oversight

Opportunity for Savings in Providing War Risk Insurance for Contractor Property and Employees

Published by the Government Accountability Office on 1971-11-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

REf’ORT TO THE CONGRESS        -




Opportunity For Savings In
Providing War Risk Insurance
For Contractor Property
And Em ployees B-772699
Department   of Defense
Department   of State
Department   of Commerce




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                                  COMPTROLLER     GENERAL     OF      THE   UNITED   STATES
                                                WASHINGTON.    D.C.     20545




            B- 172699




            To the President   of the Senate and the
    I
        ’   Speaker  of the House of Representatives

                    This is our report     on the opportunity      for savings in providing     war
            risk insurance     for contractor    property    and employees.       The report   is
            based on a study we w‘ade in various          commands      and offices   of the De-
’ I ‘-      partment    of Defense,   the Department       of State, and the Department      of             I-      ‘: ‘I.
  7         Commerce.                                                                                            y-1

                   Our review was made pursuant     to the Budget and Accounting                     Act,
            1921 (31 U.S.C. 531, and the Accounting    and Auditing Act of 1950
            (31 U.S.C. 67).

                   Copies of this report    are being sent to the Director,   Office                of
            Management    and Budget; the Secretary     of Defense;   the Secretary                 of
            State; and the Secretary    .of Commerce.




                                                                      Comptroller         General
                                                                      of the United       States




                  p                      5QTH ANNIVERSARY                   1921- 1971
COMPbROiLER GENERAL'S                     OPPORTUNITY FOR SAVINGS IN PROVIDING WAR
REPORT TO THE CONGRESS                    RISK INSURANCE FOR CONTRACTORPROPERTYAND
                                          EMPLOYEES, DEPARTMENTOF DEFENSE, DEPARTMENT
                                          OF STATE, AND DEPARTMENTOF COMMERCEB-172699

DIGEST
------

WHY THE REVIEW WASMADE

       The Department of Defense (DOD) and the Agency for International       De-                r+   T '-
       velopment (AID) generally   reimbursed Government contractors    for the
       cost of insurance  purchased&to   provide protection against war hazards
       to their  property and employees.

       Because of indications      that war-risk-insurance       costs were considerably
       greater  than losses,    the General Accounting      Office    (GAG) reviewed th$?
   '   insurance practices    of the Navy's Military       Sealift    Command and the     -.,
  _    Defense Fuel Supply Center, a unit in the-Defense             Supply Agency.      *-T


FINDINGS AND CONCLUSIONS

       The cost of war risk insurance       to the Government      has substantially       ex-
       ceeded the losses experienced       by its contractors.       This is true for
       insurance purchased for contractor-owned        vessels,     contractor     employ-
       ees, and third-country   nationals,

       Con-&actor-owned    vesse Zs

       Savings of $16.2 million     could have been realized  over the 3-year pe-
       riod ended June 30, 1969, if DOD and AID had followed       the Government's
       long-standing     policy of self-insurance.  On the basis of actuarial
       principles,    significant  savings can be expected if these agencies
       adopt a self-insurance     policy for future years.   (See p. 7.)

       Both agencies have followed     the practice   of reimbursing    private  ship-
       owners for the cost of war risk insurance on vessels used to transport
       materials   into Southeast Asia.     In July 1968, however, the Military
       Sea Transportation    Service,  predecessor  to the Military     Sealift  Com-
       mand, replaced the war risk insurance on officers         and crews of char-
       tered vessels but not on the vessels with Government insurance           ob-
       tained through the Maritime Administration.        The Defense Fuel Supply
       Center continues    to reimburse shipowners for war-risk-insurance        cover-
       age on officers    and crews.   (See p. 8 to 15.)

       Contractor   empZoyees

          DOD and AID have reimbursed    contractors    for commercial war risk in-
          surance to provide contractor    employees with supplemental     coverage
,'
          for war-hazard  death or injury.      The coverage provides   lump-sum
   >:, :- e.                                                    14Ij '4   3J971.

                                              1
  .Tear Sheet
    benefits    in addition   to the workmen's compensation   type of benefits                  ,       I
    provided    under the Defense Base Act and the War Hazards Compensation                             i
    Act.     The cost of such insurance    has exceeded the losses incurred                             I
                                                                                                        I
    (claims    paid, approved,   or pending) by $2.7 million    over the 3-year                         I
    period ended June 30, 1969.       (See p. 17.)

    DOD and AID have participated      in negotiations  of, and have approved
    the terms for, war-risk-insurance      coverage on contractor   employees
    under a blanket  policy    with a commercial insurance    company.   Terms
    of the blanket  policy,    however, omit any provision    for Government
    audit.   (See p. 19.)

    Thipd-county     nationah
    AID and two      military     commands have continued         to reimburse   contractors
    in Vietnam for the cost of commercial war-risk-insurance                    coverage of
    third-country       nationals     (citizens      of countries   other than the United
    States and Vietnam) employed by the contractors,                   even though a pro-
    gram of self-insurance          generally       adopted by DOD for such employees has
    offered     substantial     savings.        Insurance costs exceed losses by about
    $542,000,     and GAO be 1 ieves that future           savings could be realized       if
    such a program were followed              by the above agencies for these employ-
    ees.     (See p. 27.)


RECOik!MWDATIONS
              OR SUGGESTIONS                                                                            I
                                                                                                        I
                                                                                                        I
    TreSSQZS                                                                                            I
                                                                                                        I
                                                                                                        I
    The Secretary    of Defense should establish    a plan of self-insurance    for                     I
    contractor-owned    vessels.    If feasible, this coverage should be ob-                            I
                                                                                                        I
    tained from the Maritime     Administration,   as authorized   by the Merchant                      I
    Marine Act of 1936.      (See p. 16.)                                                               I
                                                                                                        I
                                                                                                        I
    .BnpZoyees                                                     ,                                    I
                                                                                                        I
                                                                                                        I
    The Secretary    of Defense     and the Secretary      of State    should                           I


      --seek legislation         to authorize  lump-sum    benefit   payments to con-
         tractor    employees for war-hazard       death   or injury    (There should be            .   I
         appropriate     dollar    limitations   and the   employees should be allowed                  I
                                                                                                        I
         to select    either     a lump-sum payment or     an annuity-type     payment of               I
         insurance    benefits.)      and                                                               I
                                                                                                        I

      --discontinue   reimbursing    contractors   for the cost of supplemental
         war risk insurance9     and, in the interim,    reopen negotiations     on
         the present  policy   to bring the administrative     costs,   brokers'
         commissions,  and profit    under Government audit.      (See p. 26.)                          I
                                                                                                        I




                                              2
I       -
I                 The Secretary      of State should seek authority           from the Congress to
I                 self-insure     for war-risk   losses incurred         by third-country     nationals
I                 under AID contracts,       and the Secretary         of Defense should issue in-
I
I                 structions    to all DOD procurement        activities      to provide   for self-
I                 insurance   of third-country      nationals      as authorized      by Defense Procure-
I
I                 ment Circular      64.   (See p. 31.)

I
            AGENCY ACTIONS AND UNRESOLVEDISSUES
I
I
I                  GAO proposed in its draft            report   that the Secretary      of Defense review
I                  war-risk-insurance         practices     and cost experiences     of the Military    Sea-
l
I                  lift   Command and the Defense Fuel Supply Center,               with a view toward
I                  providing     Government self-insurance           for war-risk   hazards to contractor-
I                  owned vessels and officers             and crews, if feasible,      through the Mari-
I
I                  time Administration.           DOD informed GAO that it had initiated           such a
I                  study.      This study was still         in progress on September 9, 1971.         The
I
I                  Maritime     Administration       has advised us that it will         be happy to pro-
I                  vide war risk insurance           to the extent allowed by the Merchant Marine
I                  Act of 1936.       (See p. 15.)
I
                   With regard to supplemental          war risk insurance      on contractor         employees,
                   DOD believes     that,    pending a suitable    substitute       for commercial war
                   risk insurance,       no action   to modify existing       policy     should be initiated
                   because such action could cause contractors              serious      difficulty     in re-
                   cruiting   and retaining       employees.    DOD advised GAO that it had ef-
                   fected reductions       in the premium rates and reserve            fund required       under
                   the blanket    policy     and would discuss other matters           relating     to the
                   policy   in future     meetings with the insurance         company.         AID said that
                   it was conducting       an in-depth    study of GAO's recommendation.               This
                   study was still       in progress on September 9, 1971.
    I
    I              The Bureau of Employees' Compensation,  Department of Labor, which ad-
    I
    I              ministers  the Defense Base Act and the War Hazards Compensation Act,
    I              agreed with GAO.
    I
    I
    I              DOD and AID proposed to reexamine their     policies   with regard                to war
    I              risk insurance  on third-country nationals.       (See p. 25.)
    I

    I
    I
    I       MATTERS FOR CONSIDERATION BY THE CONGRESS

                   Legislation   may be necessary         for   lump-sum   war-risk    insurance     payments
                   to contractor   employees.




    I        Tear Sheet
    I                                                           3
                           Contents
                                                             Page
DIGEST                                                         1
CHAPTER

  1        INTRODUCTION                                       4
               War-risk-insurance     legislation     on
                 contractor-owned     property                4
               War-risk legislation      for contractor
                 employees                                    5
               Recent war-risk-insurance        experience    6
  2        POTENTIAL SAVINGS OF SELF-INSURANCEPROGRAM
           FOR WARRISK INSURANCEON CONTRACTOR-OWNED
           VESSELS                                            7
               Military   Sealift Command                     9
               Defense Fuel Supply Center                    13
               Conclusion                                    15
               Agency comments                               15
               Recommendation                                16

  3        OPPORTUNITYTO REDUCECOST OF SUPPLWNTAL
           WARRISK INSURANCEON CONTRACTOREMPLOYEES           17
              Agency comments                                24
              Conclusion                                     25
              Recommendation                                 26

  4        OPPORTUNITYTO FURTHERREDUCECOST OF WAR
           RISK INSURANCEON THIRD-COUNTRYNATIONALS
           EMPLOYEDBY CONTRACTORS                            27
               Agency comments                               31
               Conclusion                                    31
               Recommendation                                31

  5        SCOPEOF REVIEW                                    32

APPENDIX

  I        Letter dated October 19, 1970, from the
             Assistant  Secretary of Commerce to the
             General Accounting Office and enclosures        35
             APPENDIX                                                        Page

                II      letter     dated November 13, 1970, from the
                           Acting Assistant    Secretary of Defense
                            (Installations   and Logistics) to the Gen-
                           eral Accounting Office                             40

              III       Letter dated December 18, 1970, from the
                          Auditor General, Agency for International
                          Development, Department of State, to the
                          General Accounting Office and enclosure             43

                IV      Principal   officials  responsible    for adminis-
                           tration  of the activities    discussed in
                           this report                                        46
                                         ABBREVIATIONS
             AID        Agency for   International      Development
             ASPR       Armed Services    Procurement     Regulation
             DOD        Department   of Defense
             GAO        General Accounting     Office




, .:
       . .
' COMPkROLLERGENERAL'S                     OPPORTUNITY FOR SAVINGS IN PROVIDING WAR
  REPORT TO THE CONGRESS                   RISK INSURANCE FOR CONTRACTORPROPERTY AND
                                           EMPLOYEES, DEPARTMENTOF DEFENSE, DEPARTMENT
                                           OF STATE, AND DEPARTMENTOF COMMERCEB-172699

 DIGEST
 ------


 WHY THE REVIEW WAS MADE

      The Department of Defense (DOD) and the Agency for International       De-
      velopment   (AID) generally  reimbursed Government contractors   for the
      cost of insurance   purchased to provide protection  against   war hazards
      to their  property  and employees.

