B-12741, OCTOBER 12, 1940, 20 COMP. GEN. 196

B-12741: Oct 12, 1940

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INSURANCE - PROPRIETY OF PROCURING FROM A MUTUAL COMPANY - COST-PLUS CONTRACTS WORKMEN'S COMPENSATION AND PUBLIC LIABILITY INSURANCE MAY BE PROCURED FROM A MUTUAL INSURANCE COMPANY BY A GOVERNMENT CONTRACTOR WHOSE COST-PLUS -A-FIXED-FEE NATIONAL-DEFENSE CONTRACT PROVIDES THAT THE GOVERNMENT WILL PAY THE COST OF SUCH INSURANCE POLICIES AS THE CONTRACTING OFFICER APPROVES. WHERE SAID OFFICER BELIEVES ADEQUATE PROTECTION WILL BE FURNISHED BY THE MUTUAL COMPANY AT A LESS COST THAN BY A STOCK COMPANY. NOTWITHSTANDING THERE IS SOME ELEMENT OF UNCERTAINTY AS TO THE ULTIMATE COST OF THE MUTUAL INSURANCE AND A REMOTE POSSIBILITY SUCH COST WILL BE CONSIDERABLY GREATER THAN THE COST OF INSURANCE WITH A STOCK COMPANY.

B-12741, OCTOBER 12, 1940, 20 COMP. GEN. 196

INSURANCE - PROPRIETY OF PROCURING FROM A MUTUAL COMPANY - COST-PLUS CONTRACTS WORKMEN'S COMPENSATION AND PUBLIC LIABILITY INSURANCE MAY BE PROCURED FROM A MUTUAL INSURANCE COMPANY BY A GOVERNMENT CONTRACTOR WHOSE COST-PLUS -A-FIXED-FEE NATIONAL-DEFENSE CONTRACT PROVIDES THAT THE GOVERNMENT WILL PAY THE COST OF SUCH INSURANCE POLICIES AS THE CONTRACTING OFFICER APPROVES, WHERE SAID OFFICER BELIEVES ADEQUATE PROTECTION WILL BE FURNISHED BY THE MUTUAL COMPANY AT A LESS COST THAN BY A STOCK COMPANY, NOTWITHSTANDING THERE IS SOME ELEMENT OF UNCERTAINTY AS TO THE ULTIMATE COST OF THE MUTUAL INSURANCE AND A REMOTE POSSIBILITY SUCH COST WILL BE CONSIDERABLY GREATER THAN THE COST OF INSURANCE WITH A STOCK COMPANY.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE SECRETARY OF WAR, OCTOBER 12, 1940:

I HAVE YOUR LETTER OF OCTOBER 4, 1940, AS FOLLOWS:

REFERENCE IS MADE TO THE ENCLOSED LETTER FROM THE HERCULES POWDER COMPANY, DATED SEPTEMBER 23, 1940, IN WHICH INQUIRY IS MADE AS TO THE ACCEPTABILITY OF INSURANCE POLICIES WRITTEN BY THE LIBERTY MUTUAL INSURANCE COMPANY COVERING EMPLOYER'S LIABILITY AND WORKMEN'S COMPENSATION IN CONJUNCTION WITH PERFORMANCE OF CONTRACT NO. W-ORD 462. THE FOREGOING CONTRACT IS WITH THE UNITED STATES GOVERNMENT AND THE HERCULES POWDER COMPANY, WILMINGTON, DELAWARE, FOR ACQUIRING SITE, DESIGNING, CONSTRUCTING, EQUIPPING, AND OPERATING A PLANT FOR THE MANUFACTURE OF NITROCELLULOSE SMOKELESS POWDER AT RADFORD, VIRGINIA. A DULY EXECUTED COPY OF THIS CONTRACT HAS BEEN FORWARDED TO THE GENERAL ACCOUNTING OFFICE THROUGH REGULAR CHANNELS.

