In Danger’s Path
Defense contractors in the Middle East work in some of the most dangerous and inhospitable conditions on the planet. Workers are drawn there by high pay rates, but face a long list of exposures.
Defense Base Act (DBA) insurance provides the sole workers’ compensation remedy for these employees, although some employers supplement that cover with employer liability coverage, in case of legal action from injured workers or third parties.
Provided through the Department of Labor, DBA coverage is congressionally mandated for civilian employees working outside the United States on military bases or under a contract with the government for public works or for national defense unless their employer obtains a waiver.
DBA carriers qualify for full reimbursement from the government for injuries caused by a “war-risk hazard” under The War Hazards Compensation Act.
Video: The DOL in 2009 reported that at least 1,688 civilian contractors in Iraq and Afghanistan died and more than 37,000 were injured, according to this Global Report TV broadcast.
Although conflict is spreading in the Middle East, many areas are not considered “conflict zones” where qualified injuries would be reimbursable by the federal government.
Still, DBA benefits are broad, said Karen Dobson, national client director, Aon Risk Solutions. They don’t officially provide 24-hour coverage, but they apply to many activities, sometimes even those as questionable as bar fights and softball injuries.
AIG has the lion’s share of the statutory DBA business, followed by CNA and ACE.
Neither the Department of Defense nor the Department of Labor releases statistics on the number of workers covered by the DBA, but the Business Benefits Group, a benefits consultant, reports that it covers almost 200,000 prime and subcontractor employees overseas and that it generates annual government-wide premiums of more than $400 million. DBA coverage extends to foreign nationals as well as U.S. citizens.
Contractors accounted for at least 50 percent of U.S. forces in Iraq and Afghanistan over the last decade, and before that, in the Balkans, said Moshe Schwartz, specialist in defense acquisition, before the House of Representatives’ Committee on Armed Services in October 2013.
High Risk and High Rewards
Despite its dangers and discomforts, the Middle East is an attractive place to work for many, said Aon’s Dobson, in large part because the work pays so well. For example, a truck driver who makes $40,000 per year in the United States may make $100,000 per year in the Middle East.
“An attorney will ask, ‘Is the worker’s heart condition or inflamed liver related to drinking bad water in Afghanistan?’ ” — Scott Bloch, a Washington, D.C. attorney who represents injured employees in many DBA cases.
But fundamental safety considerations sometimes get pushed to the back burner by extreme conditions. In challenging environments, such as 120-degree heat, “people just want to get the job done, and they’re not always focusing on safety procedures or taking the time to avoid risk,” said Alan Leibowitz, corporate director, environment, safety, health and security for Exelis Inc., a contractor with a large Middle East footprint.
Those shortcuts can lead to high injury rates. Workers in the Middle East are injured at least 10 times more frequently than their stateside equivalents, said Haleh Khodayari, chief executive officer, Advanced Consulting Inc., a global risk management firm based in California.
The costs in those cases can escalate rapidly due to exorbitant medical, medevac and repatriation expenses, in addition to lost time from work. The list of regional and war zone exposures is long and can be grisly, Khodayari said, ranging from slip-and-fall injuries to environmental exposures to death and injury from detonated roadside bombs and other extreme hazards from strife in the Middle East.
Post-traumatic stress and fatigue disorders occur frequently in Iraq and Afghanistan, sources said. The list of regional exposures includes allergies to foreign plants, such as palm pollen, and traffic accidents as workers try to negotiate unfamiliar or haphazard traffic patterns.
Adding to underwriters’ headaches is that the high compensation rates overseas sometimes motivate applicants to hide disqualifying ailments such as asthma or heart conditions during pre-employment screenings, which could put them at risk. It could also put their colleagues at risk if the safety of one depends on the unimpaired function of the other.
When DBA Applies
The Department of Labor is vigilant in its oversight of the DBA program, said Dobson, to the extent that it is “paternalistic” about looking after workers. In several cases, she said, the insurance company and claimant agreed on a settlement, but the DOL didn’t agree with the terms. It compelled the insurer to pay more, even though the claimants had competent legal representation.
Some disputes arise over whether or not idiopathic ailments, such as cancers and heart conditions, are related to employment, said Scott Bloch, a Washington, D.C. attorney who represents injured employees in many DBA cases.
“A DBA remedy could kick in if any aspect of the employment hastens or aggravates the conditions,” he said, which pulls the employer into complex legal and medical situations to prove or disprove a claim.
