Northrop Grumman wants FEMA Funds for Hurricane Damage

The U.S. Navy has asked for $2 billion from the Federal Emergency Management Agency to repair the damage from Hurricane Katrina to Northrop Grumman's three Gulf Coast shipyards.

Most of the funds would be used to rewrite current Navy contracts to shift the burden of hurricane-related cost overruns and building delays from the company to the government.
Under "fixed price incentive" contracts between the Navy and Northrop Grumman, cost overruns on many of the ships under construction are usually split evenly. Under the Navy proposal, FEMA would pay Northrop's half.

The Navy contends that shipyard delays would increase the cost of the ships anyway. But critics wonder if the Navy and Northrop are using Hurricane Katrina as an excuse to gain additional funding on shipbuilding programs that are notorious for cost overruns.

They point out that $2 billion is suspiciously high for shipbuilding delays that are expected to take months ? not years. Northrop is also expected to receive from $500 million to $1 billion from its insurers to cover physical damage to property.

On the insurance front, Northrop has had mixed success. Of $1 billion in estimated physical damage to Northrop property, insurers quickly agreed to pay $500 million in claims. The company carried policies for wind and flood damage to property, as well as business interruption insurance to protect its earnings.

One insurance company, FM Global, based in Johnston, Rhode Island, however, is balking because it contends its policy covers only wind, not flood, damage. That action is holding up payment on the remaining $500 million. Northrop sued FM Global on Nov. 4, alleging fraud.