      Because of indications      that war-risk-insurance       costs were considerably
      greater   than losses,   the General Accounting      Office    (GAO) reviewed the
      insurance    practices of the Navy's Military       Sealift    Command and the
      Defense Fuel Supply Center,      a unit in the Defense Supply Agency.


 FINDINGS AND CONCLUSIONS

      The cost of war risk insurance       to the Government          has substantially      ex-
      ceeded the losses experienced       by its contractors.           This is true for
      insurance  purchased for contractor-owned        vessels,        contractor    employ-
      ees, and third-country   nationals.

      Contractor-owned      vesse Zs

      Savings of $16.2 million       could have been realized    over the 3-year pe-
      riod ended June 30, 1969, if DOD and AID had followed           the Government's
      long-standing     policy   of self-insurance.     On the basis of actuarial
      principles,    significant    savings can be expected if these agencies
      adopt a self-insurance       policy    for future years.  (See p. 7.)

      Both agencies have followed          the practice      of reimbursing      private  ship-
      owners for the cost of war risk insurance                on vessels used to transport
      materials   into Southeast       Asia.     In July 1968, however, the Military
      Sea Transportation      Service,     predecessor     to the Military       Sealift  Com-
      mand, replaced     the war risk insurance          on officers     and crews of char-
      tered vessels but not on the vessels with Government insurance                     ob-
      tained through the Maritime          Administration.        The Defense Fuel Supply
      Center continues      to reimburse      shipowners     for war-risk-insurance       cover-
      age on officers      and crews.      (See p. 8 to 15.)

      Contractor    employees

      DOD and AID have reimbursed    contractors    for commercial war risk in-
      surance to provide contractor    employees with supplemental    coverage
      for war-hazard  death or injury.      The coverage provides  lump-sum


                                               1
    benefits    in addition    to the workmen's compensation   type of benefits  '             *
    provided    under the Defense Base Act and the War Hazards Compensation
    Act.     The cost of such insurance     has exceeded the losses incurred
    (claims    paid, approved,    or pending) by $2.7 million    over the 3-year
    period ended June 30, 1969.        (See p. 17.)

    DOD and AID have participated      in negotiations      of, and have approved
    the terms for, war-risk-insurance      coverage on contractor      employees
    under a blanket  policy    with a commercial     insurance   company.   Terms
    of the blanket  policy,    however, omit any provision       for Government
    audit.   (See p. 19.)

    Third-county     nationah
    AID and     two military      commands have continued        to reimburse   contractors
    in Vietnam for the cost of commercial war-risk-insurance                   coverage of
    third-country       nationals     (citizens     of countries   other than the United
    States and Vietnam) employed by the contractors,                  even though a pro-
    gram of self-insurance          generally      adopted by DOD for such employees has
    offered     substantial     savings.       Insurance costs exceed losses by about
    $542,000,     and GAO believes         that future    savings could be realized       if
    such a program were followed              by the above agencies for these employ-
    ees.     (See p. 27.)


RECOMMENDATIONS
             OR SUGGESTIONS
    Vesse 2s
    The Secretary    of Defense should establish    a plan of self-insurance    for
    contractor-owned    vessels.   If feasible,  this coverage should be ob-
    tained from the Maritime     Administration,   as authorized   by the Merchant
    Marine Act of 1936.      (See p. 16.)

    i37pZopees
    The Secretary    of Defense    and the Secretary      of State   should

      --seek legislation         to authorize  lump-sum   benefit   payments to con-
         tractor    employees for war-hazard      death   or injury    (There should be
         appropriate     dollar    limitations  and the   employees should be allowed
         to select    either     a lump-sum payment or    an annuity-type     payment of
         insurance    benefits.)      and

      --discontinue   reimbursing    contractors   for the cost of supplemental
         war risk insurance,     and, in the interim,    reopen negotiations     on
         the present  policy   to bring the administrative     costs,   brokers'
         commissions,   and profit   under Government audit.      (See p. 26.)




                                              2
     The Secretary      of State should seek authority           from the Congress to
     self-insure     for war-risk   losses incurred         by third-country     nationals
     under AID contracts,       and the Secretary        of Defense should issue in-
     structions    to all DOD procurement        activities      to provide   for self-
     insurance   of third-country      nationals     as authorized       by Defense Procure-
     ment Circular      64.   (See p. 31.)


AGENCY ACTIONS AND UNRESOLVEDISSUES

     GAO proposed in its draft            report  that the Secretary      of Defense review
     war-risk-insurance         practices     and cost experiences    of the Military    Sea-
     lift   Command and the Defense Fuel Supply Center, with a view toward
     providing     Government self-insurance          for war-risk   hazards to contractor-
     owned vessels and officers            and crews, if feasible,      through the Mari-
     time Administration.           DOD informed GAO that it had initiated          such a
     study.      This study was still         in progress  on September 9, 1971. 'The
     Maritime     Administration       has advised us that it will        be happy to pro-
     vide war risk insurance           to the extent allowed by the Merchant Marine
     Act of 1936.       (See p. 15.)

     With regard to supplemental          war risk insurance      on contractor         employees,
     DOD believes     that,    pending a suitable    substitute       for commercial war
     risk insurance,       no action   to modify existing       policy     should be initiated
     because such action could cause contractors              serious      difficulty     in re-
     cruiting   and retaining       employees.    DOD advised GAO that it had ef-
     fected reductions       in the premium rates and reserve fund required                   under
     the blanket    policy     and would discuss other matters           relating     to the
     policy   in future     meetings with the insurance         company.        AID said that
     it was conducting       an in-depth    study of GAO's recommendation.               This
     study was still       in progress    on September 9, 1971.

    The Bureau of Employees' Compensation,  Department of Labor, which ad-
    ministers  the Defense Base Act and the War Hazards Compensation Act,
    agreed with GAO.

     DOD and AID proposed to reexamine their     policies   with regard                to war
     risk insurance  on third-country nationals.       (See p. 25.)


MATTERS FOR CONSIDERATJQN
                       _ BY THE CONGRESS
     Legislation     may be necessary       for   lump-sum   war-risk     insurance    payments
     to contractor     employees.
                              CHAPTER1

                            INTRODUCTION

       The Government's war-risk-insurance          program had its or-
igin in legislation     dating back to World War I when a Gov-
ernment agency was created within the Treasury Department to
supplement the inadequate war risk insurance then available
in the commercial insurance market.            This agency--the   Bureau
of War Risk Insurance--had        authority    to insure American ves-
sels, freight,    cargo, and crews against loss or damage aris-
ing from the risks of war. Subsequently this agency was
abolished,   and itsfunctionswith         respect to merchant ship-
ping now are carried out by the Maritime Administration,             De-
partment of Commerce,

       Because of significant      losses suffered by American ma-
rine insurers    in the early stages of World War II, the Fed-
eral Government activated       a war-risk-indemnity       program in
1942 to prevent the disruption          of waterborne commerce by
providing   protection     to shipowners and preventing       undue in-
creases ininsurance      rates.    This   Government   indemnity    pro-
gram ended with the cessation of World War II hostilities,
and the commercial insurers returned to the war-risk              field.
At the time of our review in fiscal           year 1970, the American
insurers'   share of the maritime war-risk-insurance            market
for American-flag      vessels was relatively       small because over
90 percent of all commercial war risk insurance on such ves-
sels was being written       by British    insurance firms,

WAR-RISK-INSURANCELEGISLATION
ON CONTRACTOR-OWNEDPROPERTY

      The Merchant Marine Act of 1936, as amended (46 U.S.C.
12851, the Federal Aviation Act of 1958 (49 U.S.C. 15341,
and Public Law 85-804 as implemented by Executive Order
No. 10789 (50 U.S.C. 1431) provide a means by which Govern-
ment contractors    may obtain Government war-risk-insurance
coverage on contractor-owned     property.   Under 46 U.S.C. 1285
and 49 U.S.C. 1534, the Secretary of Commerce and the Secre-
tary of Transportation     are authorized  to provide war-risk-
insurance coverage on contractor-owned      vessels and aircraft,
respectively,    upon request by the Department of Defense and
such other agencies as the President may prescribe,

                                    4
       The contracting  agencies involved must agree to indem-
nify the Departments of Commerce and Transportation         for any
war-risk   losses sustained under such Government insurance.
Also DOD and various civil     agencies are authorized     by Public
law 85-804 as implemented by Executive Order No. 10789 to
indemnify Government contractors      against unusually   hazardous
losses or claims when it will facilitate      the national     de-
fense without regard to the availability      of funds,

WAR-RISK LEGISLATION FOR CONTRACTOR
                                  EMPLOYEES

      After the start of World War II, it was found that cer-
tain gaps existed in workmen's compensation protection        for
employees of Government contractors      at locations  outside the
continental    United States.   As a result,   the Defense Base
Act (42 U.S.C. 1651) was enacted to cover such employees.
This was an extension of the Longshoremen's and Harbor Work-
ers' Compensation Act (33 U.S.C. 901) which provided work-
men's compensation benefits     for employees of private employ-
ers, excluding crews of vessels and Government employees,
engaged in employment upon the navigable waters of the
United States,      Under the Defense Base Act, the scale of
benefits    is generally  the same as that provided by the Long-
shoremen's Act, Under both acts the insurance coverage was
to be provided by the contractor     from commercial sources or
from its own resources.

      To broaden the Defense Base Act, the War Hazards Com-
pensation Act (42 U.S.C. 1701) was enacted.       In essence,
this act amended the Defense Base Act to specifically       pro-
vide war-risk     coverage for employees of Government contrac-
tors engaged in work outside the United States who would not
be entitled    to benefits   for war hazards under the Defense
Base Act.     The  scale  of benefits generally is the same as
that provided by the Longshoremen's Act.

