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Northrop Seeks Navy Aid for Losses

Critics Decry Plan Increasing Contract Payments to Offset Uninsured Katrina Claims

By David Rogers

Wall Street Journal

May 2, 2006

WASHINGTON -- Northrop Grumman Corp.'s bid to make the Navy increase contract payments and help the shipbuilder offset its hurricane-related losses faces a showdown in the Senate this week.

The defense contractor, which has headquarters in Los Angeles and shipyards on the Gulf Coast, would be required to reimburse the government to the extent Northrop Grumman recovers claims being litigated with its insurer, Factory Mutual Insurance Co. But critics are outraged at the prospect of Washington inserting itself into a private business matter and, in essence, providing bridge funding for a large, profitable corporation.

"It's certainly the kind of thing that needs to be tested on the floor," said Sen. Tom Coburn, who is pressing for a vote -- possibly as early as today -- on an amendment to block the provision from taking effect. "I don't think this is where we want to go. This is one private entity dealing with another," the Oklahoma Republican said.

The way the Northrop provision is written, both the government's exposure and the manner in which it pays Northrop have emerged as contentious issues. The language, inserted in an Iraq war bill funding Navy accounts, sets no cap on the increased contract payments, and Northrop Grumman's spokesmen declined to be more specific since the company's claims are in litigation. As Northrop documents report total coverage of $500 million, Mr. Coburn and other critics argue that that could also be the cost to the government; Northrop's allies estimate the claims figure between $140 million and $200 million.

The White House, which opposes the provision, has said it may end up decreasing private insurers' incentive to pay. Some critics see justification for the government investing directly in rebuilding the shipyards. But from the Navy's standpoint, the idea of adjusting contracts up to cover costs routinely covered by insurance is troubling, because it could end up raising the cost base line on future contracts -- and, therefore, the profit paid to Northrop Grumman on a percentage basis.

Working with the Mississippi delegation, including Senate Appropriations Committee Chairman Thad Cochran, a Republican, Northrop Grumman asked that the contracting language be added to a pending $106.5 billion bill covering not only Iraq but also recovery efforts on the Gulf Coast. A similar effort failed in December due to House opposition, but the company has persisted, arguing the extraordinary circumstances of Katrina justify exceptional government action.

Mr. Coburn is pitted against Robert Helm, who heads the company's lobbying shop and is a former Senate Republican budget aide and comptroller for the Defense Department under Ronald Reagan. Mr. Helm is described by Appropriations Committee staff members as passionate on the subject, and Northrop Grumman estimates that its Avondale yard in New Orleans and Ingalls Shipyard in Pascagoula -- the former home of Sen. Trent Lott (R., Miss.) -- make it the largest manufacturing employer in Louisiana and Mississippi.

In the months following the storm, Northrop lost close to eight million man-hours of labor in its operations, "an unprecedented disruption to its business," said a spokesman. "Most of the damage inflicted on Northrop Grumman's operations is being adjudicated through insurance claims and legal processes, but these are slow and cumbersome -- and this resolution will take years. ... Without near-term and timely supplemental funding, the recovery of the shipyards will be significantly delayed and further increase the already delayed delivery schedules and costs of Navy ships."

A spokesman for Factory Mutual, of Johnston, R.I., said he couldn't comment in detail on the matter because of the litigation: "We're surprised and disappointed by the suit, but we're confident in our position because we believe our policy language is clear."

A major issue -- heard elsewhere in the Gulf Coast after Katrina -- is the extent of coverage for flood damage. Factory Mutual's answer to Northrop Grumman's complaint, filed in U.S. District Court in Los Angeles, argues that damage "directly or indirectly covered by or resulting from flood" isn't covered under the policy.

The case echoes a common complaint among homeowners who have recovered far less than they expected from insurance. With federal community development funds, Mississippi has taken the lead in creating a program to help such households rebuild, but in the case of Northrop Grumman the same type of aid is a harder sell, even with its political claim on pro-defense lawmakers.