Remember...Condi is in CHARGE!
Iraq contractors' Sky-High Insurance Costs Hobble Efforts
By Vernon Silver
Bloomberg News
Thursday 27 November 2003
Six weeks after Specialist Randy Baylen of the U.S. Army's Third Infantry Division rolled into
Baghdad on April 8 and helped topple Saddam Hussein, he was still eating meals meant for the
battlefield: precooked food in foil bags. Based at the Al-Rashid Hotel, Baylen showered and washed his
sand-caked clothes by the empty swimming pool. "They don't want to make us feel too comfortable,"
he said at the time.
Baylen lacked food and access to plumbing partly because the civilian contractors that were
supposed to provide them were unable to obtain insurance.
The difficulty in getting coverage in Iraq has had negative repercussions during the invasion, the
occupation and the rebuilding. Premiums that jumped as much as 500 percent in the weeks before the
war contributed to civilian contractors' delays in getting food, water, showers and toilets to troops, says
the U.S. Army's logistics chief at the time, Lt. Gen. Charles S. Mahan Jr.
More than a month after Baghdad fell in April, members of the tank platoon guarding the Central
Bank of Iraq said they were so low on rationed water that soldiers turned to intravenous bags from their
medical kit for hydration. They defecated in plastic shopping bags that they burned on a trash heap in
front of the headquarters of Rasheed Bank, Iraq's second-largest bank.
The cost of insuring workers and equipment has soared. "Virtually every one of the contractors'
indemnification went up 300-400 percent," Mahan says. The contractors then had to reevaluate their
business plans to take the higher costs into account. "That's why we were a little slow off the take on
getting materials and people there.
"Ultimately, our soldiers suffered," says Mahan, 57, who retired in November. "We had soldiers
living pretty badly early on."
From war to reconstruction, insurance is playing an important but little-noticed role in Iraq.
Insurance has gained in importance as the United States gives private corporations tasks that were
formerly done by military personnel, from feeding troops and guarding bases to repairing sewage and
power systems.
"By over-outsourcing, you've made yourself at the mercy of the market," says Peter Singer, a fellow
at the Brookings Institution in Washington and author of the book "Corporate Warriors" (Cornell
University Press, 2003).
He says the ratio of contractors to soldiers at war has jumped tenfold since the first Persian Gulf
War, in 1991, to one contractor for every 10 military members. "Insurance is one of these market
forces you have to take into account," he says.
The insurance business is one that U.S. Ambassador L. Paul Bremer III is well versed in. Before
becoming the top-ranking U.S. official in Iraq, Bremer had been chief executive officer of a unit of Marsh
& McLennan Cos., the world's biggest insurance broker. In October 2001, he assembled the unit called
Marsh Crisis Consulting, for advising companies on planning for and recovering from terrorism, natural
disasters, lawsuits and financial misconduct.
On Sept. 19, Bremer underscored the importance of insurance when he signed an order that
opened Iraqi industry to 100 percent foreign ownership except for three precious sectors: oil, banking
and insurance. U.S. and Iraqi financial advisers are drafting a law that would regulate insurance
companies and require that they obtain Iraqi government licenses.
The U.S. military has lagged other U.S. agencies in helping its contractors get insurance. The
State Department and the U.S. Agency for International Development (USAID), an independent agency
that gives aid around the world to further U.S. foreign policy goals, each began the war having
negotiated bulk insurance for their contractors years before.
The Pentagon tried -- and failed -- to win such insurance for its contractors half a year after the war
started.
On Aug. 8, after the invasion, the Defense Department asked insurance agencies to submit
proposals for selling discounted death and injury coverage to military contractors in Iraq, Afghanistan
and Kuwait.
Not a single insurance company bid on the solicitation, which expired Sept. 2, because the risks
were too high to make it profitable.
Because high insurance costs are squeezing defense contractors' profits in those war zones, the
military is still trying to find coverage, says Domenico Cipicchio, deputy director of policy in the
Defense Department's defense procurement and acquisition policy office. "The higher rates that were
being quoted is a driving factor," he says.
In Iraq, many Defense Department contractors are paying $10-$100 per $100 of payroll for workers'
compensation, says Sara K. Payne, a vice president at Alexandria, Va.-based Rutherfoord
International Inc., the privately owned insurance company that's the exclusive agent for such coverage
under USAID and State Department contracts. That's from five to 20 times what contractors to USAID
pay.
Under USAID's arrangement with Rutherfoord, all death and accident insurance anywhere in the
world -- including divers who are demining the port of Umm Qasr -- is locked in at $2.15 for every $100
of payroll, Payne says. For State Department contractors, it ranges from $4.30 to $5.56.
Rutherfoord's underwriters are able to charge the lower premiums for Iraq because they spread their
risk, charging the same rate in safer countries such as Germany, Payne says.
Rutherfoord didn't bid on the Pentagon's proposal because the coverage was for just three
dangerous countries, she says, and it would have had to charge too high a premium.
After the war started, the United States waived insurance requirements for some companies while
making others buy policies as premiums soared. The process has favored such U.S. companies as
San Francisco-based Bechtel Group Inc. and Iraqi companies whose support the United States needs
to build goodwill in the country.
USAID was ready by April 1 to award its "mother contract" to fix Iraq's roads, electrical systems
and other facilities. With bombs falling, the companies bidding on the contract complained to USAID
that they couldn't get policies for a war zone, says USAID's procurement director, Tim Beans.
"All of them were having difficulty getting insurance coverage," Beans says. USAID passed the
contractors' concerns on to the White House, requesting a liability waiver for many battlefield risks, he
says.
President Bush resolved the issue on April 17. In a memo to USAID, he invoked national defense to
indemnify the contractor for damages from unexploded ordnance, land or sea mines or similar
explosive devices and chemical, biological, radiological or nuclear weapons and materials. The U.S.
government -- and by extension, its taxpayers -- would pay any such damages.
That same day, USAID named Bechtel as its contractor.
Beans says USAID had chosen Bechtel a few days earlier but couldn't grant the contract while the
insurance issue was still pending.
How much is the indemnification worth? "They couldn't put a price tag on it," Beans says.
Bush's memo gave Bechtel a big advantage, says Marcus Corbally, a director of London-based
Axco Insurance Information Services Ltd., which advises insurance companies on the risks of writing
policies in various parts of the world. "It's a substantial amount of money they'd be saving," he says.
As it hands out subcontracts, Bechtel is helping carry out U.S. policy by waiving most insurance
requirements for Iraqi companies while imposing the requirements on subcontractors from other
countries, according to Iraqi contractors and Bechtel. Favoring Iraqis is policy, Bremer says.
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