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.”
Upgrading America’s Infrastructure
D+. That’s the grade assigned to the overall quality of America’s infrastructure by the American Society of Civil Engineers (ASCE). Just one notch above failure.
ASCE’s economic report on surface transportation, released in July 2011, reported that deteriorating infrastructure will cost the American economy more than 876,000 jobs and suppress the growth of GDP by $897 billion by the year 2020.
Bad infrastructure has a cascading effect on the economy. Lack of capacity and poor road conditions lead to backups and bottlenecks.
That means products sitting in trucks aren’t reaching their destinations in a timely and efficient manner. Commuters are wasting time and fuel sitting in traffic. The cost in wasted fuel and lost productivity is staggering.
“The Federal Highway Administration calculates that highway bottlenecks cause more than 243 million hours of trucking delays each year, costing $7.8 billion.
When shipping takes longer, businesses have to reorient their supply chains and rely on more distribution centers, adding more costs,” said Mark Brockinton, managing director, transportation and logistics practice at Aon.
“In 2011, traffic congestion caused American commuters to purchase an extra $2.9 billion in fuel, costing more than $120 billion in added fuel costs and wasted time.”
The effects of climate change and increasingly severe weather only further constrain traffic flow and worsen road conditions.
“If you look at the severe winter we had in the Northeast, that created a lot of wear and tear on our roads and bridges,” said Andy Herrmann, past president of the ASCE.
“They had to put a lot of de-icing material down to combat that, but that salt mixes with water and accelerates the corrosion of steel and gets into the concrete and starts corroding the reinforcing bars. And when steel corrodes, it expands seven to eight times its volume. So when you look at a bridge deck or a roadway surface and you see a pothole, that’s those reinforcing bars expanding and pushing against the concrete.”
Steve Bojan, vice president of fleet risk services for HUB International, added, “When you talk about climate change and harsh weather, you look at the Northeast and it wreaks havoc. [This past winter] was horrible. All bets were off on everything. Roads, whole cities, interstates were shut down. So you end up backing everything up for days, and at some point, some goods and services are just not produced. It’s in the billions of dollars a day in activity that can’t be done.”
“People are starting to understand that when they rebuild their infrastructure, they have to do it to a new standard.” — Erik Johanson, manager of strategic planning and analysis, SEPTA
Federal and state governments are taking steps to improve infrastructure, especially after Superstorm Sandy demonstrated that the effects of climate change can literally bring major cities to a standstill and incur huge costs.
In 2011, the Federal Transit Administration selected seven transit agencies across the country as part of a pilot program to conduct risk and vulnerability assessments of their systems and create plans for climate change adaptation.
After Sandy, it doled out capital funding to help turn some of those plans into reality.
In Philadelphia, the Southeastern Pennsylvania Transportation Authority (SEPTA) received $87 million to fund seven projects it developed during the pilot program phase.
The authority’s regional rail system in particular has been taking a beating.
“We did a pre-screening process to determine the most vulnerable points in our system, and the Manayunk/Norristown line, which parallels the Schuylkill River pretty close to the level of the river, has flooded 13 times since 2003, out of a total of 21 recorded flood events in history,” said Erik Johanson, manager of strategic planning and analysis.
“So more than 50 percent of recorded flood events that have occurred on that line have happened since 2003.”
While plans focus on flood mitigation and shoreline stabilization, improving the system’s resiliency will also involve building a backup control center and power systems, and insulating bare copper wires that can easily trip and cause signal failure.
In general, extreme temperature changes and powerful storms make any transit system vulnerable to failure.
“For heat, the big things are track buckling and sagging wires, which have major impacts,” Johanson said.
“Once it reaches 90 degrees, we have to slow the trains down, so it has service impacts.”
Snow, ice and strong winds can also lead to downed power lines, damage to signal systems and other equipment, and labor workforce issues associated with snow removal.
“People are starting to understand that when they rebuild their infrastructure, they have to do it to a new standard,” he said.
Building in Resiliency
That new standard may include building with new materials and technologies.
According to the ASCE’s Herrmann, “The University of Michigan came out with a concrete that can take some tension. Concrete is a compressive material, but if it can take tension, it can prevent it from forming the little cracks that allow salty water to get into it and start the corrosion cycle.”
Monitoring devices can also be built into bridges to track ground movement.
“When it comes to settlements of soil or ground movements, those things can change just due to small gradual movements, but can also be drastic. It has impact on the stability of a structure,” said Guido Benz, head of engineering and construction at Swiss Re Corporate Solutions.
