31.205-19
Insurance and indemnification
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.