Insurance Requirements in Government Contracts

Government contracts routinely require contractors to carry insurance at levels set by the contracting officer, with the government named as an additional insured in many cases. Failing to maintain required insurance can result in contract termination, and gaps in coverage can leave contractors financially exposed for third-party claims.

What are Insurance Requirements in Government Contracts?

FAR 28.307 and FAR 52.228-5 establish the framework for insurance requirements on government contracts. Contracting officers may require any commercially available insurance type relevant to the contract's risk profile. Commonly required coverages include:

• Workers' Compensation: Mandatory in most states. FAR requires contractors to carry workers' compensation for employees working on the contract at the statutory limit required by state law, or the equivalent if working in jurisdictions without workers' compensation requirements.
• Commercial General Liability (CGL): Covers bodily injury and property damage to third parties arising from contract operations. Minimum limits typically range from $500,000 to $5 million per occurrence depending on the contract type and work location.
• Automobile Liability: Required when contractors use vehicles in contract performance. Minimum limits are typically $200,000 per person/$500,000 per occurrence for bodily injury and $20,000 per occurrence for property damage.
• Professional Liability (E&O): Required for professional services contracts (engineering, IT, consulting). Covers claims arising from errors or omissions in professional work.
• Cyber Liability: Increasingly required for IT services and data handling contracts. Covers breach response costs, regulatory penalties, and third-party claims related to data security failures.

Contracts performed on government facilities may also require the contractor to provide evidence of insurance before receiving access badging. Contracting officers set minimum limits using FAR 28.307-2 as a floor, but may require higher limits based on contract risk.

Why insurance requirements matter for government contractors

Insurance certificates are required before award on many contracts, and failure to provide evidence of adequate coverage can delay or block award. Contractors whose policies lapse during performance violate a contract condition that can result in cure notices or termination. Insurance costs are allowable contract costs under FAR 31.205-19, meaning properly structured insurance premiums can be billed to cost-type contracts.

Example

A professional services firm wins a systems engineering advisory contract for a DoD program worth $15M. The solicitation's insurance clause requires $2M per occurrence of CGL, $1M per claim of professional liability, and workers' compensation at statutory limits. The firm's current CGL policy has only a $1M per occurrence limit. Before award, the firm must purchase an umbrella policy to reach the required $2M, adding approximately $12,000 annually in premium cost. The firm includes this cost in its proposal cost buildup for the base year.

Frequently Asked Questions

Can insurance costs be recovered from the government?

Yes. On cost-type contracts, insurance premiums are allowable and allocable costs under FAR 31.205-19, provided the insurance is required by the contract or is a type ordinarily carried by businesses in the contractor's industry. Fixed-price contractors factor insurance costs into their firm fixed price.

Does the government ever self-insure on behalf of contractors?

In some cases, particularly for work performed entirely on government facilities, the government's own insurance or sovereign immunity may cover certain risks. Contracting officers may reduce commercial insurance requirements for work performed solely on government property.

What is the difference between naming the government as an additional insured vs. certificate holder?

An additional insured has the right to be defended and indemnified by the contractor's policy. A certificate holder merely receives notification of policy changes and cancellations. Solicitations that require the government to be named as an additional insured provide the government with much stronger protection.

How does a contractor handle insurance for overseas contract performance?

Overseas performance creates unique insurance complexity. U.S. workers' compensation laws may not apply, and local regulations may require different coverage. Defense Base Act (DBA) insurance is required for contractor employees working outside the United States on certain government contracts, covering workers' compensation equivalent benefits for overseas workers.