US: Contractors, insurance firms gouging taxpayers, panel says

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Associated Press
WASHINGTON (AP) - A poorly run Pentagon program for providing
workman's compensation for civilian employees in Iraq and Afghanistan
has allowed defense contractors and insurance companies to gouge
American taxpayers, a House committee said Thursday.

Insurance companies alone have collected nearly $600 million in
excessive profits over the past five years, says a Democratic staff
report from the House Oversight and Government Reform Committee, but
the Defense Department refuses to adjust its approach for managing the

According to the committee, the Pentagon allows its contractors to
negotiate their own insurance contracts. By contrast, the State
Department, U.S. Agency for International Development and the Army
Corps of Engineers have all selected a single insurance carrier to
provide the insurance at fixed rates.

"What makes the situation even worse is the people this program
is supposed to benefit - the injured employees working for
contractors - have to fight the insurance companies to get their
benefits," committee Chairman Henry Waxman, D-Calif., said at a
hearing Thursday. "Delays and denials in paying claims are the

KBR Inc., one of the largest defense contractors in Iraq, paid the
insurance giant AIG $284 million for medical and disability coverage
under the Defense Base Act, a reference to the federal law mandating
the insurance. Due to the way KBR's contract is structured, this
premium, along with an $8 million markup for KBR, gets billed to the

"Out of this amount, just $73 million actually goes to injured
contractors, and AIG and KBR pocket over $100 million as profit,"
Waxman said.

In an e-mailed statement, AIG spokesman Chris Winans said the company
is reviewing the staff report. But AIG is confident its coverage is
accurately and fairly priced given the high risks to workers in war
zones and the potential for sizable claims, Winans said.

All contractors doing work overseas for U.S. government agencies are
required to insure their civilian employees, many of whom are handling
dangerous jobs in hostile areas. Contractors get the coverage from
private insurance companies, then they're reimbursed for what they
spend. The insurance costs are included in the contract's overall

The Associated Press reported Wednesday that the Army Criminal
Investigation Command has opened a probe into two companies working on
Iraq reconstruction that have been accused of padding their profits by
claiming reimbursements from the Corps of Engineers for insurance
coverage they never purchased.

The probe of two Iraqi companies located in Tikrit - Sakar al-Fahal
and al-Jubori - led the Corps of Engineers to scour its records for
evidence of fraud by other contractors hired with billions of U.S.
dollars to help rebuild Iraqi infrastructure devastated by the

Rep. Darrell Issa, R-Calif., asked what the Corps of Engineers is
doing to stop other companies from bilking the federal government for
unpaid insurance coverage.

James Dalton, chief of engineering and construction for the Corps of
Engineers, said contracting officers are trained to look for signs of
fraud. The case involving the Iraqi companies, Dalton said, "was
found through routine oversight of our contracts."

Waxman asked John Needham of the Government Accountability Office if
U.S. taxpayers were getting the most for their money.

"It's not apparent they are," answered Needham, who added
that the Defense Department has been unable to collect data on how
much is spent on insurance for defense contracts.

Richard Ginman, a senior Pentagon acquisition official, said the Army
Corps of Engineers' approach stems from a pilot program the Defense
Department began in 2003 after contractors doing business in Iraq
complained about the high cost of the mandatory coverage.

Rates for the Defense Base Act insurance had ballooned from $4 per
$100 of employee salary to a ratio of $20 per $100 of compensation. It
was especially tough for small companies to get the mandatory
insurance, Ginman said.

Through the pilot program, Chicago-based Continental Insurance Company
offered companies with Corps of Engineers contracts at lower fixed
rates. A company with a construction contract, for example, would pay
$7.25 for every $100 of payroll.

The Pentagon is still studying that program's results to determine if
it makes sense to require all military branches and agencies to use
it, Ginman said.

Rep. Jim Cooper, D-Tenn., said the pilot effort has already saved $19
million and he criticized the Defense Department for moving too slowly
to make needed changes.

"The foot dragging seems to be contagious," Cooper said.

But Rep. Tom Davis, R-Va., the committee's top Republican, said using
a single insurance company may not be possible for the Defense
Department. The military's obligations under the Defense Base Act, he
said, dwarf those of other federal agencies.

"It's not clear
that any insurance provider would be willing to underwrite (Defense
Base Act) insurance for all DOD contractors, or that contractors would
be willing to participate on those terms," Davis
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