The Metropolitan Transportation Authority plans to pay $40 million to $60 million next month to settle a nine-year dispute with its primary insurer for claims brought against the agency during construction of the Metro Rail line system, according to a source familiar with the settlement.


If approved, the payout would be the largest settlement ever paid by the MTA, which has suffered hundreds of millions of dollars in claims and losses in transportation funding while constructing the multibillion-dollar transportation project.


The pending settlement ends all financial obligations to the agency's former insurer, Argonaut Insurance Co., which paid $120 million on 2,440 claims for property damages and business losses caused by tearing up streets and general ground movement during construction of the Blue, Green and Red Lines. The settlement consists of reimbursement costs owed to Argonaut since 1996, when the insurer canceled its policy and the agency stopped paying its share of claims.


"We always knew they had a claim and knew it was coming," said Steven Carnevale, an assistant Los Angeles County counsel who represents MTA in the case and declined to divulge the settlement amount.


Calls to Argonaut were not returned. Argonaut's lawyer, Vincent Davitt, a partner at LeBoeuf Lamb Greene & MacRae LLP, declined comment.


The dispute between the MTA and Argonaut is similar to an increasing number of lawsuits involving policies for large property damages that have unclear terms and ambiguous language.


"In the past, they used to be resolved on an amicable basis," said Dave Steuber, co-chairman of the insurance recovery practice at Howrey LLP. "As the dollars are increasing, they are becoming more and more contentious and more and more resolved by the courts."


Cracked walls
The trouble for the MTA began a decade after the agency obtained a general liability and worker's compensation insurance policy from Argonaut to cover claims arising from work on the rail system. Under its liability policy, the MTA opted to insure the hundreds of contractors and subcontractors on the projects against claims filed by third parties, such as business owners and individuals injured near the construction sites.


Under the policy, the MTA had a $500,000 deductible and up to $2.5 million in coverage for each occurrence of damage caused by the rail construction. The MTA also had excess coverage of up to $98 million with a separate insurance firm.


About 1,000 claims passed through the MTA office during the rail system's first decade of construction. The claims against the MTA got bigger after 1994 when tunneling for the Red Line subway caused the ground to sink 10 inches. In their claims, businesses cited cracked walls and broken pipes.


"The bills started getting bigger in '96 because the first two lines were light rail lines, and there were not a lot of claims related to them," said Carnevale.


The Radisson Wilshire Plaza Hotel, for example, filed a $20 million lawsuit because the construction noise scared away guests. "It was completely blocked and in shambles," said Jim Haupert, general manager of the hotel. "There was financial damage because people couldn't get in here to stay. It was a major loss in our business."


The MTA began to question many of the bills sent by Argonaut, which had adjusted its policy. Under the new policy, effective in 1996, the agency would have a $500,000 deductible per claim, rather than for each occurrence, with an aggregate limit of about $1 million. This is an important distinction, according to the MTA, because a single "occurrence" in this case the overall construction of a Metro station would result in lower deductible payments than paying a deductible on every claim.


"At some point, someone sat down and said, 'Wait. They're asking for deductibles for everything,'" Carnevale said.


One month before it was supposed to change the policy, Argonaut cancelled its coverage.


Occurrences
In its suit, the MTA says that Argonaut's decision to cancel coverage forced the agency to find a new insurance firm, which ended up costing "considerably higher." Argonaut, in response, said the MTA owed the firm $90 million in settlements and legal defenses on claims related to the Red Line construction that were covered under the original policy. (MTA already had paid Argonaut $19 million for similar costs on claims leading up to 1996.)


The MTA defended its decision not to reimburse the firm because it says claims were not paid that should have been covered under the policy. The agency, which had hired an outside law firm to review the bills, began to argue that the claims should have been grouped together based on major events, such as construction of each station, according to court papers.


At the heart of the dispute is the interpretation of what a claim should be based on. Such arguments are not unlike the insurance disputes that followed the terrorist attacks at New York's World Trade Center, but in that case the property owner and the insurance companies took opposite stances from the MTA case.


The insurers argued that the two planes crashing into the twin towers constituted a single occurrence of damage, while real estate developer Larry Silverstein said that each plane hitting each tower constituted an occurrence, which would double his insurance recovery. Last December, Silverstein received a favorable jury verdict that forced the nine insurers to pay him $2.2 billion instead of $1.1 billion.


"This is an issue that arises a lot," said Steuber. "A lot of times, it depends on whose ox is being gored."


For years, MTA officials stood by their contention that the agency owed $5 million to $10 million in reimbursements to Argonaut, while the insurance company wanted about $100 million, Carnevale said.


Both sides discussed settling the matter, but their dollars were too far apart. "For a long time, it was hard to get a handle on the dollars," he said. "We couldn't just press a few buttons and get a printout."


Meanwhile, many of the business owners who filed claims against the MTA recovered financially. The lawsuit by the Radisson Wilshire, whose business was booming again by 1997, ended up costing Argonaut $5.2 million, according to court papers. Argonaut, which spent an additional $1 million handling the case, charged the MTA $208,429.67 in reimbursement costs one of the disputed claims in the case.


As the Nov. 1 trial date neared, both sides faced the task of determining coverage on each claim and having to explain that number to a jury. Carnevale said the agency has built up all but $3 million in reserves to write the settlement check.


Now, as the MTA begins construction on a Gold Line extension and the new Exposition Line, the agency is drafting new insurance policies with new insurers. "Hopefully, we'll write a better policy," Carnevale said.

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