      Under the War Hazards Compensation Act, the Bureau of
Employees' Compensation, Department of Labor, is authorized
to reimburse employers, insurance carriers,-or   compensation
funds for benefit payments to employees covered by the act
or to their beneficiaries   for death or injury due to war
hazards and to make direct payment of such benefits.    The
act also provided for payments to dependents of employees
who are captured or detained by enemy action,

                                  5
RECENTWAR-RISK-INSURANCEEXPERIENCE

      It is estimated that several hundred Government contrac-
tors have been actively        engaged in construction     work and
other activities     in Southeast Asia,       On the basis of our re-
view of selected major contracts          and DOD records on contrac-
tor owned and operated ships, we estimate            that,  during fis-
cal years 1967 through 1969, the costs of war risk insur-
ance amounted to $18.5 million         for contractor-owned     property
 (see p, 8) and $4.6 million        for employees (see pp. 20
and 29) insured under these selected contracts.             During the
same period total losses to contractor          equipment and employ-
ees under these contracts        are estimated at $2.3 million       and
$1.3 million,    respectively,

       Our estimates represent actual and estimated insurance
costs and losses shown by the records of selected major con-
tractors,   by reports of costs and losses under a blanket in-
surance policy for war-risk     coverage on contractor   employees,
and by DOD records on shipping operations.       The last item
included chartered-ship    operations   of the Military  Sealift
Command and ship operations     of three major petroleum con-
tractors   of the Defense Fuel Supply Center.




                                   6
                              CHAPTER2

       POTENTIAL SAVINGSOF SELF-INSURANCEPROGRAM
                                               FOR

       WARRISK INSURANCEON CONTRACTOR-OWNED
                                         VESSELS

      DOD generally   has followed the practice     of reimbursing
contractors  for premiums paid for war-risk-insurance        cover-
age of contractor-owned    vessels and crews although the cost
of such insurance has greatly     exceeded war-risk    losses.
       Our review of war risk insurance practices        of the Mili-
tary Sealift     Command,l Department of the Navy, and the De-
fense Fuel Supply Center, Defense Supply Agency--the           two
major DOD agencies which contract with private          shipowners
and suppliers     for shipment of material     to Southeast Asia--
indicates    that savings of about $16.2 million      could have
been realized     over the 3-year period ended June 30, 1969,
had these agencies followed the Government's long-standing
policy of self-insuring     where practicable.

      We believe that significant   savings could be realized
in the current and future years by these agencies.      Also be-
cause a substantial   portion of this insurance has been ac-
quired through foreign insurance firms, the use of Govern-
ment self-insurance   may have a beneficial  effect upon the
balance of payments of the United States,

       Under certain contracts    DODhas adopted the practice
of self-insurance      whereby it reimburses the contractors        for
war-risk    damage or loss of contractor-owned       property.     We
believe that a broader application         of this self-insurance
practice   would afford DOD an opportunity        for significant
savings.     Such  action  would be  in  accordance   with the long-
standing Government war-risk      self-insurance     practices    autho-
rized by statute.


1
 Prior to August 1, 1970, the Military         Sealift   Command was
 called the Military Sea Transportation         Service.
                                                                                            .

      Government self-insurance    against war-risk    hazards to
contractor-owned   vessels and crews is provided for in the
Merchant Marine Act of 1936, as amended (4.6 U.S.C. 1285).
This legislation   authorizes   the Secretary of Commerce to
provide war risk insurance for loss or damage of contractor-
owned vessels and for death, injury,      or detention   of the of-
ficers and crews or loss of their personal effects         (second
seamen's insurance).

      Under this legislation   the Secretary of Commerce is to
make this insurance coverage available     upon request and
without premium to DOD and such other agencies as the
President may prescribe.     This program is administered   by
the Maritime Administration,     and the contracting  agency in-
volved is required   to indemnify Maritime for loss claims
approved and paid.

       We have observed, however, that the Military     Sealift
Command and the Defense Fuel Supply Center have followed a
practice   of reimbursing    contractors  for premiums paid for
commercial war-risk     coverage on vessels and crews in lieu of
obtaining   similar  insurance coverage through the Government
program administered      by the Secretary of Commerce. The es-
timated cost of war risk insurance for which the contractors
have been reimbursed during fiscal years ended June 30, 1967,
1968, and 1969, and the estimated losses incurred       (loss
claims paid, approved, or pending) for the same periods are
summarized below.
                                                      Fiscal    years ended June 30
                                        Total         1969           1968      1967
War-risk-insurance       costs:
    Military     Sealift   Command   $11,652,001   $6,971,102    $3,231,350   $1,449,549
    Defense Fuel Supply
        Center                         6,872,673    2,313,164     2,340,589    2,218,920
                                      18,524,674    9,284,266     5,571,939    3,668,469
War-risk losses:
     Military  Sealift Command           646,956       60,675       586,113           168
     Defense Fuel Supply
        Center                         1,664,352      310,206         1,550    1,352,596

                                       2,311,308      370,881       587,663    1,352,764
Excess of costs   over losses        $16,213,366   $8,913,385   $4,984,276    $2,315,705
                                                                 _____



                                            8
MILITARY SEXLIFT COMMAND

       The Military     Sealift  Command is responsible   for provid-
ing sealift     requirements    for the military  services in South-
east Asia and elsewhere.         To accomplish its requirements,
the command makes use of Government-owned vessels and ves-
sels chartered      from commercial sources,     These vessels in-
clude cargo ships, passenger ships, tankers, and special
project   ships.
       Charter agreements entered into by the command provide
for full reimbursement to the shipowner for the cost of war
risk insurance purchased from commercial insurance companies
to provide coverage on hulls and machinery of chartered ves-
sels.     Information  obtained during our review indicated         that
the command provided about 4,5 percent of the shipping re-
quired for petroleum requirements          and essentially  all other
shipping requirements        for DOD in Southeast Asia.     The re-
mainder of DOD's petroleum shipping requirement,           or 55 per-
cent, was provided by the Defense Fuel Supply Center under
contracts     with suppliers     for purchase and shipment of the
petroleum, using foreign-flag         vessels.

      The total war-risk-insurance     cost charged to the com-
mand under contracts    for shipment of cargo during fiscal
year 1967 through fiscal      year 1969 is estimated at $11.6 mil-
lion, compared with estimated losses of $0.6 million,       as
shown below.

                                                      Fiscal   years ended June 30
                                 Total            -1969            1968        1967
War-risk-insurance
 costs :
     Hull and machinery
        (note a>             $11,652,001       $6,971,102      $3,231,350      $1,449,549
War-risk losses:
     Hull and machinery          646,956           60,675         586,113                168
Excess of costs   over
  losses                     $11,005,045       $6,910,427      $2,645,237
                                                                __-      -     $1,449,381
                                                                                --___-.
aIncludes   an undetermined amount for protection    and indemnity           insurance    on
 officers   and crews which is not considered significant.




                                           9
        Management of the command was concerned over the high
cost of war risk insurance for officers      and crews, and it
took action in July 1968 to cancel commercial coverage for
the second seamen's insurance on chartered vessels and to
replace this coverage with self-insurance      obtained through
Maritime,     Second seamen's insurance for Government-owned
tankers operated by contractors      for the command has been
provided by Maritime since 1954. As early as 1965 the Navy,
on behalf of the command, had inquired into Maritime's
ability    to provide war risk insurance on hulls and machinery
for chartered vessels.      In its response Maritime generally
agreed to provide such insurance if requested.

        We were informed that this type of insurance could be
initiated    by a request to Maritime from the command and by
agreement with the command to indemnify Maritime for any
losses incurred.

      Officials of the command informed us that they had not
requested this coverage from Maritime because (1) heavy war-
risk losses could wipe out the command's industrial  fund
and (2) shippers would not accept the Government's evalua-
tion of current domestic market value on their vessels for
insurance purposes.

      We noted that losses experienced over the 3-year period
as shown on page 9 amounted to only $0.6 million,          compared
with the industrial     fund corpus at March 31, 1969, of
$42 million   and a net income of $9.3 million      for the 9 months
then ended.    Instead of being charged for losses of only
$0.6 million   under a self-insurance     program, the industrial
fund of the command has been charged with costs of $11.6 mil-
lion for war-risk-insurance       premiums purchased by shipowners.
Charges to the industrial      fund are spread to the Government
agencies served by the command.
     Although it is possible that heavy losses could deplete
the fund, this risk must be taken by the Government in any
one program when it follows its policy of self-insurance.

        We believe that sufficient      time has elapsed and suf-
ficient    experience has been gained to provide relatively
valid actuarial      science-oriented     basis for determining   the
estimated fund requirements         for a self-insurance   program to

                                 10
cover losses which may be experienced       in the future.    It is
our opinion that the potential     losses constitute    a contin-
gency which DOD is authorized    to meet and that, on the basis
of past experience,    the cost of war-risk    losses under a self-
insurance program would be substantially       less than the cost
of war risk insurance.
      With regard to the acceptance of the Government's eval-
uation of current domestic market value for insurance pur-
poses, we noted that it was common for shipowners to insure
their vessels at Government expense for amounts well in ex-
cess of the valuation   placed upon these vessels by the De-
partment of Commerce, as illustrated    by the following ex-
amples.

                                                       Valuation   by
                        Valuation by                    owners for
                        Department of                   commercial
   Vessel                 Commerce                      insurance

       A                   $5,830,000                  $ 7,000,000
       B                       970,000                   7,000,000
       C                       365,000                      900,000
       D                    9,050,000                   17,000,000

       Department of Commerce valuations            shown above were
placed on the vessels for war-risk-insurance               purposes.     The
basis for these valuations          is the current domestic market
value after upward or downward adjustments              for substandard
conditions    or installation       of special equipment.         Appraisals
obtained from private        industry    are utilized     in arriving    at
the valuations.      These appraisals,       together with those of
Maritime, are reviewed by Maritime's             Ship Valuation Commit-
tee which establishes        the valuation.

      We believe that these precedures should provide for
reasonable determination     of ship values.    We believe also
that, as long as the command continues to bear the higher
cost of commercial war risk insurance occasioned by the
shipowners'    practice of insuring vessels in excess of the
Department of Commerce determination      of current domestic
market value, shipowners will prefer commercial war risk
insurance because of the high potential      return which they
would receive in the event of loss.

                                     11
      The Merchant Marine Act of 1936 provides that insured
shipowners have the right to reject the Government's valua-
tion within 60 days after attachment of the Maritime insur-
ance coverage or valuation  by the Secretary of Commerce,
whichever is later.

       The act provides that, in the event of loss, the in-
sured receive 75 percent of the rejected value and have the
right to sue the Government for an amount which would have
been payable if the vessel had been requisitioned     or pur-
chased in time of emergency by the Government under the
act (4.6 U.S.C. 1289).    The act states in effect that vessel
owners may acquire at their own cost such additional     war
risk insurance as they desire and that the Government will
not be entitled    to the benefits of such insurance (4,6 U.S.C.
1293).
     We found no evidence during our review that the command
had attempted to formally  obtain industry's views on Govern-
ment assumption of war risk insurance on hulls and machinery
or to negotiate provisions  for this type of war-risk cov-
erage in the charter agreements with shipowners.




                               12
DEFENSE FUEL SUPPLY CENTER

      The Defense Fuel Supply Center,           which is responsible         for
procuring    petroleum    products    for DOD, has contracted         directly
with the petroleum       suppliers    for transportation       of about
55 percent    of DOD's petroleum        product   needs in Southeast
Asia.     We were advised      that the vessels      used to transport
these petroleum      products     were entirely     of foreign   registry.