TITLE VI OF CONTRACT NO. W-ORD 462, ARTICLE VI-A, SUBPARAGRAPH (I) PROVIDES: "PREMIUMS ON SUCH BONDS AND INSURANCE POLICIES AS THE CONTRACTING OFFICER MAY REQUIRE; THE COST OF ALL PUBLIC LIABILITY, EMPLOYER'S LIABILITY, WORKMEN'S COMPENSATION, FIDELITY, FIRE, THEFT, BURGLARY, AND OTHER INSURANCE THAT THE CONTRACTING OFFICER MAY APPROVE AS REASONABLY NECESSARY FOR THE PROTECTION OF THE CONTRACTOR.' THE PROVISION WITH RESPECT TO EMPLOYER'S LIABILITY AND WORKMEN'S COMPENSATION IS FURTHER AMPLIFIED BY ARTICLE VIII-F OF TITLE VIII OF CONTRACT NO. W-ORD 462. THIS ARTICLE PROVIDES: "THE ACT OF JUNE 25, 1936 (49 STAT. 1938, 1939; 40 U.S.C. 290,) PROVIDES THAT THE SEVERAL STATES HAVE AUTHORITY TO MAKE THEIR WORKMEN'S COMPENSATION LAWS APPLICABLE TO CONTRACTS FOR THE CONSTRUCTION, ALTERATION, OR REPAIR OF A PUBLIC BUILDING OR PUBLIC WORK OF THE UNITED STATES, AND THE SEVERAL STATES ARE VESTED WITH THE POWER AND AUTHORITY TO ENFORCE SUCH STATE LAWS ON LANDS OF THE UNITED STATES.'

GENERALLY SPEAKING, AS A MATTER OF ADMINISTRATIVE CONVENIENCE, CONTRACTORS HAVE BEEN ADVISED THAT WHERE THEIR CONTRACTS CONTAIN PROVISIONS SIMILAR TO THOSE QUOTED ABOVE THAT THE CONTRACTING OFFICER WOULD BE INSTRUCTED TO APPROVE POLICIES COVERING EMPLOYER'S LIABILITY AND WORKMEN'S COMPENSATION INSURANCE PROVIDED THE INSURER WAS INCLUDED IN THE APPROVED LIST OF SURETIES COMPILED BY THE TREASURY DEPARTMENT. THE HERCULES POWDER COMPANY WAS GIVEN THIS INFORMATION INFORMALLY. AS A RESULT, PROPOSALS COVERING THIS INSURANCE WERE SOLICITED FROM THE TRAVELERS' INSURANCE COMPANY, THE LIBERTY MUTUAL INSURANCE COMPANY, AND THE AETNA CASUALTY AND SURETY COMPANY.

THE HERCULES POWDER COMPANY IN A LETTER OF SEPTEMBER 23, 1940, RECOMMENDS THAT AUTHORITY BE GRANTED TO ENTER INTO INSURANCE CONTRACTS WITH THE LIBERTY MUTUAL INSURANCE COMPANY, COVERING WORKMEN'S COMPENSATION INSURANCE AND EMPLOYER'S LIABILITY INSURANCE. THIS RECOMMENDATION IS BASED UPON THE COMPARISON OF ALL THE FACTS RELATING TO THE AETNA CASUALTY AND SURETY COMPANY AND THE TRAVELERS' INSURANCE COMPANY BOTH OF WHICH ARE STOCK COMPANIES AS COMPARED WITH THE LIBERTY MUTUAL INSURANCE COMPANY. OTHER WORDS, THE PREMIUM RATES OF THE TWO LEADING STOCK COMPANIES AND THOSE OF THE LIBERTY MUTUAL INSURANCE COMPANY ARE EVALUATED AND COMPARED ON THE BASIS OF THE GUARANTEED POLICY RATES OF THE STOCK COMPANIES WITH THOSE OF THE MUTUAL COMPANY LESS ANTICIPATED DIVIDEND PAYMENTS.

