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Defense Base Act insurance-preventing costly mistakes

Defense Base Act insurance-preventing costly mistakes

Thorough contract review prevents costly mistakes from DBA insurance

Anticipated cost analysis saves thousands of dollars

Prevent costly mistakes from DBA insurance

Contractors currently working or considering working overseas must contemplate insurance needs that differ from the more familiar, domestic insurance programs, i.e., Defense Base Act insurance.  Each week, we receive 5 to 10 calls or email requests on DBA information.  Some questions involve cost, the time needed to get a quote, coverage, is it really necessary?…just to name a few.  In this article, I will discuss how to prevent costly mistakes others have made when it comes to DBA insurance. 

DBA Insurance vs. Workers’ Comp – 7 Points To Consider

In it’s simplest terms, Defense Base Act (DBA) insurance is workers’ compensation insurance on steroids.  In most states, workers’ compensation is a required benefit, afforded to employees to cover medical expenses and lost wages due to an injury, illness, disability, or death resulting from work-related practices.  In other words, your workers are protected by law, in the United States, if they are injured while working with workers’ comp.  Same holds true for workers engaged in US Government contract work overseas.  DBA is there to protect those workers while participating in work on foreign soil the same way workers’ compensation would protect them if they were employed in the US.  There are differences, however and here are 7… 

  1. Benefits
  2. Reputation risk
  3. Trust in business practices
  4. Detailing the work to be performed
  5. Subcontractors
  6. The risk of policy procrastination
  7. Complacency
Benefits

Benefits are more robust than domestic workers’ compensation when compared side by side.  The claims are handled by insurance companies just as with workers’ compensation, but DBA claims have to be processed and approved by the US Department of Labor DBA insurance includes acts of war and covers employees while working in more hazardous areas (zone of special danger) of the world where the risks are greater due to political tensions, civil unrest, and military action.  Because the risks are different and in some cases greater, covering workers from such hazards is critical to the success of any government contract.

Reputation Risk

Reputations are oftentimes marred by a lack of insurance and/or employee well-being for government contractors not obtaining DBA and or other insurance coverage.  With recruiting efforts difficult at best for many companies, Human Resource professionals may be challenged with the “grapevine” of information that passes within the pool of potential workers needed to work on a contract.

Trust

Being short-sighted on insurance can be a regulatory matter as well.  If a company decides not to procure the necessary coverage for the satisfaction of the contract, penalties and fines may enter the picture.  From an insurance professional point of view, I have declined to work with companies that will refuse the coverage although mandated by the Defense Base Act.  The aspect of risk protected by insurance first, and foremost, based on trust.  If the client cannot be trusted to perform the baseline requirement related to government/defense contracting, what other areas may they fall short on?

Detailing the work to be performed

Contracts are supported by a Statement of Work (SOW) that details the operation(s) and the workers necessary to perform the contract requirements.  Occupations range from security, engineering, janitorial, to construction, and everything in between.  Because the operations are listed, it is CRITICAL that when discussing the operations from an insurance standpoint, the descriptions are clear and easy to understand.  Do not simply allow the SOW to speak for itself.  Misinterpretation of work is a very common mistake made by companies when securing DBA insurance.  If the work is not clear, then worse case scenarios will plague the underwriting process and potentially add additional premiums to the program.

Each occupation that is listed in the contract, will be assigned a rate for the cost of insurance.  For instance, if a contract indicates IT professionals working in an office environment, the rate will reflect this level of hazard.  If that same worker performs the work with a detachment of military advisers traveling throughout the region, this will be taken into consideration as well, likely increasing the rate and the overall cost of insurance.  Clarity is critical when outlining with work to be performed.  if subcontractors are used as part of the contract performance, be careful to obtain proof of their DBA insurance as well.  Many DBA policies issued by insurance companies will NOT extend to subcontracted labor.

Subcontractors

Subcontractors may be a critical component of your contact performance.  Be aware of DBA policies that exclude subcontractors.  If a contractor requires the use of subcontractors, the subcontractor may be required to have their own DBA policy.  If they do not, another subcontractor may be required, or your company may have to hire direct, those workers performing the task.  Consider subcontractors to prevent costly mistakes from DBA insurance.

Procrastination 

Another potential risk involves obtaining insurance AFTER the contract has already started.  As a business owner, the DBA insurance is required at the start of the contract.  The contracting officer (KO) may request proof of the coverage with a certificate of insurance.  The certificate must align with the start of the contract, not considered effective after.  In other words, if you have not procured DBA insurance and it is required, the date the coverage started must be within the time the contract started.  If not, the KO may consider your contract non-compliant.  Insurance companies have strict policies on changing the date of a policy or placing a date in the past when obtaining coverage.  This practice, in insurance-speak, is called back-dating and is prohibited by most insurance companies.  If you have a contract without the necessary insurance in place, the contract could potentially be canceled and payment for services performed may not be made.  Furthermore, past performance records may be impacted preventing future contracts from being won.

