US: Defense Discovers Insurance Companies Charge Huge Fees for Contractors Overseas

The Pnetagon wants to overhaul a controversial $5.5 billion workers' compensation insurance program for overseas civilian contractors after discovering that it is paying up to 10 times more for insurance than other government agencies.
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USA Today

The Defense Department wants to overhaul a controversial $5.5 billion workers' compensation insurance program for its civilian contractors overseas after discovering that it is paying up to 10 times more for the insurance than other government agencies while leaving taxpayers exposed to large uncovered claims.

Facing questions about the program's costs from Congress and the Government Accountability Office, the Pentagon plans to impose tighter discipline on the massive program by centralizing its administration under one prime contractor, which would provide fixed-rate coverage under a proposal up for bid in July.

In response, several insurers led by American International Group, which has covered 80% of the workers' comp claims to date in Iraq and 70% of the Pentagon contractors' claims worldwide, are threatening not to compete for the business.

AIG spokesman Joe Norton said the Pentagon's proposal "would eliminate a competitive marketplace." He said higher workers' compensation premiums for defense contractors reflect the "more hazardous" conditions they face in war zones.

Officials at ACE, CNA and Chubb, which also underwrite the foreign coverage, declined to comment.

In April, the GAO discovered that Defense contractors were paying up to $21 in workers' compensation premiums for each $100 in workers' salary, compared with as little as $2 in insurance costs for contractors employed by the State Department. The contractors' insurance premiums are borne by the government, which also pays the workers' claims if an injury or death is directly caused by a "war-risk hazard."

Citing broad "confusion" in the program, the GAO said it was unable to estimate the potential taxpayer cost of the program, or even how many civilian contractors are covered by it. However, the rising death toll in Iraq and Afghanistan appears certain to contribute to higher benefits payouts over many years.

Until the Sept. 11 attacks, workers' compensation benefits for civilian contractors came at a negligible cost to taxpayers. But when contractors began taking on higher-profile roles, insurers wanted to be compensated for their elevated risk, says insurance broker Sara Payne, senior vice president of Rutherfoord International.

Payne says insurers that provided workers' compensation coverage to private helicopter pilots in Iraq initially demanded $90 in premium revenue for each $100 in worker pay, though that rate eventually came down. "There's nobody regulating the rates," she says.

Yet Payne also says insurers face years of delay before the government reimburses war claims - and frequently end up absorbing the cost. When a man for whom she obtained coverage died in Iraq of a stress-related heart attack, Payne says, the insurer rather than the government paid the death benefit.

 Workers' comp in Iraq
AIG subsidiary Insurance Co. of Pennsylvania is the largest underwriter of workers' compensation insurance for the Pentagon's civilian contractors in Iraq, processing 80% of the total claims and 68% of all death-benefit applications.
Death benefits
Total claims
Insurance Co. of the State of Penn.
ACE American Insurance
Continental Casualty
Fidelity and Casualty Co. of N.Y.
Liberty Mutual Insurance
Chubb Indemnity Insurance
Source: U.S. Labor Department
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