STOCK COMPANY PREMIUMS SUCH AS THE AETNA CASUALTY AND SURETY COMPANY AND THE TRAVELERS' INSURANCE COMPANY ARE QUOTED ON A PREVIOUSLY ASCERTAINED RATE AND THE FINAL PREMIUM IS DETERMINED ON THE BASIS OF THE NUMBER OF EMPLOYEES HIRED BY THE CONTRACTOR. THE RESULT BEING A MATHEMATICAL COMPUTATION OF THE NUMBER OF EMPLOYEES COVERED TIMES THE PREMIUM AT THE QUOTED RATE AND IT IS NOT SUBJECT TO EITHER ADJUSTMENTS. MUTUAL COMPANY RATES ARE QUOTED IN THE FORM OF A DEPOSIT PREMIUM. AS THE TERM INDICATES, THE PREMIUM RATE IS MERELY A DEPOSIT AND ANY PROFIT MADE BY THE COMPANY WILL BE DISTRIBUTED IN A FORM OF DIVIDEND TO POLICY HOLDERS THEREBY REDUCING THE ULTIMATE PREMIUM IN AN AMOUNT EQUAL TO THE DIVIDEND.

OVER A LONG PERIOD OF YEARS, THE LIBERTY MUTUAL INSURANCE COMPANY, HAS CONSISTENTLY PAID DIVIDENDS RESULTING IN A NET PREMIUM AVERAGING 20 PERCENT LOWER THAN THE DEPOSIT PREMIUM CHARGED. THE POLICIES OFFERED BY THE LIBERTY MUTUAL INSURANCE COMPANY ARE ASSESSABLE AND PROVIDE THAT UNDER CERTAIN CONDITIONS THE POLICY HOLDER MAY BE ASSESSED AN AMOUNT NOT TO EXCEED THE DEPOSIT PREMIUM FOR ONE YEAR. IT SEEMS ONLY FAIR TO STATE, HOWEVER, THAT THE RECORD OF THE LIBERTY MUTUAL INSURANCE COMPANY SHOWS THAT NO ASSESSMENTS HAVE BEEN LEVIED AGAINST POLICY HOLDERS. ALSO, THE LIBERTY MUTUAL INSURANCE COMPANY HAS NEVER FAILED TO PAY A SUBSTANTIAL DIVIDEND TO THEIR POLICY HOLDERS OVER A LONG PERIOD OF YEARS. IT SHOULD BE EMPHASIZED, HOWEVER, THAT THE LIBERTY MUTUAL INSURANCE COMPANY REINSURES ALL RISKS IN EXCESS OF $50,000. CONSEQUENTLY, THE LIKELIHOOD OF AN ACTUAL ASSESSMENT IS SO REMOTE AS TO REMOVE FOR ALL PRACTICAL PURPOSES THE CONTINGENT ELEMENT WHICH IS INHIBITED BY STATUTE.

INASMUCH AS MANY OF THE CONTRACTS FOR CONSTRUCTION PROJECTS UNDER THE NATIONAL DEFENSE PROGRAM CONTAIN A PROVISION FOR THE REIMBURSEMENT OF PREMIUMS ON SUCH BONDS AND INSURANCE POLICIES AS THE CONTRACTING OFFICER MAY REQUIRE AND WITH THE PROVISO THAT SUCH EXPENDITURES, INCLUDING PUBLIC LIABILITY AND EMPLOYER'S LIABILITY, WORKMEN'S COMPENSATION, AND OTHER TYPES OF INSURANCE, ARE REIMBURSABLE ITEMS UNDER SUCH CONTRACTS, AND SINCE ARTICLE VIII-F OF CONTRACT NO. W-ORD 462 IS IN ACCORDANCE WITH A FEDERAL STATUTE, IT IS REQUESTED THAT AN ADVANCED DECISION IN REGARD TO THE ACCEPTABILITY OF INSURANCE POLICIES WRITTEN BY MUTUAL INSURANCE COMPANIES BE RENDERED AT THE EARLIEST CONVENIENT DATE.

RETURN OF THE ENCLOSED CORRESPONDENCE IS DESIRED.