“An attorney will ask, ‘Is the worker’s heart condition or inflamed liver related to drinking bad water in Afghanistan?’ ”
To stave off financial crises in case DBA does not apply or while a case is in review, Bloch said, many employers offer their workers disability insurance over and above the workers’ compensation insurance to cover gaps that DBA may not cover.
Although DBA prevents employers from being hauled into civil lawsuits for its direct employees, employers may still be liable for third-party suits independent of DBA, Bloch said.
For example, if an employee leaves a live electrical cord that electrocutes a subcontractor in the shower, the employer may be subject to liability in civil court for action or inaction taken vis-à-vis the electrocuted subcontractor, who is a third party despite being part of “the team.”
The same pertains to any third party who wanders onto a work site or is struck by a contractor’s car.
Claims Management in Farsi
Language and distance often hobble claims management for injuries in the Middle East, said Terri Rhodes, CEO of the Disability Management Employer Coalition. U.S. doctors and carriers have to read medical reports from non-English-speaking countries to determine the nature and cause of injuries and whether they’re job-related.
They have to be able to read a treatment plan to arrange return-to-work. Even when she hires interpreters, Rhodes said, she never has full confidence that the interpretation is accurate.
“There’s always some variance in language,” Rhodes said.
Extracting, transporting and repatriating injured workers from conflict zones and remote regions to a location with adequate medical facilities can be complicated and expensive, said Eric Dean, senior vice president, ACE Risk Management Global Casualty.
DBA insurance provides coverage for repatriation. But problems multiply when a worker is medically incapacitated and can’t speak, Rhodes said, and it becomes necessary to obtain medical records.
“We have to communicate with hospitals,” she said, “and we run into time zone problems. In an emergency, we have to find out immediately when the injured worker was admitted and what the injury is.”
As elsewhere, incident prevention in the Middle East is the best claims management strategy, to whatever extent that’s possible in an environment where explosives and extreme heat are a fact of life.
Michael Baker International, a global engineering, planning and integrated consulting firm, strives for a “zero-incident, zero-accident” workplace at every site around the world, said Nicholas Gross, chief operating officer, international operations. That pays off both in protection of its employees and in its claims experience: Last year, Michael Baker International got “the best DBA rates in history,” Gross said.
“Our safety record has a direct benefit on our bottom line.”
Industry best practices include thorough pre-and post-employment screens, which include medical, dental and psychological exams, followed up with checkups during deployment, even in war zones, Aon’s Dobson said.
Michael Baker keeps a solid, detailed documentation trail about every incident, illness and injury, which ensures that injured employees get swift treatment and also protects the company against future claims.
Like Michael Baker, Exelis spends a lot of resources training its workers, both U.S. and foreign nationals, in safety protocols. It holds workers in the field to the same standard as its U.S. offices and factories.
Safety protocols could include redundant testing for electrical current on a rewiring site — an important precaution where infrastructure is cobbled together and wiring is “not always the safest,” Exelis’ Leibowitz said. It also includes forced hydration breaks, because people don’t notice heat exposure until it’s too late.
Compliance is high, Leibowitz said, because workers appreciate that the protocols are in their best interest. Exelis offers incentives for following safety rules and applies penalties, such as being sent home, for breaking them.
Return-to-work programs for Middle East contract workers can be hard to implement, Advance Consulting’s Khodayari said. A fairly simple injury such as a broken leg can be treated in most regions of the Middle East, but the worker can’t get back to work as quickly as in the U.S. because light duty assignments are not usually available.
The cost of lost wages can be high because the DBA entitles some injured workers to full wage loss for the rest of their lives.
“If a worker can’t return to the original contract, we may conduct a formal Labor Market Survey and help the injured worker look into other jobs with the same employer in a different capacity,” Khodayari said.
Gross attributes much of Michael Baker International’s safety success to its proactive approach — and to its partnership with its broker and DBA insurance provider.
“Our broker took an active role in identifying and managing risk, reducing claims and getting personnel back to work,” he said. “Our partnership with our carrier helped us reduce claims and experience.”
And key to the successful relationship, said ACE Group’s Dean, is working directly with the client, face to face when possible.
“Insurance is a contract of trust. Putting a face to the name helps build that trust,” he said, even with statutory coverage, such as DBA insurance.
“The relationship doesn’t change the coverage, but it facilitates the placement of coverage.”
Fighting Violence in Health Care Settings
Violence in health care settings occurs with rising frequency, costing facilities, insurers and society dearly, but many incidents can be deterred – and many facilities already have the tools to exert the deterrence.
