B-168106, JUL 3, 1974

B-168106, JUL 3, 1974

GAO CANNOT CONCUR IN ADMINISTRATIVE PROPOSAL, MOTIVATED BY POTENTIAL FINANCIAL SAVINGS, THAT GOVERNMENT ASSUME COMPLETE RISK OF LOSS FOR COMPANY-OWNED PROPERTY USED ALMOST EXCLUSIVELY FOR BUSINESS UNDER GOVERNMENT CONTRACTS, SINCE REIMBURSEMENT FOR LOSS OCCURRING DURING NON GOVERNMENTAL ACTIVITIES WOULD NOT APPEAR TO BE EXPENSE NECESSARY TO ACCOMPLISH COMPANY'S GOVERNMENT CONTRACTS OR, CONSEQUENTLY, EXPENSE PROPERLY CHARGEABLE TO APPROPRIATIONS SUPPORTING COMPANY'S GOVERNMENT CONTRACTS; FURTHER, GAO IS NOT GIVEN ADVICE AS TO SPECIFIC APPROPRIATIONS THAT ARE CONTEMPLATED FOR PAYMENT OF SUCH LOSS.

TO DEPT. OF THE NAVY

THE DEPARTMENT OF THE NAVY REQUESTS THE CONCURRENCE OF OUR OFFICE IN ITS OPINION THAT THERE IS NO LEGAL OBJECTION TO ITS ASSUMPTION OF THE RISKS OF LOSS FOR CERTAIN CONTRACTOR-OWNED REAL AND PERSONAL PROPERTY AT FACILITIES WHERE PRACTICALLY ALL WORK IS DONE FOR THE GOVERNMENT.

THE DEPARTMENT REPORTS THAT THE BASIC IMPETUS FOR THUS "SELF INSURANCE" APPROACH IS THAT HISTORICAL DATA AND SOUND BUSINESS JUDGMENT INDICATES THAT, IN THESE INSTANCES, IT PAYS MUCH MORE IN REIMBUSEMENTS FOR INSURANCE PREMIUMS THROUGH OVERHEAD ADJUSTMENT UNDER COST-TYPE CONTRACTS THAN IT WOULD PAY IN ORDER TO COVER THE LOSSES ACTUALLY EXPERIENCED UNDER THE INSURANCE POLICIES.

TO HIGHLIGHT THE BENEFITS OF THIS APPROACH, THE DEPARTMENT RELATES ITS EXPERIENCE WITH THE ELECTRIC BOAT DIVISION OF GENERAL DYNAMICS CORPORATION. OVER THE PAST 5 YEARS THE ELECTRIC BOAT DIVISION HAS RECEIVED PAYMENT OF $212,000 FOR INSURANCE PREMIUMS TO COVER PROPERTY RISKS IN CONNECTION WITH CORPORATION-OWNED REAL AND PERSONAL PROPERTY AT THE FACILITY. APPROXIMATELY 99 PERCENT OF ELECTRIC BOAT'S SALES ARE WITH THE GOVERNMENT, SO THAT THE GOVERNMENT IS ESSENTIALLY PAYING THE ENTIRE PROPERTY INSURANCE BILL. THE NAVY FURTHER REPORTS THAT:

"*** DURING THIS PERIOD, ELECTRIC BOAT HAS NOT EXPERIENCED A SINGLE RECOVERY UNDER ITS INSURANCE POLICIES. TO THE EXTENT THAT DAMAGE DID OCCUR, IT WAS BELOW THE $100,000 DEDUCTIBLE PROVISION OF THE INSURANCE POLICIES. THE GOVERNMENT, THEREFORE, PAID FOR THESE LOSSES THROUGH OVERHEAD REIMBUSEMENTS. AS IS CLEARLY EVIDENT, UNDER THESE CIRCUMSTANCES, THE NAVY WOULD HAVE BEEN MUCH BETTER OFF HAD IT NOT REQUIRED THE CONTRACTOR TO INSURE, BUT INSTEAD, ASSUMED THE RISK OF LOSS FOR ELECTRIC BOAT'S REAL AND PERSONAL PROPERTY.

