31.205-19 Insurance and indemnification
Source: FAR 31.205-19 on acquisition.gov
Only reasonable, contractually required, and properly allocated insurance costs are allowable under government contracts, with strict limitations on self-insurance, captive insurers, and certain types of coverage.
Overview
FAR 31.205-19 establishes the rules for the allowability of insurance and indemnification costs under government contracts. It covers both purchased insurance and self-insurance, including insurance provided by captive insurers. The regulation details which insurance costs are allowable, the limitations on self-insurance and purchased insurance, and specific exclusions such as insurance for correcting contractor defects or retroactive coverage. It also addresses the treatment of insurance for government property, business interruption, and life insurance, as well as the government's indemnification obligations.
Key Rules
- Allowable Insurance Costs
- Insurance required by the contract or maintained as part of normal business operations is generally allowable, subject to specific limitations.
- Self-Insurance and Captive Insurers
- Self-insurance charges must comply with cost accounting standards and cannot exceed the cost of comparable purchased insurance. Catastrophic risk self-insurance is unallowable.
- Purchased Insurance
- Purchased insurance costs are allowable if reasonable and in line with sound business practices. Premiums for fronting arrangements and actual losses are subject to strict limitations.
- Specific Exclusions
- Costs for insurance covering contractor defects, retroactive insurance, and certain late premium payments are unallowable.
- Government Property and Indemnification
- Insurance for government property is only allowable under specific conditions, and government indemnification is limited to what is expressly authorized by law or contract.
Responsibilities
- Contracting Officers: Must review and approve insurance programs, ensure compliance with cost allowability rules, and enforce limitations on indemnification.
- Contractors: Must allocate insurance costs per cost accounting standards, maintain reasonable and sound insurance practices, and avoid unallowable insurance charges.
- Agencies: Oversee contractor compliance and ensure proper application of insurance cost principles.
Practical Implications
- This section ensures that only reasonable and necessary insurance costs are charged to the government, preventing abuse or over-insurance. Contractors must carefully document and justify their insurance expenses, particularly for self-insurance and captive arrangements. Common pitfalls include charging for unallowable insurance types, failing to follow cost allocation rules, or misunderstanding indemnification limits.
(a) Insurance by purchase or by self-insuring includes-
(1) Coverage the contractor is required to carry or to have approved, under the terms of the contract; and
(2) Any other coverage the contractor maintains in connection with the general conduct of its business.
(b) For purposes of applying the provisions of this subsection, the Government considers insurance provided by captive insurers (insurers owned by or under control of the contractor) as self-insurance, and charges for it shall comply with the provisions applicable to self-insurance costs in this subsection. However, if the captive insurer also sells insurance to the general public in substantial quantities and it can be demonstrated that the charge to the contractor is based on competitive market forces, the Government will consider the insurance as purchased insurance.
(c) Whether or not the contract is subject to CAS, self-insurance charges are allowable subject to paragraph (e) of this subsection and the following limitations:
(1) The contractor shall measure, assign, and allocate costs in accordance with 48 CFR9904.416, Accounting for Insurance Costs.
(2) The contractor shall comply with (48 CFR) part 28. However, approval of a contractor’s insurance program in accordance with part 28 does not constitute a determination as to the allowability of the program’s cost.
(3) If purchased insurance is available, any self-insurance charge plus insurance administration expenses in excess of the cost of comparable purchased insurance plus associated insurance administration expenses is unallowable.
(4) Self-insurance charges for risks of catastrophic losses are unallowable (see 28.308(e)).
(d) Purchased insurance costs are allowable, subject to paragraph (e) of this subsection and the following limitations:
(1) For contracts subject to full CAS coverage, the contractor shall measure, assign, and allocate costs in accordance with 48 CFR9904.416.
(2) For all contracts, premiums for insurance purchased from fronting insurance companies (insurance companies not related to the contractor but who reinsure with a captive insurer of the contractor) are unallowable to the extent they exceed the sum of-
(i) The amount that would have been allowed had the contractor insured directly with the captive insurer; and
(ii) Reasonable fronting company charges for services rendered.
(3) Actual losses are unallowable unless expressly provided for in the contract, except-
(i) Losses incurred under the nominal deductible provisions of purchased insurance, in keeping with sound business practice, are allowable; and
(ii) Minor losses, such as spoilage, breakage, and disappearance of small hand tools that occur in the ordinary course of business and that are not covered by insurance, are allowable.
(e) Self-insurance and purchased insurance costs are subject to the cost limitations in the following paragraphs:
(1) Costs of insurance required or approved pursuant to the contract are allowable.
(2) Costs of insurance maintained by the contractor in connection with the general conduct of its business are allowable subject to the following limitations:
(i) Types and extent of coverage shall follow sound business practice, and the rates and premiums shall be reasonable.
(ii) Costs allowed for business interruption or other similar insurance shall be limited to exclude coverage of profit.
(iii) The cost of property insurance premiums for insurance coverage in excess of the acquisition cost of the insured assets is allowable only when the contractor has a formal written policy assuring that in the event the insured property is involuntarily converted, the new asset shall be valued at the book value of the replaced asset plus or minus adjustments for differences between insurance proceeds and actual replacement cost. If the contractor does not have such a formal written policy, the cost of premiums for insurance coverage in excess of the acquisition cost of the insured asset is unallowable.
(iv) Costs of insurance for the risk of loss of Government property are allowable to the extent that-
(A) The contractor is liable for such loss;
(B) The contracting officer has not revoked the Government’s assumption of risk (see 45.104(b)); and
(C) Such insurance does not cover loss of Government property that results from willful misconduct or lack of good faith on the part of any of the contractor’s managerial personnel (as described in FAR 52.245-1(h)(1)(ii)).
(v) Costs of insurance on the lives of officers, partners, proprietors, or employees are allowable only to the extent that the insurance represents additional compensation (see 31.205-6).
(3) The cost of insurance to protect the contractor against the costs of correcting its own defects in materials and workmanship is unallowable. However, insurance costs to cover fortuitous or casualty losses resulting from defects in materials or workmanship are allowable as a normal business expense.
(4) Premiums for retroactive or backdated insurance written to cover losses that have occurred and are known are unallowable.
(5) The Government is obligated to indemnify the contractor only to the extent authorized by law, as expressly provided for in the contract, except as provided in paragraph (d)(3) of this subsection.
(6) Late premium payment charges related to employee deferred compensation plan insurance incurred pursuant to Section 4007 (http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title29-section1307&num=0&edition=prelim" target="_blank">29 U.S.C. 1307) or Section 4023 (http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title29-section1323&num=0&edition=prelim" target="_blank">29 U.S.C. 1323) of the Employee Retirement Income Security Act of1974 are unallowable.