War Risk Insurance Alert: Legal Requirements And Issues On Insurance For Contractor Employees Working Abroad

Monday, March 1, 2004 - 01:00

Due to the increasing volume of overseas contracts made in connection with
the war in Iraq and anti-terrorism, contractors can expect to face an increasing
number of questions concerning war risk protections and liabilities. In this
regard, there is new policy guidance from the Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics, concerning requirements for
insurance for contractor employees working overseas. In a memo dated December 8,
2003, the Director for Defense Procurement and Acquisition Policy issued a
memorandum to DOD procurement chiefs emphasizing that the Federal Acquisition
Regulation ("FAR") requirements for insurance for contractor employees working
overseas should be included in DOD contracts for services to be performed
overseas. By issuing this memorandum, DOD signaled a renewed intent to enforce
these requirements, notwithstanding the high cost to contractors in obtaining
insurance for employees working overseas, especially in dangerous areas such as
Iraq and other places in the Middle East. Accordingly, contractors must review
these requirements to ensure they are in compliance.

Governing
Statutes


Understanding the Federal Acquisition Regulations
requirements for insurance for employees working overseas requires an
understanding of two statutes: the Defense Base Act ("DBA"), 42 U.S.C.
§§ 1651, et. seq., and the War Hazards Compensation Act ("WHCA"), 42 U.S.C.
§§ 1701, et. seq.

The Defense Base Act


Under the DBA, government contractors must provide to nearly
all of their employees working outside the United States the workers'
compensation benefits that employers are required to provide by the Longshore
and Harbor Workers Compensation Act, 33 U.S.C § 901, et. seq., for death or
injury arising out of or from their employment. Employer liability under the DBA
is exclusive and supersedes all other liability, including liability under the
law of torts. However, if an employer fails to provide the required coverage,
the employee or his survivors may elect to sue the employer for tort damages
and, in such an action, the defendant may not plead as a defense that the injury
was caused by the negligence of a fellow employee, or that the employee assumed
the risk of his employment, or that the injury was due to the contributory
negligence of the employee. The DBA also provides that, if a subcontractor at
any tier does not secure payment for the required compensation, the contractor
will be liable for, and required to secure the payment of, such benefits.


Employers who fail to secure the payment of the required compensation
are guilty of a misdemeanor and may be punished by a fine of $10,000 or by
imprisonment for not more than one year. If the employer is a corporation, the
president, secretary, and treasurer are severally liable for the fine and
imprisonment. In addition, the president, secretary, and treasurer of the
corporation are severally and personally liable, jointly with the corporation,
for any compensation or other benefits payable under the Act.

War
Hazards Compensation Act


In general terms, benefits for death
or injury occurring as a result of certain "war risk hazards" are payable to
certain contractor employees under the WHCA, in circumstances in which the DBA
does not apply because the event giving rise to the claim was outside the scope
of the employee's employment or because the injury or death was attributable to
an act of war excluded from insurance coverage obtained pursuant to the DBA. In
these circumstances, the contractor employees are treated as federal civil
servants and entitled to benefits under the Federal Employees' Compensation Act,
5 U.S.C. § 8116. Compensation is paid directly by the government from the
Federal Employees' Compensation Fund.

In most cases, benefits payable
under the WHCA are also payable under the DBA. Thus, the WHCA provides for
reimbursement of employer or insurance carrier expenses in cases of overlapping
coverage. However, where the insurance carrier charged a premium for its promise
to pay these benefits, the insurance carrier will not receive
reimbursement.

The WHCA also provides special benefits for captured and
detained employees.

Waivers

The DBA permits the
Secretary of Labor to waive the application of the DBA upon the written request
of the head of any department or other agency. Requests for waiver must be made
to DOL's Office of Worker Compensation Programs ("OWCP"). DOL routinely grants
DBA waiver requests. However, DOL's policy is that the waiver does not apply to
citizens or legal residents of the U.S. or to employees hired in the U.S. In
addition, a condition of all waivers granted by DOL is that the contractor must
provide alternative workers' compensation benefits to the waived employees
pursuant to applicable local law. DOL also takes the position that a waiver of
the DBA operates as a waiver of the WHCA. Waivers are generally requested where
the benefits provided under local law cost less than the benefits under the DBA
would cost. This is problematic in Iraq since there is no formal Iraqi local
government or law in place yet.