"IN LIGHT OF THE EXPERIENCE WITH ELECTRIC BOAT, IT APPEARS TO BE WITHIN THE BEST INTEREST OF THE GOVERNMENT FOR THE NAVY TO DISCONTINUE REQUIRING ELECTRIC BOAT TO INSURE AGAINST LOSS OF CERTAIN CONTRACTOR OWNED PROPERTY AND INSTEAD, TO ASSUME THE RISKS PRESENTLY COVERED BY THE CONTRACTOR'S INSURANCE POLICIES. ***

"ADMITTEDLY IN MANY INSTANCES IT IS NOT PRACTICAL FOR THE GOVERNMENT TO ASSUME THE RISK OF LOSS FOR CONTRACTOR-OWNED PROPERTY. ***

"*** IT IS IMPRACTICAL AND PERHAPS IMPOSSIBLE TO OBTAIN AN INSURANCE POLICY WHICH WILL ONLY COVER THE PLANT AND EMPLOYEES ONLY WHEN THEIR EFFORTS ARE RELATED TO COMMERCIAL BUSINESS. THIS WOULD NOT BE THE CASE, HOWEVER, IN SITUATIONS SUCH AS WITH ELECTRIC BOAT, WHEN THE CONTRACTOR- OWNED PROPERTY IS USED ALMOST 100% IN CONNECTION WITH GOVERNMENT WORK. THIS INSTANCE, ONLY THE GOVERNMENT IS PAYING FOR THE INSURANCE PREMIUM AND THERE IS NO NEED TO DIFFERENTIATE BETWEEN GOVERNMENT AND COMMERCIAL ACTIVITIES."

IT IS THE ESTABLISHED POLICY OF THE GOVERNMENT TO BE A SELF-INSURER ON ITS OWN RISKS OF LOSS ON THE THEORY THAT THE SIZE OF THE GOVERNMENT'S RESOURCES PERMITS IT TO DO SO--THUS EFFECTING A SAVING OF THOSE ITEMS OF COST AND PROFIT THAT WOULD NORMALLY BE INCLUDED IN THE PREMIUMS CHARGED BY PRIVATE INSURERS. SEE B-175086, MAY 16, 1972. EXCEPTIONS HAVE BEEN MADE TO THIS POLICY WHERE THE ECONOMY SOUGHT BY SELF-INSURANCE IS DEFEATED, WHERE SOUND BUSINESS PRACTICE INDICATES THAT A SAVINGS CAN BE HAD BY PURCHASING INSURANCE, OR WHERE SERVICES OR BENEFITS NOT OTHERWISE AVAILABLE CAN BE OBTAINED BY PURCHASING INSURANCE. B-151876, APRIL 24, 1964.

FOLLOWING THE POLICY, WE HAVE INDICATED THAT WHERE THE GOVERNMENT HOLDS LEGAL TITLE TO PROPERTY, APPROPRIATED FUNDS ARE NOT GENERALLY AVAILABLE FOR PAYMENT OF INSURANCE ON THE GOVERNMENT'S RISK OF LOSS TO THE PROPERTY IN THE ABSENCE OF SPECIFIC STATUTORY AUTHORITY FOR PAYMENT OF SUCH PREMIUMS. SEE 39 COMP. GEN. 145 (1959); 21 COMP. GEN. 928 (1942). AND WE HAVE ALSO INDICATED THAT WHERE THE GOVERNMENT HOLDS EQUITABLE TITLE TO PROPERTY PURSUANT TO A LEASE-PURCHASE ARRANGEMENT, APPROPRIATED FUNDS ARE NOT AVAILABLE TO INSURE THE GOVERNMENT'S INTEREST IN THE PROPERTY SO LONG AS THE GOVERNMENT HAS RESPONSIBILITY FOR THE CONDITION, MAINTENACE, AND MANAGEMENT OF THE PROPERTY. SEE 35 COMP. GEN. 391 (1956); 35 COMP. GEN. 393 (1956).

WE HAVE ALSO RECOGNIZED THAT THE GOVERNMENT MIGHT BE AN INSURER FOR RISKS OF LOSS THAT ORDINARILY WOULD NOT BE CONSIDERED RISKS OF THE GOVERNMENT BECAUSE THE GOVERNMENT DID NOT HAVE LEGAL OR EQUITABLE TITLE TO THE PROPERTY IN QUESTION. THUS WE HAVE HELD THAT THE GOVERNMENT MIGHT INSURE: THE RISK OF LOSS FOR THE FIRST $100 OF PROPERTY DAMAGE TO RENTED AUTOMOBILES WHERE THE RENTAL AGENCIES IMPOSED SUCH RISK ON GOVERNMENT EMPLOYEES WHO RENTED THE AUTOMOBILES DURING THE PERFORMANCE OF OFFICIAL BUSINESS (B-162186, JANUARY 7, 1970); THE RISK OF LOSS FOR DAMAGE, EXCLUSIVE OF NORMAL WEAR AND TEAR, TO AIRCRAFT RENTED FOR GOVERNMENT USE (42 COMP. GEN. 708 (1963); AND THE RISK OF LOSS FOR DAMAGE, EXCLUSIVE OF NORMAL WEAR AND TEAR, TO BUSES RENTED FOR GOVERNMENT USE. 48 COMP. GEN. 361 (1968).

