Wars test limits of law requiring insurance for overseas contractors

A 1941 law mandating insurance for contractors working overseas was not designed to handle conflicts on the scale of the wars in Iraq and Afghanistan and should be reformed, witnesses told a House panel on Thursday evening.

The Defense Base Act originally was intended to cover a small contingent of engineers and construction workers overseas, officials told the House Oversight and Government Reform Domestic Policy Subcommittee during a hearing delayed by five hours due to a marathon lineup of votes on the fiscal 2010 Commerce-Justice-Science appropriations bill. But about 200,000 civilian workers are involved in the conflicts in Iraq and Afghanistan and nearly 35,000 contractor employees have been injured or killed since the wars began.

The act requires civilian contractors to purchase insurance for injuries or potential fatalities sustained on the job. The government must build the cost of that insurance into contracts, and the Labor Department is responsible for monitoring compliance.

Seth Harris, deputy secretary of Labor, conceded the department faces "systematic challenges" in administering the law and said DBA is "insufficient to meet the needs of its participants." He cited a litany of problems, including difficulty tracking overseas contractors, language barriers, insufficient resources and an inability to act as an adjudicator in claims disputes between contractors and insurance companies.

Congress, he said, needs to fundamentally reform the law. "Tinkering around the edges is not going to work," Harris said.

Next month, the Defense Department is scheduled to release a report outlining a number of potential reforms. Witnesses suggested creating a governmentwide self-insurance plan or allowing injured contractors to receive care at veteran hospitals.

The Defense Base Act requires insurance providers to decide within 14 days whether to approve compensation for an injury. George Fay, executive vice president for CNA Financial, the overseas insurance carrier for the State Department, the U.S. Agency for International Development and the Army Corps of Engineers, said that time frame is unrealistic and leads to miscommunication and unintended consequences.

"The unfortunate result is that claims representatives are in effect obliged to file a notice with the Department of Labor that, while often intended as nothing more than a placeholder, is improperly interpreted by the department as either an improper delay, or worse, as an outright denial," said Fay, a retired U.S. Army Reserve general who served for four years in Iraq.

Between 2003 and 2007, an average of 11,000 civilian contractors annually filed injury claims with the Labor Department under the Defense Base Act, Fay said. Total payments for health care and benefits related to these claims rose fourteenfold during the first four years of the Iraq war, to more than $170 million annually, he said.

But, profits for insurance carriers also have skyrocked. Subcommittee investigators found that since the wars began insurers have collected more than $1.5 billion in premiums under the Defense Base Act -- all paid by taxpayers -- but paid out only $900 million in benefits.

"The single biggest cause of these failures is the insurance carriers' practice of seeking to profit in every way possible from our fight for national survival instead of becoming part of the forces united against our enemies," said Timothy Newman, a former DynCorp contractor who lost his leg when an improvised explosive device detonated in Iraq.

Other injured contractors testified that insurance carriers refused to pay for treatment, medication and surgeries despite orders from the Labor Department or judges.

"We demand that we receive the care that was promised us and we deserve," said Kevin Smith, a former truck driver for the Defense contractor KBR who was severely injured in Baghdad in 2004 when his convoy was ambushed by insurgents and was later diagnosed with post-traumatic stress disorder. "We are not asking for … [extravagant] bonuses, or lavish parties or even parades. We just want what we are entitled to under the Defense Base Act like medical care, disability pay and retraining if necessary."

Charles Woodson, who used a magnifying glass to read his testimony after losing most of his vision to a roadside bomb in Iraq, added: "Every aspect is a disagreement, a complex and indefinite process."

Top executives from AIG, now rebranded as AIU Holdings Inc., defended the company's decisions and motives, pointing the finger at a lack of Labor Department oversight and a system overtaxed with cases. "We are doing everything we can do," suggested Charles Schader, senior vice president and chief claims officer for AIU Holdings.

Insurance companies also reap a profit from challenging a claimant's benefit, said Gary Pitts, who has represented hundreds of injured civilian contractors. Not only can they potentially reduce or eliminate the benefit, but they also earn an additional 15 percent in administrative fees. "There is a built-in incentive for carriers to benefit from litigation," Pitts said.

Lawmakers vowed swift reform and said insurance companies should be prepared to turn over additional documents.

"The way this is structured, insurance companies can't lose," said Rep. Elijah Cummings, D-Md. "It's almost criminal."