Overview
FAR 28.308 prescribes the requirements and procedures for Government approval of a contractor’s self-insurance program. It ensures that contractors opting to self-insure are financially stable, maintain adequate reserves, and that the program is in the best interest of the Government.
Key Rules
- Approval Thresholds: Written approval from the Administrative Contracting Officer (ACO) is required if a segment’s self-insurance costs are expected to be $200,000 or more and 50% or more of those costs are allocable to negotiated Government contracts.
- Submission Requirements: Contractors must provide 10 specific categories of documentation, including program descriptions, board resolutions, financial statements, loss histories, and formulas for establishing reserves.
- Qualifications for Approval: To qualify, a contractor must demonstrate the financial ability to sustain potential losses, considering factors such as financial soundness, geographic dispersion of assets, and previous loss history.
- Workers' Compensation: Self-insurance for workers' compensation is only permitted if it completely covers employer liability or if the combined cost of self-insurance and commercial liability insurance is lower than full commercial coverage.
- Prohibitions:
- Catastrophic Risks: Self-insurance cannot be approved for unusually hazardous or nuclear risks (indemnification or purchased insurance are the alternatives).
- Workmanship/Defects: Self-insurance for the cost of correcting a contractor's own defects in materials or workmanship is prohibited (though normal rework and warranty costs are excluded from this definition).
- Maintenance of Approval: Major changes to an approved program require ACO consent; approval may be withdrawn if the program fails to comply with FAR 31.205-19 or if the contractor's financial situation changes significantly.
Practical Implications
- Contractors must maintain rigorous actuarial data and financial records to justify self-insurance to the ACO and ensure the costs remain allowable under FAR Part 31.
- While self-insurance can offer cost savings on premiums, the administrative burden of initial approval and ongoing compliance reporting is significant, particularly for large-scale, multi-segment contractors.