      Each contract          contains      a provision      for reimbursement           of
war-risk-insurance            premiums,      which is similar          to the reim-
bursement       provisions       contained       in charter       agreements      of the
command.        On the basis of records               of the Defense Fuel Sup-
ply Center,        we   estimate      that    the   Center    reimbursed      its con-
tractors      for war-risk-insurance               premiums on hull,         machinery,
and personnel         of vessels        used in shipment          of petroleum       prod-
ucts to Vietnam for fiscal                 years 1967 through           1969 in the
amount of $6.9 million              and that the losses            incurred     incident
to such coverage           were about $1.7 million,              as shown in the
following       summary.

                                                 Fiscal    years ended June 30
                                 Total           1969
                                                 --             --1968    1967
War-risk-insurance
 costs (note a>              $6,872,673      $2,313,164     $2,340,589      $2,218,920
War-risk    losses
  (note b)                    1,664,352          310,206            1,550     1,352,596
Excess of insurance
    cost over losses      $5,208,321
                           --          $2,002,958    $2,339,039     $ 866,324
                                                      --
a
  Includes    an undetermined     amount for war-risk     coverage on of-
  ficers   and crews.
b
  Does not include rocket-fire        damage sustained     in fiscal     year
  1968 by one vessel or losses sustained          by its officers      and
  crew because this information         was not available.        In our
  opinion these losses are not considered          likely    to materially
  effect   results  of the above comparison.




                                            13
       The amounts shown above include war-risk-insurance
premium costs for hulls and machinery, loss of hire, life
insurance for officers      and crew, and insurance on personal
effects   of officers   and crew. Although a breakdown of the
insurance cost applicable      to each category could not be
determined,   the available    information  indicates that the
bulk of the cost was for hull and machinery war risk insur-
ance.

       The Center has recognized the need for reducing the
high cost of war-risk-insurance        premiums and since June 1969
has ceased reimbursing     the premiums on war risk insurance of
Government-owned petroleum cargo at savings estimated at
$1.4 million   to $2.5 million    a year.    After we brought this
to the attention   of Center officials,       the Center requested
Maritime for information      concerning the feasibility     of pro-
viding war risk insurance on hulls, machinery, and crews in
accordance with the provision       of the Merchant Marine Act of
1936.

       Maritime has advised Center officials           that it may be
feasible     to provide this type of coverage but that addi-
tional information        should first    be obtained from the con-
tractors.      At the close of our fieldwork,        the Center had re-
ceived only one reply to its requests for information               from
contractors.        This contractor    replied that, based on a cur-
sory check, the shipowners were not receptive              to Government
war risk insurance.         In most cases, according to this con-
tractor,     shipowners use insurance firms of their own nation-
ality    and prefer not to be placed in a position           that re-
quires them to obtain payments from the U.S. Government on
commercially      insurable    risks.
      We noted that, since the Government reimbursed ship-
owners for the costs of commercial war risk insurance
through the petroleum contractors,   the shipowners,    in ef-
fect, obtained payment from the United States for the insur-
ance cost on commercially  insurable risks.    The major dif-
ference between present insurance practice    and insurance
provided by Maritime would be that, in the latter      case,
shipowners would file their claims for war-risk     losses with
the Government and would receive reimbursement directly
from the Government.


                                   24
         Maritime, the command, and the Center have existing
facilities       and personnel that may be utilized       in administer-
ing a self-insurance        program.     Insurance industry   statistics
indicate      that administrative    costs, exclusive     of brokers'
fees and commissions, of insurance companies allocated                to
ocean marine insurance average 8 to 11 percent of gross
premiums.       An official    of Maritime indicated    that no addi-
tional cost would be incurred by the agency.
CONCLUSION

      We believe that the Government can realize          significant
savings through action by DOD to self-insure          for war risks
to contractor-owned    vessels required for the performance of
Government contracts.        We did not attempt to determine the
costs to administer     such a program, but we believe that, by
using the existing    facilities    of Maritime and DOD, the Gov-
ernment would not incur significant        additional    administra-
tive costs.

AGENCYCOMMENTS

      We proposed in our draft report that the Secretary of
Defense initiate     a review of the war-risk-insurance    prac-
tices and cost experience of the command and the Center
with a view toward obtaining,    if feasible,    war-risk-
insurance coverage from Maritime on contractor-owned       vessels,
as authorized    by the Merchant Marine Act of 1936.

       In commenting on our draft report,  DOD stated that it
concurred in our recommendation and that it was initiating
a study to determine what course of action was in the best
interest   of the Government.   This study was still  in prog-
ress on September 9, 1971.

       Maritime has stated in reply to our draft report that
the provision      in section 902(a) of the Merchant Marine Act
of 1936, which limits        insurable    hull values to "just compen-
sation" --actually     current domestic market value--appears       to
be the reason why the command has not requested war-risk
hull insurance under the act.            As noted on page 11, it is
our view that this condition          will prevail   as long as the
command continues to reimburse shipowners for the cost of
insuring vessels in excess of current domestic market values

                                    15
as determined by the Department of Commerce. We believe
that this matter should be covered in DOD's study.

      Maritime has advised us that, to the extent war-risk-
insurance needs of contractors    of the command, AID, and the
Center can be met under the act, it will be happy to pro-
vide war risk  insurance  to those agencies.

RECOMMENDATION

       We recommend that the Secretary of Defense should es-
tablish     a plan for self-insurance    for contractor-owned ves-
sels.     If feasible,    this coverage should be obtained from
Maritime,     as authorized    by the Merchant Marine Act of 1936.




                                 16
                            CHAPTER3

         OPPORTUNITYTO REDUCECOST OF SUPPLENENTAL

         WARRISK INSURANCEON CONTRACTOR
                                      EMPLOYEES

      DOD and AID reimburse Government contractors    for pre-
miums paid for war-risk-insurance    policies purchased from
commercial insurance companies to provide contractor      em-
ployees with supplemental coverage for death or injury from
war hazards,    Such insurance supplements the workmen's com-
pensation type of insurance coverage for war hazards al-
ready provided by the Government without charge to contrac-
tors under the Defense Base Act and the War Hazards Compen-
sation Act.   The cost to the Government for this supple-
mental insurance has greatly exceeded the incurred war-risk
losses.

       On the basis of our review of agency and contractor    rec.
ords, we estimated that savings to the Government of about
$2.7 million   could have been realized  over the 3-year pe-
riod ended June 30, 1969, if DODand AID had been authorized
to make lump-sum benefit payments for war-risk    death or in-
jury similar   to the payments provided by supplemental war
risk insurance purchased by contractors.     Under existing
legislation   Government payment of such benefits  is limited
to the workmen's compensation type of benefits.

       The Defense Base Act extended the workmen's compensa-
tion coverage of the Longshoremen's and Harbor Workers'
Compensation Act to employment at military       bases, Government
installations,    and public works outside the continental
United States.     The scale of benefits   under the Defense Base
Act is generally    the same as that provided by the.Longshore-
men's Act and consists of workmen's compensation type of
payments in specified     amounts for accidental   injury or death
during the course of employment.       Benefit payments to an
employee or his beneficiaries     for disability   or death can-
not exceed a maximum of $70 a week.1 Where the disability          is

1
 In January 1971 bills were introduced      in the Senate and the
 House of Representatives (S, 525 and H.R. 247) to increase
 the maximum to $119 and $132,respectively.

                                 17
not total and permanent, the cumulative       benefit   payments
are limited to a maximum of $24,000.

      There is no limit on the aggregate of benefit payments
for total and permanent disability      or for death.      It is
estimated that over a 30-year period such benefit payments
could aggregate as high as $109,000 for total disability
and $85,000 for death.      The act provides for benefit pay-
ments to be made in semimonthly installments,         except that
the Department of Labor may authorize       installments     to be
made monthly, or at some other period, and may, in the in-
terest of justice,   authorize   lump-sum payments.
       The War Hazards Compensation Act extends the workmen's
compensation benefits     provided under the Longshoremen's
Act and the Defense Base Act to employees of Government
contractors    who suffer injury or death as the result of a
war-risk    hazard and provides for payments to dependents of
employees who are captured or detained due to belligerent
action of an enemy, It also authorizes       the Government to
reimburse employers, insurance carriers,      or compensation
funds for payments for disability     or death from war-risk
hazards and to assume responsiblity     for payment of benefits
to employees or their dependents, with the effect that the
Government becomes a self-insurer     under the act.

       Benefits payable for death or injuries       are generally
the same under the War Hazards Compensation Act as those
provided by the Longshoremenls Act and are subject to the
same maximum limits.         In the case of employees detained or
captured by hostile       forces, the War Hazards Compensation
Act provides that employees' accounts be credited with 100
percent of their average weekly wage, not to exceed the
average weekly wage of a civilian        employee of the United
States performing      the same type of work in the same area,
and that employees ' dependents be paid 70 percent thereof.
These acts are administered        by the Bureau of Employees' Com-
pensation,     Department of Labor.

      The Armed Services Procurement Regulation        (ASPR) 15-
205.16(a)(l)    and the Federal Procurement Regulations
(41 CFR l-10.3)    contain provisions  which authorize     agencies
to reimburse contractors     for the cost of necessary     and ap-
proved insurance,     Therefore DOD and AID follow a practice

                                 18
of accepting premiums for supplem'ental war risk         insurance
as an allowable cost under negotiated   contracts.

       Since June 1, 1965, many DOD and AID contractors      in
Southeast Asia have obtained supplemental war-risk-insurance
coverage under a unique blanket insurance policy offered
by a commercial insurance company. Government contractors
who acquire supplemental war-risk-insurance      coverage for
their employees under this blanket policy are reimbursed
by DOD and AID for the cost of premiums paid.       A retrospec-
tive premium agreement applicable     to the policy contains a
provision    under which the Government will receive a refund
of premiums after deductions by the insurance company of
(1) 25 percent of total premiums for administrative        costs,
broker's    commissions, and profit,  (2) losses for the period,
(3) State taxes on premiums, and (4) amounts necessary to
maintain a stabilization    fund,

        The stabilization       fund balance, originally  set at
$1.5 million      and later reduced to $500,000, was established
to provide a reserve to cover war-risk           losses under the
policy,     Under the terms of the ageement, the Government
receives 4-percent        interest   on the fund balance, and upon
policy termination        the fund balance will be paid to the
Government.

      Officials   of DOD and AID do not consider the blanket
policy to be a Government contract       although the Government
is party to the refund and its officials         have participated
in negotiations    of policy terms with the insurer.          There is
no signature by Government officials        on the policy or on
the retrospective     premium agreement,     Neither the policy
nor the retrospective     agreement provides for Government au-
dit of pertinent    insurance company records,

      Contractors  also may purchase supplemental war risk
insurance from commercial sources other than the blanket-
policy insurer.    Certain contractors  have obtained supple-
mental war-risk   coverage from other insurance companies,
and the Government has reimbursed them for the cost of such
insurance.
     As shown in the following schedule,         the total estimated
costs to the Government for supplemental         war risk insurance


                                  19
for fiscal  years 1967 through 1969 for contractors    covered
by the blanket policy and for other selected contractors
including  major contractors  covered by other insurance
policies,  exceeded losses incurred for the same period by
about $2.7 million.

