Defense Base Act Revisited

May 23, 2008 • Commentary
This article appeared in United Press International on May 23, 2008.

My earlier column on mandatory employee insurance for defense contractors under the Defense Base Act stirred up a bit of a hornets’ nest. As this is a complex issue, I think it is worth revisiting, especially in light of a House Oversight and Government Reform Committee hearing on the issue last week chaired by Rep. Henry Waxman, D‐​Calif.

Three points in particular I made raised people’s blood pressure: that Pentagon contractors sometimes waived DBA requirements; that the cost‐​effectiveness of DBA insurance for the U.S. taxpayer remains unclear; and that insurers repeatedly blocked claims for treatment of psychological injuries sustained by civilian workers in Iraq and Afghanistan.

Can Pentagon contractors waive DBA insurance requirements? In theory, no. The Department of Labor, which administers the DBA program, is very clear. Among other criteria, the DBA applies to all employees, not just U.S. nationals; it applies to subcontractors at any level or degree of separation; it applies to foreign companies hiring third‐​country nationals; and it applies regardless of the employment contract or length of employment.

There are some circumstances in which the DBA can be waived, but they are extremely limited, such as for workers in Guam.

That makes what Washington reporter David Phinney found in 2006 so astonishing. He obtained and posted a one‐​page memo that apparently allowed Halliburton/​KBR to waive insurance requirements for potential subcontractors working under Halliburton’s huge LOGCAP logistical support contract with the Pentagon. The waiver granted KBR contract officers the freedom to ignore insurance requirements when subcontractors claimed they could not find a suitable insurance carrier.

As one attorney told him, “If KBR must require subcontractors to obtain insurance, and it’s not doing so, then every invoice certifying contract compliance is a false claim.”

Phinney told me that officials with whom he had spoken said the waiver was “an internal matter” for KBR, and the issue appears to have sunk without a trace — it was not even mentioned at the Waxman hearing.

Is the way DBA insurance is negotiated cost‐​effective for the taxpayer? Some members of Congress think not.

Waxman said the State Department, the U.S. Agency for International Development and the U.S. Army Corps of Engineers approach the DBA requirement responsibly. They conducted a competition to select a single insurance provider to offer this insurance at low rates to all of their contractors.

But insurance lobbyists say the provider they chose, CNA, actually lost money on the deal, paying out 8 percent more in claims and expenses than it has received in premiums.

Waxman said insurers offering workers’ compensation that also pay out as much as or more than they take in through premiums make their money on investment returns they earn after they have received the premiums and before they pay out claims and expenses.

But Bruce Wood, associate general counsel and director of workers’ compensation at the American Insurance Association, asked whether any industry should be required to work that way. “It is deemed OK that CNA should have an underwriting loss. It is OK to lose money with the hope that one makes it up on the investment side. Is there any other industry that works that way?”

With the bursting of the tech bubble in 2000 and the more recent slump in real estate markets, investment returns have fallen to the point where insurers cannot be sure of making their money this way.

Waxman contrasted the State Department and USAID approach with that of the Pentagon, which allows contractors to negotiate their own individual insurance contracts, producing what Waxman says is a boondoggle for the insurance companies and the private contractors — at the taxpayers’ expense.

As an example, he cited the LOGCAP troop support contract, which at the start of the Iraq War was held by KBR, then a Halliburton subsidiary. KBR paid AIG $284 million for workers’ compensation coverage. KBR’s contract was cost‐​plus, meaning the government agrees to pay all the companies’ costs plus a percentage to guarantee them a profit. So the $284 million premium plus a markup for KBR of up to $8 million was billed to the taxpayer, for a total of $292 million. Out of this amount, just $73 million actually goes to injured contractors, and AIG and KBR pocket the rest.

Waxman said, “This is disgraceful. The taxpayer is paying nearly $300 million to deliver less than $75 million in benefits to injured contractors. Rube Goldberg could not design a more inefficient way to help employees wounded or injured in Iraq.”

Do insurers block claims for treatment of injuries? DBA rules are clear. “First payment of compensation is due within 14 days of the first day of disability. No compensation is due if time loss is less than three days.”

And, generally speaking, DBA coverage is much broader than standard domestic workers’ comp, which covers injuries only at the workplace, while DBA is a 24/7 deal. DBA requires an employer to file a claim within 10 days of the date that the employer first has knowledge of an injury/​illness (or death) that causes the employee to lose one or more shifts of work. The penalty for failure to file is up to $10,000, payable by the employer.

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