B-5414, AUGUST 16, 1939, 19 COMP. GEN. 211

B-5414, AUGUST 16, 1939, 19 COMP. GEN. 211

INSURANCE - CONTRACTS ON A NATION-WIDE BASIS WITHOUT ADVERTISING - GOVERNMENT POLICY RE INSURANCE GENERALLY WHERE, IN ADDITION TO OBJECTIONS SUCH AS POSSIBLE FAILURE TO OBTAIN THE BEST PRICE, ETC., THE ADMINISTRATIVELY CONTEMPLATED NATION-WIDE EXTENSION OF AN INSURANCE AGREEMENT COVERING FARM SECURITY ADMINISTRATION PROPERTIES IN A PARTICULAR STATE INVOLVES THE PLACING OF THE NATION-WIDE BUSINESS IN THE HANDS OF A SINGLE COMPANY--- A CONDITION WHICH PREVIOUSLY HAD BEEN ADVANCED ADMINISTRATIVELY AS JUSTIFYING REJECTION OF THE LOW BID OF A SINGLE COMPANY AND THE AWARD TO A SUBSTANTIALLY HIGHER BIDDER COMPOSED OF 17 COMPANIES ON THE BASIS THAT AWARD TO THE ONE COMPANY WOULD NOT OFFER THE FINANCIAL STABILITY OR SERVICES OF THE 17 COMPANIES--- SUCH EXTENSION, WITHOUT ADVERTISING, IS UNAUTHORIZED, THE ADVERTISING TO BE ON BOTH A LOCAL AS WELL AS A NATION-WIDE BASIS, AND THERE WOULD APPEAR TO BE FOR CONSIDERATION ALSO WHETHER, NOTWITHSTANDING THE ADMINISTRATIVE AUTHORITY TO CONTRACT FOR INSURANCE CONFERRED BY STATUTE, THE GOVERNMENT SHOULD NOT CARRY ITS OWN RISKS IN THIS MATTER IN VIEW OF ITS LONG ESTABLISHED GENERAL POLICY NOT TO CARRY INSURANCE, WITH ITS PROBABLE LESS COST THAN PROCUREMENT OF INSURANCE FROM PRIVATE SOURCES.

COMPTROLLER GENERAL BROWN TO THE SECRETARY OF AGRICULTURE, AUGUST 16, 1939,*

I HAVE YOUR LETTER OF AUGUST 2, 1939, AS FOLLOWS:

SINCE OCTOBER 20, 1936, THE FARM SECURITY ADMINISTRATION OF THIS DEPARTMENT HAS BEEN OBTAINING INSURANCE AGAINST LOSS BY FIRE AND OTHER RELATED HAZARDS PURSUANT TO AN AGREEMENT TO INSURE BETWEEN THE RESETTLEMENT ADMINISTRATION, PREDECESSOR TO THE FARM SECURITY ADMINISTRATION, AND THE NATIONAL MUTUAL ASSOCIATION. THIS AGREEMENT TO INSURE IS ON FILE IN YOUR OFFICE UNDER THE NUMBER ER-RA-3890.

IN ADDITION TO THE FOREGOING AGREEMENT TO INSURE, WHICH COVERS THE INSURANCE NEEDS OF THE FARM SECURITY ADMINISTRATION ON A NATIONAL BASIS, THE FARM SECURITY ADMINISTRATION HAS, SINCE AUGUST 1938, BEEN OBTAINING APPROPRIATE INSURANCE COVERAGE IN THE STATE OF ALABAMA UNDER AN INSURANCE AGREEMENT, DATED AUGUST 3, 1938, WITH THE EUREKA-SECURITY FIRE AND MARINE INSURANCE COMPANY. SAID INSURANCE AGREEMENT IS LIKEWISE ON FILE IN YOUR OFFICE UNDER THE NUMBER ER A-5-FSA-445.