         Supplemental  war risk                                       Fiscal   years ended June 30
       insurance   on employees                     Total            1969           -1968     1967

War-riskinsurance        costs:
     Blanket policy      (after       refunds)   $2,998,21ga   $     850,109     $     853,550   $1,294,560
     Other                                           974,594         254.204           334,596       385.794

                                                  3.972.813        1,104,313         1,188,146       1.680.354

War-risk.losses:
      Blanket policy                             1,060,OOO           150,000           335,000         575,000
      Other                                      _ 200,000             -     b           -             200.000

                                                  1.260,OOO          150,000           335,000         775,000

Excess of costs       over   losses              $2.712.813    $     954,313     $     853.146   $     905,354

aCon.sists of administrative  costs and profits,    $1,878,062;   additional  coverage
 premiums, $166,672; and amounts    to cover losses,    $1,060,000 less interest    on
 stabilization  fund, $106,515.

bThrough   April   18, 1969.


      Although the blanket policy is unique in that the pre-
mium refunds are paid by the insurance company directly         to
the Government instead of to the insured,     the overall   ef-
fect is that the Government absorbs all war-risk      losses and
pays the insurance company a fee which, at the time of our
review, was 25 percent of total premiums and which covered
administrative    costs, brokers' commissions, and profits,
This fee was 30 percent at the outset of the policy in 1965
and later was reduced to 25 percent as the result of DOD's
negotiations   with the insurance company. DOD representa-
tives advised that the insurance company could not provide
cost data in support of the fee.

       The current rate of 25 percent appears excessive when
compared with the much lower rates generally            charged for
administrative     costs and profit     on group life insurance
policies    and disability    income policies     of 3,9 percent and
8.9 percent,    respectively,     plus brokers'    commissions rang-
ing from 1 to 3.5 percent.          The group life and disability
income insurance policies        are reasonably comparable with
the war-risk    blanket policy,
                                                      20
      In May 1966 the ASPR Committee received information
that, as a result of the escalation        of activities  in South-
east Asia, contractors      were including   in their contract
proposals significant     items of costs to provide for supple-
mental war-risk-insurance      coverage on their employees.     The
ASPR Committee appointed a subcommittee to perform a review
of war-risk-insurance     coverage and to consider development
of DOD guidance which would be uniformly         applied to all
contractors    involved.

       In March 1967 the subcommittee concluded that it was
in the best interest    of the Government to assume all war
risk insurance on contractor       employees.    With cooperation
of the Bureau of Employees' Compensation, DOD prepared a
proposed amendment to ASPR which would have eliminated            re-
imbursement to contractors      for the cost of supplemental
war-risk-insurance    coverage and which would have increased
the maximum benefits    available    to contractor   employees un-
der the Defense Base Act and War Hazards Compensation Act
from the existing    $70 a week to $150 a week,

      GAO also was given the opportunity   to review the pro-
posed change to ASPR, In a letter     dated October 30, 1967,
to the chairman of the ASPR Committee, GAO commented as
follows:

      “We understand that the proposed clause is an at-
      tempt to gain better control      over indemnifica-
      tion of contractor    personnel in such areas as
      Vietnam where existing     Defense Base Act cover-
      age has been competitively      supplemented by the
      defense contractors    involved in order to suc-
      cessfully   recruit  employees for work in hazard-
      ous areas.    We consider the proposed ASPR clause
      a logical   step toward achieving     the desired gov-
      ernmental control over employee indemnification
      and see no objection     to its issuance."

The subcommittee obtained industry   reaction  to the proposed
change so that the overseas contract    effort would not be im-
paired in the event that the proposed change was unaccep-
table to the contractors.



                                   21
      Industry reaction    was adverse.   Contractors   and in-
dustry organizations     contended that the proposed increase
in weekly benefit payments was inadequate and would not re-
place the need for lump-sum benefit payments which contrac-
tor employees allegedly     required.   As a result   of the in-
dustry reaction,     the subcommittee recommended in January
1968 that the proposed change to ASPR not be adopted and
that war-risk-insurance     costs under individual    contracts
continue to be approved subject to the test of reasonable-
ness.

      We found no evidence that the ASPR Committee or DOD
explored the feasibility    of obtaining     authority  for the
Government to pay lump-sum benefits       for war-hazard deaths
and injuries  in amounts acceptable      to contractor    employees.
We were advised that consideration      had been given to lump-
sum payments for U.S. nationals     but that the matter was
dropped because it was believed that legislative         authoriza-
tion would be difficult   to obtain at that time.

       The concept of lump-sum payments by the Government for
war-risk    deaths or injuries  is not new. DOD has acted to
provide lump-sum, war-risk     benefits  to third-country   nation-
als.     (See p. 29.)  Maritime has authorized     lump-sum pay-
ments of $20,000 under the war risk insurance provided by
the Government for officers     and crews of vessels (second
seamen's insurance).

      The cost to administer         such a Government self-insurance
program is not known. Presently            DOD and Maritime administer
the third-country      nationals'     war-risk   program and the second
seamen's war-risk      program, respectively,        and the Bureau of
Employees' Compensation, Department of Labor, administers
the Defense Base Act and the War Hazards Compensation Act.
Each of those agencies becomes involved in reviewing and
processing   war-risk-loss       claims.     We do not believe that
expansion of a Government self-insurance             program would re-
sult in significantly       increased costs.

      DOD has continued to reimburse contractors   for the
costs of supplemental war risk insurance.     The only in-
stance we found, in which DOD or the ASPR Committee had at-
tempted to determine the reasonableness   of commercial versus
Government war risk insurance,   was in connection with

                                   22
third-country     nationals employed by Government contractors
and insured     by a Korean insurance firm.

       DOD had noted that premiums proposed by that firm,
which were initially      high, underwent drastic    increases,
presumably as a result of the Tet offensive,         even though
there were no substantial       employee losses.   Therefore DOD
developed a revision      to ASPR--Defense Procurement Circular
64--which authorized      DOD to indemnify contractors     for losses
to third-country     nationals   and to prohibit  the allowance of
expenditures     for insurance premiums for third-country       na-
tionals.     (See p. 28.1
        The Longshoremen's Act, the Defense Base Act, and'the
War Hazards Compensation Act provide for lump-sum payments
based upon installments      otherwise payable when determined
to be in the interest     of justice.    An amendment to one or
more of these acts, however , probably would be needed to
clearly    authorize  lump-sum payments of specific   amounts for
war-hazard deaths or injuries       at the option of the insured.




                                 23
AGENCY COMMENTS

     DOD made the           following       comments       in their      response        to
our draft report.

       "As the GAO report              notes,       this matter was exten-
       sively      reviewed      by the Armed Service                  Procurement
       Regulation        (ASPR) Committee               several       years back.
       The desirability            of the Government                becoming a
       self-insurer          on war-risk          insurance         was actively
       considered.           It was concluded              after      an extensive
       examination         and interchange              of views,        both in
       house and with industry,                   that it was impractical
       to adopt a policy             of Government             self-insurance
        (indemnification)            at the time.              Further,      since
       contractor        recruitment          in Southeast            Asia was past
        its peak, the Committee, determined                         that it was
       not feasible          to pursue legislation                  to permit      the
       payment of lump-sum benefit                      payments.         In   our
       opinion,       pending      a suitable           substitute        for com-
       mercial       supplemental         war-risk         insurance,        no action
       to modify        existing       policy       should be initiated.
       Such a prohibition              as recommended by GAO could re-
       sult     in serious       difficulty           for contractors           in re-
       cruiting       and retaining           skilled        technicians        and
       specialists         in areas of conflict."

        With regard to the blanket                 policy,      DOD stated       that the
 last meeting --by representatives
                             _                     of DOD and AID with repre-
sentatives        or the insurance          company resulted            in a rate de-
crease of about 20 percent,                 a   reduction       of   the   basic charge
from 28 percent          to 25 percent          of the premium,           and a reduc-
tion of the stabilization                fund from $1 million              to $500,000.
DOD noted that this was the fourth                      reduction       negotiated
after     inception      of the policy          and advised        that any action
to bring      the policy        records     under Government            audit would be
voluntary       on the part of the insurance                 carrier,       because
there was no contractual               relationship         with the Government.
DOD stated,         however,      that these matters           would be topics        of
discussion        in future      meetings      with the insurance            company.
In February         1971 we were informed             that DOD had effected
another      20-percent       reduction       in premium rates under the pol-
icy.



                                             24
       AID in commenting      on the draft    report     stated  that it
must consider     further    all aspects    of the question      before
agreeing   to seek legislation       to permit    self-insurance       for
war-hazard    losses.     AID advised    that it was conducting          an
in-depth   study of our recommendation          on this matter.        This
study was still       in progress   on September 9, 1971.

         The Department     of Labor advised        that this    section    of
the report     had no direct     application        to the Department.         It
agrees with our presentation           and our      conclusion    that sub-
stantial     savings    could be made by the          Government    through    a
self-insurance       program.

CONCLUSION

        The information       obtained      during   our review      indicated
that substantial        savings     could be realized         if the Government
discontinued       the general      practice      of reimbursing       Government
contractors      for supplemental         war risk     insurance     on employees
and acted as a self-insurer              to provide      lump-sum benefit       pay-
ments for war-hazard          deaths or injuries           in amounts comparable
with those presently          provided      by the Maritime       Act of 1936
or by the supplemental           war-risk-insurance          coverage     purchased
by contractors.

        The major problem      in DOD's attempt         to eliminate       war
risk    insurance     on employees    as an item of reimbursable              cost
appeared to be the preference             by contractor     employees       ror
lump-sum benefit        payments.     The ASPR Committee's           decision
in January        1968 not to adopt a self-insurance            or indemnifi-
cation     policy    appeared to be based upon the industry's                 op-
position       to the proposed    substitution       of Government-sponsored
benefits       of $150 a week in place of substantial              lump-sum
benefits      payable under commercial         insurance.

        We believe     that DOD should explore       the matter   further,
particularly       with regard    to the feasibility     of providing
lump-sum benefits,         and should,if  necessary,     request    the
Congress     to consider     an amendment to the law to provide            such
benefits.

         With regard   to the blanket    policy  for war risk     insur-
 ance, we believe      that,  if use of this policy    continues,        its
 provisions     should be revised     so that the amounts retained


                                          25
by the insurance      company for administrative        costs and prof-
its will   be based upon experienced       costs subject         to DOD
audit.    Also the rate of interest       payable     to the Government
on the stabilization       fund should be increased        commensurate
with the current      rates of interest    for borrowed        funds.    In-
terest   should also be payable      to the Government         on the aver-
age annual amount of any additional          funds held for payment
of total   disability     and other claims     pending   final     approval.

RECOMMENDATION

       We recommend that the Secretary                of Defense and the Sec-
retary    of State seek legislation               as necessary    to authorize
the Government          to make lump-sum benefit           payments for war-
hazard death or injury              to contractor     employees,     with appro-
priate    dollar      limitations,        and to allow the insured        employees
to select      either       lump-sum or annuity-type          payment of insur-
ance benefits.           We recommend also that DOD and AID discon-
tinue   their     practice        of reimbursing     contractors     for the cost
of supplemental           war risk     insurance.

