War is risky business

For many Americans, the world suddenly seems to be a much more dangerous place than they ever realized. This is as true for companies as it is for individuals.

Company leaders who never envisioned themselves as defense contractors suddenly are realizing that they are intimately involved in supporting the national defense. In fact, with the the Defense Department's significant shift toward the greater use of commercial sources and commercial contracting methods during the past decade, there are many otherwise purely "commercial" companies that now find themselves providing supplies and services to the U.S. military. Moreover, many of these companies are deploying personnel right alongside U.S. troops at or near the front lines.

These companies are proud to be part of these important efforts. However, their patriotism does not blind them to these endeavors' risks, nor does it absolve their officers and directors of their responsibilities to employees and shareholders.

One of the special risks that some companies are becoming more familiar with involves the war risk exclusion found in almost every insurance contract. Under the exclusion, insurers disclaim any obligation to compensate the insured for damages resulting from acts of war. Obviously, that is a problem for companies whose employees are deployed into potential war zones or are otherwise directly supporting defense efforts.

Some of the risk is ameliorated by the War Hazards Compensation Act, under which contractor employees who are injured, detained or killed by hostile forces are entitled to compensation as though they were government employees.

Unfortunately for contractors, however, the act and the capture and detention clause are not as broad as the war risk exclusion. There are many otherwise insurable risks that are not covered if attributable to acts of war. Where that leaves the contractor depends on the type of contract involved.

For example, if a contract was awarded on a cost- reimbursable basis, it should include a standard clause under which the government agrees to compensate the contractor for any liabilities to third persons for whom the contractor is found to be responsible and whom the contractor's insurance does not cover, subject to the availability of appropriated funds.

On the other hand, if the contract was awarded as one of the many other types — such as fixed-price, fixed labor rate, or time and materials — it will not include this special clause. Moreover, recent decisions by both the Court of Federal Claims and the Armed Services Board of Contract Appeals have raised some questions regarding the enforceability of an earlier version of the cost-reimbursable contract clause.

The Information Technology Association of America has identified the issue of war-zone insurance coverage as one of its top 10 issues for information technology companies involved in the war on terrorism. Current events certainly highlight this issue's importance.

Peckinpaugh is senior counsel for Computer Sciences Corp. in Reston, Va. This column represents his personal views.