Risk Spotlight: Government Contracts Overseas Increasing While Defense Base Act Sees Changes
Published on: 04-Sep- 2012 | Comments: 0
The number of contracts in Iraq and Afghanistan sponsored by the US government for infrastructure projects—including construction of water treatment plants, roads, dams, and schools—is expected to increase in the near future. For contractors employing civilian workers abroad on US government agency funded projects, this will either expand existing or create new exposures for the primary workers’ compensation vehicle used for overseas risks, the Defense Base Act (DBA). At the same time, DBA insurance is undergoing changes that have led to significant pricing increases for some organizations.
Current DBA Exposures
Unlike other employees of US companies—whose wages and medical benefits are covered by workers’ compensation insurance if injured on the job—civilian workers employed overseas by US government sponsored contractors are covered under DBA benefits. Further, unlike state regulated workers' compensation schemes, DBA is regulated by the Department of Labor. All private businesses receiving such a government contract are required to provide DBA benefits for their employees, which they obtain from private US registered insurers, of which there are eight currently in the DBA market.
Given the nature, volume, and locations of the work, DBA exposures and claims are growing in frequency and complexity. According to the federal Office of Workers’ Compensation Programs:
- More than 78,000 DBA claims were made between September 2001 and September 2011 involving workers from nearly 1,900 companies.
- In 2008 (the latest year for which data is available) nearly $200 million in DBA claim payments were made.
- The number of workers injured annually has increased over the past several years.
There are currently three primary government agencies employing civilian contractors overseas: the US Agency for International Development (USAID); the Department of State (DOS), and the Department of Defense, including the US Army Corps of Engineers. To date, about 80 percent of the exposures are in Afghanistan and Iraq, with others in Israel, Bosnia; Kuwait; Germany; Okinawa, Japan; and a few other countries.
DBA insurance applies only to civilian contractors. Government employees are self-insured under the Non-Appropriated Fund Instrumentalities Act. A waiver of the DBA coverage for local and third country nationals is available, and routinely granted, upon application to the Department of Labor. However, no waiver is granted for:
- US citizens, no matter where hired.
- US legal residents (green card holders), no matter where hired.
- Anyone physically hired in the United States.
Waivers are subject to the proviso that the contractor provides a local workers’ compensation program with benefits equal to local laws. In Iraq and Afghanistan no local laws yet exist, so locals are subject to DBA provisions. Since benefits are contingent to actual wages, rates for locals of these countries are typically lower than for US citizens. There are also special provisions for handling claims involving locals and third country nationals. These provisions often are favorable to the insuring company and allow for special settlement procedures.
All carriers provide some form of emergency evacuation service in their DBA coverage package. This can be in the form of an emergency service provider, which often includes a network of offices worldwide. These services may be owned by the insurer or contracted out.
Carriers provide coverage beyond DBA depending on the insured and the exposure. The most common coverage is employers’ liability, with limits that may be US$500,000 or US$1 million per occurrence. Other coverages offered include business travel accident, emergency medical, kidnap and ransom, and foreign liability package programs.
DBA Program Changes
DBA coverage for DOS projects had been handled differently than other DBA placements for approximately 20 years; that situation has now changed. In 1991, the DOS created a single source DBA insurance program to improve contract administration, avoid unnecessary insurance costs, and limit its potential liability. The idea was to provide DOS contractors with a single source, flat rate DBA insurance program for ease of administration, and, more importantly, take out the uncertainty of insurers’ open market rating practices.
The DOS exclusive DBA program with insurer CNA ended on July 22, 2012. The DOS had put together an RFP in May 2012, but no insurers bid on the proposed program. As a result, the DOS decided that coverage would need to be placed in the open DBA insurance market for the time being. This move is likely to result in significant pricing increases to contractors—in many cases multiples of what they have historically paid.
In addition, minimum premiums that are significantly higher than the expiring DOS program pricing may apply. The impact will be of great significance to contractors as they calculate their bid pricing as either contractors or subcontractors for DOS work. The significance of the price increase will also be felt in the overall DOS budget for fiscal year 2012-2013.
As the single source DBA program for DOS will be gone for any upcoming renewals, insureds will need to obtain coverage from the open market as is done for other non-DOS DBA exposures. Keeping abreast of the changes regarding the DBA is critical for those companies that fall within its purview, or that may do so soon.
To learn more about the risk and insurance issues involving the multinational workforce and what they mean for your organization, join Marsh’s upcoming New Reality of Risk webcast, “International Workforce Risk Issues—From Defense Base Act Compliance to Safety Concerns,” on Wednesday, September 19, at 11:00 a.m. (ET).
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