As bearers of bad and even heartbreaking news, doctors and other caregivers are at high risk for assaults and “active shootings.”
With 154 hospital-related shootings between 2000 and 2011 that left 235 dead or injured, according to the American College of Emergency Physicians, “we’re on notice for the potential for violence,” said Pamela Popp, executive vice president/chief risk officer, Western Litigation.
Health care workers are injured through violent acts at more than four times the national rate, according to the Bureau of Labor Statistics. FBI statistics show a rising trend in active shooter incidents in health care settings, from 6.4 per year between 2000 and 2006, to 16.4 per year between 2007 and 2013.
Those are scary numbers. But there are tools to forestall violent acts in hospitals and some of them don’t cost that much.
“Empathetic communication is key,” said John Walpole, area senior vice president, Arthur J. Gallagher & Co. The techniques that help hospital medical staff de-escalate situations and repair broken conversations can also help front-line employees.
“We can’t wait for something to happen. We have to have a prepared response.” — Pamela Popp, executive vice president/chief risk officer, Western Litigation
“The good news is that organizations can use their own low-cost resources,” he said.
“They don’t always need to bring in expensive trainers and consultants.”
Organizations can benefit from training everybody who comes into face-to-face or phone contact with patients and relatives.
That could include contractors, social workers, facilities staff, superintendents and engineers — who double as security staff in small facilities — food service personnel and triage nurses.
Receptionists are a particular target of people who arrived angry or became frustrated by long waits in a hospital lobby or emergency room and should definitely be included in such training.
Workers welcome training in this regard, Walpole said.
The journal “Prehospital and Disaster Medicine” reports that emergency medical service responders “felt better prepared to respond to an active shooter incident after receiving focused tactical training.”
Taking Corrective Action
Complacency is dangerous, Walpole warned, and risk managers shouldn’t assume their facilities are doing everything that can be done to keep employees safe.
“Run a drill, take corrective action and then test it with another drill. Keep monitoring.”
Hospitals have considerable experience with infant abduction drills, he said, and now those processes must be applied to emergency room violence and active shooter scenarios.
“We can’t wait for something to happen. We have to have a prepared response,” Western Litigation’s Popp said.
That means, she said, that senior management should dedicate security resources. Even if organizations can’t afford onsite security personnel, they should talk to their crime, malpractice and general liability carriers about prevention, both through incident de-escalation and securing the facility.
They may qualify for grants through Homeland Security and FEMA programs.
“Risk managers may assume they have it under control,” but after a safety audit may “find they’re not quite as prepared as they thought.” — Beth Berger, managing director, healthcare practice, Arthur J. Gallagher & Co.
Insurance brokers, carriers and consultants also play a role in workplace and patient safety training, said Beth Berger, a managing director with Arthur J. Gallagher’s Healthcare Practice.
But Berger said the broker community doesn’t always offer these services and clients often don’t ask for them.
“There should probably be more discussion up-front with brokers and carriers,” she said.
“Risk managers may assume they have it under control,” but after a safety audit may “find they’re not quite as prepared as they thought.”
Government agencies and nonprofit organizations, including the Occupational Safety and Health Administration, the Centers for Disease Control, the Joint Commission and the American Hospital Association, also offer free or low-cost resources.
Which Coverage Responds?
While active shooters grab headlines and represent a very real threat, they are hardly the only source of violence in U.S. hospitals and other health care facilities. Which coverage responds depends on the situation: where the incident occurred, who perpetrated it, and who or what was injured or damaged.
In a true crime situation, Popp said, the general liability or captive coverage could respond, assuming one or the other covers crime. If not, facilities can buy violent and malicious acts (crime) coverage, which picks up expenses that wouldn’t fall under a property policy.
“Total losses in an incident are hard to calculate and often underestimated.” — Pamela Popp, executive vice president/chief risk officer, Western Litigation
In patient-on-worker crime, workers’ compensation responds. If other patients are hurt in the event, general liability responds, as is the case with property damage (such as cars caught in the crossfire during a parking lot shooting).
In some cases, losses won’t be covered, and facilities should expect to make payments from the operations budget.
The scenarios are endless, said AJG’s Berger. A stranger with criminal intent mugs a visitor in a parking lot. A grieving relative assaults a nurse. An agitated and disoriented senior in a nursing home strikes a nurse.
Then, there’s worker-on-worker assault, or the angry ex-spouse marching in with a weapon. If an innocent bystander becomes collateral damage in any of these assaults, the insurance questions multiply.
