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
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.