What Do You Do With Your GFE?Government Property In Your Care

November 2012 • Lockton® Companies

L O C K T O N C O M P A N I E S

MICHAL GNATEKVice President

Aerospace and Defense Sector202.414.2662 (D)202.841.8666 (M)

mgnatek@lockton.com

The question often arises with Government Contractors as to whether government property or government furnished equipment (GFE) should be declared as property in the “care, custody or control” of the insured. When faced with this question, our answer is usually an unequivocal “it depends.”

The world of the U.S. Federal Government Contractor revolves around the Federal Acquisition Regulations (FAR) and Defense Federal Acquisition Regulations Supplement (DFARS). While the FAR and DFARS provide contract certainty that lacks in the commercial business world, there are many variations on the clauses used, even within the same agency. Standard clauses are typically used, but depending on the specifics of the statement of work (SOW) or the overarching customer objective, alternate clauses may be inserted at the discretion of the contracting officer.

While property insurers will typically make a case that all property in a client’s care, custody or control, including “big ticket” items such as ships, aircraft or vehicles, should be reported in the event a loss occurs where the real or personal property is damaged or destroyed, we often caution our clients to consult with the various contracting officers or internal customer liaisons to determine which FAR section has been inserted for purposes of the work being performed and the property being provided.

We often caution our clients

to consult with the various

contracting officers or

internal customer liaisons

to determine which FAR

section has been inserted for

purposes of the work being

performed and the property

being provided.

2

Before declaring replacement cost values to property underwriters, clients should determine whether FAR 52.245-1 in its original form is being referenced for purposes of the contract. If this is the case, we would make the argument that the intent of the U.S. Federal Government is to self-insure real and personal property furnished to the contractor. Therefore, there is no need to cover GFE under a contractor’s property damage and business interruption program. An exception to the clause would be if the contractor insured the GFE under a risk transfer program in which the proceeds would either benefit the policy holder (contractor) or a loss payee (U.S. Federal Government).

It would make sense that if the government is paying for the insurance on its property as an allowable cost, then the appropriate contracting agency should be reimbursed for loss or damage to that property. Otherwise, we would hold that absent the insurance, the government will be responsible for replacing or fixing damaged property.

Insureds would need to be cautioned that there is a good likelihood that despite best intentions, in the event of a loss involving GFE, a Property carrier may consider Government property in the overall loss adjustment. Therefore, we would suggest that a company’s broker should negotiate with underwriters up front as to how GFE will be covered in the event of a claim. In other words, a potential solution would be to manuscript wording that would exclude GFE from loss payment unless contractually obligated to do so under the FAR or DFARS.

As with most rules, there is an exception. At the contracting officer’s discretion, an alternate clause can be included that would shift the assumption of risk from GFE to the contractor, with the exception of normal wear and tear.

Another area of consideration for US Federal Government Contractors would be work in process or property/equipment that will eventually be owned by the US Government, but not yet delivered or accepted by the customer. Contractors should have a firm grasp of how work in process is to be treated in the event of a loss prior to final acceptance. There are certain incidences when the Government will claim equitable title to property that is not yet delivered. Depending on the contractual terms, a company may be at risk of loss until final delivery or until which time the Government claims title or ownership prior to that delivery.

Therefore, we would recommend that U.S. Federal Government contractors consult with their respective contracting officers to determine which FAR clause applies. If the basic clause is being used — as is the case for most contracts — we would argue that adding GFE to an insurance policy creates the assumption of risk that would not exist if the property values were to not be reported.

52.245-1 Government Property – Full Text with Alternate (2007)

(h) Contractor Liability for Government Property.

(1) Unless otherwise provided for in the contract, the Contractor shall not be liable for loss, damage, destruction, or theft to the Government property furnished or acquired under this contract, except when any one of the following applies—

(i) The risk is covered by insurance or the Contractor is otherwise reimbursed (to the extent of such insurance or reimbursement). The allowability of insurance costs shall be determined in accordance with 31.205-19.

(ii) The loss, damage, destruction, or theft is the result

The intent of the U.S. Federal Government is to self-insure real

and personal property furnished to the contractor.

November 2012 • Lockton Companies

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of willful misconduct or lack of good faith on the part of the Contractor’s managerial personnel. Contractor’s managerial personnel, in this clause, means the Contractor’s directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of all or substantially all of the Contractor’s business; all or substantially all of the Contractor’s operation at any one plant or separate location; or a separate and complete major industrial operation.(iii) The Contracting Officer has, in writing, revoked the Government’s assumption of risk for loss, damage, destruction, or theft, due to a determination under paragraph (g) of this clause that the Contractor’s property management practices are inadequate, and/or present an undue risk to the Government, and the Contractor failed to take timely corrective action. If the Contractor can establish by clear and convincing evidence that the loss, damage, destruction, or theft of Government property occurred while the Contractor had adequate property management practices or the loss, damage, destruction, or theft of Government property did not result from the Contractor’s failure to maintain adequate property management practices, the Contractor shall not be held liable.

(2) The Contractor shall take all reasonable actions necessary to protect the Government property from further

loss, damage, destruction, or theft. The Contractor shall separate the damaged and undamaged Government property, place all the affected Government property in the best possible order, and take such other action as the Property Administrator directs.

(3) The Contractor shall do nothing to prejudice the Government’s rights to recover against third parties for any loss, damage, destruction, or theft of Government property.

(4) Upon the request of the Contracting Officer, the Contractor shall, at the Government’s expense, furnish to the Government all reasonable assistance and cooperation, including the prosecution of suit and the execution of instruments of assignment in favor of the Government in obtaining recovery.

Alternate I (June 2007). As prescribed in 45.107(a)(2), substitute the following for paragraph (h)(1) of the basic clause:

(h)(1) The Contractor assumes the risk of, and shall be responsible for, any loss, damage, destruction, or theft of Government property upon its delivery to the Contractor as Government-furnished property. However, the Contractor is not responsible for reasonable wear and tear to Government property or for Government property properly consumed in performing this contract.

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