When working through a violence prevention plan when an incident is still theoretical, Popp recommends identifying which coverage will apply in a variety of scenarios.
“After an event, there’s so much chaos and emotions are so high that you’ll be too distracted to figure it out then.”
Total losses in an incident are hard to calculate, Popp said, and often underestimated. The cost of medical care for an injured staff member averages $90,000, and the total cost of an incident could easily reach $500,000 to $1 million when the myriad, often-forgotten peripheral expenses are included.
Popp calculates the total cost of a violent incident by including treatment for:
- Injured staff members (workers’ compensation)
- Non-employees and patients (general liability)
- Patients (professional liability)
Peripheral expenses may include:
- Property damage (general liability)
- Emergency response, such as police
- Business interruption and lost revenue
- Media, such as public relations and crisis management agencies
- Lost time from work for injured and traumatized staff
- Staff counseling
- Potential litigation
Violence in health care settings is “a big problem” from financial and social risk perspectives, Popp said.
Leaders should ask themselves, ‘Is our facility safe? Are we at least keeping up with safety standards of other facilities in the area?’ ” Failure to do so, she said, not only violates the social contract that says that hospitals are safe places, but it also casts uncertainty on insurance coverage.
“We can’t tell ourselves, ‘It won’t happen here.’ ”
Transferring Polluted Properties
Close and trusting relationships among all parties is the single most important factor for the success of a real estate transaction involving an environmentally contaminated — or “brownfield” — property.
In the best of these transactions, the underwriter has good relationships with brokers, underwriters, clients and vendors, said Christopher Alviggi, business development leader, Alliant Insurance Services Inc., a Newport Beach, Calif.-based specialty insurance brokerage firm.
“You want to make sure everybody’s interests are aligned before you close. That will make claims settlement easier, post-close.”
And loop in the regulators, said Randall Jostes, chief executive officer, Environmental Liability Transfer Inc., an environmental liability buyout company. “If they’re included early in the transaction process, they’ll clearly communicate their expectations.”
Different states have different environmental standards and regulations, and different types of properties are subject to different federal regulation. To sort out the regulatory requirements, Jostes said, “we need relationships with federal and state regulators as well as other trusted parties: brokers, carriers, buyers and sellers. They all have their own jurisdictions and expectations.”
The circle of trusting relationships also extends to the consultant that performs the Phase I Environmental Site Assessment — the first step in environmental due diligence that identifies potential or existing environmental contamination liabilities — said David Rieser, head of the Environmental, Regulatory & Redevelopment Law practice at Much Shelist.
“Hire a reputable consultant,” he said. “A great deal depends on the quality of the people who do the work.”
A careless assessment could miss things such as underground storage tanks, which are prone to leaks, “weird pipes you can’t understand” and an unexplained patch of fresh cement — any of which should trigger further investigation, Rieser said.
Those problems could kill the deal or change its terms, since liability for problems on a property transfers with ownership.
Phase I Environmental Site Assessments also include reviewing public documents, such as government databases, building permits and historic fire maps. They create a safe harbor against liability from contaminations.
Demand for Phase I assessments boomed after enactment of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), which holds a buyer, lessor or lender responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination.
Risk Transfer Strategies
The National Brownfield Association estimates that $2 trillion of real estate in the United States is devalued due to the presence of environmental hazards — an enormous opportunity for those who can unlock the properties’ redevelopment potential, said Jostes.
The money to be made is legendary: Think Manhattan’s Meatpacking District, the exorbitant neighborhood of young hipsters and boutique-lined streets whose name is the sole relic of its gritty past.
Every kind of property is game for redevelopment, each with its own possible contaminations and risks, said John Wasilchuk, account executive and environmental specialist, Lockton.
Abandoned residential buildings, for example, may have mold, asbestos or lead that require remediation. They may have housed meth labs, leaving behind chemical waste that may be reactive and toxic to human health and the environment, since meth cooks — unlike the fictional Walter White — tend not to be meticulous housekeepers.
Defunct gas stations may suffer petroleum contaminations in soil and groundwater from leaky underground storage tanks, and old agricultural sites could leave fertilizer, pesticide and herbicide contaminations behind, especially at points where the chemicals were stored, loaded or unloaded.
“Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?” — Matt O’Malley, president, North America environmental insurance business, XL Group
Between developers’ appetite for brownfield properties as the economy recovers and strict environmental regulation, the robust pollution legal liability market is “a huge enabler” of brownfield development, said Jim Vetter, environmental risk, insurance and solutions expert, managing director, Marsh.
