Iraq Injury Claims Costly To U.S.

American Paul Johnson, a defense contractor who was kidnapped in Saudi Arabia June 12, 2004, is seen in this image taken from a video shown on an Islamic Web site. His captors threatened to kill him unless Saudi authorities released al Qaeda prisoners within three days. On June 18, a U.S. official confirmed that Johnson had been beheaded. A month later, his head was found during a raid on the Riyadh hideout of the Saudi al Qaeda chief. CBS

The mounting deaths and injuries to civilian contractors in Iraq could cost the federal government millions of dollars for hundreds of workers' compensation claims.

Federal law requires all U.S. government contractors and subcontractors to obtain workers' compensation insurance for civilian employees who work overseas. If an injury or death claim is related to a "war-risk hazard," the War Hazards Compensation Act provides for government reimbursement to insurance carriers.

Nearly half the 771 injury claims filed by U.S. contractors so far this year occurred in Iraq — 345. Of the 66 deaths reported as of last week, all but nine occurred in Iraq, according to the Labor Department, which handles the reporting of claims and reimbursements.

Since January 2003, there have been claims for 476 injuries and 80 deaths in Iraq.

Casualties are rising. A convoy of contractors was ambushed Tuesday in Baghdad. Two people were killed and three were injured when shots were fired from a highway overpass. Among the most gruesome deaths were four civilian security personnel who were killed March 31 in Fallujah, their bodies mutilated and burned. The remains of two were hung from a bridge.

"The security situation is virtually unprecedented," said Bob Hartwig, chief economist with the Insurance Information Institute, an industry group. "You've got the potential to be kidnapped, to be killed, to be tortured, shot at, blown up."

Labor Department officials said they had no cost estimate for reimbursements of Iraq-related claims, but given the maximum payment of $1,030.78 per week and the number of injuries and deaths, it could well climb into the multimillions. In past years, annual reimbursement costs under the War Hazards Act have ranged from $1 million to $2 million.

The Employees Compensation Fund, which pays war hazard claims as well as workers' comp claims for federal employees, is allocated about $2.3 billion annually, according to the Labor Department.

Coverage for employees of U.S. contractors, regardless of citizenship, is required under the 1941 Defense Base Act, just as workers in the United States must have workers' compensation insurance. Military personnel are not eligible and have a separate program.

Insurers are not required to provide coverage under that act, so as an enticement, the government promises reimbursement to carriers for war-related claims.

"The rebuilding of Iraq and other areas around the world would be more difficult without these laws because insurance premiums would rise dramatically, causing some contractors not to take on jobs in challenging and faraway locations and raising the overall cost of the rebuilding effort," Labor Department spokesman Ed Frank said.

But escalating claims are creating concerns for insurers despite the promise of government reimbursement, mainly because it can take the government months to investigate the claims and pay the insurer. In the interim, insurers are responsible for paying the claims, creating cash flow problems even though they get to keep the premiums.

"The question is, when are they going to get reimbursed? In the meantime, they are going to have to pay the claims," said Steven Sadler, managing director of Marsh Inc., a New York insurance broker.

Coverage under the Defense Base Act is getting harder to obtain, even as demand increases. Underwriters "are being very, very selective," Sadler said "They're taking a very hard look at new clients because they're all concerned about their capacity and concentration" in Iraq.

The three major insurance companies that provide Defense Base Act coverage, AIG WorldSource, ACT Ltd. and CNA Financial Group, declined interview requests. Halliburton Co., the largest contractor in Iraq with about 24,000 employees, also declined comment.

The violence in Iraq is reflected in rising insurance rates for coverage under the Defense Base Act.

Rates have ranged from an early low of $10 per $100 of an employer's payroll to as much as much as $40 per $100 of payroll in recent months, said Hartwig of the insurance institute. That means an employer with a million-dollar payroll would pay between $100,000 and $400,000 in premiums.

Insurers also are limiting terms of policies, such as not offering as much coverage in some locations or for certain types of jobs, and raising deductibles.

The Defense Base Act requires full disability compensation for two-thirds of a worker's average weekly earnings, up to a maximum $1,030.78 per week. Death benefits are 50 percent of an employee's average weekly earnings payable to the surviving spouse or to one child, and two-thirds of earnings for two or more survivors, up to the weekly maximum. Benefits may be payable for life, and are subject to annual cost-of-living adjustments.

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