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Contracts in Iraq are taxpayers' nightmare: The U.S. pays contractors' insurance premiums and war casualty claims. No one regulates or audits the cost
[December 24, 2006]

Contracts in Iraq are taxpayers' nightmare: The U.S. pays contractors' insurance premiums and war casualty claims. No one regulates or audits the cost

(News & Observer, The (Raleigh, NC) (KRT) Via Thomson Dialog NewsEdge) Dec. 24--Roughly 100,000 private contractors work for the U.S. government in Iraq, and every one of them must be insured against getting killed or hurt on the job.

Given the dangers of war, insuring the contractors would seem to be an underwriter's nightmare. But it's not.

U.S. taxpayers pay the premiums to insurance companies for these contractors. When the contractors are killed or injured in war, taxpayers pay the benefits, too.

This unusual arrangement is the result of two World War II-era laws: the 1941 Defense Base Act requires contractors to be insured, and the 1942 War Hazards Compensation Act allows the insurers to apply to the U.S. government to cover the payments for contractors killed or injured.

An insurance industry spokesman said the law makes sense because no one will insure against acts of war. "War is not an insurable risk," said Bruce Wood of the American Insurance Association. "You can't predict the frequency or the severity."

Bunny Greenhouse, a top contracting officer for the Army Corps of Engineers, said that insurance companies have charged exorbitant premiums, considering that it is taxpayers who are taking the risks.


"The insurance companies are getting over on us," Greenhouse said. "This has been accepted because no one looked into it."

The cost of insurance for contractors on the battlefield is at record levels; 100,000 contractors are in Iraq now, far more than in the Persian Gulf war in 1991, when 9,200 private contractors were used. This unprecedented use of private contractors -- driven in part by the relatively small number of troops deployed to Iraq -- is a mounting, open-ended tab for taxpayers.

It is impossible to say how much the insurance costs. No agency regulates the premiums, and no one tracks the overall costs.

One thing is certain: These costs have risen quickly and will continue to grow as the Department of Defense turns more and more to private companies to supply troops, provide security and rebuild infrastructure. The number of contractors covered by the insurance has grown more than sevenfold in the past five years and will continue to grow, according to AIG, the insurance giant.

Most of the contractors and subcontractors work for the Department of Defense. They serve meals, drive trucks, guard buildings and rebuild roads and sewers.

In the first gulf war, seven contractors were killed. As of October, 646 U.S.-financed private contractors had been killed in Iraq. Most deaths stem from acts of war, insurance and government officials say. This allows the insurance companies to ask the U.S. Department of Labor to pay all future benefits and reimburse the insurers for all payments, plus 15 percent for processing the claims.

In the past six years, insurance companies have filed 186 such claims, 140 of them from Iraq. The Department of Labor has made reimbursements in 81 of the cases; most of the remaining cases have not been resolved. The average reimbursement was $48,412; this figure does not include ongoing payments the government will make.

Relying on contractors

Defense Base Act insurance is a workers' compensation policy created by Congress as World War II loomed to insure workers at remote bases: divers pulling up ships sunk at Pearl Harbor, for example, or welders repairing damaged ships. At the time, no one envisioned a war where the number of contractors would nearly match the number of troops, performing jobs once handled by the military.

The Defense Base Act requires this insurance on all U.S.-funded projects overseas. The insurance covers medical expenses, time lost from work and disability and death benefits. It covers all U.S.-financed contractors, whether it is an American engineer or an Iraqi truck driver.

If a torch burns a welder in Iraq, the insurance company must pay for the lost time and the medical costs. If a security guard is kidnapped or blown up by a roadside bomb, the United States will pay under the War Hazards Compensation Act.

The insurance has become a central issue in a lawsuit filed against Blackwater USA by the families of four contractors whose mutilated bodies were burned and dragged through the streets of Fallujah in March 2004. In seeking damages, the families contend that Blackwater sent the contractors on a dangerous mission without proper equipment or preparation. Blackwater, based in Moyock, N.C., has said the families are entitled only to the $1,073 weekly benefits paid under the contractors' Defense Base Act policies.