Traditional pollution insurance will cover unknown contaminations that emerge post-sale, but not known contaminants, many of which buyers, sellers, insurers and regulators should be aware of from the due diligence studies, said Wasilchuk.
Along with “workhorse” pollution legal liability products, transactions also lean on the resurging remediation cost cap insurance market, said Vetter. Although many buyers and sellers still “play hot potato” with known cleanup liabilities through transactional methods, such as indemnification, purchase price adjustment and escrow accounts, they also look to environmental liability buyouts.
In these transactions, a third party assumes ownership in perpetuity of a property’s known environmental conditions in exchange for payment. The buyout company takes on responsibility for remediation and liability.
Among the advantages, said Jostes, is that such arrangements free property owners to concentrate on their core business while the buyout company “owns” and neutralizes the relationship with regulators, which can be adversarial with property owners.
The Power of Indemnification
In some cases, said Mary Ann Susavidge, chief underwriting officer, XL Group, sellers don’t want buyers to perform due diligence and will sell a property only on a “buy as is, where is” basis.
Lacking an appetite for environmental risk, banks often require a Phase I inspection, but buyers that finance the purchase themselves may still accept those risks for a desirable property, either stand-alone or bundled in a portfolio.
“If the property is so desirable, and if the buyer feels it’s educated enough about potential risks, it becomes a ‘don’t ask, don’t tell,’ situation,” Susavidge said. “If they poke around, state or federal regulations may force them to take corrective action.”
For example, the Industrial Site Recovery Act (ISRA) may pertain to New Jersey properties, where certain types of operations trigger a requirement to perform an environmental investigation that may not be required in other states.
“If the new entity wants to add the property to its portfolio, it might be motivated to take on the perceived risk. It’s a risk management choice,” Susavidge said.
A buyer forewarned of likely contamination may negotiate a reduced price, said Cathy Cleary, executive underwriter, XL Group, who is also an environmental attorney. She looks at a laundry list of contractual items that make a strong indemnity for buyers and sellers. It may come in the form of a purchase and sale agreement, or a separate indemnity agreement.
For example, who is responsible for investigation of any environmental issues and subsequent cleanups? If there are claims, how are they made, and who pays? What kind of protection is the buyer getting for future environmental liability obligations, and how long will the indemnity last?
Are there monetary caps on the indemnity — say, for the first $2 million only? Are there retentions before the indemnification pays? If contamination migrates to or from another property, who is responsible for the cleanup? Who is responsible for bodily injuries in the community? Property claims? Third party claims?
Most important is the financial strength of the indemnifier. A seller that is a limited liability company raises a red flag, said Matt O’Malley, president, North America environmental insurance business, XL Group. “Even if the indemnifier’s parent company is highly rated by Moody’s or A.M. Best, do we have the financial backing of the parent, or is it limited to the assets of the limited liability company?”
Quantify the Risks
Ann Viner, general counsel and director of environmental risk management, WCD Group, said brownfield risk management is like a three-legged stool composed of the contract, the insurance, and properly scoped schedule and budget.
All three are best managed by quantifying the property’s environmental risk, she said, which is separate and distinct from a qualitative “guestimate” based on the kind of contamination and historical outcomes of similar properties.
Quantifying the risk is relatively easy in transactions involving a single property, said Marc S. Faecher, senior vice president at TRC, a risk management, engineering, and construction management organization.
With a single property, he said, “you know where the property is located and what its issues are.”
However, he said, portfolios of real estate that blend desirable and impaired properties across primary, secondary and tertiary markets require more detailed analysis. Portfolios likely involve sites facing a variety of issues, and apportionment of responsibility between buyer and seller can be complicated.
“You need to analyze what ultimate cleanup costs would be and what cash flow impacts would be. You need to analyze when the liability would hit and deal with structuring remediation programs to reduce liability over time,” Faecher said.
Experienced consultants aim for a cost risk with a 95 percent degree of confidence, said Viner.
To quantify risk, the consultant develops data inputs for a risk modeling program, then runs iterations based on various scenarios. A lower confidence level can produce a spread of several million dollars in estimated cleanup costs, but a good quantitative analysis will identify the driver for the low confidence level, such as PCBs in the sediment.
Once aware of what information is missing, the consultant can obtain additional data on that driver. Using the new data, a risk modeling program produces a closer estimate of likely remediation costs.
“We know more about what remediations are called for, how much they’ll cost and how long they’ll take,” Viner said. “We can define better contract terms, better and more specific insurance coverage. Quantifying risk helps all three legs of the risk management stool.”