Insurance for Olympics won’t cover every risk

A rendering of the proposed Olympic stadium.Boston 2024

Olympic organizers are pledging to insure against budget-busting scenarios ranging from the apocalyptic to the mundane, from cancellations due to infectious disease to routine labor disputes, according to an outline provided by Boston 2024.

The goal is to create a web of insurance policies to cover nearly every possible cause for a cost overrun and to protect taxpayers from having to pick up the bill. The policies, likely spread among dozens of insurers, would make the Boston Olympics the most insured Games in history, bid leaders said.

But insurance specialists said that no matter how comprehensive the policies, some taxpayer risk is unavoidable.

“In the insurance world, eliminating all risk is the equivalent of cold fusion or the perpetual motion machine,” said Tom Baker, a professor of insurance law at the University of Pennsylvania. “But that doesn’t mean they won’t go a long way in that direction.”

Patricia A. McCoy, a Boston College law professor, was more skeptical. While Boston 2024 can cobble together many plans to cover a variety of hazards, she said, insurers will not simply promise to protect taxpayers from any financial risk.

“Insurers do not cover risks that are certain to materialize, and almost every Olympics in the recent past has had major cost overruns,” McCoy said. “Any suggestion that private insurance will pick that up is smoke and mirrors.”

Said one senior executive at a national insurance firm: “There’s no wraparound, no Band-Aid that says, ‘OK. You blow the budget by $1 billion and the insurance steps in and funds that.’ It doesn’t exist.”

Boston 2024 says it will seek multiple policies to insure the Games against the underlying reasons that construction projects usually go over budget, such as bad weather or unexpected soil conditions discovered when building undergound.

The largest policies would be spread in layers among multiple insurers as is commonly done on megaprojects, according to Boston 2024. For instance, a $500 million policy could cover the cost of canceling an event and the lost revenue from ticket sales, with the risk potentially spread among a dozen or more insurance companies.

The bid committee, however, acknowledges it cannot obtain an insurance policy that would cover voluntary changes in the scope of a project, such as last-minute enhancements to make a bigger velodrome. The committee has said it would strictly manage the Games to avoid such ambition-driven cost increases.

The committee also cannot insure against overly rosy budget projections — for example, if the bids for the velodrome come in higher than the $64 million budgeted for that venue. Boston 2024 officials said they have addressed that danger by using realistic estimates in their budget.

The committee also said it can insist that contractors bid for specific prices, and can require builders to insure their work with surety and construction bonds. Those bonds guarantee, through a bank or insurer, that money will be provided to finish the work if a builder falters.

Vancouver, host of the 2010 Winter Games, famously had to step in with taxpayer money to finish the athletes village, after the project lost financing in the global recession.

Boston 2024 said it will require developers to buy capital replacement insurance designed to provide money to keep a project on track if financing falls through.

Contractors would also have to buy policies to cover damage to venues and worker injuries.

Bid chairman Steve Pagliuca described the insurance plan as just one part of a multi-layered approach to reduce risk. Boston 2024, he said, will also build cushions into its budget for unexpected construction costs and obtain legal agreements to ensure contractors perform their work on time and on budget.

“The data right now would show the risk is very small,” he said. The question is, “Do we think the housing, the benefits for the region, is worth that risk?”

Boston 2024 officials have said their plan is designed to go beyond the insurance policies pioneered by the chairman of Chicago’s bid for the 2016 Olympics, Pat Ryan, the former chairman and chief executive of insurance giant Aon. The Boston committee has budgeted $128 million for insurance premiums, almost double the $66 million that Chicago budgeted.

According to the Chicago Tribune, Ryan proposed insurance in the event of natural disasters, cancellation of the Games, or the collapse of construction financing. He obtained a letter of intent from a German insurer willing to provide coverage, but never purchased it because Chicago ultimately lost the Games to Rio de Janeiro.

The proposed insurance policies for the Chicago bid were not released to the public but were reviewed by The Civic Federation, an independent research organization in Chicago that analyzed the bid at the request of the Chicago City Council, said Peter B. Matuszak, a senior analyst for the Institute for Illinois’ Fiscal Sustainability at the Civic Federation.

“These were layers of insurance that began with a very simple event coverage that you would expect,” Matuszak said of the Chicago coverage. “But as we asked more questions about how they would deal with other possibilities, mostly around the financing of the Olympic village, they began obtaining more and more insurance, to the point they were insured by about $1.5 billion worth of coverage.”

In the end, the Civic Federation “found that the operating budget, including the venue construction proposed by Chicago 2016 was fair and reasonable and provided adequate protection from financial risk to the Chicago taxpayer,” he said. “However, we felt the development of the Olympic village exposed the city to continuing real estate risk that needed to be managed on an ongoing basis.”