Board of Contract Appeals Denies Contractor Claim for Insurance Costs

The Department of Energy (DOE) and Mission Support Alliance LLC (MSA) entered into a contract to provide support services to DOE's environmental cleanup mission. Although the contract did not require MSA to do so, MSA submitted an application to the Department of Homeland Security (DHS) to become a seller of Qualified Anti-Terrorism Technology (QAAT). As a condition for receiving QAAT status, DHS required MSA to have liability insurance coverage of up to $30 million for acts of terrorism.

MSA charged the insurance premiums to its DOE contract. MSA did not seek contracting officer approval for the premiums, as per contractual requirements and by the time DOE became aware of that the premiums had been billed to its cost-reimbursable contract, they had grown to $1.36 million.

The contracting officer concluded that the preiums were unallowable under the contract and demanded that MSA refund the amount paid. The contracting officer's position was threefold: (i) the insurance was not required by contract, (ii) MSA knew the costs were unallowable, and (iii) MSA did not seek approval from the contracting officer to treat them as allowable.

MSA appealed the contracting officer's decision to the Civilian Board of Contract Appeals (CBCA). MSA argued that the DOE contract required adequate insurance against liability. MSA reasoned that a terrorist attack at the DOE site could result in liability for damages. MSA further maintained that the purchase of such insurance was reasonable. Third, even if the contract did not require the insurance, MSA was entitled to exercise reasonable judgment to purchase such insurance. Finally, MSA pointed to the benefits that DOE might derive because of the insurance.

DOE countered noting that the contract did not require MSA to receive QATT status, DOE also noted that in its application for QATT designation, MSA certified, under penalty of perjury, that insurance costs were not allowable under its DOE contract. Finally, MSA did not request or receive contracting officer approval for the insurance costs, as required by contract.

CBCA agreed with DOE. CBCA essentially affirmed DOE's arguments. Concerning the benefits that DOE might derive from the insurance, CBCA ruled that although the government may benefit, the contracting officer never had a chance to evaluate the policy to decide whether the insurance would be worthwile.

Contractors need to know that FAR (or a FAR supplement) are not the only consideration for determining cost allowability. A cost may meet all FAR requirements (i.e allowable, allocable, and reasonable) but they must also meet the explicit terms of the contract to be allowable.

You can read the full text of the decision here.