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In Part 1 of this series, we introduced the Federal Acquisition Regulation's (FAR) approach to insurance and risk allocation in federal procurement, focusing on FAR Part 28 and the insurance-related clauses in FAR Subpart 52.228. In Part 2, we examined automobile liability provisions, and in Part 3, we addressed liabilities for worker injuries under FAR 52.228-3 and the Defense Base Act.
This final installment turns to a third category of risk that frequently arises in federal contracts: liability to third persons. Unlike worker injury claims — which are addressed through statutory compensation systems — or certain categories of property loss that may be allocated to the government, claims brought by third parties are typically grounded in tort law. FAR 52.228-7 addresses adjustment of those claims in the context of certain federal contracts, including the allocation of responsibility and insurance support for that allocation.
FAR 52.228-7: Liability to Third Persons in Cost-Reimbursement Contracts
FAR 52.228-7 applies primarily in cost-reimbursement contracts, where the government pays the contractor for the allowable costs incurred in performing the work. In that context, the clause establishes both insurance requirements and a framework for addressing third-party claims arising from contract performance.
When included, the clause generally requires the contractor to maintain specified types of insurance — commonly including workers' compensation, employer's liability, automobile liability, and commercial general liability — or additional insurance as the contracting officer may require. These requirements ensure that third-party claims are addressed first through the contractor's insurance program.
At the same time, FAR 52.228-7 recognizes that insurance may not always fully respond to a given loss. In defined circumstances, the clause permits the government to reimburse the contractor for certain costs associated with third-party claims. This may include the reasonable cost of required or approved insurance, as well as amounts the contractor pays to satisfy liability arising from a final judgment or a government-approved settlement.
That reimbursement framework, however, is not unlimited. The clause does not shift primary responsibility for third-party liability to the government. Rather, it operates as a backstop, addressing residual exposure in situations where insurance is insufficient or unavailable and where the costs are otherwise allowable under the contract.
Risk Allocation and the Role of Insurance Under FAR 52.228-7
FAR 52.228-7 reflects a different approach to risk allocation than the clauses discussed in earlier posts. Instead of assigning responsibility exclusively to one party, the clause establishes a layered framework.
At the first level, the contractor remains responsible for third-party claims arising out of its operations, and those claims are expected to be addressed through the contractor's insurance. This aligns with the general principle that contractors bear responsibility for the risks associated with performing the work.
At the second level, the clause recognizes that not all losses will be fully covered by insurance. Where a claim exceeds available coverage, falls within a gap in coverage, or otherwise remains unpaid, the government may — subject to the terms of the clause and the contract — reimburse certain costs. This approach reflects the nature of cost-reimbursement contracting, where the government ultimately bears many of the costs associated with performance, but only within defined limits and subject to oversight.
Importantly, the clause specifically limits this reimbursement authority. For example, it does not extend to losses involving property owned, occupied, or controlled by the contractor. These limitations reinforce that the clause is not intended to serve as a broad indemnity in favor of the contractor, but rather as a structured mechanism for addressing particular categories of residual risk.
The clause also establishes procedural requirements designed to protect the government's interests. Where a claim arises that may not be fully covered by insurance, the contractor is generally required to provide notice and cooperate with the government. In certain circumstances, the government may elect to participate in — or assume control over — the defense or settlement of the claim. These provisions ensure that the government retains visibility into, and control over, potential liabilities for which it may ultimately bear financial responsibility.
Aligning FAR 52.228-7 with Insurance Coverage
Because FAR 52.228-7 relies heavily on the contractor's insurance program as the first line of response, alignment between the contract and the insurance policies is critical.
In practice, this means ensuring that the contractor's commercial general liability (CGL) and related policies respond to the types of third-party claims contemplated by the contract. For example, where the contract requires the contractor to assume certain liability obligations, the CGL policy should include standard provisions — such as coverage for liability assumed in an "insured contract" — so that those obligations are not left uninsured.
Attention should also be given to how policies address defense costs. FAR 52.228-7 allows for reimbursement of certain losses in defined circumstances, but it does not guarantee reimbursement of all costs associated with a claim. Whether defense costs are within limits, how deductibles or self-insured retentions apply, and how excess or umbrella coverage responds can materially affect the contractor's exposure. These issues are particularly important in large-loss scenarios with significant defense costs.
The clause also contemplates the possibility of self-insurance, subject to the contracting officer's approval and applicable legal requirements. Contractors that self-insure should carefully evaluate their self-insurance's interaction with the clause's reimbursement framework and the potential for uninsured exposure.
As with the other FAR provisions discussed in this series, early review is key. Evaluating insurance requirements and policy terms at the solicitation stage helps ensure that coverage aligns with contractual obligations and that potential gaps are identified and addressed before performance begins.
Concluding Thoughts
Liability to third persons represents a significant and often unpredictable category of risk in federal contracting. FAR 52.228-7 addresses that risk through a structured approach that combines contractor responsibility, insurance requirements, and limited government reimbursement in defined circumstances.
Across this series, a consistent theme has emerged: The FAR does not treat insurance as an afterthought. Instead, it uses insurance as a central tool for allocating risk, defining responsibility, and addressing losses in a predictable and orderly manner. For contractors, understanding the operation of these provisions — and their interaction with real-world insurance coverage — is essential to managing risk and avoiding unintended exposure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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