Army Corps Overpaid CNA $10 Million on War Insurance: Audit

The U.S. Army Corps of Engineers overpaid war insurance premiums by at least $10 million to a unit of CNA Financial Corp. (CNA) because contract officers failed to negotiate better prices, according to a new audit.

The overpayments stemmed from a combination of lax oversight and CNA paperwork that was “not always complete, accurate or current,” said Acting Special Inspector General for Afghanistan Reconstruction Herb Richardson in an audit released today.

“We identified significant problems with the insurance program” and “the Corps agreed to higher premium rates than were provided for under the company’s definition of ‘loss ratio,’” Richardson wrote. The “loss ratio” in insurance parlance is defined as incurred losses divided by earned premiums. The higher the ratio, the more CNA could charge.

Auditors also concluded “some trends in CNA reserve data, as well as its most recent loss and premium reports, raise questions about actual loss experience” that Pentagon-paid premiums were based on.

The review is the latest report to illuminate the workings and alleged deficiencies -- such as excessive premiums and late or non-payments to survivors -- of a little-known system intended to pay death and injury benefits to war-zone workers. These issues have been raised in reporting by the U.S. Army Audit Agency, U.S. Government Accountability Office and the ProPublica non-profit news group.

1941 Act

U.S. and foreign contractors, under the 1941 Defense Base Act (DBA), are required to take out death and injury insurance for all U.S. employees and subcontractors doing business overseas.

The government reimburses companies for the premiums. In many cases, if the injury or death is war-related, insurers also will be reimbursed as well for the full cost of benefits, plus 15 percent in administrative fees.

The Pentagon and the Labor Department are both responsible for overseeing the war insurance program that’s seen claims surge since the invasions of Afghanistan and Iraq. As of December, the number of DBA cases in Afghanistan totaled 10,600.

The number of DBA cases paid worldwide have climbed to 14,863 in 2009 from 309 in 2000, according to Labor Department figures cited by Richardson.

There have been 2,429 death benefits claims for Iraq and Afghanistan as of June 30, including 1,542 in Iraq, according to the Labor Department.

CNA View

In addition to the premium overpayments, the auditors concluded that the Corps and military contract specialists “failed to ensure that contractors obtained the correct amount of insurance” and some subcontractors “did not have DBA policies.”

Two of Chicago-based CNA’s wholly owned U.S. property and casualty underwriting companies are the among the top five U.S. insurers handling DBA claims between Sept. 2001 and June 30, according to the Labor Department’s Office of Workers’ Compensation Programs statistics.

The audit focused on payments to Continental Insurance Co. between 2006 and 2009 when it received $225 million in premiums.

CNA spokeswoman Katrina Parker said in an e-mail “the program was appropriately priced and CNA acted transparently and in good faith in our dealings with the Corps.” Bloomberg provided CNA portions of the report.

“CNA did not receive any premiums in excess of amounts to which it was entitled under the contract,” she said.

‘Sound Actuarial Science’

“In connection with this audit, we retained a leading industry expert in actuarial science. After reviewing all of the data, he concluded the methodology loss ratio and reserving practices we used to price the program was consistent with both sound actuarial science and reasonable industry practices,” she said.

Army Corps Director of National Contracting Organization Brigadier General Theodore Harrison, in written comments included with the audit, said the Corps would take steps to improve oversight.

This includes modifying, not canceling, the CNA contract to require an annual independent actuary review of all DBA claims.

CNA won a competition in 2005 to provide DBA for all Army Corps contractors. That job expanded to all firms operating under the U.S. Central Command’s Joint Theater Support Contracting Command.

Self-Insurance Option

A Theater Command memo included in the audit called the $9.9 million “overcharges.”

CNA provides insurance coverage for contractors such as DynCorp International Inc., Contrack International Inc., FCEC United Infrastructure Projects Joint Venture, ECC International, LLC and Rea Sea Engineers.

The contract was renewed April 1 after a Pentagon study and Army audit that suggested the Corps could save money by self- insurance, said Richardson’s audit.

“Because many problems we identified are a result of interaction with a third party” -- CNA and its broker agent -- “our findings suggest that consideration of the self-insurance option may be warranted,” Richardson wrote.

To contact the reporter on this story: Tony Capaccio in Washington at

To contact the editor responsible for this story: Mark Silva at

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