FAR 31.205-19—Insurance and indemnification.
Plain-English Summary
FAR 31.205-19 explains when insurance and indemnification costs are allowable as contract costs and when they are not. It covers both purchased insurance and self-insurance, including insurance maintained for the general conduct of the contractor’s business, insurance required or approved by the contract, captive insurer arrangements, fronting company premiums, and the treatment of actual losses, nominal deductibles, and minor uninsured losses. It also sets special limits for catastrophic-loss self-insurance, business interruption coverage, property insurance above acquisition cost, insurance for Government property risk, life insurance on key personnel, defect-correction coverage, retroactive or backdated insurance, and late premium charges tied to certain ERISA-related employee deferred compensation insurance. The section also addresses indemnification, making clear that the Government’s obligation to indemnify exists only when authorized by law or expressly stated in the contract. In practice, this rule is important because contractors often carry broad insurance programs that mix allowable and unallowable elements, and contracting officers and auditors must separate ordinary business insurance from costs that exceed FAR limits or are not properly supported.
Key Rules
Insurance includes self-insurance
For cost allowability purposes, insurance is not limited to policies bought from outside insurers. It also includes coverage the contractor is required to carry under the contract and other coverage the contractor maintains as part of its general business operations.
Captive insurers treated as self-insurance
Insurance provided by a captive insurer is generally treated as self-insurance, so the related charges must meet the self-insurance rules. If the captive sells substantial amounts of insurance to the public and the contractor can show the charge is market-based, the Government may treat it as purchased insurance instead.
Self-insurance has strict limits
Self-insurance costs are allowable only if they comply with CAS 416, FAR Part 28, and the specific limits in this section. If comparable purchased insurance is available, self-insurance plus administration costs above the comparable purchased cost are unallowable, and self-insurance for catastrophic losses is unallowable.
Purchased insurance is also limited
Purchased insurance is allowable only within the limits in this section. For full CAS-covered contracts, the contractor must follow CAS 416, and premiums for fronting arrangements are unallowable to the extent they exceed the cost of direct captive coverage plus reasonable fronting charges.
Actual losses usually are not allowable
Actual losses are unallowable unless the contract expressly provides otherwise. Limited exceptions apply for losses under nominal deductibles in sound business practice and for minor ordinary-course losses such as spoilage, breakage, and disappearance of small hand tools not covered by insurance.
Business insurance must be reasonable
Insurance maintained for the general conduct of business must reflect sound business practice, and rates and premiums must be reasonable. Business interruption and similar insurance cannot include coverage for profit, and property insurance above acquisition cost is allowable only if the contractor has a formal written replacement-value policy.
Government property risk has special conditions
Insurance for loss of Government property is allowable only when the contractor is liable for the loss, the contracting officer has not revoked the Government’s assumption of risk, and the coverage does not protect against loss caused by willful misconduct or lack of good faith by managerial personnel.
Certain coverages are unallowable
Insurance to cover the contractor’s own defects in materials and workmanship is unallowable, though insurance for fortuitous or casualty losses resulting from such defects may be allowable. Retroactive or backdated insurance for known losses is also unallowable, and late premium charges tied to certain ERISA deferred compensation plan insurance are unallowable.
Indemnification is limited by law
The Government is obligated to indemnify a contractor only when authorized by law or expressly stated in the contract. Contractors cannot assume indemnification will be available unless the contract and applicable law clearly provide for it.
Responsibilities
Contractor
Classify insurance correctly as purchased insurance or self-insurance, including captive arrangements; measure, assign, and allocate costs under CAS 416 when applicable; ensure insurance programs comply with FAR Part 28; document reasonableness, business purpose, and any required written policies; exclude unallowable costs such as catastrophic self-insurance, excess fronting premiums, defect-correction coverage, retroactive insurance for known losses, and prohibited late premium charges.
Contracting Officer
Determine whether contract-required or approved insurance is needed, whether the Government has assumed risk for Government property, and whether indemnification is authorized by law or expressly included in the contract; review contract terms that affect insurance allowability and risk allocation.
Auditor or Cost Reviewer
Test whether insurance costs are properly measured, assigned, and allocated; verify that self-insurance and purchased insurance charges comply with FAR 31.205-19, CAS 416, and FAR Part 28; identify unallowable portions of premiums, losses, administration costs, and fronting charges.
Agency
Set and administer contract clauses and risk allocations that affect required insurance, approved insurance programs, Government property risk, and any indemnification commitments; ensure any indemnification is supported by legal authority.
Practical Implications
Contractors often need to split one insurance program into allowable and unallowable pieces; a policy may be partly allowable and partly not, depending on coverage type, limits, and purpose.
Captive insurance is a frequent audit issue because it is usually treated as self-insurance unless the contractor can prove market-based pricing from a captive that sells substantially to the public.
Fronting arrangements can create hidden unallowable costs if the premium exceeds the amount that would have been allowed for direct captive coverage plus reasonable fronting fees.
Property, business interruption, and Government property insurance require close review of policy terms; missing a written replacement-value policy or including profit coverage can make part of the premium unallowable.
Contractors should not assume the Government will indemnify losses or accept retroactive insurance for known events; both are tightly limited and often require explicit contract language and legal authority.
Official Regulatory Text
(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 ( 29 U.S.C. 1307 ) or Section 4023 ( 29 U.S.C. 1323 ) of the Employee Retirement Income Security Act of1974 are unallowable.