THE DEFENSE BASE ACT WAR RISK SYNDROME

• Published in: Public contract law journal Vol. 46; no. 4; pp. 717 - 752
• Main Author: Bromley, C. Jason
• Format: Journal Article
• Language: English
• Published: Chicago American Bar Association Section of Public Contract Law 22.06.2017; American Bar Association
• Subjects: Administrative expenses; Contractors; Cost control; Defense contracts; Defense spending; Employees; Employers; Evaluation; Federal employees; Finance; Government risks insurance; Insurance coverage; Insurance premiums; Laws, regulations and rules; Legislative oversight; Liability; Management; Military bases; Reimbursement; Risk management; War; Workers compensation; United States > US; Afghanistan; Iraq
• ISSN: 0033-3441; 2162-8181

Confirmatory terms of the solicitation offer significant avenues for immediate DBA cost oversight. d. Methods to Mitigate the War Risk Syndrome The failure of carriers to exclude WHCA compensable claims from their loss ratios inflates the government's costs the most.263 If a DBA insurance carrier includes war-risk hazards within its insurance premium, yet seeks WHCA reimbursement, it wrongfully premium loads.264 At times, a DBA insurance carrier will obscure its loss ratio methodologies and definition by including war-risk hazards in order to skew the overall DBA premium.265 Due to these inappropriate WHCA inclusions, SIGAR reported that one major DBA insurance carrier's overall loss ratio methodology became unclear, inconsistent, and unreliable.266 Loss ratio and premium figures are generally located in each DBA binder, which is the agreement among the DBA insurance carrier, contractor, and the broker.267 War related injuries must be fully segregated when a DBA insurer computes its loss ratio, leading to immediate decreases in DBA premiums.268 In addition, true loss ratios should be used to set rates, not IBNR numbers or open market rates.269 Contracting officers can screen IBNR calculations to certify they do not include WHCA cases.270 Subsequently, explanations of the loss ratio calculations may be requested.271 An IBNR explanation should demonstrate consistency with corresponding loss ratio calculations.272 Loss ratio calculations must also be consistent with explanations of any inconsistent calculations.273 In other words, a contracting officer may examine inconsistent calculations and then request an explanation from the DBA insurance carrier.[...]prior to contract award, a contracting officer may request a copy of the DBA binder from the contractor.274 A DBA binder must contain language certifying that no premiums are charged by the insurance company for war-risk hazards.275 This represents an oversight opportunity for a contracting officer to confirm, prior to award.276 In addition, a contracting officer may examine the DBA insurance carrier's loss ratio methodology and definition.277 The loss ratio definition used by the DBA insurance carrier may be an area to concentrate efforts on.278 Solicitation requirements for war hazard reports can detail: (1) each war hazard claim; (2) a statistical report of all claims and labor reimbursement approvals; and (3) denials, amounts, and information on direct payments of war hazard benefits to beneficiaries.279 This information permits a contracting officer an opportunity to view DBA insurance carriers' methodology for loss ratio numbers while confirming carriers' reports that reflect approved WHCA reimbursement.280 Essentially, this data can reveal the existence of the war risk syndrome and could be a key to identifying loss ratio manipulation.[...]DBA reserve adequacy needs contracting officer scrutiny.281 Oversight language could help mitigate a DBA insurance carrier from maintaining a reserve total that equals twice as much as it pays for claims.282 DBA insurance carriers will close out cases for far less than the maximum amount reserved yet they may face no consequences and may continue to over reserve going forward.283 A contracting officer can request a contractor to provide information from the DBA insurance carrier to explain reserve levels, especially since a majority of these reserves wrongly applied war hazards when calculating its loss ratio and then sought WHCA reimbursement.284 The government should also request information about any DBA premium refunds the contractor receives.285 At the end of each year, brokers or DBA insurance carriers are supposed to apply credit from contracts that overestimated labor costs to contracts with underestimated labor costs.286 These DBA refunds from the insurance carrier-a form of reimbursement- rightfully belong to the government.287 Yet, DBA refunds are sent directly to the contractor, not to the government.288 Under the U.S. Army Corps of Engineers (USACE) DBA pilot program, DBA refunds were not tracked.289 Since 2005, contractors received approximately $58.5 million in refunds.290 Contracting officers must track refunds by examining whether an initial estimated cost of DBA insurance is different than the actual number for an end ofyear audit.291 In section L of the solicitation, it is sensible to insert language such as "[a]ny reimbursement of DBA costs from the insurer back to the contractor shall be reimbursed to the Government."300 If used correctly, SPOT can become an oversight tool for government contracting personnel and may help a contracting officer verify missing links in DBA coverage.301 Under the terms of FAR 52.228-3, the contractor is responsible to procure DBA insurance coverage before commencing any performance under the contract in volatile areas, such as Iraq or Afghanistan.302 Failure to obtain DBA coverage in accordance with the contract is a material breach of contract.303 Proof of DBA insurance must be submitted directly to the contracting officer.304 Proof can be a copy of the DBA binder that reflects the rate structure.305 The DBA policy number becomes proof of coverage prior to issuance of an LOA.306 Only the "bound DBA policy" acts as proof.307 Therefore, contracting officers can use information in SPOT to track how much a contractor paid for its DBA insurance.[...]if SPOT can track DBA, this tracking tool can be modified to start tracking WHCA reimbursements. b. Options of an Audit Nothing in DFARS 242.3 precludes a contracting officer from conducting an independent audit on a contractor's DBA to look for war risk syndromes during contract performance.308 Many governmental agencies lack the internal mechanisms, manpower, or expertise to conduct detailed audits.[...]improvements to the DoD's acquisition strategy, formation, and performance associated with DoD services contracts in Afghanistan and Iraq will effectively obtain cost savings. 1.