Democratic Report Accuses Insurance Companies of Profiteering From Pentagon Budget

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 program.

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 rule."

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 taxpayer.

"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 price.

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 war.

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 said.