Implementation of the Arts and Artifacts Indemnity Act

B-115398.01 April 19, 1977

Joseph R. Sherman, Esq. General Counsel, National Endowment for the Humanities Washington, D.C. 20506

Dear Joe:

This refers to our prior corresopndence and your discussions with our audit and legal staffs concerning implementation of the Arts and Artifacts Indemnity Act, Pub. L. No. 94-158 (December 20, 1975), 89 Stat. 844, 20 U.S.C. Sec. 971-977 Supp. V, 1975).

The Act authorizes the Federal Council on the Arts and Humanities to enter into agreements to indemnify against loss or damage to works of art and other materials while on exhibition under specified circumstances. See generally, 20 U.S.C. Sec. 971-972. The Counsil is expressly authorized to pledge the full faith and credit of the United States to pay liabilities incurred under such indemnity agreements, and the Act provides for the enactment of appropriations to liquidate indemnity claims once they have been certified as valid. 20 U.S.C. Sec. 973(c), 975, 976. /1/

Among the other restrictions on indemnity agreements in section 5 of the Act, 20 U.S.C. Sec. 974, subsection 5(b) provides:

"The aggregate of loss or damage covered by indemnity agreements made under this Act shall not exceed $250,000,000 at any one time."

In your discussions with Mr. Gerald DeRyder of our Financial and General Management Studies Division concerning design of an accounting system for the indemnity program, you raised the following legal questions with reference to the $250 million limit in section 5(b):

1. Can more than $250 million be covered during a year, as indicated by the Congressional Budget Office?

2. Should claims being processed be included in the $250 million limit and, if so, when should they no longer be included?

3. When should an agreement no longer be included in the $250 million limit; on the date the coverage ends, after the deadline for filing a claim, or some other date?

As noted in your first question, the Congressional Budget Office cost estimate for the House version of lthe legislation enacted as Pub. L. No. 94-158 took the approach that more than $250 million could be covered by indemnity aggreements in a given year. See H.R. Rep. No. 94-680, 8-9 (1975). The estimate assumed that an average exhibit would be covered by an indemnity agreement for a period of 3 months. Thus it projected a maximun aggregate amount for indemnity agreements during a year of $1 billion, i.e., the $250 million limit "at any one time" multiplied by four 3-month cycles of agreements during the year. /2/

We agree with this approach. Clearly use of the phrase "at any ne time" in subsection 5(b) means that the $250 million limit does not operate as a cumulative restriction on the indemnity program. Thus, for example, the limit is not, in effect, continually reduced by the amount of indemnity claims paid over the life of the program or in any given year. Likewise, nothing in the legislative history of the Act suggests tht the $250 million figure was designed as a cumulative limit. We note that during the House debate one Congressman described the limit as "$250 million in 1 year." Cong. Rec., December 1, 1975 (dailey ed.), at H11538 (remarks of Mr. Quie). However, we assume that the reference to "1 year" was inadvertent since there is no basis for a yearly restriction in the Act or any portion of the legislative history.

With reference to your second and third questions, we believe that the $250 million limit applies only to the aggregate face amount of indemnity agreements which are actually in effect at any point in time. Thus an indemnity aggreement would cease to count against the limit as soon as the coverage preiod ends. In our view, this approach necessarily follows from the conclusion that the limitation is not cumulative. If, as indicated above, the amount of claims which have already been validated and paid does not count against the limit, there would be no reason for counting potential calims under an expired agreement which might be submitted within the filing deadline or which are being processed.

In sum, we interpret the section 5(b) limit as including only the face amount of outstanding agreements during their coverage periods, without reference to the aggregate face amount by year or to potential, pending, or liquidated claims under expired aggreements.

We hope that this analysis is of use to you, and we will be happy to provide any further assistance you may desire.

Sincerely yours,

Paul G. Dembling General Counsel

1. These statutory provisions constitute full authority to incur indemnity obligations in advance of appropriations, subject of course to the various conditions and restrictions in the Act. Thus an indemnity agreement represents a "contract or obligation *** authorized by law" which is excepted from the restrictions of subsection (a) of the so-called "Antideficiency Act," 31 U.S.C. Sec. 665(a)(1970).

2. The $1 billion maximum figure applied to each full fiscal year of the program's operation. The Congressional Budget Office estimated less than $1 million in jpotential outlays (indemnity claim payments) for each fiscal year up to the fiscal year 1980.