Effect of Navy shipbuilder payments on insurance questioned

A Navy plan to pay Gulf Coast shipbuilders about $1.7 billion for losses related to damages and construction delays from Hurricane Katrina may overstate the actual costs and could dampen efforts to collect insurance payments, according to a Congressional report.

The nonpartisan Congressional Research Service said Northrop Grumman Corp. may be able to collect insurance claims for future increased costs related to labor and overhead. If the government pays now, the report said, the company will have little incentive to negotiate with insurers for those payments.

The researchers said Northrop Grumman may be covered for losses related to disruption of work caused by the hurricane, and suggested the company could collect for increased labor costs on ship construction that is a year or more down the road.

But officials from the Navy and Northrop Grumman said that there is no overlap between the company’s insurance claims and the Navy’s funding. And the Navy has personnel at the shipyards overseeing the recovery and monitoring the costs, said Capt. Tom Van Leunen, a Navy spokesman.

The funding is included in Congress’ $29 billion hurricane relief bill. Lawmakers also expressed concerns about the funding, adding language to the bill that requires additional oversight by the Pentagon. It also requires that the Defense Department, 30 days before spending the money, must certify to Congress that the funds are for legitimate costs related to the hurricane and would not be paid by the insurer.

Northrop Grumman’s facilities in New Orleans and Pascagoula, Miss., where nine ships are under construction, were heavily damaged in the hurricane. Two other Navy ships were near completion at the time, and both were turned over to the Navy and moved out in recent weeks.

The congressional researchers took issue with the Navy’s argument that the money is needed immediately, and suggested the government should wait for more accurate cost estimates. Delaying the request, the report said, could also allow insurance negotiations to proceed. The report also said the Navy should have at least considered shutting down the shipyards for six months to a year for repairs. But that suggestion was shot down.

“Putting Gulf Coast businesses back to work, including the largest employer in the states of Mississippi and Louisiana, is an essential step in putting the region and its citizens’ lives back together,” said Northrop Grumman spokesman Dan McClain.

McClain said insurance claims will cover repairs and cleanup at Northrop Grumman-owned facilities, while the federal funds would be used to cover damages to the government-owned equipment as well as additional contract costs caused by the construction delays. At least $132 million in damages was done to the ships, the Navy estimated.

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Topics Hurricane Construction