Mr. Ray Rogers

Page Two

erage limits for consequential damage.

Until that time,

you may use the information in our discussion of Alternative 6 in Enclosure 1.

Very truly yours,

Nemanitead

N. C. Manitsas

Chief, Contracts and

Procurement Services Group

Enclosures

1. Discussion of FRA Alternatives

2. Discussion of FRA Objectives of NEC Indemnification 3. News Articles

Discussion of FRA Alternatives

Alternative 1: "Hold DCP executives, such as yourself and
Mr. Howell, personally liable for any negligence of DCP."

Discussion:

b.

C.

Holding DCP executives personally liable for negli-
gence is not consistent with the Government's po-
sition, as set forth in Clause 43 "Insurance", which
states that the contractor shall be reimbursed for
losses not compensated by insurance "whether or not
caused by the negligence of the Contractor".

The personal resources of DCP executives are limi-
ted. Holding them personally liable for negligence
would neither provide prompt and adequate compensa-
tion for victims of any catastrophic accidents nor
provide needed indemnification for DCP and its sub-
contractors from such accidents. Errors and Omissions
liability insurance is by its very nature intended to
protect a firm against negligent or inadvertent acts
by its members. This alternative would force DCP to
seek to prove in each incident of alleged negligence
that negligence was not involved. So doing would re-
sult in protracted litigation and high legal fees.
The efforts of senior DCP executives must be directed
towards providing the leadership DCP needs to fulfil
its contractual obligations.

In brief, DCP considers that this alternative is not
responsive to the need for liability protection and
is unfair in proposing to hold DCP executives per-
sonally liable for any negligence of DCP. It is not
acceptable.

Alternative 2: "Provide for one dollar of fee reduction for each twenty dollars of claims paid out above ten million dollars."

Discussion:

a.

To reduce fee on the basis of cumulative claims is to-
tally unfair, unrealistic, and unacceptable. First,
it presupposes that errors and omissions are absolute-
ly controllable. They aren't. This is why we have in-
Surance. Second, one error could exceed the threshold
and would therefore be manifestly inequitable for a
project of this size. Third, the program could have been
completed and paid for before claims requiring DCP pay-
back were made. And fourth, this alternative would
apparently require the Contractor to accept a downward
adjustment to the already negotiated fee without any
compensation benefits. This liability exposure is
open-ended. No reputable business could accept such
risks.

Enclosure 1

b.

An

This alternative does not meet the need for indemnifying DCP and for compensating victims of catastrophic accidents that could result from the unusually hazardous and large number (125-150) of FRA construction contracts currently envisioned. adequate indemnification arrangement must be found to provide both protection to the public and to DCP. Alternative 3: "Develop some "pooling" arrangement whereby those who benefit from the program would assume some of the liability. Under this arrangement the Government would limit its liability to a specified amount, say ten million dollars, and DCP would seed further indemnification from private railroads, regional transit authorities, cities, states and others who benefit from the program.

Discussion:

a.

Requiring DCP to arrange with local governments, rail-
roads, and others, a "pooling" arrangement above ten
million dollars would be unfair for two reasons:
first, FRA as the Federal Government, along with Am-
trak, certainly have more leverage to obtain coopera-
tion than DCP can exert; and second, on the basis of
the NEC States reactions to cost-sharing of NECIP non-
operational facilities to date, it is most unlikely
that DCP could develop a feasible pooling arrangement
with them.

b. This alternative does not provide the degree of pro-
tection required by the public nor by DCP and its
subcontractors. Considering the estimated 440 DCP
A-E subcontractors and 125 to 150 FRA prime contractors
who will be involved and the unusually hazardous na-
ture of rebuilding a railroad under traffic, the lia-
bility exposure is both unique and great.

Alternative 4: "Provide for a one million dollar deductible per occurrence under our current indemnity."