      We suggest that DOD and AID, pending                the outcome of
these recommendations,  reopen negotiations                 on the blanket
policy to bring the administrative   costs,               brokers'  commis-
sions, and profit  under Government audit,




                                        26
                               CHAPTER 4

             OPPORTUNITYTO FURTHERREDUCECOST OF

                       WARRISK INSURANCEON

       THIRD-COUNTRYNATIONALS EMPLOYEDBY CONTRACTORS

      AID and two military    commands have continued to reim-
burse contractors  in Vietnam for war-risk-insurance          cowage
of third-country  nationals    (citizens    of countries   other than
the United States and Vietnam) employed by the contractors
even though an indemnification       program generally    adopted by
DOD for such employees has provided substantial          savings.
       Government agencies have followed the practice             of ob-
taining    from the Bureau of Employees' Compensation a waiver
of the application       of the Defense Base Act and the War Maz-
ards Compensation Act coverage to foreign nationals               employed
by contractors      in war-risk    areas.     In lieu of the coverage
provided by those acts, workmen's compensation and war-risk-
insurance coverage for waived employees has then been pro-
vided by the contractor         in accordance with the legal re-
quirements of the foreign countries             involved.   For certain
categories     of third-country     nationals,      the cost of the war
risk insurance has been excessive and has resulted              in DOD's
establishing     an indemnification       program.

       Information  obtained during our review indicates      that
war-risk-insurance    coverage for third-country    nationals     un-
der certain AID and DOD contracts     not converted to a Gov-
ernment indemnification     program has cost the Government a
total of about $586,000 for insurance premiums although the
insurer has experienced losses of only $44,000--an         additional
cost to the Government of about $542,000.        (See p. 29.)
       We believe that significant     savings can be realized    an-
nually if AID adopts an indemnification       program similar   to
that generally    adopted by DOD. We believe also that addi-
tional   savings can be realized    if DOD requires  all procure-
ment activities     in all military   agencies to implement its
existing   indemnification   program.



                                   27
        Prior     to fiscal     year 1969, the Government had incurred
significant         costs for war risk        insurance      covering     third-
country      nationals      employed by contractors            in Vietnam al-
though claims         for war-risk-insurance           benefits      had been nomi-
nal.     For example,        a review    in 1968 by the Deputy Comptroller
for Internal         Audit,   DOD, disclosed        that premiums of about
$6.3 million         were paid during       fiscal     years 1967 and 1968 for
war risk      insurance      with one insurance         carrier      under DOD con-
tracts.       Claims approved        or pending during           that period     were
only $148,000.

       Most of the military         contracts      in Vietnam have since
been revised     to provide.that        contractors       self-insure      for
losses   to third-country        nationals     employed by them under an
arrangement     whereby the contractor           is indemnified         by the
Government    for any war-risk         death or injury         benefits    paid
to such employees.         We have found, however,             that two mili-
tary commands and AID are continuing                 to incur     excess costs
for war risk     insurance     on third-country         nationals.

       The U.S. Army Procurement             Agency, Vietnam made a deter-
mination    during     1968 that significant            savings    could be re-
alized    by acting      as self-insurer       against      war risks      for third-
country    nationals      employed by contractors,              The Agency esti-
mated that commercial          insurance      costs of $4.1 million             would
be incurred       in fiscal    year 1969 under contracts              with its
three major contractors            which were responsible           for about
82 percent      of the third-country          nationals      employed under
contracts     awarded by the Agency.             Actual     experience       through
the middle      of June 1969 showed that only $162,000                   in claims
had been paid during         fiscal      year 1969 under the self-
insurance    program of the U.S. Army Procurement                   Agency, Viet-
nam.

        In March 1968 the Agency requested                a revision      to ASPR
to provide      authority       to self-insure       the third-country-
national      employees.        As a result    item VII,      Defense Procure-
ment Circular          64, dated October 28, 1968, was prepared.                 This
item of the circular            revised    ASPR and authorized         heads of
procuring      activities       to determine     that contractors         not pur-
chase war risk          insurance     for employees     for whom coverage        had
been waived under the Defense Base Act and that the contrac-
tor's     costs for assuming liability             for war-risk      protection
be considered         an allowable       cost under the contract.            In

                                          28
essence, DOD authorized    a form of Govexnment self-insurance
whereby the contractor    could be indemnified  by the Govern-
ment for the cost of war-risk    death or injury benefits    paid
by the contractor   to his employees.

       The U.S. Army Procurement Agency, Vietnam began to in-
corporate the provisions    of item VII, Defense Procurement
Circular   64, into all fiscal year 1969 contracts       even before
the circular   was issued.    Other military    agencies incor-
porated the self-insurance     provisions    of item VII into con-
tracts after becoming aware of this circular.

       We found, however, that the two military     commands and
AID, the latter     not being subject to the requirements     of the
circular,    continued to reimburse contractors    for commercial
war risk insurance on third-country     nationals,    the estimated
cost of which exceeded losses incurred under AID and mili-
tary contracts     as follows:
                                                        cost of              Excess premium
                                                      insurance                  cost over
           Contractor                 Period          premiums    Losses          losses

 AID:
        RSEA                      3-68   to    6-69   $ 29,800      (a>         $ 29,800
        Han Yang Construction     4-67   to    3-69    133,624    $25,213        108,411
        Eastern Construction      7-66   to    5-69     89,362      6,119         83,243
        Philco  Ford             12-68   to    6-69     59.500                    59,500

                                                       312,286     31,332        280,954

 Military:
        Eastern Construction       7-66 to 5-69        160,847     12,709        148,138
        Page Communications        9-67 to 8-69        112,843         106       112.737

                                                       273.690     12.815         260.875

             Total                                    $585.976    $44,147       $541,829

 a
     Schedule does not include       claims pending for war-risk   injuries to RSEA
     employees.      Maximum losses possible    would be $20,000 per claim or
     ~$~,CK)~,    leaving   an excess of insurance   premiums in the amount of
          I     .

       The Eastern Construction    military   contracts   are adminis-
tered by the Military    Assistance     Command, Vietnam; the Page
Communications contracts     are administered     by the Army Elec-
tronics   Command, Fort Monmouth, New Jersey.         These appear to
be the major contracts    with significant     amounts of commercial

                                                 29
war risk insurance on third-country          nationals;    however,
there may be others.

       AID officials      informed us that they had not adopted a
self-insurance       plan because it would be necessary but im-
practical     to obligate      funds to cover the maximum potential
losses to avoid the possibility          of overobligating      appro-
priated    funds if such losses did occur0 We noted, however,
that, under existing         laws and regulations,     AID obligated
funds to cover the costs of reimbursable            insurance premiums
paid for war-risk        coverage of third-country      nationals    and
that such costs had greatly exceeded losses incurred               to
date.

       We believe that there has been sufficient          war-risk-loss
experience under AID contracts         to provide a basis for esti-
mating future losses for the obligation           of funds under a
self-insurance     program.     Funds required to cover such esti-
mates would be less than the funds required under the pres-
ent practice     of reimbursing    contractors    for the cost of war
risk insurance purchased from insurance firms.              A self-
insurance reserve fund to cover the anticipated             losses
could be established      by including     appropriate   provisions     in
the annual budget.
      As a result   of our review, the Contract Services Divi-
sion of AID has advised its contracting       officials     for the
East Asia and Vietnam areas of the provisions           of Defense
Procurement Circular     64 and has asked them to consider the
feasibility   of providing   self-insurance    for losses to third-
country nationals    employed by its contractors.         Our discus-
sions with AID officials,     however, indicated      that funding
problems would be a deterrent       to such action.

      As stated on pages 4 and 5, DOD has authority        under
Public Law 85-804 to self-insure      against war risks without
regard to the availability   of funds.      The Department of State,
however, did not receive similar authority       because it was
not included   in the list of eligible     Government departments
in Executive Order NO. 10789 which implemented the law.
      Since DOD is administering    a program of self-insurance
covering losses to third-country      nationals,  we believe that
its administrative    costs would not be significantly      increased
by inclusion    of the above contracts    in its program.
                                     30
AGENCYCOMMENTS

     DOD informed us that it planned to reexamine its poli-
cies on this matter to determine whether further  clarifica-
tion was needed.

      AID stated that it was conducting an in-depth     study
before making a decision regarding    its future course of ac-
tion on self-insurance.   The study was still    in progress on
September 9, 1971.

CONCLUSION

       AID's policy of reimbursing      contractors     for commercial
war risk insurance on third-country         nationals     is signifi-
cantly more costly than a self-insurance          policy would be, as
evidenced by AID experience noted above and by actions taken
by the U.S. Army Procurement Agency, Vietnam.               Therefore we
believe that a similar     self-insurance     plan should be adopted
by AID. We believe also that DOD has ample evidence as to
the economy of such action and should require implementation
of Defense Procurement Circular        64 by all contracting         offi-
cers and procuring   activities      in Vietnam and in any other
areas where war risk insurance on third-country              nationals     is
an element of contract     cost,

RECOMMENDATION

      We recommend that the Secretary of State seek legisla-
tive authority      to self-insure      for losses to third-country
nationals   employed by contractors,           including     an amendment to
Executive Order No. 10789, if necessary,                 and take the neces-
sary action to establish          a war-risk     self-insurance      program
for third-country       nationals    under contracts        administered    by
AID. We recommend also that the Secretary of Defense issue
appropriate    instructions       to all DOD's procurement activities
to provide for self-insurance           of third-country        nationals   in
accordance with the provisions           of Defense Procurement Circu-
lar 64.




                                      31
                              CRAPTER5

                          SCOPEOF REVIEW

        Our review of war risk insurance on personnel and prop-
erty included a review of the applicable            laws, policies,
regulations,      and practices   of Government agencies and con-
tractors     located in Southeast Asia, Europe, the Middle East,
Africa,    Latin America, and the United States.          We examined
records maintained by Government agencies and contractors
and had discussions       with responsible   officials    as deemed
necessary in the circumstances.          We visited    or contacted nu-
merous Government departments,        agencies, contractors,        and
insurance companies during our review.
        The major part of our efforts     was directed  to the fol-
lowing departments and agencies:       AID, Department of State;
DOD agencies responsible    for procurement and contract      admin-
istration    in Southeast Asia; Defense Fuel Supply Center, De-
fense Supply Agency; Military     Sealift    Command, Department of
the Navy; Bureau of Employees' Compensation, Department of
Labor; and Maritime Administration,        Department of Commerce.




                                  32
APPENDIXES




33
                                                                                      APPENDIX I


                                                     THE ASSISTANT           SECRETARY       OF CBMMERCE
                                                     Washmgton,   D.C.   20230




            OCT 19 1970


Mr.     Eugene      C. Wohlho rn
Assistant       Director
International        Division
General       Accounting      Off ice
Room      53689
The Pentagon
Washington,         D. C.     20301

Dear    Mr.    Wohlhorn:

This    is in reply      to Mr.      Eschwege’s         letter    of September       11, 1970,
requesting       comments          on a proposed         report     to Congress      on
“Opportunity         For     Savings    In Providing          War-Risk     Insurance
Coverage       For Government             Contractor         Employees      and Contractor-
Owned      Property.       ”

We have reviewed            the comments         of the Maritime            Administration
and believe  they        are appropriately          responsive           to the report.

