Wednesday, August 8, 2012

Insurance for Government-Owned Property

DCAA recently clarified its guidance for assessing the cost of insurance for Government-owned property. According to FAR 31.205-19(e)(2)(iv), the costs of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only to the extent that:

  1. the contractor is liable for such loss, damage, destruction or theft;
  2. the contracting officer has not revoked the Government's assumption of risk (the contracting officer may revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements - see FAR 45.104(b)); and
  3. such insurance does not cover loss, damage or destruction which results from willful misconduct or lack of good faith on the part of any of the contractor's management personnel.
The clarified guidance now reads: "Where the risk of loss is not the responsibility of the contractor, or the contracting officer has revoked the Government's assumption of risk, or the insurance covers loss, damage or destruction resulting from willful misconduct, etc., the cost of purchased insurance coverage or self-insurance (including the contractor's deductible) should be questioned."

This guidance seems very straight forward, however implicit in the guidance, is the expectation that the auditor will review Government-property records, insurance documents, and other relevant supporting data in order to make such a determination. Contractor's that have insured Government-owned property and have claimed (or plan to claim) the cost of the insurance premiums, should be prepared to demonstrate to the auditor that i) it is responsible for any losses to Government-owned property, and ii) the premiums do not cover loss, damage, or destruction resulting from willful misconduct or lack of good faith. This could be tricky.

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