The Lane Anderson text addresses six areas:

1. Contractually required. Costs of coverage required by the terms of the contract are allowable.

General Business Insurance. Costs of insurance related to the general conduct of business are generally allowable with certain exceptions. The type and extent of coverage must follow sound business practice and be "reasonable." Exceptions include: (a) the cost of insurance covering an asset in excess of an its acquisition value is unallowable unless the contractor has a written policy providing that in the event of an involuntary conversion, the new asset will be valued at the book value of the replaced asset plus or minus adjustments for the difference between insurance proceeds and the actual replacement cost (b) costs of insurance for the risk associated with government property is allowable only to the extent a contractor is liable for damages other than that caused by willfull misconduct or lack of good faith (c) business interruption insurance premiums are allowable except for any portion that provides coverage for loss of profits and (d) life insurance on company officials are unallowable when the beneficiary is the company or partners while when the beneficiary is named by the company official (e.g. family member, estate) it is considered additional compensation covered by FAR 31.205-6, personal compensation.

Also insurance coverage exists for a particular occurrence so a contractor must seek recovery on the insurance rather than from the government in the form of indemnification. The rationale for this is since the government helped pay the insurance premiums the loss must be borne by the insurance carrier not the government. We also frequently encounter assertions by government representatives that certain types of insurance (e.g. product liability, professional liability) are either unallowable or if allowable, not allocable to government contracts because the government does not receive benefit (e.g. damages paid on military products are less than commercial, no third party law suits result from government funded projects). Such questioned costs generally should be challenged on the grounds they are a necessary cost of doing business (see the GCA DIGEST Vol. 3, No.4 for a case study of a successful challenge to such questioned costs).

3. Actual losses. Actual losses are unallowable unless they are (a) expressly provided for in the contract (b) for nominal deductibles required by purchase insurance policies and (c) minor losses that occur in the ordinary course of business and are not usually covered by insurance (e.g. spoilage and breakage). Also, in accordance with CAS 416, actual losses may be used to determine the self-insurance charge provided the actual losses do not differ significantly from the projected average losses for the accounting period.

4. Contractor defects. Insurance expenses to protect against the costs of having to correct the contractor’s own defects are unallowable except for casualty losses like fires and floods. The government’s rationale is it does not want to have to pay to insure against the contractor’s own poor performance because it is paying for a quality product (however, warranty costs are generally allowable).

5. Professional Liability Insurance. General practice coverage is usually considered an allowable indirect cost allocable to all work. If the policy contains special coverage on designated products, services or projects a direct allocation is generally required. You can expect auditors to compare commercial and government work to ensure the relative risks in the two areas are comparable.

6. Self-Insurance. FAR 31.205-19 limits the recoverable amount for self-insurance programs to purchased insurance, if available, plus administrative expenses. Insurance provided by captive insurers is considered self insurance unless the captive can demonstrate it sells insurance in substantial quantities to the general public and that the premiums it charges are based on market forces. Premiums for "fronting" arrangements with companies who reinsure with a captive are allowable but cannot exceed the amount (plus reasonable fronting company service charges) that would have been charged directly by the captive.

{TAG_FORM_TITLE}