The insurance industry agrees and has urged federal judges to dismiss the lawsuit and force insurance companies to pay the benefits. Any other decision will hurt the insurance industry and deprive the United States of the use of private contractors, AIG wrote in a friend-of-the-court brief. AIG didn't cover Blackwater.

But in the Fallujah incident -- and most other contractors' deaths in Iraq -- the insurance companies would be reimbursed by the government, plus 15 percent.

Unregulated policies

These insurance policies differ from conventional workers' comp in one major way: Domestic workers' comp is heavily regulated and analyzed, but the contractors' insurance is not. The U.S. Department of Labor monitors the number of claims and resolves disputes over benefits, but it has no authority over pricing or availability.

"We are not an insurance commission operation," said Shelby Hallmark, director of the department's Office of Workers Compensation. "We are not in the business of controlling or even monitoring prices."

The Government Accountability Office, Congress' watchdog agency, examined contractors' insurance in 2005 and could not calculate its cost to taxpayers. The auditors couldn't estimate what impact the insurance costs had on reconstruction activities in Iraq. The GAO found that Department of Defense contractors were being charged premiums between $10 and $21 for every $100 of salary.

That means taxpayers were paying up to $21,000 a year to insure a worker with an annual salary of $100,000, which is not unusual pay for a private contractor.

Those Defense Department rates were far above the rates paid by the State Department, which uses many private contractors overseas.

Another model

For years, the State Department has put its contractors' insurance out for bid; the winning bid provides the insurance anywhere in the world at the same price. The U.S. Agency for International Development, the government's foreign aid agency, also bids its insurance. The rates in Iraq are very good, said Sara Coyne, an insurance broker at Rutherfoord International, which manages the contractors' insurance programs for the State Department and USAID.

"We have divers de-mining the port Umm Qasr for $2.15 per hundred of salary," Coyne said.

The contractors' insurance market is dominated by AIG. Chris Winans, an AIG spokesman, said that his company charges lower rates than those cited by the Government Accountability Office. AIG premiums in Iraq range from $4 to $9 per hundred dollars of salary, Winans said. Bad roads, long work hours, stress and poor access to health care push the rates above those in other countries, Winans said.

Insurers set their own rates, but they can't charge higher rates to cover people in a war zone. If insurers charge a higher price -- known as a contingency -- for war policies, federal law prohibits them from collecting reimbursement under the War Hazards Compensation Act.

Hallmark could not recall his department's ever concluding that a premium contained a war-risk contingency.

"It is a very tall order, to try to get into how a particular premium was set," Hallmark said. "We will look at it if someone raises the issue."

Competitive bids?

One public official who has raised the issue is Greenhouse, the Army Corps of Engineers contracting officer.

"The travesty or injustice is the insurance companies getting full repayment for bombs and bullets after putting in contingencies to protect them from losses," Greenhouse said. "That is where the harm is for the taxpayer."

In 2005, Greenhouse started a program requesting bids for the Corps' contractor insurance. She said the winning bid cut rates in half for many contractors, and ultimately for taxpayers. Greenhouse said she also fought against minimum insurance premiums that could run as high as $25,000, even if the contractor would be in Iraq for only a week. The minimum is now $7,500, she said.

The Corps is only a part of the Defense Department contracting budget, Greenhouse said. Huge savings could be gained in the Army's huge logistical supply contract, she said.

Houston-based Halliburton holds that contract, which is managed by the U.S. Army Material Command. Since 2003, the Army says, it has spent at least $284 million on contractors' insurance under the Halliburton contract.

The insurance industry opposes putting the insurance contracts up for bid. "We objected to this sole provider notion," said Wood, the insurance association counsel. "It was inequitable for government to establish a monopoly price and monopoly vendor."

Copyright (c) 2006, The News & Observer, Raleigh, N.C.
Distributed by McClatchy-Tribune Business News.
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