The FAR Clauses


FAR 52.228-3, Workers' Compensation Insurance (Defense Base
Act), which should be included in all contracts requiring performance outside of
the U.S., requires the contractor to obtain and maintain the insurance coverages
required by the DBA and to flow the clause down to all subcontracts to which the
DBA applies. This clause is just a reminder, though, because the DBA applies
regardless of the inclusion of the clause.

FAR 52.228-4, Workers'
Compensation and War Hazard Insurance Overseas, is used where the Secretary of
Labor has waived the applicability of the Defense Base Act. It requires the
contractor to provide workers' compensation insurance to the waived employees in
accordance with the laws of the country in which the employees are nationals and
the same protection afforded by the WHCA except that the level of benefits is to
be set according to any controlling law or international agreements.

The
December 8, 2003 DOD memorandum requested procurement chiefs throughout the
services to cure implementation "inconsistencies" within the Department by
including FAR 52.228-3 in all DOD service contracts to be performed outside the
United States, as well as in all supply contracts that also require the
performance of services overseas, and FAR 52.228-4 whenever a waiver is granted
for foreign nationals hired outside the U.S. Both clauses should be included "if
any services will be performed overseas by employees to whom the waiver does not
apply, such as United States citizens or foreign nationals hired within the
United States."

Where a DOD agency uses FAR 52.228-4 and the head of the
contracting agency makes a determination that the contractor may not buy
insurance for war hazard losses, the Defense Federal Acquisition Regulation
Supplement ("DFARS") prescribes use of DFAR 252.228-7000, Reimbursement for War
Hazard Losses. This clause makes war hazard benefits allowable costs under
certain circumstances.

DFARS 252.228-7003, Capture or Detention, may be
inserted into contracts in circumstances in which the contractor's employees are
not covered by the WHCA. This clause provides that certain benefits payable
under agreement with the employee or that would have been paid had the WHCA
applied (whichever is less) are allowable costs.

Other
Regulations


DOL's implementing regulations for the DBA and WHCA
are set forth at 20 CFR 61, 701 through 704. These regulations contain elaborate
procedures for the making and processing of DBA and WHCA claims. These
regulations provide that DBA insurance must be obtained from DOL-authorized
carriers. Contractors should note that the language used on such insurance
policies is important. These regulations also provide that contractors may only
self insure with the approval of DOL.

Current Issues


There are a number of questions currently arising within the
federal procurement community:

• Are DBA waivers issued for
State Department contracts in Iraq valid? According to a DOL official at a
recent public seminar, these waivers may not be valid because contractors may
not be in compliance with the waiver condition that the contractor supply
workers' compensation benefits that are in accordance with local law. This
official thought that the absence of local law in Iraq on this question might
invalidate these waivers.

• Can contractors rely on
Contracting Officer opinions concerning DBA requirements? Some federal
Contracting Officers may not have a good understanding of DBA and WHCA
requirements and may have advised contractors (erroneously) that DBA
requirements are not applicable to contractor employees who are citizens of the
foreign country in which they are working. Contractors who rely on such opinions
do so at their own peril, since COs do not have authority to waive statutory
requirements.

• Does the DBA apply to United States-funded
contracts negotiated by the Coalition Provisional Authority ("CPA") in Iraq but
executed by an official of an Iraqi government agency?

• Are
contractors entitled to price adjustments to fixed-price contracts to cover DBA
insurance premiums that were not included in the price due to the government's
failure to include the required FAR clause in the contract?

Careful
assessment of all of these matters is essential for those involved in overseas
government work.

Raymond S. E. Pushkar is a Partner and
Christopher Bouquet is an Associate in the Government Contracts
Practice of McKenna Long & Aldridge LLP. Mr. Pushkar can be reached at rpushkar@mckennalong.com and Mr.
Bouquet can be reached at cbouquet@mckennalong.com with
questions about this article.