THE INSURANCE REQUIREMENTS OF THE FARM SECURITY ADMINISTRATION HAVE, TO DATE, BEEN VERY SATISFACTORILY AND ADVANTAGEOUSLY PROVIDED UNDER BOTH OF THE FOREGOING CONTRACTS. HOWEVER, UNDER DATE OF JUNE 26, 1939, THE ADMINISTRATOR OF THE FARM SECURITY ADMINISTRATION WAS NOTIFIED, IN WRITING, BY THE NATIONAL MUTUAL ASSOCIATION THAT, EFFECTIVE DECEMBER 31, 1939, THE AGREEMENT TO INSURE (CONTRACT ER-RA 3890) WILL BE CANCELLED. COPY OF SAID NOTICE IS ATTACHED.) WHILE SUCH CANCELLATION DOES NOT NECESSARILY INVOLVE THE CANCELLATION OF CERTIFICATES OF INSURANCE COVERING SPECIFIC PROPERTIES WHICH HAVE BEEN ISSUED BY THE NATIONAL MUTUAL ASSOCIATION UNDER SAID AGREEMENT, THE FARM SECURITY ADMINISTRATION HAS BEEN INFORMALLY ADVISED THAT THE NATIONAL MUTUAL ASSOCIATION CONTEMPLATES TERMINATING ALL SUCH CERTIFICATES OF INSURANCE WHEN THE CANCELLATION OF THE AGREEMENT TO INSURE BECOMES EFFECTIVE AT THE END OF THE YEAR.

ACCORDINGLY, IT BECOMES NECESSARY FOR THE FARM SECURITY ADMINISTRATION TO MAKE NEW ARRANGEMENTS TO PROVIDE FOR ITS INSURANCE NEEDS, AND OBTAIN APPROPRIATE COVERAGE FOR ALL ITS PROPERTIES PRIOR TO THE TIME CANCELLATION OF THE AGREEMENT TO INSURE WITH THE NATIONAL MUTUAL ASSOCIATION BECOMES EFFECTIVE.

UNDER DATE OF JULY 3, 1939, A PROPOSAL WAS RECEIVED BY THE FARM SECURITY ADMINISTRATION FROM LEEDY-GLOVER, INC., ON BEHALF OF THE EUREKA-SECURITY FIRE AND MARINE INSURANCE COMPANY, TO AMEND THE EXISTING CONTRACT ( ER A-5 -FSA-445) WITH SAID COMPANY, WHICH IS NOW LIMITED IN ITS APPLICATION TO THE STATE OF ALABAMA, TO COVER PROJECTS THROUGHOUT THE UNITED STATES AND ITS TERRITORIES, ON SUBSTANTIALLY THE SAME BASIS AS IT NOW PROVIDES INSURANCE COVERAGE IN THE STATE OF ALABAMA. (A COPY OF SAID PROPOSAL IS ATTACHED.)

BEFORE PROCEEDING TO NEGOTIATE A NEW NATION-WIDE CONTRACT WITH THE EUREKA -SECURITY FIRE AND MARINE INSURANCE COMPANY, WHICH WOULD SUPERSEDE THE AGREEMENT TO INSURE WITH THE NATIONAL MUTUAL ASSOCIATION WHEN THE CANCELLATION THEREOF BECOMES EFFECTIVE, I DESIRE TO SUBMIT FOR YOUR DETERMINATION THE QUESTION AS TO WHETHER YOUR OFFICE WILL BE REQUIRED TO OBJECT TO THE AMENDMENT OF THE EXISTING EUREKA AGREEMENT WITHOUT FURTHER NEGOTIATIONS WITH OTHER INSURANCE COMPANIES OR GROUPS OF COMPANIES.