“Structural elements today have more up-to-date monitoring tools that can be built in during construction, which was not the case in the ‘50s. — Guido Benz, head of engineering and construction, Swiss Re Corporate Solutions
“Structural elements today have more up-to-date monitoring tools that can be built in during construction, which was not the case in the ‘50s.”
When bad weather strikes, lower salt and salt-free mixtures can also be used on roadways to melt ice. There are also new high-performance forms of concrete and steel, which are less permeable, more resistant to corrosion, and higher strength.
“But those things come with a cost,” Herrmann said. “State departments of transportation have hard decisions to make — what to do with limited dollars. Do they do maintenance, repairs or replacements with new structures? Maintenance can get put off, and it just gets more expensive the longer you put it off.”
By Bojan’s estimates, “It’s probably at least 20 years to uncork this. These projects are all very long term and take a lot of planning.”
Critical infrastructure may also be delayed due to lack of will.
“Infrastructure is not sexy, for lack of a better word,” Bojan said.
“People are much more likely to want a park on the lakefront. They’ll spend $150 million for that, but to spend $100 million for a viaduct, for example, they react negatively.”
Lack of funds is another primary reason that necessary upkeep and upgrades to transportation infrastructure have not been made.
“Investments needed are in the billions of dollars. They’re massive numbers. The big question is: Where will the funds come from?” Benz said. The ASCE estimates it will take a $3.6 trillion investment by 2020 to bring the many components of America’s infrastructure up to an acceptable standard, and that total could increase if higher-strength, weather-resilient tools and materials are considered.
The federal government may invest in rebuilding efforts after a disaster, but these long-term projects need a steady stream of capital for maintenance.
Public-private partnerships (PPPs) are one way to attract investors to costly infrastructure projects.
“Models that bring in private investors but also involve project parties in long-term operational contracts generate revenue to maintain the structure. Achieving proper maintenance and keeping infrastructure upgraded is the critical element,” Benz said.
“In times of financial difficulty, maintenance gets cut short, so the quality will decay over time. So the benefit of the PPP approach is that the upkeep as well as the operations of the infrastructure is outsourced, and that presents a business opportunity for the private parties. From the investor’s point-of-view, it’s attractive because they can make a profit off of tolls, for example, and sell the property back when their contract is over.”
Other experts say a fuel tax increase is necessary to move projects forward at a steady pace. As vehicles have grown more fuel-efficient, the fuel tax percentage has remained static, meaning that more miles are being driven while fewer funds are collected. The revenue can’t keep up with the demand for repairs, upgrades and maintenance.
“The fuel tax needs to be raised an additional 40 cents to a total of 65 cents. The federal diesel tax hasn’t changed since 1993,” said Aon’s Brockinton.
“The American Trucking Association actually is pushing for higher taxes now,” HUB’s Bojan said.
“Freight is good, profits are up, and they’re saying, ‘We need to improve our lanes and infrastructure so we can improve our throughput, otherwise we’re just getting clobbered by constraints.’ ”
Planning for the Storm
The Environmental Protection Agency predicts that unless greenhouse gas emissions decrease substantially, temperatures will continue to climb, the world’s oceans will become more acidic and the frequency of severe storms and precipitation levels will increase.
Failure to address the risks to infrastructure will not only worsen congestion, but threaten to totally shut down transit if roads, bridges and rails become too dangerous to use. Safety also becomes a major issue.
“Certain insurance companies have products insuring against a loss a company might have within the transportation infrastructure, such as a port delay, local embargo, or a natural disaster,” Brockinton said.
“The products would include business interruption, contingent business interruption, trade disruption, political risk, logistics insurance.
Certain companies will insure risks without an actual loss of product under certain circumstances, which would include a delay or non-delivery of product due to a strike or natural catastrophe.
“A well-performing transportation network keeps jobs in America. It allows businesses to expand, and it allows businesses to manage their inventories and transport goods more cheaply and efficiently.”
Benz of Swiss Re said companies should view infrastructure failure as an “operational risk,” and mitigate it by building redundancies into their supply and delivery chains. As harsh weather presents an ever-growing challenge, it becomes more and more important for risk managers to “always have a Plan B ready to go.”
A Global Perspective
As any traveler knows, the world is full of uncertainty and dangerous places, where the challenges of simply trying to run a profitable business far from home are complicated by even greater risks, such as political violence, civil unrest, credit risk, corruption, expropriation of private assets by the government, and more.
