Builders Risk Insurance - DOC

							From:                Scott Colt
Sent:                Monday, August 16, 2004 9:52 PM
To:                  'Lance.Sposito@esa.co.santa-clara.ca.us'; Lani Lee
Cc:                  Larry Jinkins; Ken Rado; 'Leslie.Orta@cco.sccgov.org'; Gary Wetzel
Subject:             Builders' Risk Insurance for Bond Funded Capital Improvement Projects
Lance

This will confirm my telephone conversation with you last Thursday, 8/12/04, regarding Builders' Risk
insurance for the County's bond funded capital improvement program.

The bond program totals approximately $400M with projects currently estimated to range in construction
cost from approximately $16M to $80M. They will be constructed on overlapping schedules from the fall
of 2004 through the spring of 2008. The County has never done a series of large construction projects
like the bond program, with their attendant level of risk during construction. We don't believe it is prudent
for the County to be directly responsible and at risk over the duration of construction of each bond project
to see that the general contractor is managing each bond construction project in compliance with the
terms and conditions of the Builders' Risk insurance policy. 3D/I's strong recommendation to Capital
Programs is that for all the bond funded capital improvement projects the County include the provision of
Builders' Risk insurance in the construction contract rather than the County provide Builders' Risk
insurance through its CSAC shared insurance pool.

There is a very aggressive and rigorous risk management process followed by Builders' Risk insurance
companies when the general contractor purchases the Builders' Risk insurance in order to be certain that
the general contractor manages the construction project in compliance with the requirements of the
Builders' Risk policy is to conduct regularly scheduled and unannounced construction site inspections
throughout the course of construction. These inspections may be combined with or be separate from
similar inspections related to the risk management of the Comprehensive General Liability insurance that
the general contractor is also typically required to provide. Builders' Risk insurance inspections, both
regularly scheduled and unannounced, typically consist of a complete site inspection documented by a
detailed written inspection report from the insurance company risk management inspectors. The general
contractor is required to immediately correct unsatisfactory conditions and practices in order to maintain in
effect the Builders' Risk policy.

The rigorous site inspection and enforcement process provided by the Builders' Risk insurance
companies through their risk management process is the primary added value that comes from having
the general contractor buy the Builders' Risk insurance. The general contractor has the strongest
possible contractual and financial interest in fully participating in the construction site inspection process
and following the directions issued by the Builders' Risk insurance company risk management inspectors.

We have been surprised to learn that no one in Capital Programs was familiar with the typical risk
management oversight process routinely provided by Builders' Risk insurance companies to the
construction industry. We were very concerned to learn that there is apparently no risk management
inspection and enforcement process being provided as part of the County's current Builders' Risk
insurance program.

We recognize that Builders' Risk insurance will cost more if purchased through the General Contractor
than by the County through its shared insurance pool. However, it is our view that the cost of the
Builders' Risk insurance is not the most important measure of its value. An allowance for the cost of
Builders' Risk insurance has been in the budget for each bond project from the beginning of design, so
only a portion of the cost to have the general contractor purchase the Builders' Risk insurance will be
seen as an added cost to each bond project.

We have confirmed the current marketplace cost of Builders' Risk insurance with three large general
contractors who are among the pool of pre-qualified general contractors who will be bidding on several of
the bond projects: Hensel Phelps, Swinerton Builders and SJ Amoroso. They report that the average
cost of "all risk" coverage, including earthquake and flood, as provided by the County's current Builders'
Risk insurance through the shared insurance pool, is +/- 0.6% of the cost of construction on an annual
basis.

It is our understanding that the County's current Builders' Risk insurance coverage through the County's
shared insurance pool does not cover projects not located on County owned property or with a
construction value of greater than $40M.

The Morgan Hill Courthouse project with an estimated construction cost of $25M will be constructed on a
site leased from the City of Morgan Hill Redevelopment Agency. It is currently out to bid and construction
is scheduled to start in October 2004. It seems an ideal candidate to test the idea of having the general
contractor purchase and be responsible to keep in force the Builders' Risk insurance in lieu of the County
purchasing the insurance through the shared insurance pool. We have therefore recommended to
Capital Programs that an addendum be issued to the bid documents later this month to make this
change. We estimate the cost of Builders' Risk insurance for Morgan Hill CH purchased through the
construction contract with an anticipated duration of 21 months will be approximately $265,000.

We plan to make a similar recommendation for:

   Valley Specialty Center project which has an estimated construction cost for the base building of
    approximately $64M plus an additional $15M in additive alternates and is scheduled to bid in
    December 2004. The cost of Builders' Risk insurance for the base building purchased through the
    construction contract with an anticipated duration of 24 months is $768,000.

   Crime Lab project which has an estimated construction cost, including specialized laboratory
    equipment to be purchased directly by the County and installed during the construction period, of
    approximately $40M and is scheduled to bid in late 2005. The cost of Builders' Risk insurance
    purchased through the construction contract with an anticipated duration of 24 months is $480,000.

   County Center at Charcot tenant improvement retrofit project which has an estimated construction
    cost for the tenant improvements of approximately $12M and a total replacement cost in excess of
    $70M and is scheduled to bid and construct from December 2004 through February 2006. The cost
    of Builders' Risk insurance purchased through the various tenant improvement projects with total
    duration of 12 months is $72,000. This amount may be increased to reflect the risk associated with
    replacement cost of existing improvements.

   Health Centers in Fair Oaks, Gilroy and Milpitas with construction costs of $16M, $22M and $32M
    respectively and scheduled to bid mid 2005 to early 2006 with construction durations averaging
    approximately 21 months and total value of Builders' Risk insurance for all three Health Centers
    purchased through the construction contracts of $735,000.

   Three or four small seismic upgrades of existing fully occupied and functioning courts facilities with a
    total estimated construction cost of approximately $10M, anticipated total construction duration of 18
    months and cost of Builders' Risk insurance purchased through the construction contracts of
    $100,000. This amount may be increased to reflect the risk associated with replacement cost of
    existing improvements.

We have discussed this subject with Larry Jinkins - Director of Facilities and Fleet / Capital Programs,
Ken Rado - Manager Capital Programs and Leslie Orta - Lead Deputy County Counsel. In particular,
Leslie Orta has extensive background in construction surety and course of construction insurance law. I
believe they are all generally supportive of this approach. Please give them a call to discuss this further.


          Scott C. Colt - Program Manager | 3D/I | 2310 North First Street, Suite 200 | San Jose, CA 95131
                    t 408.993.4816 c 925.595.4762 f 408.993.4695 e colt@3di.com; scott.colt@faf.sccgov.org