Costs of such insurance is generally allowable. However, the Government believes that risks are often lower for military products than they are for commercial products.
With that in mind, contract auditors like DCAA (Defense Contract Audit Agency) will look into the possibility that whatever method a contractor is using to allocate product liability insurance costs may be inequitable to the Government.
A common base for allocating such premiums is sales but sales may not achieve an equitable result or allocation of costs to Government contracts.
Auditors are instructed to ascertain that contractors have "conscientiously" attempted to negotiate with its insurance carriers separate military (or Government) product rates commensurate with the loss experience of such products. If that hasn't occurred, auditors are to obtain the view of the contracting officer and proceed accordingly. Also, auditors are instructed to ensure that there is no absorption by Government contracts of premiums solely applicable to a contractor's commercial products.
Auditors will analyze Government and commercial loss experience for a representative period. Any allocation that exceeds loss experience may be unreasonable and therefore questionable. At this point, the auditor might delve in further by
- requesting detailed explanations from the insurance carriers on the basis of the premium split between commercial and Government and a breakdown of risk exposure. Note here, the audit will go directly to the insurance carrier and not necessarily rely on the contractor to provide the information.
- if possible, compare premiums and allocation bases with comparable companies.
- if possible, obtain independent quotes from insurance carriers on Government exposure only.
We've never seen the last two bullets followed. In the first case, finding comparable companies is not possible. There are always vagaries in the risk assessment that are unique to specific companies. In the later case, preparing a quote requires extensive fact finding and analysis. No insurance company is going to do this work without the possibility of writing a policy.