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Army, Insurer in Iraq at Odds

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Times Staff Writer

Besieged financial services giant American International Group Inc. repeatedly has sought to derail an effort by the Pentagon that could save taxpayers millions of dollars on reconstruction work in war zones like Afghanistan and Iraq.

For more than a year, AIG and industry allies have fought an initiative to cut the rates for workers’ compensation insurance that U.S. contractors operating overseas are required to carry, according to interviews and documents obtained by the Los Angeles Times.

Rates have soared since the war in Iraq began, raising suspicions among government officials that the companies may be overcharging contractors and, ultimately, taxpayers who foot the bill. AIG and a handful of other companies dominate the highly specialized market -- whose value since the Sept. 11 attacks has rocketed by more than $1 billion, according to some estimates.

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“We’re saying, let’s stop the train here. We need to look at a new concept,” said Bunnatine Greenhouse, the Army Corps of Engineers official leading a proposal to conduct competitive bidding for the insurance. “We have the insurance companies shaking in their boots right now.”

Pentagon officials said their suspicions grew after the insurance companies began charging rates as much as 30 times higher in Iraq than in developing countries.

Though workers in Iraq face a much higher risk of injury or death from violence, insurance companies do not have to pay those claims.

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Under an obscure government program, the U.S. reimburses any combat-related claims -- meaning that the insurance companies don’t have to bear the risk. The only claims they would be liable for would be those resulting from routine workplace accidents. Thus the rates shouldn’t be directly affected by the violence.

“We couldn’t see a justification for the rates being as high as they were,” a Pentagon official said. “When we saw these rates, eyebrows were raised.”

Industry officials said they objected to government interference in the insurance market and that the higher rates were justified by the high number of workplace accidents in Iraq.

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Joe Norton, a spokesman for AIG, said the rates in Iraq reflected “the hostile work environment,” not the violence itself. He said accident rates in Iraq were much higher than in the rest of the world and that Iraq was unique in terms of the type of work being done, stress, climate and availability of medical care.

Norton also said that only 12% of AIG’s Iraq claims stemmed from war incidents. Another AIG official said at a recent meeting that the company expected as much as 30% of AIG’s premiums to be reimbursed by the government due to combat claims.

At issue is insurance required by the Defense Base Act, a little-known law that mandates workers’ compensation and death benefits for employees of federal contractors working overseas. The law was passed during World War II to protect civilians thrown into the rush to build U.S. bases abroad.

In the ensuing years, there were a few hundred Defense Base Act claims filed annually, mostly for routine workplace injuries suffered on U.S. bases and construction sites. The wars in Afghanistan and Iraq, however, injected new life into the market.

Estimates vary widely, but there are perhaps 30,000 Americans and third-country nationals, and more than 40,000 Iraqis working on U.S. contracts in Iraq, all covered by the workers’ compensation requirement. So far, about 300 contractors have been killed and 2,700 injured.

The Department of Labor, which oversees the claims, has not determined how many were combat-related.

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As casualties mounted, insurance rates skyrocketed, from an average of $4 to $8 for every $100 of a company’s payroll costs, to $20 for every $100. Insurance for a worker making $100,000 a year -- not unusual in Iraq -- would cost an employer $20,000. That cost, in turn, would be built into the company’s contract with the Pentagon -- in effect being paid by U.S. taxpayers.

The increase puzzled U.S. officials because of the reimbursement guaranteed under the War Hazards Compensation Act. The act, also passed in the 1940s, was designed to persuade insurers to write policies for danger zones. The government agrees to reimburse insurers the full cost for combat-related deaths and injuries, plus 15% in administrative fees.

In Iraq, industry observers predict the U.S. will reimburse hundreds of millions of dollars to the insurance industry. Death claims have routinely resulted in payments of $1.2 million to $1.8 million each, depending on the salary and age of the worker, industry officials said. With more than 300 death claims filed so far, that means U.S. taxpayers may pay more than $500 million to insurance companies.

Investigators from the Defense Department and the Government Accountability Office tried without success to get justification from the companies for the much higher rates, officials said.

“It really is a big black box,” said David Cooper, the GAO’s director of acquisition and sourcing management. “There’s some kind of magic that goes on that makes these rates. We don’t have a lot of faith in it.”

A Pentagon official involved in the Army Corps effort said one company’s underwriter explained that the rates were high because “it was 130 degrees. There was a lot of dust. There was a lack of hospitals.”

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“Does that warrant the rates we have seen? We have our doubts,” said the official, who was allowed to speak to a reporter only on condition of anonymity.

Sara K. Payne, a senior vice president at Rutherfoord International Inc., a brokerage that handles Defense Base Act insurance, said rates widely differed around the world.

In Colombia, for instance, a contractor flying helicopters in support of a U.S. State Department drug mission pays $3.87 per $100 of payroll. In Iraq, a contractor flying helicopters pays $90 per $100.

Payne said that carriers had erred on the side of caution in raising their rates in Iraq and Afghanistan to make sure they were able to pay claims. She said reimbursement under the War Hazards Act could take several years, and there was no guarantee the U.S. would accept an insurance carrier’s contention that a claim was combat-related.

