(a) When it is anticipated that 50 percent or more of the self-insurance costs to be incurred at a segment of a contractor’s business will be allocable to negotiated Government contracts, and the self-insurance costs at the segment for the contractor’s fiscal year are expected to be $200,000 or more, the contractor shall submit, in writing, information on its proposed self-insurance program to the administrative contracting officer and obtain that official’s approval of the program. The submission shall be by segment or segments of the contractor’s business to which the program applies and shall include-
(1) A complete description of the program, including any resolution of the board of directors authorizing and adopting coverage, including types of risks, limits of coverage, assignments of safety and loss control, and legal service responsibilities;
(2) If available, the corporate insurance manual and organization chart detailing fiscal responsibilities for insurance;
(3) The terms regarding insurance coverage for any Government property;
(4) The contractor’s latest financial statements;
(5) Any self-insurance feasibility studies or insurance market surveys reporting comparative alternatives;
(6) Loss history, premiums history, and industry ratios;
(7) A formula for establishing reserves, including percentage variations between losses paid and losses reserved;
(8) Claims administration policy, practices, and procedures;
(9) The method of calculating the projected average loss; and
(10) A disclosure of all captive insurance company and reinsurance agreements, including methods of computing cost.
(b) Programs of self-insurance covering a contractor’s insurable risks, including the deductible portion of purchased insurance, may be approved when examination of a program indicates that its application is in the Government’s interest. Agencies shall not approve a program of self-insurance for workers’ compensation in a jurisdiction where workers’ compensation does not completely cover the employer’s liability to employees, unless the contractor-
(1) Maintains an approved program of self-insurance for any employer’s liability not so covered; or
(2) Shows that the combined cost to the Government of self-insurance for workers’ compensation and commercial insurance for employer’s liability will not exceed the cost of covering both kinds of risk by commercial insurance.
(c) Once the administrative contracting officer has approved a program, the contractor must submit to that official for approval any major proposed changes to the program. Any program approval may be withdrawn if a contracting officer finds that either-
(1) Any part of a program does not comply with the requirements of this subpart and/or the criteria at 31.205-19; or
(2) Conditions or situations existing at the time of approval that were a basis for original approval of the program have changed to the extent that a program change is necessary.
(d) To qualify for a self-insurance program, a contractor must demonstrate ability to sustain the potential losses involved. In making the determination, the contracting officer shall consider the following factors:
(1) The soundness of the contractor’s financial condition, including available lines of credit.
(2) The geographic dispersion of assets, so that the potential of a single loss depleting all the assets is unlikely.
(3) The history of previous losses, including frequency of occurrence and the financial impact of each loss.
(4) The type and magnitude of risk, such as minor coverage for the deductible portion of purchased insurance or major coverage for hazardous risks.
(5) The contractor’s compliance with Federal and State laws and regulations.
(e) Agencies shall not approve a program of self-insurance for catastrophic risks (e.g., see 50.104-3, Special procedures for unusually hazardous or nuclear risks). Should performance of Government contracts create the risk of catastrophic losses, the Government may, to the extent authorized by law, agree to indemnify the contractor or recognize an appropriate share of premiums for purchased insurance, or both.
(f) Self-insurance programs to protect a contractor against the costs of correcting its own defects in materials or workmanship shall not be approved. For these purposes, normal rework estimates and warranty costs will not be considered self-insurance.