Insurers Accused Of Profiteering On Defense Base Comp Risks

WASHINGTON--Democratic members of a House oversight committee last week accused several insurers of "war profiteering" because the Defense Department allows defense contractors to secure their own workers' compensation insurance on overseas contracts.

Indeed, Rep. Henry Waxman, D-Calif., chairman of the panel, the House Oversight and Government Reform Committee, said he would soon introduce legislation requiring the DOD to follow the policies of the State Department and Army Corps of Engineers on workers' compensation insurance on foreign contracts.

Those agencies take bids for the coverage. But DOD was said to allow contracting firms to get their own coverage and pass costs back to the government.

AIG, one of four insurers cited for alleged "profiteering" at the hearing, defended its charges.

In a statement released after the hearing, AIG said it is "confident that we price our DBA [Defense Base Act] coverage as accurately and fairly as possible, given the inherent high risks of this insurance line in these regions, the uncertainties concerning the frequency and severity of future claims, and the obligation to pay claims for many years after the losses occur, including lifetime death and disability benefits."

The standard used to charge the insurers was based on the policies of the State Department and Corps of Engineers. According to testimony at the hearing, these agencies solicit bids and pick a carrier to offer insurance at fixed rates.

But the DOD, despite congressional pressure to change course, allows its contractors to negotiate their own deals, the panel members said.

And, because the firms pass on the insurance fees to the various agencies of the DOD, they lack incentive to control costs, Democratic committee members charged.

"What we're really talking about here is war profiteering," said Rep. Jim Cooper, D-Tenn. Rep. Cooper's comment was based on a memo prepared by the committee's Democratic staff.

The memo said that leading insurers overestimated the risk facedby contractors in Iraq to win profits far exceeding normal domestic returns. Under the Defense Base Insurance Act, U.S. contractors and subcontractors abroad must buy workers' compensation insurance.

The memo from the majority staff of the committee was based on data provided by the top four insurers used by the DOD: American International Group, the Chubb Corp., CNA and ACE USA.

The memo said the insurers have had gains of 39 percent between premiums charged and claims paid on insurance policies from 2002 to 2007.

According to the memo, workers' comp insurers normally break even on claims versus payments while making money on investment returns.

Rep. Waxman, basing his comments on a memo from the Army Audit Agency, saidformer Halliburton subsidiary KBR has paid AIG $284 million for insurance and added its own markup of $8 million, even as AIG paid out $73 million in claims.

"This is disgraceful," Rep. Waxman said. Witnesses at the hearing said the $73 million may not cover future payouts.

The insurers were also criticized because they usually disputed claims by injured workers.

"I view this as looting," said Rep. John Sarbanes, D-Md. "High-end, upscale, white-collar looting."

Defending the AIG policy, Mr. Winans said that any DBA proposal to a broker and its client encompasses price, the scope of coverage and the services to be provided.

"The broker and the insurance buyer together evaluate the proposal relative to the alternatives and make a selection based on numerous factors, of which price is only one of several important elements," he said.

As for the specifics on the profitability of DBA business, "we wouldn't comment since we don't disclose financial data on individual lines of business like this," Mr. Winans added.