Northrop Grumman wants the best insurance coverage of all: the federal government.
By Opinion
The Washington Post
May 22, 2006
NORTHROP GRUMMAN Corp.'s revenue last year totaled $30.7 billion, with profits of $1.4 billion, up 29 percent from 2004. On Wednesday, the company, which ranks 67th among the Fortune 500, announced a 15 percent increase in quarterly stock dividends -- "our third double-digit dividend increase in as many years," crowed Chairman Ronald D. Sugar. We're pleased the company's doing well, but we can't help but wonder: Why, then, should Northrop Grumman be getting hundreds of millions of dollars from the federal government to pay for cost overruns on Navy ships as a result of damages from Hurricane Katrina? Answer: It shouldn't.
The money for Northrop Grumman is contained in the bloated, $109 billion Senate version of an emergency spending measure to pay for costs of the war in Iraq and Katrina. The contractor says it needs the money -- the amount isn't specified in the legislation, but Northrop estimates between $140 million and $200 million -- to help it cover extra costs as a result of massive damages to its shipyards from Katrina. "Unprecedented events require unprecedented actions," Philip A. Teel, who heads the company's ship operations, said at a news conference this month.
Unprecedented chutzpah is more like it: There's $2.7 billion in federal money going to help rebuild the shipyards along the Gulf of Mexico, but Northrop Grumman wants to ensure some of that goes directly to its bottom line -- without having to wait for its insurers to pay up. There's no doubt the company's operations, particularly the Ingalls shipyard in Pascagoula, Miss., were devastated; Northrop says that it's already spent $250 million on cleanup and that total costs will amount to $850 million. It has recovered $180 million from insurers, and it's in the midst of litigation about more with Factory Mutual Insurance Co., which is supposed to cover Northrop's business disruption costs in excess of $500 million. But as the Defense Contract Management Agency explained, "If the government pays the costs . . . there is a risk that insurers will deny coverage on the basis that there has been no loss suffered by Northrop Grumman." Indeed, why would any government contractor buy such insurance in the future, if it knows the government will come along to bail it out no matter what? As Assistant Navy Secretary Delores M. Etter told Defense News, "The precedent is not good, because it opens us up for lots of companies to potentially come back and have us cover expenses."
Sen. Thad Cochran, a Mississippi Republican and, perhaps more to the point, chairman of the Senate Appropriations Committee, argues that the federal government will end up paying either way: Higher ship prices would be passed on to the government -- an additional $300 million to $600 million, Northrop Grumman warns. "You can pay me now or pay me later," Mr. Cochran said during the Senate debate. "I guess that is the way to say it." If so, perhaps this episode reflects a bigger problem with the way the military pays defense contractors.
Unfortunately, an amendment from Sen. Tom Coburn (R-Okla.) to remove the Northrop Grumman provision failed by three votes on the Senate floor. The measure is now in conference with the House, which has said it "strongly believes" no federal money should go to costs "subject to reimbursement" by an insurer. The House position ought to prevail in conference.
