0706_fea_insurance_craig.mp3

Insuring the proposed 2024 Boston Summer Olympics is an admittedly complicated undertaking. And while organizers promise several layers of insurance as protection against taxpayers being stuck with the bill, opinion seems divided as to whether Boston 2024 can insure against cost overruns that could cost Boston taxpayers dearly.

The group organizing Boston’s bid to host the 2024 Olympics says the games here would be protected by more insurance than any Olympics in history.

So what would insurance cover, and what wouldn’t it cover?

In his presentation of the newly revised Olympics plan, Boston 2024 chairman Steve Pagliuca said they’d spend $128 million in premiums for a comprehensive insurance package that would include not only the standard coverage for a big event, but would also protect taxpayers.

"We hope it won’t cost $128 million," Pagliuca said. "We hope we can get it for $100 [million]. And it’s going to be multiple layers of insurance to protect the taxpayers if anything goes wrong on the revenues or the expenses."

It turns out all kinds of things can go wrong at an Olympics, and there’s insurance for all of it, according to Patricia McCoy, a professor of insurance law at Boston College.

"Property damage, physical injury, terrorism risk, the risk that a contractor will go insolvent, some business interruption coverage," McCoy said. "Past Olympics have had insurance packages like these, they’re really very standard for Olympics. That’s what the $128 million will cover. But it’s not going to cover anything that an insurance company refuses to insure."

Despite what organizers insist, one thing they won’t cover, she says, is runaway expenses.

“If you look at the recent history of Olympics, almost every Olympics had major cost overruns, on the order of 1.5 to two times original estimates," McCoy said. "So cost overruns are virtually certain to happen. And insurers never insure something that’s virtually certain to happen, because they won’t make money."

"I think I take issue with that," said Boston 2024 CEO Richard Davey. "There’s not inevitability with that question."

Davey says there are a lot of ways to protect taxpayers from getting stuck with the tab for out-of-control spending.

"Making sure that there isn’t scope creep, there isn’t changes in design, is one," he said. And two, you’re clear through the contract that it’s the contractor’s responsibility to assume any cost overruns. You don’t do that through an insurance company per se. You do it by writing a good contract."

For example, Davey says, the contract can include a fixed price for any work that’s done. And if a contract isn’t honored, there’s a way to protect against that, too.

"Lets say that you hire me to build your house," said John Harris, adjunct professor at the University of Connecticut Law School, an expert on something called surety bonds. "And you’ve paid me a couple of hundred thousand dollars against the work that I’ve performed, and now I take off for the Caribbean, and decide I’m not going to finish the project."

Now you’d think that maybe you'd be out of luck because you've dropped all of that money and all you've got is a half finished project and an MIA contractor. But that’s where surety bonds can step in. Here’s how it works: Contractors are required to buy these bonds from someone called the surety. That's usually an insurance company, even though this isn’t technically insurance. Now since the contractor has stopped building my house and defaulted on our contract, I get to call on the surety to step in. The surety will be entitled to the remainder of the contract proceeds that have not been paid, that you've agreed under the contract to pay to the contractor, and then it will complete the contract in accordance with the contract specifications.

So even though your contractor is on a beach somewhere, you know the house will be finished. One big difference between this and insurance is that once the surety steps in, they can go after the contractor to pay for the whole thing.

The problem for the Olympics, Harris says, is that the surety doesn’t jump in to finish a job quickly. It has to do a lot of investigation about the contract and what went wrong before it does anything, which isn’t great if you’re on a tight deadline, like, say, for an Olympic opening ceremony.

Davey says they’re also hoping insurance will protect them in case they wind up losing funding for a project.

"Vancouver had some challenges where the financing for a project fell through, so the contractor was solvent and continued to work," Davey said. "But their loan, their bank, or their capital went away. And so you can buy capital replacement insurance as well."

That kind of insurance was part of the plan for the Chicago Olympics, but of course the games never actually happened there, so they didn’t wind up needing it. McCoy says "capital replacement insurance" isn’t really a thing.

"I don’t know any situation where an insurer says, 'I will provide insurance in case you can’t raise enough from investors to finance a project,'" McCoy said. "That’s not what the insurance industry does."

Whether or not Boston 2024 can find an insurance company to cover them for this kind of thing is still an open question. They’re busy shopping around for it now.

"You buy the car, then you place the insurance," he said. "You don’t do the vice versa. So we won’t actually buy the insurance until we’ve won the bid."

Of course, whether or not that happens, and any of this insurance becomes is even necessary, is still an open question, too.