IN THIS CONNECTION, I WISH TO REFER YOU TO STANDARD FORM 1036, DATED MARCH 26, 1937, WHICH WAS FILED IN YOUR OFFICE IN SUPPORT OF THE AGREEMENT TO INSURE WITH THE NATIONAL MUTUAL ASSOCIATION ( CONTRACT NO. ER-RA-3890); STANDARD FORM 1036, DATED NOVEMBER 3, 1938, WHICH WAS FILED IN YOUR OFFICE IN SUPPORT OF THE INSURANCE AGREEMENT WITH THE EUREKA-SECURITY FIRE AND MARINE INSURANCE COMPANY ( CONTRACT NO. ER A 5-FSA-445); AND THE LETTER FROM TERRY J. MCADAMS, CHIEF, PURCHASE SECTION, BUSINESS MANAGEMENT DIVISION, FARM SECURITY ADMINISTRATION, DATED APRIL 5, 1939, TO THE CONTRACT EXAMINING SECTION, AUDIT DIVISION, OF YOUR OFFICE, IN REPLY TO A LETTER FROM THAT DIVISION DATED MARCH 21, 1939 ( A-JFK-CE). FROM THE FOREGOING, IT WILL READILY BE OBSERVED THAT THE PROBLEM OF THE FARM SECURITY ADMINISTRATION, IN PROVIDING ITSELF WITH APPROPRIATE INSURANCE COVERAGE UNDER ADVANTAGEOUS TERMS, HAS BEEN AN EXTREMELY DIFFICULT AND UNUSUAL ONE. IT WILL ALSO BE NOTED FROM THE FOREGOING TO WHAT EXTENT NEGOTIATIONS WERE CONDUCTED BY THE FARM SECURITY ADMINISTRATION AND ITS PREDECESSOR WITH VARIOUS INSURANCE ORGANIZATIONS AND COMPANIES BEFORE THE TWO EXISTING AGREEMENTS WERE ENTERED INTO.

I AM ADVISED THAT SINCE THE SUBMISSION OF THE FOREGOING, NUMEROUS INQUIRIES HAVE CONTINUED TO BE RECEIVED BY THE FARM SECURITY ADMINISTRATION FROM OTHER MUTUAL AND STOCK INSURANCE COMPANIES AND ORGANIZATIONS AS TO THE INSURANCE REQUIREMENTS OF THAT ADMINISTRATION. EVERY CASE WHERE THE INQUIRER WAS ADVISED THAT, DUE TO THE SPECIAL NEEDS OF THE FARM SECURITY ADMINISTRATION, ANY AGREEMENT FOR INSURANCE WOULD HAVE TO BE MADE UPON TERMS WHICH WOULD BE AT LEAST AS ADVANTAGEOUS AS THOSE OF THE EXISTING AGREEMENTS WITH THE NATIONAL MUTUAL ASSOCIATION OR THE EUREKA-SECURITY FIRE AND MARINE INSURANCE COMPANY, NO FURTHER ATTEMPT WAS MADE BY SUCH COMPANIES OR ORGANIZATIONS TO NEGOTIATE A CONTRACT.

IN VIEW OF ALL OF THE FOREGOING, I AM ADVISED BY THE FARM SECURITY ADMINISTRATION THAT THE EUREKA-SECURITY FIRE AND MARINE INSURANCE COMPANY IS THE ONLY INSURANCE COMPANY THAT IS WILLING TO PROVIDE IT WITH SUCH INSURANCE COVERAGE AS IT REQUIRES ON THE ADVANTAGEOUS TERMS THAT HAVE HERETOFORE BEEN PROVIDED BY THE NATIONAL MUTUAL ASSOCIATION ELSEWHERE THAN IN ALABAMA, AND BY THE EUREKA COMPANY, ITSELF, IN THAT STATE.

