What Federal Contractors Need to Know about Self Insurance
May 11, 2015
Contractors often disclose the cost savings of self-insured plans with excitement, but buyer beware. Most contractors are surprised when I don’t immediately commend them on cost savings and instead ask them, “Did you know there are ’special‘ compliance requirements for self-insurance plans and failure to meet the compliance requirements makes the cost unallowable?” Most self-insurance plans are established by contractors with the intention of lowering fringe benefit rates, but as with all things in government contracting, it’s more complicated than that. Failure to follow the Federal Acquisition Regulations (FAR) can put the cost at risk for a complete disallowance.
FAR Part 31.205-19, Insurance and Indemnification, has many requirements, but today I will highlight the self-insurance reporting requirements. First, for purposes of applying the provisions of FAR 31.205-19, the government considers insurance provided by captive insurers (insurers owned by or under control of the contractor) as self-insurance, and charges for it must comply with the provisions applicable to self-insurance costs.
FAR 31.205-19 directs contractors to FAR Part 28, specifically FAR Part 28.308, Self-Insurance, which provides specific instructions requiring a written proposal and an ACO approval to maintain a self-insurance plan when the cost exceeds $200,000. FAR 28.311-1 also requires the CO to insert FAR 52.228-7 in the contract, limiting the reimbursement based on compliance with FAR Parts 28 and 31, not to mention the inclusion of CAS 416.
Are you confused yet? This blog focuses on the first step: the written notification and approval of the plan. To protect the taxpayer interests, the government requires contractors to demonstrate ability to sustain the potential losses involved. Only after the CO’s approval shall the contractor be reimbursed for that portion of reasonable cost of insurance allocable to the contract and required or approved under this clause (FAR 52.228-7).
FAR Part 28.308 Self-Insurance
As stated in the clause, “When it is anticipated that 50 percent or more of the self-insurance costs to be incurred at a segment of a contractor’s business will be allocable to negotiated Government contracts, and the self-insurance costs at the segment for the contractor’s fiscal year are expected to be $200,000 or more, the contractor shall submit, in writing, information on its proposed self-insurance program to the administrative contracting officer and obtain that official’s approval of the program. The submission shall be by segment or segments of the contractor’s business to which the program applies and shall include—
- A complete description of the program, including any resolution of the board of directors authorizing and adopting coverage, including types of risks, limits of coverage, assignments of safety and loss control, and legal service responsibilities;
- If available, the corporate insurance manual and organization chart detailing fiscal responsibilities for insurance;
- The terms regarding insurance coverage for any Government property;
- The contractor’s latest financial statements;
- Any self-insurance feasibility studies or insurance market surveys reporting comparative alternatives;
- Loss history, premiums history, and industry ratios;
- A formula for establishing reserves, including percentage variations between losses paid and losses reserved;
- Claims administration policy, practices, and procedures;
- The method of calculating the projected average loss; and
- A disclosure of all captive insurance company and reinsurance agreements, including methods of computing cost.
Once the administrative contracting officer has approved a program, the contractor is in compliance with the terms of the contract provisions surrounding insurance plan approval. However, this is not considered approval of the cost. The cost is still open for review of overall reasonableness, measurement, assignment and allocation in accordance with CAS 416, as well as compliance with the specific cost principle FAR 31.205-19.
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