Discussion:

a. There are perhaps no construction management firms who have had railroad construction experience on a project in the United States of this magnitude and complexity. Therefore, there is no valid basis upon which to estimate the total exposure below the deductible limit, in terms of number of claims, cost of defending, cost of paying and year in which they might occur.

b. DCP would have to purchase an insurance policy to protect itself and its subcontractors. The policy too would have deductible limits. DCP would expect payment of claims below the deductible limit which would constitute an allowable cost under its contract. Both the insurance policy and the FRA-DCP agreement would have to provide for protection for the life of the project and for an appropriate discovery period. In

31-665 - 78 - 19

c.

this connection, Maryland's statute of limitations
on professional liability claims extends to 20 years,
and in certain cases, longer.

If this alternative was intended to have DCP assume
full liability for all claims under $1 million, it is
unacceptable. If the concept discussed in b. was in-
tended, it appears that no significant benefit would
be derived to either the Government or DCP.

Alternative 5: "Limit the size of the Government's liability to an amount sufficient to cover each year. Or, keep the liability low until evidence on potential claims is available."

Discussion:

a.

It is not clear exactly how the Government could fund a year-by-year liability arrangement, nor is it clear that FRA is agreeing to maintain the $100 million indemnification currently in Article XIV.

b. To limit the size of the Government's liability to an amount sufficient to cover each year's liabilities appears impracticable for the following reasons:

c.

(1) If claims are under the yearly estimate, no problem. If significantly over, the question arises as to the source and availability of funds to pay the claims. If DCP is held liable and FRA funds are not immediately available, DCP pays not only the claim amount but the cost of money. This is unacceptable.

(2) Significant claims could occur upon completion of the contract. How could DCP protect itself against claims for which FRA may or may not have the funds or the procedures in being to give DCP relief? What agreement could be negotiated to provide protection to DCP and its subcontractors during a discovery period of 20 years or more?

(3)

On a project of the complexity and exposure of the NECIP, it is unrealistic to use the claims adjudged in one year as the basis to determine liability exposure in future years.

Again, the Government's paramount objective must be
to provide prompt and adequate protection for the
public in the event of a catastrophic accident and
for the indemnification of DCP and its subcontractors.
This objective would not provide this protection.

Un

Alternate 6: "Provide indemnification through insurance. der this alternative we would consider any insurance package which you propose. We have reviewed the Northbrook policy which you submitted last year and it warrants further consideration if it can be guaranteed renewable for a satisfactory number of years. Since it excludes consequential damages we would like to know the level of indemnity you would require against such damages in the event we purchased the Northbrook policy."

Discussion:

a. DCP would be agreeable to re-exploring indemnification through insurance. Our Ralph M. Parsons insurance expert is currently in Saudi Arabia but will return February 13. Therefore, we have not fully defined, at this time, availability and cost of the type of policy appropriate to the needs of DCP and its subcontractors.

b.

c.

DCP, at this time, can identify the following elements as essential in an errors and omissions policy:

(1)

(2)

Insureds: DCP, its associate subcontractors
and all DCP A-E_subcontractors participating
in the FRA-DCP contract.

Policy Period: Project duration and retroactive
to project start. If insurance will not cover
the project retroactively, DCP would expect such
coverage from the Government. Insurance would
have to apply for discovery period of at least
20 years.
The statutes of limitations are of
Such complexity and variety in the NEC states
that the establishment of an adequate discovery
period represents a considerable task.

(3) Premium: Terms and payment schedule must be
acceptable to FRA and to DCP.

(4) Liability Limits: As negotiated by FRA and DCP.

(5)

(6)

(7)

Conditions: All third party claims arising out of the project; claims for consequential damages; and client claims.

Policy Cancellation: None, unless contract is terminated and then without effect on the discovery period.

Claim Service:

Either integral to the policy or

a separate contract.

We would like to explore the feasibility of an insurance/PL85-804 combination. For example, a $10 million policy with a deductible limit and with full claims service could be purchased. Claims below the deductible limit would be allowable costs against our con