SHOULD IT BE CONCLUDED BY YOUR OFFICE THAT THE FARM SECURITY ADMINISTRATION MAY NEGOTIATE AN AMENDMENT OF THE CONTRACT WITH THE EUREKA- SECURITY FIRE AND MARINE INSURANCE COMPANY IN ACCORDANCE WITH ITS PROPOSAL OF JULY 3, IT IS PROPOSED TO PROVIDE THAT SUCH CONTRACT REMAIN IN EFFECT FOR A FIXED PERIOD OF TIME, UNLESS CANCELLATION OR MODIFICATION THEREOF SHOULD BE MUTUALLY AGREED UPON BETWEEN THE GOVERNMENT AND THE COMPANY. SUCH A PROVISION WOULD BE EXTREMELY DESIRABLE FROM AN ADMINISTRATIVE STANDPOINT AND FAIR TO THE INSURANCE COMPANY WHICH, THE CONTRACT IS AWARDED, WILL BE REQUIRED TO ESTABLISH OFFICES IN WASHINGTON AND PROVIDE ELABORATE MACHINERY FOR CARRYING OUT ITS OBLIGATIONS THEREUNDER.

DUE TO THE ABSOLUTE NECESSITY FOR CONCLUDING A NEW AGREEMENT PRIOR TO THE TIME CANCELLATION OF THE AGREEMENT WITH THE NATIONAL MUTUAL ASSOCIATION BECOMES EFFECTIVE, IT WOULD BE GREATLY APPRECIATED IF YOUR REPLY TO THIS LETTER COULD BE EXPEDITED.

THE RECORD SHOWS THAT WHEN THE NATION-WIDE CONTRACT OF OCTOBER 20, 1936, WAS AWARDED THE NATIONAL MUTUAL ASSOCIATION, COMPRISED OF 17 INDIVIDUAL COMPANIES, THE REJECTION OF A SUBSTANTIALLY LOWER OFFER BY THE PACIFIC NATIONAL FIRE INSURANCE CO. WAS ADMINISTRATIVELY JUSTIFIED ON THE BASIS THAT AN AWARD TO THAT COMPANY WOULD PLACE THE INSURANCE IN THE HANDS OF 1 COMPANY WHICH DID NOT OFFER THE FINANCIAL STABILITY OF 17 COMPANIES OR OFFER THE SERVICES THAT 17 COMPANIES HAVE AVAILABLE. WHEN THE CONTRACT OF AUGUST 3, 1938, FOR THE STATE OF ALABAMA WAS MADE WITH THE EUREKA-SECURITY FIRE AND MARINE INSURANCE CO. WITHOUT PRIOR ADVERTISING IT WAS ADMINISTRATIVELY EXPLAINED THAT ALTHOUGH ALABAMA WAS COVERED BY THE EXISTING NATION-WIDE CONTRACT THE PLACING OF INSURANCE THEREUNDER WAS OPTIONAL, THAT THE EUREKA COMPANY OFFERED TERMS AND RATES EQUAL TO AND POSSIBLY MORE ADVANTAGEOUS THAN THOSE IN THE NATION WIDE CONTRACT, THAT THE EUREKA COMPANY WAS ,ACCEPTABLE" TO THE FARM SECURITY ADMINISTRATION, AND THAT CONSIDERABLE CORRESPONDENCE WITH INSURANCE COMPANIES AND BROKERS HAD FAILED TO ELICIT ANY OTHER OFFERS MEETING THE TERMS OF THE EXISTING NATION-WIDE CONTRACT. IT IS NOW PROPOSED, WITHOUT PRIOR ADVERTISING, TO EXPAND THE EUREKA CONTRACT FOR ALABAMA INTO A NATION-WIDE CONTRACT, UPON THE CANCELLATION OF THE EXISTING NATION-WIDE CONTRACT WITH THE 17 COMPANIES, THUS PLACING THE NATION-WIDE BUSINESS IN THE HANDS OF THIS COMPANY, ALTHOUGH A SUBSTANTIALLY LOWER OFFER PREVIOUSLY WAS REJECTED ON THE GROUND THAT PLACING THE NATION-WIDE BUSINESS IN THE HANDS OF A SINGLE COMPANY WOULD NOT BE IN THE GOVERNMENT'S INTEREST.