Sincerely      yours,




Enclosure




                                                35
               APPENDIX I


                                                U.S. DEPARTMENT              OF COMMERCE
                                                     MARITIME        ADMINISTRATION

                                                       WASHINGTON,           D.C.     20235



OFFICE    OF   ‘THE   ADMINISTRATOR




         SET 29 1970
          Mr. Eugene C. Wohlhorn
          Assistant Director
          International  Division
          General Accounting Office
          Room 5~689
          The Pentagon
          Washington, D. C. 20301
          Baar Mr. Wohlhorn:
          A review has been made of the draft report titled "Opportunity for Savings
          in Providing War Risk Insurance Coverage for Government Contractor Etqployees
          and Contractor-Owned Property" which was received by letter of September 11,
          1970 from Mr. Henry Eschwege, Associate Director, Civil Division.
          We find that only Chapter 2 concerns marine war risk insurance coverage,
          which could be provided under Section I.205 of Title XII, Bkrchant Marine
          Act, 1936, as anxznded, upon request of the Government lkpartzrmts or
          Agencies.
          With regard to Military  Sealift Command, attention is called to the letter
          of July 23, 1965, copy attached, from the Msritirne Administrator   to the
          Assistant Secretary of the Navy (Installations    and Logistics), particular-
          ly that paragraph which limits hull values insurable to the SullDunt payable
          under Section 902(a) of the Act. This limitation     appears to be the reason
          Military   Se&Lift Commandhas not requested war risk hull insumnce under
          TLtle XII.




                                                        [See GAO note.1


         GAO note:                    The material   deleted  relates      to matters          which
                                      were presented    in the draft     report   but         which
                                      were revised   in the final     report,




                                                                      36
                                                                      APPENDIX    I


Me con%frm that metings    as recited      in the Report have been held from time
to time not only with Military     Sealift    Comxmd, but also with representa-
tives of the Agency for International        Developmnt,    and Defense Fuel Supply
Center in an effort  to enable thoseAgencies        to determine whether or not
they could take advantage of Section 1205 coverage.            Only Military Sealif%
Command has arranged for the coverage described          in the Report.

To the extent that the war risk insurance needs of the Agencies* contractors
can be Illet within the limits of our authority under Section 2.205 of the
Merchant Marine Act, 1936, the Maritime Administration   wiU be happy to
provide war risk insurance to such Agencies.

Sincerely,




                                          37
APPENDIX I




  July 23, 1965

  Honorable Graeme C. Bamer~n
  Assistant sscrataq  or th% G3-q



  Dear&.      Eannem:
  l Reference is r&e  to your letter dated July 1, 1965, In which you stats
    that the Ilcwwtmnt  of the &wy desires to replace +u&tinfl agreements
  with tha DexwLmnt of Gx~euce, Writime        Administratbon, for the
  availability  of wwious war risk imuranc~ coverages a8 authorized by
  Section 32.35 of Title XII of the Kerchazt k!a?dn8 Act, 1936, as amended,
  46 U.S.C. 3285, with a 8ingle, broader   agresment.
  To the extent w&her%eed by ststute,          the   Fiarit$me   Addnistration         hereby
  agrees to orovide mr risk inswanes            for the follm&q         program       conducted
  or to be eondusted by the ikq&mmt             of the Navy:

           1. Ships of all typss cwrmd by the Departmmt of ths Xavy and operated
              by the Xilitaxy    Sea Transportation  Service through commercial
              ouerators under contract - Second Saamen'lp liar I:isk &xam%nC8
              (cwrentlg    immlviuf    thme contraot opsrators,     Keystone Shinping
              Comany,V&e        Transport I&mm, Inc., aud Kathlasen's Tanker
              &l&UStdQS   , bE.  , in the operation  of contract-o~rated     tankers
              and rvmge W&wiwntatiou        ship.)
           2. SMp# of aU. tsrpos omsd by               nrlvate    comcaroial interests     and
              bareboat cha&ered to the t&U.itary Sea' Transpostion Service -
              Ser$ond Ssa!neu@sXw Risk, kiar Risk Hull and h'ar Rfsk Protection
              and Indemiity Insmmce ( currently                  hnvolving oqly the SS Shi%ANDCW,
              bar&oat chatid               to the %Llitary Sea Trawmwtatio~            Setice by
              ihqT5tc.m     suyxlnq      kmpmy).         Binder No. 65-l dztcd 1'3rch 1, 1955,
              covcx-3   o,id.,n ::zr ?is!:    ZuJ.2.a.r,d Srcond Soa?eu*s i.ar -&'3b Lmurance.
              k&r I&& Protmtim               and Indtity       Iusumxe     uill be added by
              cndcmamt           w&a and If req&ed by the De-gmtixen% of tim iiavy.

        3. Ships of all tpes       owned by pr$vate ccmmmzial fntoresta and
              the QF wpgs ohartersd to the Hilitary        Sea Trariswrtation        Sotice
              Second Semen's h’ar Risk, War Risk Hull. and Wax- Risk Protectiop
              aud In&x&.ty at such tine as the Comarvier, Kilitary          Sea Trans-
              pprtatlon Semite, shall notify the Efaritiag AcM.nist?ator            of a
              need for such wveraqes.      (It Is uuderstood that this w%l.l. be a
              atzb&-?q  am&zf&ymnt   amdthatthereare      noahfps    ;rssig~sdtothia
              category  at the pmsmt    tine.)

        4.    The $3 IgSTERlJ Hm        -   War Risk ?iuXL, IneludIng            coverage of riska
                                                                      APPENDIX      I


2
       where hostilities     exist   other than those between the Five Great
       Powers. (This is also a stand-by        arrangement.  No L'ar Risk In-
       surance to attach until requested         by the Ceom-tmmt   of the &v-y.)

In connection with all War Risk Hull Insurance nrotided for in this
letter,   your attention  is invited to the fact, that 311~auti:orl+,y in
Section E!C5(a) is lirclited by the protisions   of En&ion 1X3(~)(2)      of
the Act, uhich wotides that the valuation for actuL1 or cxxtructive
tot3110ss    of the vessel insured s?xll not exceed the amount that would
be papble if the vessel had been requisitioned       for title C?:!CP Section
902(a) at th e t ime of the attachment of the insurance under the policy.

You ham agreed th& in consideration         of mch Insurar.ce bein? nr~;irlo4
without pretium in t:?e CAmor set Po:tit.h in Section l.Xjs;L~) oi‘ t,he Act, the
DeWEent     of the ;lavy will indemffy      the I'm-iti-ze k&iniotratim    a?Linst
aU lcsses covered by such insurance.          You have ako ~i,~mcri to nrovxrk t?.c
Haritize AdzLnistration    with a quarterly     report of the shi!-1s with resect
to w'hich imurance corerag     wae required duriw the quarter pursuant to
this agreament.

It ia und&stood that ir.xeassd benefits under the Second Searzen's Har
Risk Insurance beinq furnished    or to be furnishes pursuant to ehis acreemnt,
coverir~~ the Vict ICammr risk bonus area providiv,         axon;: other thin;s,
a @O,CGO loss of life benefit,      mst be held in abopnce !;ekti~ aT:ree-
merit between the Dtqwtmnt     of the Eavy af.d the %riti.,~e klxnistration
with regard to the additional risks, if w,        found to exist there.

The previous azreenents hereby replaced till  be corsiderod trrzizated,
exce& with respect to outstmdinp, cl.aiz~: of the I'aritixe  h&inistratior,    for
lndemity under any of the previous agreements.     Tr:e indemity    ~rovisicns
of these agreements shall remin in effect until the clzkzzs Shall have
been  satisfied.  The Karitim  Administration will furnish a list of th3sa
pending or potentid   claims pronptlr.




cc:
C.Keely Fox
Room ?Qll - Davy




                      C~art,Jr.:mh      7/U/65




                                       39
                APPENDIX           II



                                           A§%§TAN11 SECRETAWY OF DEFENSE
                                                WhSlbiMGTC#&        OX.   2G301




1NSTALLATlONS    AND   LOGISTICS
                                                                                          13 Nov 1970
          Mr. Oye V. Stovall
          Director,   International    Division
          U. S. General     Accounting   Office
          Washington,     D. C. 20548

          Dear     Mr.        Stovall:

          This is in response   to your letter   of September     11, 1970 forwarding     a
          copy of your report   titled, “Opportunity     for Savings in Providing     War-Risk
          Insurance  Coverage    for Government      Contractor   Employees    and Contractor-
          Owned Property”     (OSD Case #3180):

           According     to the report,        this review was made to determine                 whether    the
          methods    being used to provide             war-risk      protection     to contractors      for their
          property    and their employees             in Southeast       Asia and elsewhere        were in the
          best interests      of the Government.              The report      concludes     that the cost of
          war-risk    insurance        has substantially         exceeded war-risk         losses experienced
          by Government         contractors.         In reaching       this conclusion,       the report    cites
          the excess of insurance            premiums        over losses for the cost of war-risk
          insurance    on privately       owned vessels          and the excess of insurance            premiums
          over benefits     paid for war-risk           insurance       on contractor      personnel     for death
          or injury   resulting      from war-hazards.              It is GAO’s view that the Government
           should generally      be a self-insurer.             We have listed each of the report
          recommendations          addressed        to the Department           of Defense(DoD)      and followed
          each with the Departm&“s                 comment.

         GAO Recommendation:            “We recommend        that the Secretary      of Defense
         initiate a review3        %e war-risk     insurance     practices   and cost experience
         of the Military    Sealift Command       and the Defense Fuel Supply Center with
         a view toward    obtaining,      at an early date, war-risk       insurance      coverage
         from the Maritime        Administration      on contractor-owned       vessels..     . ‘I.

          DOD Comment

         We concur witi     this         recommendation   and propose   to initiate a study of this
         matter  to determine            what course of action is in the best interests    of the
         Government.



                                                               40
                                                                                                     APPENDIX II

GAO Recommendation:                   “We recommend          that DOD and AID establish
appropriate       dollar   limitations         for lump-sum        benefits      for war-hazard                   death
or injury    to contractor          employees        and seek legislation           as necessary                 to
authorize     the Government              to make      such pdyments.       . ).    We also      rei”lrllllclid

that DOD and AID revise                 their  regulations     and contracting          policies              to
discontinue      the practice          of reimbursing       contractors        for the cost wf
supplemental        war- risk       insurance.       ”

DOD     Comment

As the GAO report                notes,      this matter           was extensively               reviewed        by the
Armed       Service       Procurement             Regulation            (ASPR)       Committee            several       years
back.      The     desirability          of  the    Government             becoming          a   self-insurer          on
war-risk       insurance          was actively            considered.             It was concluded              after     an
extensive       examination           and interchange               of views,         both in house           and with
industry,       that it was impractical                   to adopt a policy              of Government              self-
insurance        (indemnification)              at the time.             Further,         since      contractor
recruitment           in Southeast          Asia    was past its peak,                 the Committee              determined
that it was not feasible                to pursue         legislation         to permit          the payment          of
lump-sum         benefit        payments.           In our opinion,             pending        a suitable        substitute
for commercial             supplemental            war-risk           insurance,          no action         to modify
existing     policy       should     be initiated.             Such a prohibition                as recommended               by
GAO could          result     in serious         difficulty        for contractors              in recruiting          and
retaining       skilled      technicians          and specialists             in areas         of conflict.

