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AIG may have overcharged KBR and other contractors for Defense Base Act Coverage February 29, 2008

Posted by Aaron Walter in Uncategorized.
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This comes as no surprise to many, but AIG may have been lining its pockets at the expense U.S. taxpayers. AIG is currently under investigation for overcharging KBR Inc., the Army’s largest contractor in Iraq, possibly by tens of millions. The money paying for these overpriced premiums comes from tax payers as part of the $23+ Billion contract KBR has with the Department of Defense.  AIG actually gets to charge the American tax payer twice, because your tax dollars not only pay the premiems, but also reimburse AIG for what it pays out on the 15,000+ Defense Base Act claims filed with AIG since 2003.

In case you missed this story, read more about it below in an article from Bloomberg.com by Tony Capaccio:   

AIG May Have Overcharged on War Coverage, Army Says

Dec. 4 (Bloomberg) — American International Group Inc., the world’s largest insurer, may have overcharged defense contractors for the life and casualty coverage they are required to buy for their workers, according to a U.S. Army audit.

The premiums AIG charged to KBR Inc., the Army’s largest contractor in Iraq, showed “wide swings” that appeared “excessive” before dropping in 2006, the audit said. The premiums, amounting to $284.3 million from 2003 to 2006, “substantially exceeded” the estimated cost of less than $73.1 million in KBR claims for those four years, the audit said.

The rates appear “unreasonably high based on the significant fluctuations and the expected value of claims to be paid,” the Army Audit Agency said in a document obtained by Bloomberg News under the Freedom of Information Act. “These indicators create a heightened risk” that AIG “could have been overcharging.”

The audit, which lawmakers say may trigger congressional probes, is the latest example of government scrutiny of KBR, the largest private contractor in Iraq. The former unit of Halliburton Co. has been the focus of congressional probes and U.S. Army reviews focused on whether the company is managing its work effectively, including a $23 billion contract with the Army for troop support.

Insurance for all U.S. contractors doing business overseas is required by the 1941 Defense Base Act. The government pays the premiums. In many cases, if the injury or death is war-related, insurers will be reimbursed as well for the full cost of benefits, plus 15 percent in administrative fees.

No `Adequate Controls’

The Army audit, dated Sept. 28, concluded that “adequate controls weren’t in place to make sure” insurance costs “were minimized.”

“We believe similar problems could exist on other contracts,” the audit said. “Given the large amount of money paid for this insurance and the increased risk the Army could be overcharged, we believe” these costs “warrant an increased level of scrutiny,” the audit said.

New York City-based AIG has been Houston-based KBR’s sole war-coverage insurer since 2003, said KBR spokeswoman Heather Browne. KBR has 50,000 U.S. and foreign workers in Iraq and Afghanistan, she said.

AIG spokesman Chris Winans said the company had no comment on the audit and, “to our knowledge, the Army hasn’t contacted us about it.” These premiums contributed “far less” than one- half percent of AIG’s $113 billion revenue in 2006, he said.

`Competitive Process’

This coverage entails “a lot more expense” than “just paying out and reserving” money for claims, Winans said. AIG’s role “is not only paying covered claims promptly and maintaining the financial strength to do that but also providing the best possible support when workers are injured.”

Setting annual premiums is an “open, competitive process in which virtually every interested party — including the government — participates,” Winans said in an e-mailed statement.

AIG prices its 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, including lifetime death and disability benefits,” the statement said.

KBR’s Premiums

KBR’s rates ranged from a low of $3.75 per $100 of payroll in fiscal 2003 to a high of $16.20 in 2004 before dropping to $13.80 in 2005 and $8.50 in 2006, according to the audit.

KBR did question its insurance broker about “the approximate four-fold increase in rates between” fiscal 2003 and 2004, the audit said.

Browne, the KBR spokeswoman, said the rate for fiscal 2004, which the Army questioned as high, reflected “the substantial increase” in the number of workers in Iraq and Kuwait after the Iraq invasion.

U.S. contractors operating in Iraq from March 2003 through Sept. 30 filed 17,588 claims with insurers, including 1,078 death claims, according to the Labor Department. AIG received 14,826 of these claims.

Medical benefit and compensation payments by all insurers issuing this coverage have increased to $115 million in fiscal 2006 from $11 million in fiscal 2003, according to the Labor Department.

Congressional Probes

The Army audit will probably trigger stronger congressional oversight over insurance premiums paid out for the Iraq war, said Democratic Representative Jan Schakowsky of Illinois, when told of the findings.

“I’ve been concerned about the high premiums and insurance payments the U.S. government has been paying for some time,” said Schakowsky, a member of the House Intelligence and Energy and Commerce committees, who has pushed for stronger oversight of private security contractors.

Schakowsky and Henry Waxman of California, chairman of the House Oversight and Government Reform Committee, wrote Labor Secretary Elaine Chao in October asking how much the federal government is reimbursing companies for premiums and how much it is paying for war-related deaths or injuries.

Chao hasn’t responded, Schakowsky said. Labor Department spokesman David James didn’t return several calls and e-mails seeking a comment.

Waxman, in an e-mailed statement today, said, “If true, the findings in this new audit raise serious questions about overcharging the taxpayer. Unfortunately, the Department of Labor has not been cooperative to date.”

Army Deputy Assistant Secretary for Procurement Policy Tina Ballard, in a written response included with the audit, said the service may adopt a pilot program used by the Army Corps of Engineers that has reduced rates by selecting one commercial insurer through competition to cover all the Corps’ contractors.

“In the interim, we will carefully audit DBA premiums to ensure that the base used to calculate rates is fair and reasonable,” Ballard wrote.

To contact the reporter on this story: Tony Capaccio at acapaccio@bloomberg.net ;



1. Iraq Contractor KBR Has Dodged $500 Million in U.S. taxes « The Defense Base Act Blog - March 10, 2008

[…] KBR has been passing along to the American taxpayer, AIG’s inflated premiums for Defense Base Act coverage, so that KBR (and other contractors in Iraq and Afghanistan) could be […]

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