of the bid evaluation committee, influenced her fellow evaluation committee members to rate all of the bid proposals with a technical score of three or higher.

Those instructions by Braun caused Marsh USA's technical score to be "improperly raised" and "was perceived by other members of the evaluation committee as undue influence by the chairperson," wrote Wendy K. Imamura, city purchasing administrator, in a letter to Marsh last year.

The city then terminated the award to Marsh.

"Although the city found no evidence of fraud or bad faith on the part of the chairperson, the chairperson's rationale did not conform with the requirements of the (request for proposals)," wrote Imamura.

Braun did not respond to a message left on the telephone of her city office. Louise Kim McCoy, press secretary for Mayor Peter Carlisle, said Braun is "well-versed in insurance matters, but she is not an expert in procurement."

McCoy said that the city changed its procedures in the wake of the OCIP bid and now assigns a city Purchasing Division staff member with expertise in procurement procedures as a technical adviser to all committees that are evaluating bid proposals.

That change in bid evaluation procedures is designed "to avoid similar occurrences during future City solicitations," McCoy said in an emailed response to questions.

Imamura indicated in a Feb. 19, 2010, letter to Marsh that the city planned to rebid the OCIP contract, but that never happened. The city has since transferred responsibility for OCIP procurement to HART, which was formed this year to manage the rail project.

To complicate the issue even further, Hamayasu said a new analysis done for the city by another consultant suggests OCIP might actually be more expensive than allowing each contractor to purchase its own insurance.

That new analysis contends OCIP might actually cost the city $10 million more than a traditional insurance program, Hamayasu said. That directly contradicts the CALTROP analysis done in 2009.

HART is now doing an internal evaluation to determine which consultant is correct, and to figure out which alternative the city should choose, Hamayasu said.

HART has budgeted $14.7 million for premiums for the OCIP program next year and budgeted another $437,500 to hire a consultant to manage the program.

That money will be available if the OCIP program moves forward or can be used to cover other insurance costs if the city decides not to proceed with OCIP, city officials said.

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