Are you self-insured? You may be under a related Federal Acquisition Regulation (FAR) and not even know it. The FAR addresses the allowability of insurance in FAR 31.205-19 Insurance and Indemnification.
Among other conditions, F 31.205-19 (c) requires that self-insurance costs be measured, assigned and allocated in accordance with Cost Accounting Standard (CAS) 416 (48 CFR 9004.416), Accounting for Insurance Costs — regardless of whether or not your contract is subject to CAS.
A lot of U.S. government contractors do not realize that CAS 416-30 (a)(4) states that self-insurance includes the deductible portion of purchased insurance. So even if you purchase insurance, if you have a deductible amount, then you are also self-insured.
For purposes of applying FAR 31.205-19 provisions, the government considers insurance provided by captive insurers (insurers owned by or under control of the contractor) as self-insurance and charges for it have to comply with the provisions applicable to self-insurance. 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.
FAR 31.205-19(c) also requires that the contractor comply with FAR Part 28. FAR Part 28 requires any contractor subject to CAS 416 to obtain insurance, by purchase or self-coverage, for the perils to which the contractor is exposed, except when indemnified or otherwise relieved of liability by the government.
FAR 28.308, Self-insurance, requires that you have a written plan when it is anticipated that 50 percent or more of the self-insurance costs to be incurred at a segment of your business will be allocable to negotiated government contract and the self-insurance costs for the segment’s fiscal year are expected to be $200,000 or more. So if your contract mix meets or exceeds this threshold and your deductible under your purchased insurance policies is $200,000 or more, then you will be required to submit this plan to your cognizant Administrative Contracting Officer (ACO) and obtain approval of the program.
According to FAR 28.308, the written description must include the following:
- A complete description of your program, including any board of directors resolutions authorizing and adopting coverage, types of risks, limits of coverage, assignments of safety and loss control and legal service responsibilities;
- If available, your corporate insurance manual and organization chart detailing fiscal responsibilities for insurance;
- The terms regarding insurance coverage you have for any government property;
- Your latest financial statements;
- Any self-insurance feasibility studies or insurance market surveys you have done or had prepared on your behalf reporting comparative alternatives;
- Your loss history, premiums history and industry ratios;
- Your formula for establishing reserves, including percentage variations between losses paid and losses reserved;
- Your claims administration policy, practices and procedures;
- Your method of calculating the projected average loss; and
- A disclosure of any captive insurance and reinsurance agreements, including methods of computing cost.
Each of your programs of self-insurance covering your insurable risks, including the deductible portion of purchased insurance, may be approved when an examination of the program indicates that it is in the government’s interest. Once your Administrative Contracting Officer has approved one of your programs, any major proposed changes to the program must be submitted for approval.
Program approval will be withdrawn if:
- Any part of your program does not comply with the requirements of FAR Part 28 or FAR 31.205-19.
- The conditions or situations change to the extent that a program change is considered necessary.
If you fail to submit the required written description and obtain the necessary approval. If your program is disapproved, then your self-insurance costs may be determined to be unallowable per FAR 31.205-19.
In order to qualify for a self-insurance program, you must demonstrate ability to sustain potential losses. The government will consider a number of factors, including:
- The soundness of your financial condition, including available lines of credit;
- The geographic dispersion of your assets, with a wider dispersion indicating that the potential of a single loss depleting all the assets is unlikely;
- Your history of previous losses, including how often losses occurred and the financial impact of each loss;
- The type and magnitude of risk, e.g. minor coverage for the deductible portion of purchased insurance versus major coverage for hazardous risks;
- Your history of compliance with federal and state laws and regulations.
The government will not approve a program of self-insurance for catastrophic risks. Should your performance of government contracts create the risk of catastrophic losses, the government may, to the extent authorized by law, agree to indemnify you or recognize an appropriate share of premiums for purchased insurance, or both. Self-insurance programs to protect you against the costs of correcting defects in your materials or workmanship will not be approved and such costs are unallowable per FAR 31.205-19(e). However, normal rework estimates and warranty costs are not considered self-insurance and are typically considered allowable costs as long as such costs are reasonable.
Approval of your insurance program in accordance with Part 28 does not constitute a determination that the program’s costs are allowable. While costs of insurance required or approved pursuant to the contract are allowable, FAR 31.205-19(e) includes other cost limitations for both self-insurance and purchased insurance costs.
- The types and extent of your coverage must follow sound business practice and the rates and premiums you pay be must be reasonable. This may require you to show a comparative analysis of insurance premiums offered by two or more providers to demonstrate price reasonableness.
- The portion of your business interruption or other similar insurance that provides for coverage of your lost profits is unallowable.
- The portion of your property insurance premiums for insurance coverage in excess of the acquisition cost of the insured assets is unallowable, unless you have a formal written policy assuring that the new asset will reflect the plus or minus adjustments for differences between insurance proceeds and actual replacement cost.
- Costs of insurance for the risk of loss, damage, destruction or theft of government property are allowable to the extent that you are liable for the losses. However, if the contracting officer has revoked the government’s assumption of risk, or the insurance covers losses resulting from willful misconduct or lack of good faith on the part of any of the contractor’s managerial personnel, then the insurance costs will be considered unallowable.
- Insurance costs on the lives of officers, partners, proprietors or employees (key person life insurance) are unallowable unless the insurance represents additional compensation.
- Insurance to protect against the costs of correcting your 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.
- Premiums for retroactive or backdated insurance written to cover losses that have occurred and are known are unallowable.
If your annual self-insurance costs are expected to be $200,000 or more, including deductibles of $200,000 or more under your purchased insurance policies:
- Prepare a written description of each plan;
- Include the attributes and criteria required by FAR 28.308;
- Obtain necessary approvals;
- Monitor your plans to ensure prompt notification of changes in conditions and obtain any additional approvals;
- Establish appropriate accounts for identification and recording of unallowable insurance costs and screen your insurance costs at least once each year to ensure that the unallowable costs have been properly excluded from your incurred cost representations.