We've been working our way through various types of insurances to see what FAR (Federal Acquisition Regulations) has to say about the allowability of their costs and also to highlight, where we can, the audit procedures that contract auditors might employ to assess the reasonableness and propriety of such costs.
We began early this year with War Hazard Insurance, a type of insurance coverage that most Government contractors don't need (see War Hazard Premium Payments). We wrote a couple of posts on "self-insurance" because this is an area with potential 'cost' issues (see FAR Provisions Covering Self-Insurance and Self-Insurance Plans - What Contract Auditors Will Look For). Next, we asked the question of whether it is necessary to insure Government property in contractors' possession (see Should You Insure Government Property in Your Possession). And last week we discussed the need for product liability insurance (see Insurance - Product Liability Insurance). Today we will look at Professional Liability insurance.
The cost or professional liability insurance is allowable, subject, of course, to tests of reasonableness and allocability. The allocability test is where some contractors run afoul of Government oversight.
If a professional liability insurance policy provides coverage for its general practice, allocation of premiums to all contracts through overhead or G&A (general and administrative) expense is usually acceptable. However, if the policy is written to provide unique liability coverage for a particular business segment or product, costs should be directly allocated to the benefiting cost objective.
Consider Boeing. Boeing builds airplanes for commercial customers and for the Government. It is safe to assume that the company's its potential liabilities for commercial customers is much greater than that for its Government customers. One only needs to consider the on-going 737-Max saga to realize that is true.
Where a plain reading of the policy does not clearly establish the general nature of the coverage or the contract auditor has reason to believe that unique liability coverage is involved, the Government will examine the types of services being rendered to both the Government and commercial customers. If the services are essentially similar, a broad-based allocation is acceptable. On the other hand, where the services are dissimilar, examination should be made of the claims and loss experience.
In determining premiums for a contractor, the insurance carrier usually considers such factors as location of the business, size of the firm, professional discipline being practices, and loss experience. The proper allocation of premium costs should be determined primarily by the terms of the coverage. If the coverage between commercial and Government is similar, a broad based allocation method is probably appropriate.