Anyone doubting this need only take a look at current events. Some 70 percent of the world’s nations currently have serious corruption problems throughout their governmental and civil service framework. Nearly 40 percent of all nations are experiencing some form of significant civil unrest. Signs of economic distress are everywhere, from falling oil prices to Eurozone debt crises to economic slowdown in China.
Despite such geopolitical risks, the world still needs its businesses to continue running amid dangers that range from warfare and terrorism to punishing economic conditions caused by international sanctions, to simple graft and hostility toward foreigners.
For global and multinational companies, keeping an eye on their political risk profile is as important as handling worker safety, environmental impact, products liability, or any other insurable risk. Thankfully, political risk exposures are insurable as well, and Starr Companies is there to provide its clients with robust political risk insurance coverage, a suite of unique support services that truly is second to none, and the ability to educate clients on how to manage their political risk.
Political risk hazards generally fall into one of the following categories:
Breach of Contract and Non-Honoring of Financial Obligations
These related hazards involve the failure of a local actor to uphold their contractual or financial obligations to a foreign investor, and the inability or unwillingness of local authorities to intercede on the foreign investor’s behalf. This is perhaps the most common form of political risk hazard, as it is a major problem in any environment where there is substantial economic instability and/or corruption.
Confiscation of Property
Also known as “expropriation,” “ownership risk” and “nationalization,” this is when a government seizes property or assets without compensating the owners for them. An overt example of expropriation would be a revolutionary government seizing an office building or a factory belonging to a foreign-owned corporation. An example of creeping expropriation would be a series of successive events by a government to gradually deprive an investor of their property rights.
This is when the local laws change in such a way as to constrict foreign investors’ economic activity in some way. It could range from creeping expropriation to changing taxation or labor laws that might simply make it far less profitable or far less efficient for a foreign entity to operate in a local jurisdiction.
Inconvertability of Currency
Also known as “transfer risk,” this is when a government takes action to prevent the conversion of local currency to another form of currency, making it difficult or impossible for foreign investors to transfer their profits elsewhere. This tends to happen in countries undergoing some kind of political crisis, like when Zaire—now the Democratic Republic of Congo—declared a new national currency in 1980.
Property or income losses stemming from violence committed for political purposes, including, but not limited to declared and undeclared warfare, hostile actions taken by foreign or international forces, civil war, revolution, insurrection and civil strife (politically motivated terrorism or sabotage).
Kidnap and Ransom
Political violence might also manifest itself as a kidnap, ransom and extortion hazard, but that is typically covered by a separate, specialized policy.
To protect against these risks, insurers can provide comprehensive and custom-tailored political risk solutions, which at a client’s request can be broadened to cover investment contract repudiation, currency inconvertibility and political violence. Such policies typically last for periods of 5 to 10 years. Protected assets for this coverage include fixed assets (e.g., a factory, farm, warehouse or office), mobile assets (e.g., harvested natural resources, raw or manufactured inventory or mobile equipment), leased assets (e.g., aircraft, watercraft or construction vehicles) and investment interests in assets abroad (e.g., money dedicated to funding a foreign project, held in a host country bank and subject to expropriation).
Kidnap & ransom coverage protects company personnel and family by providing financial reimbursement for such an event. Depending on the insurer, some K&R programs also provide independent expert consultancy before and after a potential act of kidnapping, ransom or extortion.
Great insurance coverage isn’t enough to adequately protect against political risk, however. Businesses need extra support to stay on top of their exposures, and to know what the latest geopolitical developments are.
Starr Companies, for example, does this through Global Risk Intelligence, a specialized team of political risk experts with long-standing backgrounds in national intelligence and international affairs. GRI delivers to Starr clients a unique risk advisory service that spans the gamut of commercial property & casualty exposures. GRI also produces two assets that are extremely helpful. The first is the Executive Intelligence Brief, a world-class monthly analysis of ongoing geopolitical developments (especially in emerging markets) available exclusively to a carefully selected readership of top executives. The second is the Global Risk Matrix, a quarterly ranking of the overall political security risk of every country on the planet.
The world’s geopolitical landscape is changing at a remarkable pace, with new risks and uncertainties arising in even the unlikeliest of places. And yet, as business becomes ever more globalized, insurers can provide their clients with tailored coverage to absorb the losses that stem from political turmoil. By finding the right insurer, with the financial strength to cover their risks as well as the analytical acumen to help turn risk into opportunity, businesses can create partners in prosperity anywhere in the world.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.