Complacency

Complacency is your worst enemy in DBA insurance compliance.  First of all, secure the necessary insurance so your contract is good-to-go.  Second, don’t sit on your hands for years to come after the insurance is in place.  Consider other insurance markets, expertise, and premium savings by selecting the right insurance partner.  If you had to teach your current insurance professional about DBA insurance or if they only write a few DBA policies, be aware of potential shortcomings.  First and foremost is the general lack of experience many insurance professionals have when it comes to DBA insurance.  If your insurance professional routinely represents apartment complexes, dry cleaners, and restaurants, what could they really know about foreign liability exposures and underwriter guidelines for DBA insurance?  Putting it another way, would you trust a family doctor to perform brain surgery?  Not to compare DBA insurance with brain surgery in a literal context, this type of program is not in every agent’s wheelhouse.  Consider working with an expert to obtain the right rates, the understanding needed for claims, and providing the rates needed when seeking additional contracts.

Why is DBA insurance so expensive?  Or, is it?

Why is DBA insurance so expensive? Or, is it?

 

Workers moving munitions

Defense Base Act insurance, (DBA) is required insurance for all government contractors with work in foreign countries.  For the sake of this blog post, I will not venture into the specifics of where it is required, but will address the frequently asked question – Why is DBA insurance so expensive?

In response to this question, I oftentimes ask in retort – What does so expensive mean to you?  I respond not be evasive or coy, but to identify what their definition is of affordable as compared to what they wanted or expected to see.  The answers reveal bigger issues than that of price; procrastination and planning.  Procrastination in securing the coverage and planning or lack thereof, due to proposal costs versus the unexpected costs related to the insurance.

Let’s take a step back and look at the question, why is Defense Base Act insurance so expensive?  DBA insurance premium is based on three simple factors, the work performed, payroll associated with the work to be performed, and historical losses (if applicable).  The rate itself is the real basis of the premium question, so let’s stay there.

The rate determined by the underwriter is straight-forward once they understand the work to be performed.  If it is office work, then this rate.  If it is construction, then that rate and so on…The difference rests on how the work is understood by the underwriter and starts with the translation of the insurance professional to the underwriter when the application is completed.  When completing an application for DBA insurance, keep the following considerations in mind:

  • Do not simply send the Statement of Work (SOW) as a means of detailing the work to be performed by your company.
  • Ensure your insurance professional knows what is being performed, but equally, what is not being performed.
  • Ask your insurance professional to recite back to you the work you have indicated, so you can verify they understand in terms of risk and performance.
  • Articulate the many facets of the contract involvement that only your company is responsible for.  No more, no less.
  • Be cognizant of regional conflicts where the work is to be performed, i.e., the Middle East, Central or South America, Asia, Europe, etc. when considering the anticipated cost of insurance.  Countries or regions may have a significant impact on the rates afforded by the insurance companies.
  • Seek alternatives from a variety of insurance carriers by demanding your insurance professional provide responses for three or more insurers.
  • If weapons, watercraft, weapon systems, linguists, or field operations (outside the wire) are not involved, make sure this is added to the application.  Many underwriters will simply assume certain work functions and place a higher rate on a risk, just to be safe.  This is true too of your insurance professional.  Many insurance professionals have no experience or familiarity with military or government contracting operations.  It is important to ask them what they consider your contract to consist of the associated risks before they market your application to insurance companies.
  • Take an active role in completing and reviewing the application to be sent to the underwriter.  Ask your insurance professional, why should they be considered as a good carrier partner and not another insurer.  Is it strictly based on price, or are services offered, or will they be a strong partner as other contracts are won?
  • If payroll for the contract includes work that is performed in the United States, don’t include this in the contract payroll.  The payroll made in the US should be allocated to the domestic workers’ compensation program, not the DBA program.
  • Negotiate, negotiate, negotiate…Make sure the insurance professional is negotiating with the underwriter.  Even a small rate reduction could make a strong impact on your contract profit margin.
  • Select the right insurance partner.  Picking the wrong insurance agency or brokerage to work with could cost you thousands in additional premium costs if they are not familiar with similar contract exposures.

Procrastination and planning

Planning contract insurance demands

The best way to ensure premiums are affordable is to plan for the insurance well in advance of securing the award win.  During the proposal phase, the insurance rates should be discussed, determined, and placed in the proposal identifying the right costs associated with your bid.  If you look to secure DBA insurance after the contract award, you risk cutting into the profit margins possibly due to underfunding the anticipated cost.  Working with your insurance professional will offset the risk of unexpected costs well in advance through dialogue and rate determination.

Plan for any contract win by knowing the rates in advance and anticipating the premium associated with the new contract.  Oftentimes, a new DBA policy is required if the work is completely different from the original policy is already in place.  Factors include different countries of operation, work to be performed, subcontractor utilization.

In conclusion, I recommend working with the right person the first time when it comes to DBA insurance.  Simply tossing this type of insurance to an agent or broker that is not familiar with its underwriting or rate determination factors may make you initially feel good that it is done, but later regret you selected the wrong person for the job.  Again, right person, the first time.