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If a torch burns a welder in Iraq, the insurance company must pay for the lost time and the medical costs. If a security guard is kidnapped or blown up by a roadside bomb, the United States will pay under the War Hazards Compensation Act.

The insurance has become a central issue in a lawsuit filed against Blackwater USA by the families of four contractors whose mutilated bodies were burned and dragged through the streets of Fallujah in March 2004. In seeking damages, the families contend that Blackwater sent the contractors on a dangerous mission without proper equipment or preparation. Blackwater, based in Moyock, N.C., has said the families are entitled only to the $1,073 weekly benefits paid under the contractors' Defense Base Act policies.

The insurance industry agrees and has urged federal judges to dismiss the lawsuit and force insurance companies to pay the benefits. Any other decision will hurt the insurance industry and deprive the United States of the use of private contractors, AIG wrote in a friend-of-the-court brief. AIG didn't cover Blackwater.

But in the Fallujah incident -- and most other contractors' deaths in Iraq -- the insurance companies would be reimbursed by the government, plus 15 percent.

Unregulated policies

These insurance policies differ from conventional workers' comp in one major way: Domestic workers' comp is heavily regulated and analyzed, but the contractors' insurance is not. The U.S. Department of Labor monitors the number of claims and resolves disputes over benefits, but it has no authority over pricing or availability.

"We are not an insurance commission operation," said Shelby Hallmark, director of the department's Office of Workers Compensation. "We are not in the business of controlling or even monitoring prices."

The Government Accountability Office, Congress' watchdog agency, examined contractors' insurance in 2005 and could not calculate its cost to taxpayers. The auditors couldn't estimate what impact the insurance costs had on reconstruction activities in Iraq. The GAO found that Department of Defense contractors were being charged premiums between $10 and $21 for every $100 of salary.

That means taxpayers were paying up to $21,000 a year to insure a worker with an annual salary of $100,000, which is not unusual pay for a private contractor.

Those Defense Department rates were far above the rates paid by the State Department, which uses many private contractors overseas.

Another model

For years, the State Department has put its contractors' insurance out for bid; the winning bid provides the insurance anywhere in the world at the same price. The U.S. Agency for International Development, the government's foreign aid agency, also bids its insurance. The rates in Iraq are very good, said Sara Coyne, an insurance broker at Rutherfoord International, which manages the contractors' insurance programs for the State Department and USAID.

"We have divers de-mining the port Umm Qasr for $2.15 per hundred of salary," Coyne said.

The contractors' insurance market is dominated by AIG. Chris Winans, an AIG spokesman, said that his company charges lower rates than those cited by the Government Accountability Office. AIG premiums in Iraq range from $4 to $9 per hundred dollars of salary, Winans said. Bad roads, long work hours, stress and poor access to health care push the rates above those in other countries, Winans said.

Insurers set their own rates, but they can't charge higher rates to cover people in a war zone. If insurers charge a higher price -- known as a contingency -- for war policies, federal law prohibits them from collecting reimbursement under the War Hazards Compensation Act.

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