Government Contractor Risk Management

GOVERNMENT CONTRACTOR RISK MANAGEMENT

Risk Management is a broad term that can be used to describe any number of methods of avoiding financial and/or physical loss. Some of the different types of Risk Management include: Avoidance, Retention, Risk Transfer, and Insurance. In developing and executing a Risk Management plan, most Government Contractors (GCs) will employ several of these methods at one time or another. Each method presents its own set of issues which should be carefully reviewed and understood.

Perhaps more than any other method outlined above, the Insurance Risk Management method is commonly, and frequently, the most misunderstood. Many companies feel they have adequate protection in place when they do not (there are coverage gaps in their policies); others are unaware of the exclusions contained in some of their existing policies; and many companies are simply paying too much for the insurance they are already purchasing.

HOW ARE GOVERNMENT CONTRACTORS DIFFERENT?
(to an insurance underwriter)

Insurance underwriters are concerned with the following:
Perils – causes of loss (example: fire);
Hazards – conditions that increase perils (example: frayed wiring);
Exposures – being exposed to certain perils (example: an office located next to a foundry would have a higher than normal exposure to the peril of fire); and,
Policy Language – both what is covered and what is excluded
Premium - what is the expected loss ratio for a given class and what is the required premium to offset the anticipated losses?

There are several unique aspects of the world of Government Contracting that justify treating Government Contractors somewhat differently from similar companies whose clients are commercial entities. Performing an identical task, with the same employees and tools of performance (computers, forklifts, etc.), for a Government customer creates a different exposure to risk than if the customer is a commercial entity (banks, hospitals, small businesses, etc.). From the perspective of the insurance and risk management professional, the underwriting, loss control, and claims procedures and philosophies that work with insureds that have commercial customers must sometimes be modified if the customer of an insured is a U.S. Federal Government agency. Unfortunately, many Government Contractors appear to do work that can frighten off an insurance underwriter. (A perception of too many exposures to loss.)

Why is there a material difference in the exposures of Government Contractors? Some of the reasons include:
· The terms and conditions of federal contracts vary from that of commercial contracts, and the contractor may have little, if any, control over that language. Best practices for contract risk management are different in the Government world and, thankfully, better in many instances.
· The law behind federal contracts and the history of litigation over those contracts creates a different legal environment for GCs, as compared to a contractor in a dispute with a commercial customer.
· The ways in which federal programs are funded, and contractors are paid for their performance, can vary from the world of commercial work.
· The federal Government is immune from suits by private parties in a wide variety of circumstances, and contractors performing the work of the federal Government can enjoy that immunity as well (the Government Contractor Defense or “GCD”). The GCD is especially important to understand when underwriting contractors to Federal agencies such as the Dept. of Defense, the Dept. of Homeland Security, intelligence agencies, or NASA.
· Some of the work performed by GCs is rarely, if ever, analogous to commercial work – e.g. designing weapons systems or performing work for intelligence agencies – and can be regarded, at first, as high hazard from an underwriting perspective.
· The competitive environment for GCs can be markedly different than contractors with commercial customers. For example, a GC may compete with another GC to be the prime on a contract, lose the competition, and then be a sub to the winning prime. Government contract awards can be protested by losing bidders in a manner unique from the commercial world.
· The methodologies used by the federal Government to pay GCs, and the standards for record keeping and accounting, can vary from the commercial world.

For all of these reasons, Government Contractors are often assigned a ‘high risk profile’ with resultant higher insurance costs because the nature of their business is misunderstood by most insurance brokers and insurance underwriters. In reality, in many instances, the most typical insurance claims and losses are less likely to occur with Government Contractors than with commercial-based companies. Hence, there is a basis for a lower risk profile, meaning better terms and lower costs.

Timothy J. Hutton, AFSB, CPCU
(703) 220 - 7771
timothyjhutton@gmail.com
tim.hutton@usi.biz