Bechtel benefits in Iraq insurance crisis
By Vernon Silver
Bloomberg News Service
Six weeks after Spc. Randy Baylen of the 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 plumbing partly because the civilian contractors that were supposed to provide them were unable to obtain insurance to protect them against liability for injury, death and damage caused by unexploded ordnance and other threats.
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.
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 re-evaluate 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.
Little-noticed role
"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 Washington gives private corporations tasks that were formerly done by military people, 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 ten-fold 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.
Ex-insurance exec in charge
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 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, 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.
Pentagon failure
The Pentagon tried — and failed — to win such insurance for its contractors half a year after the war started.
On Aug. 8, months 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.
High costs
In Iraq, many Defense Department contractors are paying $10 to $100 per $100 of payroll for workers' compensation, says Sara K. Payne, a vice president at Alexandria, Virginia-based Rutherfoord International Inc., the 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.
Watching the news
"The underwriters watch the news like everyone else," says Payne, whose agency sells Iraq policies from American International Group Inc., the world's largest insurer, and CNA Financial Corp., the insurance company controlled by Loews Corp. Britain's biggest construction company, Balfour Beatty Plc, cited insurance concerns in November when it backed out of talks to do reconstruction work in Iraq.
Mahan, the general who ran army logistics, says insurance began to be a big issue after an incident two months before the war began. On Jan. 21, a gunman in Kuwait ambushed a contractor's silver Toyota sport-utility vehicle, killing Michael Pouliot, executive vice president and cofounder of Tapestry Solutions, a San Diego-based software maker working with the Defense Department.
The shooting spurred insurers to raise rates, Mahan says. "I've heard from 30 contractors that their cost of insurance for going into that area went up," he says. "Would you be rushing into the gap with a 400 percent cost increase in insurance? I bet not," says Mahan, who couldn't name a contractor who had an insurance delay but says he's sure it happened.
Requirements waived
After the war started, Washington waived insurance requirements for some companies while making others buy policies as premiums soared. The process has favored such U.S. companies as Bechtel Group Inc. and Iraqi companies whose support the U.S. needs to build good will 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 days earlier but couldn't grant the contract while the insurance issue was still pending.
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.