IN THESE CASES, WE STRESSED THAT ANY EXPENSE OF REIMBURSEMENT FOR DAMAGE TO THE ITEMS IN QUESTION SEEMED TO BE PROPERLY CHARGEABLE TO THE APPROPRIATION OTHERWISE SUPPORTING THE CONTRACT UNDER WHICH THE ITEMS WERE AT THE OUTSET, AND HENCE WAS NOT ON INDETERMINATE LIABILITY OF THE TYPE PROHIBITED IN 16 COMP. GEN. 803 (1937); THAT UNLESS CIRCUMSTANCES WERE SUCH AS TO INDICATE SOME LIKELIHOOD OF PAYMENT BEING REQUIRED, THE BARE POSSIBILITY OF PAYMENT BEING REQUIRED UNDER THE ASSUMPTION OF LOSS PROVISION WAS NOT SUFFICIENT TO REQUIRE ESTABLISHING A RESERVE THEREFORE; AND THAT, WITH THE EXCEPTION OF THE SITUATION IN 42 COMP. GEN., SUPRA, WHEN WE OBSERVED THAT THE GOVERNMENT AS BAILEE MIGHT PROPERLY ASSUME THE RISK OF LOSS INVOLVED THERE UNDER TRADITIONAL CONCEPTS OF BAILMENTS, THE ASSUMPTION OF LIABILITY WAS IMPOSED ON THE GOVERNMENT AS A CONDITION OF DOING BUSINESS WITH THE CONTRACTOR.

AS WE UNDERSTAND THE PROPOSAL, THE DEPARTMENT INTENDS TO ASSUME THE COMPLETE RISK OF LOSS TO GENERAL DYNAMICS' PROPERTY, IRRESPECTIVE OF OF WHETHER LOSS OCCURS DURING GOVERNMENTAL OR COMMERCIAL ACTIVITIES. WE HAVE HELD, IN THIS REGARD, THAT AN APPROPRIATION IS PROPERLY CHARGEABLE WITH ALL EXPENSES NECESSARY TO ACCOMPLISH THE OBJECT FOR WHICH MADE, UNLESS PARTICULAR ITEMS OF EXPENSE ARE SPECIFICALLY PROVIDED FOR BY SOME OTHER APPROPRIATION OR SPECIFICALLY PROVIDED FOR BY LAW. 42 COMP. GEN., SUPRA. ALTHOUGH THE PROPERTY IN QUESTION IS USED FOR COMMERCIAL ACTIVITIES ONLY ONE PERCENT OF THE TIME, WE FAIL TO SEE HOW REIMBURSEMENT FOR LOSS OCCURRING DURING COMMERCIAL ACTIVITIES WOULD BE AN EXPENSE NECESSARY TO ACCOMPLISH ANY OF THE COMPANY'S GOVERNMENT CONTRACTS OR, CONSEQUENTLY, AN AN EXPENSE PROPERLY CHARGEABLE TO THE APPROPRIATIONS SUPPORTING THE CORPORATION'S GOVERNMENT CONTRACTS.

CONSEQUENTLY, AND SINCE WE ARE NOT GIVEN ANY ADVICE AS TO THE SPECIFIC APPROPRIATIONS THAT ARE CONTEMPLATED FOR PAYMENT OF SUCH LOSS, WE CANNOT CONCUR IN THE PROPOSAL TO ASSUME THE COMPLETE RISK OF LOSS TO THE CORPORATION'S PROPERTY IN THE ABSENCE OF EXPRESS STATUTORY AUTHORITY AUTHORIZING SUCH ASSUMPTION.

ABSENT EXPRESS STATUTORY AUTHORITY, WE FIND NO BASIS FOR THE ASSUMPTION BY A GOVERNMENT AGENCY OF THE RISK OF LOSS FOR A CONTRACTOR'S PROPERTY NOT BEING USED IN CONNECTION WITH GOVERNMENT BUSINESS.