THERE APPEARS TO BE NO AUTHORITY TO TAKE SUCH ACTION WITHOUT PRIOR ADVERTISING. WHERE SUPPLIES OR SERVICES ARE POSSIBLY AVAILABLE FROM VARIOUS SOURCES ON A COMPETITIVE BASIS, THE ONLY WAY TO DETERMINE WHAT RESULTS MAY BE OBTAINED BY ADVERTISING FOR BIDS IS TO ADVERTISE, AND THAT IS THE PROCEDURE REQUIRED BY LAW. IN THIS CONNECTION THERE MAY BE REPEATED WHAT WAS SAID IN PART IN DECISION OF JUNE 7, 1939, TO THE SECRETARY OF COMMERCE, AS FOLLOWS:

AS HAS BEEN POINTED OUT IN NUMEROUS DECISIONS OF THE ACCOUNTING OFFICERS AND THE COURTS, SECTION 3709, REVISED STATUTES, REQUIRES THAT, SUBJECT TO EXCEPTIONS, SPECIFIED THEREIN, ALL PURCHASES AND CONTRACTS FOR SUPPLIES OR SERVICES FOR THE GOVERNMENT SHALL BE MADE AFTER ADVERTISING A SUFFICIENT TIME PREVIOUSLY FOR PROPOSALS CONCERNING THE SAME. SEE PURCELL ENVELOPE COMPANY V. UNITED STATES, 51 CT.1CLS. 211, 214, AFFIRMED 249 U.S. 313; SCHNEIDER V. UNITED STATES, 19 CT.1CLS. 547. SEE, ALSO, 15 COMP. GEN. 1095; 18 COMP. GEN. 579. NO MERE ASSUMPTION, BELIEF, OPINION, OR CONCLUSION OF A CONTRACTING OFFICER OR AGENCY THAT SOME OTHER METHOD OF ACQUISITION WOULD BE MORE DESIRABLE OR IN THE INTEREST OF THE GOVERNMENT IN A PARTICULAR CASE IS SUFFICIENT TO JUSTIFY DISREGARD OF THE POSITIVE MANDATE OF THE STATUTE, REGARDLESS OF THE POSSIBILITY OR EVEN PROBABILITY THAT 1 BIDDER, BY REASON OF A SPECIAL RELATION TO THE SUBJECT MATTER OF THE PURCHASE OR SERVICE, EITHER AS MANUFACTURER OF THE PROJECT OR AS POSSESSING SUPERIOR EQUIPMENT OR FACILITIES FOR PERFORMANCE OF THE SERVICE, OR OTHERWISE, MAY OCCUPY AN ADVANTAGEOUS POSITION IN THE BIDDING. THE ONLY AUTHORIZED, DEFINITE, AND LEGAL METHOD OF DETERMINING SUCH A QUESTION IS BY ADVERTISING UPON SPECIFICATIONS ADEQUATELY SETTING FORTH AND DESCRIBING THE SERVICE TO BE RENDERED OR THE ARTICLES, MATERIALS, SUPPLIES, OR EQUIPMENT TO BE FURNISHED, AFFORDING ALL QUALIFIED PERSONS OPPORTUNITY TO COMPETE UPON TERMS OF EQUALITY, WITH ACCEPTANCE OF THE LOW RESPONSIBLE BID. SCOTT. V. UNITED STATES, 44 CT.1CLS. 524; O- BRIEN V. CARNEY, 6 FED. SUPP. 761, 762. IF IT BE CONCEDED THAT IN ISOLATED INSTANCES ADVERTISING IS A MERE FORMALITY, IT IS, NEVERTHELESS, A FORMALITY ENJOINED BY STATUTE AND NOT TO BE ADMINISTRATIVELY NEGATED BY PREDECISION THAT ANOTHER WAY IS BEST.