GAO Recommendation:                 “We suggest        that DOD and AID                        reopen    negotiations
on policy       FD-712     to establish        more   equitable rates   for                     an administrative
cost,   profit,      and interest       rates,     and to bring the policy                       records     under
Government          audit.   ”

DOD     Comment

As the GAO report             notes,      this is a rather         unique     insurance       policy     offered
by the Insurance           Company         of North       America      for contractors         to obtain
supplemental         war-risk        insurance         for employees.            Many    contractors
obtain   supplemental          war-risk          insurance       under    this policy.        The Government
was an active        participant        in the negotiation           of this policy       and receives
certain    benefits,       such as refunds             of premiuLms.          Representatives           of DOD
and AID have been meeting                   with    this insurance         carrier     about twice         a year
since   the inception         of the program             in 1965.      The last meeting           resulted      in a
rate decrease         of approximately              20%,    a reduction       in the basic       charge




                                                             41
  APPENDIX II

 (retained   by the company)      from 28% to 25% of the premium,             and a reduction
in the stabilization     fund from $1 million       to $500,000     effective   1 July 1970.
This is the fourth     reduction     in cost negotiated    by DOD and ND since
inception    of the policy.     With regard    to bringing     the policy records     under
audit scrutiny     by the U.S. Government,          this would have to be voluntary         on
the part of the contractor       since the Government         has no contractual
relationship    with the carrier.       These matters      will be topics of discussion
at the future meetings       with the carrier.

GAO Recommendation:              “We recommend         that DOD issue appropriate
instructions     to all of its procurement        activities  to provide for self-insurance
of third-country       nationals    in accordance     to the provisions  of Defense
Procurement        Circular     #64.”   (ASPR 10-403 and 10-502)

DOD Comment

 The comments          in the GAO report        on this-matter          seemingly      reflect   that
the policy changes to ASPR lo-403*and                   lo-502      require    Government          self-
insurance.        However,     the  policy     emphasis       leans     more   towards       the  converse
of this, in that ASPR 10-502(b)             provides       for the inclusion        of the Government
 self-insurance        clause (indemnification)          ‘I.. . only if the Head of a Procuring
Activity     or his designee has decided that the contractor                      shall not purchase
insurance       against the liability..      . “. We propose            to reexamine        our policies
on this matter        to determine      whether    further      clarification      is needed.

We appreciate        this   opportunity     to comment         upon your     report.

                                                         Sincerely,




                                                    42
                                                                        APPENDIX III

                          DEPARTMENT            OF STATE
                 AGENCY   FOR   INTERNATIONAL        DEVELOPMENT
                            WASHINGTON.     D.C.   20523




                                                                   DEC 18 1970

Mr. LZurgene C. Wohlhorn
Assistant Director,  International              Xvision
U.S. General Accounting Office
)-d-k1G Street, N.W.
Washington, D. C. 20548

Dear Mr, Wohlhorn:
We have reviewed your report of September 11, 3.970, concerning
War-Risk Insurance coverage for government contractor employees
and contractor-owned equipment,
We agree that the report's   recommendations warrant caref'ul
consideration by this Agency as well as by the various Depart-
ments concerned. As you will note in the attached memorandum
from the Assistant Administrator   (Vietnam Bureau), we are
conducting an in-depth study of the recommendations pertaining
to A.I.D.    We estimate that this will require approximately
90 days before we have the basis for making a decision regarding
our future course of action on self insurance programs. However,
we wilJ. be in touch with you regarding progress.
       .




                                                Auditor    General


J3nclosure   :   4s




                                            43
APPENDIX III

               OPT-
               W&Y FORMNo.
                Is2EmTloH10
               GSA
                FPMR(41
                      cm)101~,,.s
               UNITED    STATES      GOVERNMENT

               Memonzndum
TO         :     AG, Mr.    Edward F. Tenntit                                           DATE:     DEC8 1970

FROM       :     AA/m,     Robert     H. Nooter


SUBJECT:         Agency Reply to Recommendations Made by the GAO in Draft Report
                 Entitled  "Opportunity for Savings in Providing  War Risk Insurance
                 Coverage for Government Contractor   Employees and Contractor-Owned
                 Property"

                 The draft report concludes that substantial              savings would have
                 been realized     had organizations     covered in the report,        including
                 AID, followed     a policy   of self insurance       instead of reimbursing
                  their contractors     for the cost of war risk insurance purchased
                 by them from commercial       companies.      The report recommends, in
                 part, that AID seek legislation         which would permit the Agency to
                 self insure for war risk losses.           As pointed out in the report,
                 AID does not now have legislative          authority     to engage in any form
                 of self insurance program.          The GAO has compared the cost of
                 insurance   premiums paid during the last three years to the claims
                 paid in the same period and has shown that premium costs have
                 indeed exceeded claims paid in all cases.               This, of course, is
                 an argument for moving immediately          to take advantage of potential
                 savings through self insurance         programs.      However, at this time
                 we are not in a position       to unreservedly       endorse the GAO's
                 recommendation     to seek legislation      to permit self insurance         for
                 war hazard losses.        We must further     consider     all aspects of the
                 question   before agreeing to seek the enabling legislation.

                 Some of the        items   to be considered      Fe:

                       1. How much administrative  cost will be involved   in self
                 insurance programs?   The Agency does not have a staff  to administer
                 a self insurance program nor do we have any idea as to the cost of
                 such staff.

                       2. What have other           civilian     agencies     done in providing       self
                 insurance?

                        3. Are the potential           savings    large     enough to   justify    a self
                 insurance  program?

                      4. To what extent should the risk of a future                      major    claim
                 from a calamity be taken into consideration?

                       5. To what extent,    if         any, should the pending reorganization
                 of AID influence a decision            to seek legislative  authorization   to
                 self insure?


                            Bay U.S. Savings Bomis Regdarly 012de Payroll Savings Plan

                                                          44
                                                                         APPENDIX III



At the present time         the Vietnam Bureau is conducting; a study which
will  consider these        and other questions.    This study, which will  oe
completed within      the    next. 90 aqs, will  provide the basis for makinp
a decision    regarding       our future course of action on self insurance
orogralns.


It is certain that the agency cannot          self   insure   against   war hazard
losses under present legislation.




                                         45
APPENDIX IV


              PRINCIPAL OFFICIALS RESPO~?SIBLEFOR
              THE ADMINISTRATION OF ACTIVITIES
                  EISCUSSEDIN THIS RWORT

                                        Tenure of office
                                        From            To
                    DEPARTMENTOF DEFENSE
SEZRETARYOF DEFENSE:
   Melvin R. Laird                   Jan.   1969    Present
ASSISTANT SECRETARYOF DEFENSE
  (COMPTROLLER):
    Robert C. Moot                   Sept. 1968     Present
ASSISTANT SECRETARYOF DEFENSE
  (INSTL~L~~TIOMSAND LOGISTICS):
     Barry J. Shillito               Feb.   1969    Present

                   DEPARTMENTOF THE ARMY
SFX2RETARYOFTHEARMY:
    Robert F. Froehlke               July   1971    Present
  - Stanley R. Resor                 July   1965    June 1971

                   DEPARTMENTOFTHENAVY
SXRETARYOF THENAVY:
   John H. Chafee                    Jan.   1969    Present
COMMAWDER,MILITARY SEALIFT COM-
  MAND:
   Vice Adm. Arthur R. Gralla        Mar.   1970    Present

                 DEPARTMENTOF THE AIR FORCE
SECRETARYOF THE AIR FORCE:
   Dr-. Robert C. Seamans, Jr.       Feb.   1969    Present

                              46
                                                         APPENDIX IV

                                           Tenure      of office
                                           From                    To
                       DEFENSE SUPPLYAGENCY

DIRECTOR, DEFENSE SUPPLY AGENCY:
    Lt. Gen. Wallace H.
       Robinson, Jr.                    Aug.   I.971       Present
    Lt.     Gen. Earl C. Hedlund        July   1967        July    1971

COMMANDER, DEFENSEFUEL SUPPLY
  CENTER:
    Maj. Gen. C. C. Case                Nov.   1969        Present


                   DEFENSECONTRACTAUDIT AGENCY

DIR-ZTOR:
    William     B. Petty                Ju1y   1965        Present


                           VIETNAM COMMANDS

COMMANDER,MILITARY ASSISTANCECO&
 MAND,VIEmAM:
   Gen. Creighton W. Abram       July          1968        Present

COMMANDER,SEVENTHAIR FORCE:
   Gen. Lucius D. Clay, Jr.             Sept. 1970         July         1971
   Gen. George S. Brown                 Aug. 1968          Aug.         1970

OFFICER-IN-CHARGEOF CONSTRUCTION,
 v1m:
    Rear Adm. M. Labor Foster,   Jr. Mar.      1971        Present
    Rear Adm. Albert R. Marshall     Mar.      1970        Feb. 1971
    Rear Adm. Henry J. Johnson       July      1968        Mar. 1970

DEPUTYCOMMANDINGGENERAL,UNITED
  STATES ARMY, VIETNAM:
    Lt. Gen. William J. McCaffrey July         1970        Present
    Lt. Gen. Frank T. Mildren     fiY          1968        June 1970




                                   47
APPENDIX IV
                                                                           .
                                        Tenure of office
                                        From            -To
                       DEPARTMENTOF STATE
SEICRE'MRYOF STATE:
    William P. Rogers                Jan.   1969    Present

              AGENCYFOR INTERNATIONALDEvELc.yMEBT
ADMINISTRATOR:
   John A. Hann;ah                   Apr.   1969    Present
DIRECTOR, MISSION TO THE REPUBLIC
  OF VIGTNAM:
    John R. Mossler                  July   1970    Present
    Donald G. MacDonald              Aug-   1966    July 1970

                       DEPARTMENTOFLABOR
SJXREXARYOF LABOR:
    James D. Hodgson                 July   1970    Present
DIREICTOR,BUREAUOF EMPLOYEES'
  COMPENSATION:
    John M. Ekeberg                  Apr.   1969    Present

                    DEPARTMENTOF COMMWCE
SECRETARYOF COmmCE:
   Maurice H. Stans                  Jan.   1969    Present
ADMINISTRBTOR, MARITIME ADMINIS-
  TRATION:
    Andrew E. Gibson                 Mar.   1969    Present




                                                   U.S., GAO. Wash.. D-C
                               48
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