The insurance companies “don’t know what they’re up against,” she said. “It’s a judgment rating. They’re picking rates out of the air.”

In October 2003, the Pentagon decided it had to act to bring down the rates, which had begun to eat into funds available for reconstruction projects.

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Under the system, each Defense Department contractor is responsible for buying insurance individually from one of the few companies offering it.

The Pentagon decided to have the Army Corps hold a competitive bidding process in which one insurance company would win the right to cover all Army Corps contractors around the world, a system in place at the State Department and the U.S. Agency for International Development. In those two agencies, insurance experts and U.S. officials said, a blanket policy resulted in cheaper rates by spreading the risk across more workers.

AIG and industry officials, however, said that they opposed the Army Corps effort because the government was unnecessarily injecting itself into the marketplace. Rates have come down over time -- evidence, they said, that the market worked.

Although exact figures are hard to come by -- no agency tracks rates -- prices are believed to have dropped since the beginning of the war in Iraq from an average of about 20% of payroll costs to about 15%, according to government and insurance industry officials.

“We continue to believe that an open market provides contractors the best opportunity to weigh a number of factors in selecting an insurance carrier, including price, expertise and claims-handling ability,” Norton, the AIG spokesman, said.

But insurance industry critics said AIG’s and its allies’ true motive was to protect a large and mostly unregulated profit center that had exploded during the war on terrorism.

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The federal government does not regulate Defense Base Act rates charged by the insurance carriers. A Senate bill that would create an interagency group to study Defense Base Act insurance is awaiting approval.

“There’s very little oversight. People don’t understand it,” said Robert McGarrah, coordinator for workers’ compensation at the AFL-CIO. “You can get away with charging very high rates.”

Four companies issue the vast majority of Defense Base Act policies: New York-based AIG, Bermuda-based ACE Ltd., Chicago-based CNA and New Jersey-based Chubb Corp.

Though CNA has expressed interest in the Army Corps bidding process, AIG, ACE and Chubb have opposed it, the defense official said.

ACE and Chubb declined to comment for this article. However, the American Insurance Assn., which counts both firms as members, said it objected to any effort to award all Defense Base Act insurance business to a single company.

“It’s an astounding step for this administration to take,” said Bruce C. Wood, an assistant general counsel for the association. “We happen to believe that a competitive market working over time is best, not a government market with government-set prices.”

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Several of the firms involved in the effort to block the Army Corps program, including AIG, are facing scrutiny in unrelated probes of insurance industry practices by New York Atty. Gen. Eliot Spitzer and the U.S. Securities and Exchange Commission.

Among other things, Spitzer has accused AIG of manipulating workers’ compensation premiums. But Spitzer’s office said the charges did not involve the Defense Base Act.

The lobbying campaign against the Army Corps program began in March 2004, shortly after the military announced its intention to launch a pilot program. It would be modeled after programs already in place at the State Department and USAID, with rates of about $4 to $5 per $100 in payroll -- far below what Defense Department contractors were paying. CNA now holds both those contracts, using Rutherfoord as an administrator on the claims.

AIG led a group of insurance companies and brokers to protest the competition at a meeting with Deidre Lee, the Pentagon’s top contracting official, in June 2004. Also at the meeting were representatives from ACE and Chubb, and brokers Marsh & McLennan Cos. and Willis Group Holdings Ltd., participants said.

Industry officials said the competition would “destroy the working marketplace,” according to a copy of the presentation obtained by The Times.

The AIG representative, Shane McCaffrey, told Lee that AIG and ACE together controlled “close to 90% of the business” for Defense Base Act insurance issued to Pentagon contractors, according to the Pentagon official.

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“That was a fairly stupid thing to say,” the official said. “They were explaining why they didn’t want us to go forward with this.... It’s a de facto monopoly.”

According to figures maintained by the Labor Department, which administers claims, AIG has filed 80% of the 2,732 claims for deaths and injuries in Iraq and Afghanistan, and ACE has filed 10% of them.

Norton denied that McCaffrey made such a statement. He said AIG did not publicly comment on its share of individual insurance markets, and said that the percentage of claims filed in Iraq and Afghanistan was not necessarily an indication of market percentage.

AIG and ACE lobbyists also went to Capitol Hill to voice their displeasure, according to lobbying reports and Defense Department officials.

By August, industry representatives crowded into a meeting at Ft. Belvoir, Va., held by the Army Corps to listen to the industry’s concerns. It was confrontational, with insurance representatives and brokers charging that the government was stealing potentially billions of dollars in business from them, according to government minutes of the meeting.

At the meeting, the industry issued a series of new questions to the Army Corps, resulting in further delays.

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Earlier this month, the Army Corps formally announced it was moving ahead with the program.

Greenhouse -- the same Corps official who publicly denounced procedures used to award Halliburton Corp. exclusive contracts in Iraq -- said she was determined to press ahead.

“It is going to reduce some costs,” she added. “I can feel the dynamite.”

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