RESPECTING THE OBJECTIONS TO ADVERTISING AND AWARDING CONTRACTS TO AN INDIVIDUAL FIRM FOR NATION-WIDE SERVICES WHERE POSSIBLY THE SERVICES COULD BE OBTAINED LOCALLY AS REQUIRED, OR BY DISTRICTS, STATES, OR GROUPS OF STATES, ON TERMS MORE ADVANTAGEOUS TO THE GOVERNMENT, SEE DECISIONS OF SEPTEMBER 16, 1936, AND JANUARY 21, 1937, 16 COMP. GEN. 258; ID. 670. IS UNDERSTOOD THAT THE PROPERTIES HERE PROPOSED TO BE INSURED ARE LOCATED IN MANY, IF NOT ALL, OF THE STATES THROUGHOUT THE NATION, AND AS INSURANCE RISKS, RATES, LAWS, AND STATE REGULATION OF INSURANCE COMPANIES VARY SUBSTANTIALLY FROM STATE TO STATE, THERE WOULD APPEAR NO MEANS TO DETERMINE WHETHER BETTER TERMS CAN BE OBTAINED ON A NATION-WIDE BASIS THAN BY A NUMBER OF STATE OR AREA CONTRACTS EXCEPT TO ADVERTISE FOR BIDS ON THE LATTER BASIS AS WELL AS ON A NATION-WIDE BASIS, AND IT IS CONCLUDED, THEREFORE, THAT TO CONFINE THE BIDDING TO A NATION-WIDE BASIS UNDER SUCH CIRCUMSTANCES WOULD BE UNDULY RESTRICTIVE OF THE COMPETITION CONTEMPLATED BY THE STATUTE.

WHILE SECTION 3 OF THE ACT OF JUNE 29, 1936, 49 STAT. 2036, PROVIDES THAT RECEIPTS DERIVED FROM THE OPERATION OF CERTAIN RESETTLEMENT PROJECTS OR RURAL REHABILITATION PROJECTS, IN ADDITION TO THE MONEYS APPROPRIATED OR ALLOCATED FOR SUCH PROJECTS, SHALL BE AVAILABLE FOR "EXPENDITURES FOR OPERATION AND MAINTENANCE (INCLUDING INSURANCE) OF SUCH PROJECTS," AND, ACCORDINGLY, THERE IS NOT QUESTIONED THE ADMINISTRATIVE AUTHORITY TO CONTRACT FOR INSURANCE WITHIN THE TERMS OF THE ACT, IT MAY BE REMARKED THAT WHILE THE STATUTE AUTHORIZES, IT DOES NOT DIRECT OR REQUIRE THAT SUCH INSURANCE BE OBTAINED AND THAT IT HAS BEEN THE LONG ESTABLISHED POLICY OF THE GOVERNMENT NOT TO CARRY INSURANCE. THE MAGNITUDE OF ITS RESOURCES OBVIOUSLY MAKES IT MORE ADVANTAGEOUS FOR THE GOVERNMENT TO CARRY ITS OWN RISKS THAN TO SHIFT THEM TO PRIVATE INSURERS AT RATES SUFFICIENT TO COVER ALL LOSSES, TO PAY THEIR OPERATING EXPENSES, INCLUDING AGENCY OR BROKERS' COMMISSIONS, AND TO LEAVE SUCH INSURERS A PROFIT. THE INSURANCE CONTRACTS HERE INVOLVED PROVIDE, IN EFFECT, THAT TO THE EXTENT ANY OF THE INSURED PROPERTIES ARE DAMAGED BY FIRE, TORNADO, ETC., THE INSURER WILL RESTORE THEM. IT IS DIFFICULT TO CONCEIVE THAT THE GOVERNMENT CANNOT MAKE ITS OWN REPAIRS AS REQUIRED MUCH CHEAPER THAN PAYING AN INSURANCE COMPANY PREMIUMS SUFFICIENT TO COVER ALL RISKS OF SUCH REPAIRS, PLUS OVERHEAD, COMMISSIONS, AND PROFIT.

IT IS NOTED THAT THE TWO CONTRACTS HERETOFORE MADE DO NOT CONTAIN THE STIPULATIONS REQUIRED BY SECTION 3741, REVISED STATUTES, AS AMENDED, 41 U.S.C. 22.