Contractors, insurance firms gouging taxpayers, panel says

Insurance providers, aided by Pentagon inaction, are using an obscure but costly federal insurance program for contractors overseas to gouge U.S. taxpayers, House Oversight and Government Reform Committee members charged at a hearing Thursday.

"What we're really talking about here is war profiteering," said Rep. Jim Cooper, D-Tenn., citing a committee memorandum that suggests leading insurers overestimated the risk faced by 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.

While the State Department and Army Corps of Engineers solicit bids and pick a carrier to offer insurance at fixed rates, the Defense Department, despite congressional pressure to change course, lets contractors negotiate their own deals.

But because the firms pass on the insurance fees to the agencies, they lack incentive to control costs, committee members said.

According to the memo by the committee Democrats, the top four insurers under the law --American International Group, the Chubb Corporation, CNA, and ACE USA -- have had gains of 39 percent between premiums charged and claims paid on insurance policies from 2002 to 2007. Workers compensation insurers normally break even on claims versus payments while making money on investment returns, according to the memo, which relied on data from the insurers. House Oversight and Government Reform Chairman Henry Waxman, D-Calif., citing findings by the Army Audit Agency, said former 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," Waxman said.

Witnesses noted the $73 million may not cover future payouts. Democrats criticized insurers for routinely disputing claims by injured workers. "I view this as looting," said Rep. John Sarbanes, D-Md. "High-end, upscale, white-collar looting."

Committee members and a GAO official faulted the Pentagon for moving too slowly to comply with a provision in the enacted fiscal 2006 defense authorization bill mandating reconsideration of how department contractors get insurance. Waxman said he will introduce a bill requiring the Defense Department to adopt an approach like the State Department's. CBO has already estimated the measure would save more than $300 million a year, he said.

But House Oversight and Government Reform ranking member Tom Davis, R-Va., said the Pentagon's size might mean a so-called "single-source" approach to insurance would reduce competition and raise costs. Davis said Waxman's bill should cover insurance only in war zones. Richard Ginman, the Pentagon's deputy director for defense procurement and acquisition policy, testified that the department in 1996 found it saved money by letting contractors buy insurance themselves, though Ginman noted costs have shot up since 2003.

Though committee members cited data showing premiums in Iraq rose far above the increase in danager to contractors, insurers say their prices reflect increased risk of covering employees in a war zone. "AIG is confident that we price our DBA 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," a company spokesman said in a statement.