This Spotlight Team series was prepared by editor Gerard O'Neill and reporters Brian Mooney, Thomas Palmer, Alice Dembner, Thomas Farragher, and Matt Carroll.
The Big Dig's mammoth insurance program, once touted as a clever scheme to offset skyrocketing costs, has been a bonanza for the chief insurer and a vehicle for secret side deals by the project's broker, a Globe investigation has found.
Project officials have deemed the apparent double-dipping by the Boston broker, Sheppard Riley Coughlin, a conflict of interest and are reviewing the contract.
The broker, which has billed the Big Dig more than $1 million a year since 1992 for hourly fees, claims it actually lost money on one of two hidden "contingency agreements" with insurers. But its failure to disclose them is a breach of industry ethics standards and violates its contract with the project.
The alleged conflict of interest is the latest problem for the insurance program that had been the linchpin of a strategy by Big Dig officials to convince the public that the beleaguered project would come in on budget.
As officials tried futilely to hold the total cost of the Big Dig to its now-discredited $10.8 billion budget, the project continued to pour discretionary insurance funds into an investment pool that would yield an $826 million windfall rebate -- in the year 2017. As part of this unusual deal, American International Group, the Big Dig's principal insurer, has taken a $23.5 million share of the investment dividends, on top of about $75 million in fees and expenses it has received.
Project managers defended the arrangement with American International, but they have hired an outside consultant to investigate Sheppard Riley Coughlin's dealings.
Project director Patrick J. Moynihan, in a March 31 letter, demanded the broker rebate the tainted fees, which he said are in ``direct contravention'' of its contract and raise ``an actual or potential conflict of interest.''
The Big Dig is not Sheppard Riley Coughlin's only public client. In 1999, six of its employees charged the project a combined $835,122 for their services, most approaching 40 hours a week, even though five of them had significant responsibilities under contracts with two or more other public agencies at the same time.
For instance, Thomas W. Sheppard, the firm's chairman, billed the Big Dig $214,748 in 1999 for an average of at least 26 hours a week while he was also project manager for the insurance program on the Massachusetts Water Resources Authority's Walnut Hill treatment plant in Marlborough. He also billed the Massachusetts Convention Center for 201 hours of consulting work. Sheppard heads a firm that claims 150 corporate and government clients.
Sheppard defended the billings, saying the Big Dig is his most time-consuming client. Of the other employees, he said: ``Those individuals work a lot of hours, and they bill the hours that they work.''
Of his firm's contingency agreements - fee incentives to place multiple clients with the same insurer - Sheppard said they involved less than one percent of the project's insurance cost and had ``no impact on the price of the insurance'' for the Central Artery/Ted Williams Tunnel project.
He said his firm made $10,000 on an undisclosed contingency with Kemper Insurance but lost $33,000 with The Hartford because the business placed there was unprofitable. His failure to disclose the deals to the project was a ``misunderstanding'' he regrets, Sheppard said.
Almost since its inception, the overall insurance program has been manipulated by project managers. A review of planning documents found the Big Dig used insurance money in mutually exclusive ways. On one hand, insurance premiums in an overfunded program have been projected as the mammoth ``credit'' to bail the project out in 2017. On the other hand, the money has been designated as a standby fund to handle injury and damage claims that could wipe out the fund with one catastrophic accident.
The Big Dig's chief of staff, Jeremy Crockford, conceded the project has been effectively having it both ways with the insurance money. Pressed on whether it was a debit or a credit, he made it clear he viewed the fund as money in the bank.
``On the face of it, we have a logic problem,'' Crockford said. ``You can't keep the money if you are going to spend it. The risk managers say there could be a catastrophe and you'll need that money. But we've had such a good safety record and built up such a pot of money, we feel we'll get all the money back.... Yeah, we're still counting on it.''
But it appears he has no choice. The money has already been committed. When the return on the project's insurance investments began mounting in 1997, officials started using the potential income to offset rising expenses. At first, the money only reduced insurance premiums, but by 1998, managers used it to offset other costs, helping them keep the ``on time, on budget'' project total at $10.8 billion. They began treating a 20-year potential investment return as if it were cash-on-hand to balance growing construction costs.
The insurance credit rose to its maximum level early last year when the project counted it not only to offset $575 million in insurance premiums through the end of construction, but also to negate $251 million in other expenses.
Beyond the accounting gimmickry, one of the most controversial aspects of the project's insurance program has been its sharing of investment income with an international insurance company that has already received nearly $100 million in fees, expenses, and investment dividends.
New York-based Ameerican International Group, the world's largest insurance company, has been investing tax dollars in fixed-income securities since 1992 and splitting its return with the project. While such an investment arrangement with insurers has been used in private business, it is highly unusual, if not unprecedented, in a publicly funded job. The project provided the Globe an incomplete income explanation for AIG that revealed the company had received $18.3 million as its share of the investment return. However, the project did not disclose an additional $5.2 million AIG received from dividend income - even though the amount is listed in internal Big Dig documents.
AIG is paid to process claims paid directly from Big Dig funds. But most of its compensation has come from little-used high-risk coverage above substantial deductibles paid by the project itself. Unused high-risk insurance may look bad in hindsight, but AIG has still profited from the project's excellent safety record. The insurer has paid $770,000 for one worker's compensation claim and $2.7 million in a general liability case -- the only accidents that exceeded the Big Dig's $1 million deductibles.
The bloated insurance program is rooted in an early decision by the project to overpay premiums so they could be set aside to offset expenses and to begin its joint investment venture with AIG. The Big Dig agreed to self-insure the hazardous construction job to maximum annual amounts.
So far, according to figures given outside auditors, it has paid an average of $46.4 million in premiums a year for workers compensation and general liability coverage and has typically paid claims of $9.8 million annually.
Last year, a little-noticed report by the Inspector General for the US Department of Transportation revealed that nearly half of the premium payments in the early years had been diverted into an investment fund housed at the State Street Bank. The report challenged the way about $150 million had been handled.
In short, the Big Dig paid premiums based on inflated employee numbers later found to be inaccurate. It then allowed its insurer to keep nearly half of the investment income stream from taxpayer money. The premiums were not lowered until 1996 when the project finally began paying for coverage that fit an accurate number of construction workers.
Federal officials confronted the Big Dig last year with the consequences of fast-and-loose accounting, but the insurance gambit was first uncovered by state Auditor Joseph DeNucci in 1998. Auditors from his office found the premium overpayments and forged an agreement with the project to reclaim $117 million and apply them to future premiums. The project, however, reneged on this accord, and a revisit by auditors last year found $25 million more in premium overpayments.
While the disputed investment fund has received most of the attention from regulators, the cost of the insurance program separates it from most other major public construction jobs.
And while Big Dig officials stress the project is unprecedented in scope, the insurance program still appears out of line with similar, albeit smaller, public works programs. When measured in dollar amounts and as a percentage of overall costs, the Big Dig is paying more for the same basic coverage. By the end of the project in 2005, it will have paid $400 million in workers' compensation premiums, or 3 percent of the entire Big Dig budget. Only one other project, a Los Angeles-to-Long Beach rail link, had a comparable ratio. And the Big Dig must also pay $1 million for every injured worker before AIG insurance kicks in.
Public officials at other large projects were wary of investing tax dollars with an insurance company the way the Big Dig has. Jim Wines, the risk administrator for Dallas-Fort Worth International Airport, which begins a five-year expansion this spring, said ``I see red flags all over the place there.... I think our lawyers would go crazy.''
``That's a new one,'' added Jane A. Keegan, the risk manager for the Port of Oakland, which recently began a $2 billion expansion of its harbor and airport.
