| In This Article: Learn how professional liability insurance and the government contractor defense work together to protect contractors from legal and financial risks |
Working with the federal government can present a business with a world of great opportunities, but the downside is a host of legal complexities. For executives and risk managers at professional services firms, understanding the relationship between professional liability insurance and government contractor defense is essential.
What Is the Government Contractor Defense?
The government contractor defense is a federal common-law doctrine that may protect contractors from certain civil liability claims arising from the work performed under a government contract. It arose from the Supreme Court’s ruling in Boyle v. United Technologies Corp., 487 U.S. 500 (1988), which established that federal law can preempt state tort claims when particular federal interests are at stake.
To successfully invoke this defense, contractors will be asked to demonstrate that the government approved reasonably precise specifications, that the contractor’s work conformed to these specifications, and that the contractor warned the government of any known dangers not already known to it. It is the third condition that is often underestimated. Courts tend to apply it strictly, and a contractor who fails to disclose known risks could end up losing their protection entirely.
Design and manufacturing disputes tend to see the clearest application of this defense. However, it is not unusual for it to be invoked in professional services contexts, especially when a contractor implements government-directed systems or processes. It is worth noting that outcomes can differ across federal circuits.
Why the Defense Doesn’t Eliminate the Need for Insurance for Government Contractors
The government contractor defense won’t be automatically applied in cases where it is available. Litigation is required to invoke it, which entails incurring its associated legal fees and the uncertainty it entails.
A professional liability policy, also known as errors and omissions (E&O) insurance, can help respond to these claims. A well-structured policy will cover defense costs even when the contractor is expected to prevail. Without this coverage, the business could win its legal argument but still take a serious financial hit.
How GovCon Professional Liability Coverage Actually Works
The government contractor liability protection provided by a professional liability policy addresses the exposures firms encounter when delivering services under a federal contract. This coverage could include claims of negligent acts, errors, or omissions in a range of professional services, such as engineering, program support, management advisory, and IT consulting.
When evaluating these policies, it is important to pay attention to how the defense costs are structured. While some policies will cover legal fees within the policy limit, keep in mind that this could reduce the coverage available for any settlements or judgments. However, some policies will provide defense expenses in addition to the limit. It is a powerful distinction when substantial legal fees are at stake.
Government contracts often include indemnification clauses, and businesses need to review their policy language to determine whether it addresses them. Some exclude them by default, but it may be possible to obtain an endorsement to establish proper coverage.
Keep in mind that standard E&O policies are designed for commercial environments and often have exclusions that could jeopardize firms working under federal contracts.
The Federal Acquisition Regulation (FAR) establishes baseline insurance requirements for certain types of federal contractors (https://www.acquisition.gov/far/part-28), but contracting officers may impose additional requirements in individual contracts. It is essential to understand these obligations before signing the contract.
Practical Steps for Strengthening Your Liability Protection
Insurance coverage for defense costs and legal protections should be approached systematically to maximize their efficacy. Here are some steps that can help businesses get the most out of these protections.
First, businesses must keep thorough documentation of the specification reviews, directions, and government approvals they receive throughout their contract. Without records to support it, the government contractor’s defense will not hold up.
It is helpful to have your professional liability coverage reviewed by a broker experienced with government contractors. Gaps that would not be considered problematic in standard commercial contexts can take on outsized significance during federal contracting disputes. Find out how your policy will respond when the work is carried out under government direction.
Any time your contract changes or grows in scope, be sure to reassess your limits and coverage terms. When performance obligations grow, you will likely see greater exposure; your insurance coverage needs to be updated to reflect these new risks.
Protect Your Business With Business Benefits Group
The relationship between government contractor liability protection and professional liability coverage is complex, and expertise in both insurance and the legal framework is needed to secure optimal protection. At Business Benefits Group (BBG), our consultants work with professional services firms to assess coverage gaps and build insurance policies that meet the demands of federal contracting. Reach out to our team today to learn how our services can support your goals.