MTA Rail Project Faces Possible Loss of Its Insurer : Transportation: Insurance firm wants to double the agency’s deductible. That and other proposed changes are prompted by the many setbacks in the subway project.

The main insurer for the trouble-plagued Los Angeles subway is threatening to abandon its coverage unless transit officials agree to what could amount to a sharp increase in taxpayers’ liability for the rail project.

Prompted by expensive setbacks in the $5.8-billion subway project, Argonaut Insurance wants to double the Metropolitan Transportation Authority’s deductible to $1 million per incident and impose other changes that would effectively broaden the agency’s financial exposure.

“At no time is this kind of thing good news,” said MTA board Chairman Larry Zarian. “When you’re spending public money, this is always one thing you don’t want to deal with, but at the same time I understand where Argonaut is coming from.”

Negotiations are heating up just as the MTA confronts a series of financial and political worries on other fronts:

* In Washington, MTA Chief Executive Officer Franklin E. White urged support Tuesday for legislation that would provide $125 million to the Los Angeles project. MTA staff lobbyist Arthur Sohikian said White sought to assure representatives from six Southland congressional offices during the day’s meetings that the agency is ably handling a recent string of problems, including an ongoing federal criminal probe into lax tunnel construction.

“There is concern,” Sohikian said. “It ultimately comes back to, ‘Did the taxpayers get screwed? And if they did, what are you doing about it?’ ”

* In Sacramento, the Assembly will consider legislation passed Monday by the Senate barring the MTA from collecting $400 million in rail construction funds until it can “reduce its debt, achieve solvency and restore affordable bus service for the transit-dependent population.”

The restriction was tacked onto a $2-billion seismic retrofitting bond by state Sen. Tom Hayden (D-Santa Monica), a longtime critic of management practices at the MTA.

* In Los Angeles, MTA officials are working this week to determine the quickest and least expensive way of bringing in a new builder for the Vermont/Hollywood Boulevard subway tunnels after the agency fired contractor Shea-Kiewit-Kenny from the job six days ago, said Joseph Drew, deputy chief executive of the transit agency.

A key issue centers on whether the agency will put the multimillion-dollar construction job out to competitive bidding or seek to bypass normal contracting procedures. The MTA said it had “lost confidence” in Shea-Kiewit-Kenny. The firm was fired one day after agents from the U.S. Department of Transportation and the MTA’s inspector general executed a search warrant at the contractors’ offices in Hollywood and Walnut.

The criminal investigation centers on Shea-Kiewit-Kenny’s use of wood wedges as bracing for 12 miles of twin tunnels under construction along Hollywood Boulevard and Vermont Avenue, including some portions of roadway that sunk last year above the tunneling.

The investigation was opened by the MTA inspector general last fall, after articles in September in The Times brought to light construction deficiencies--including the contractor’s substitution of the wood wedges for stronger metal struts.

Use of the wooden wedges came under fire after portions of Hollywood Boulevard sank up to 10 inches last year, shutting down the project for five months and prompting federal officials to temporarily cut off $1.6 billion in funding.

The sinkage led to dozens of lawsuits against the MTA by Hollywood merchants and homeowners who claim that their property was damaged, and that in turn appears to have triggered Argonaut’s reassessment of the policy, MTA officials said. More recent problems--including debate over blame for last month’s 70-foot-wide sinkhole over Hollywood Boulevard--have exacerbated the insurance issue, officials said.

Officials at Argonaut refused to discuss the policy.

Some MTA officials say the push for changes in the policy was virtually inevitable after the agency’s recent setbacks. “When things fall down,” said one official who asked not to be identified, “[the insurer] either wants to get out or raise the premiums.”

Argonaut is the first line of insurance for the massive subway project, responsible for up to $5 million per incident once the deductibles for the contractor and the MTA have kicked in, Drew said. If the liability exceeds set limits under the Argonaut policy, an insurance consortium led by Lloyd’s of London then covers a total of up to $98 million.

MTA officials said the agency paid $34 million last year for its total coverage, paying $2 million on its own to resolve legal claims under its deductible. Drew said staff members are still reviewing the Argonaut plan to determine how much it would cost to implement the proposed changes--including the doubling of the agency’s $500,000 deductible, and a restructuring of the way property claims are handled.

Drew said the MTA may end up saving money on the policy depending on how well future construction fares. The MTA has not agreed to any of the changes, but it faces the danger that Argonaut may cancel the policy in six months if its proposals are not met, Drew said. “That’s inferred in what they’ve communicated to us--that they don’t want to do that but they would have to look seriously at it,” he said.

That would force the MTA to find another carrier.

But Drew said: “The insurance world knows that this is a world-class public works project. . . . There should be no fear that we’re not insurable.”

Times staff writer Richard Simon contributed to this article.