THE LETTER OF THE HERCULES POWDER CO., TRANSMITTED WITH YOUR LETTER, IS ADDRESSED TO THE CONSTRUCTING QUARTERMASTER AND IS, IN PERTINENT PART, AS FOLLOWS:

FOR THE PURPOSE OF PROVIDING WORKMEN'S COMPENSATION INSURANCE AND PUBLIC LIABILITY INSURANCE DURING THE CONSTRUCTION OF THE RADFORD PLANT WE HAVE CONTACTED THE TRAVELERS INSURANCE COMPANY, LIBERTY MUTUAL INSURANCE COMPANY, AND AETNA CASUALTY AND SURETY COMPANY. THEY ARE THE FIRST, SECOND, AND FOURTH LARGEST CASUALTY INSURANCE COMPANIES OF THE COUNTRY ON THE BASIS OF PREMIUMS WRITTEN DURING THE LAST TWO YEARS. THEY ALL HAVE EXCELLENT RECORDS FOR CLAIM PAYMENTS, SERVICES, ETC.

AFTER FULL CONSIDERATION OF THE QUOTATIONS RECEIVED FROM THE AFORESAID COMPANIES AND DISCUSSION WITH THEIR RESPECTIVE REPRESENTATIVES WE BELIEVE THAT THE NET COST OF THIS INSURANCE TO THE GOVERNMENT, IF PLACED WITH THE LIBERTY MUTUAL INSURANCE COMPANY, WILL SHOW A SAVING OF FROM $17,000 TO $26,000 PER YEAR AS COMPARED WITH PLACING THIS INSURANCE WITH THE TRAVELERS INSURANCE COMPANY, AND A SOMEWHAT LARGER SAVING AS COMPARED WITH PLACING IT WITH THE AETNA CASUALTY AND SURETY COMPANY.

THE INSURANCE COMPANIES' QUOTATIONS ON THE WORKMEN'S COMPENSATION POLICY ARE BASED ON ESTIMATED CONSTRUCTION PAYROLLS AND ARE SUBJECT TO ADJUSTMENT FOR THE ACTUAL PAYROLL AT THE END OF THE INSURANCE YEAR OR THE TERMINATION OF THE POLICY. ONE SUCH POLICY WILL BE ISSUED TO COVER HERCULES POWDER COMPANY CONSTRUCTION PAYROLL, AND A SIMILAR POLICY TO COVER MASON AND HANGER COMPANY CONSTRUCTION PAYROLL.

THE PUBLIC LIABILITY INSURANCE POLICY WILL BE WRITTEN SO AS TO COVER HERCULES, MASON AND HANGER, AND THE UNITED STATES GOVERNMENT FOR ALL PUBLIC LIABILITY AND OWNERS AND CONTRACTORS CONTINGENT LIABILITY ARISING OUT OF THE CONSTRUCTION OF THE PLANT FOR BOTH PERSONAL INJURY AND PROPERTY DAMAGE, WITH $100,000/$300,000 LIMITS. THE INSURANCE COMPANIES' QUOTATION FOR THIS COVERAGE ARE LIKEWISE BASED ON ESTIMATED PAYROLLS AND THE INITIAL PREMIUM IS THEREFORE, AS IN THE CASE OF THE WORKMEN'S COMPENSATION POLICY, SUBJECT TO ADJUSTMENT FOR ACTUAL PAYROLLS. AS IS CUSTOMARY IN POLICIES ISSUED BY MUTUAL COMPANIES, BOTH POLICIES ARE ASSESSABLE AT THE RATE OF 100 PERCENT OF THE ORIGINAL PREMIUMS.

WE ARE TABULATING BELOW LIBERTY MUTUAL INSURANCE COMPANY'S QUOTATION ON THIS BUSINESS, WHICH IS PREDICATED ON THEIR BEING AWARDED BOTH THE WORKMEN'S COMPENSATION AND THE PUBLIC LIABILITY INSURANCE POLICIES.

CHART

ESTIMATED LESS 20 ESTIMATED

INITIAL PERCENT NET COST

PREMIUM DIVIDEND

WORKMEN'S COMPENSATION ------------$110,000 $22,000 $88,000

(TWO POLICIES--- ONE COVERING

HERCULES POWDER CO. CONSTRUCTION

PAY ROLL AND ONE COVERING MASON

AND HANGER CO., INC.,

CONSTRUCTION PAY ROLL.)

PUBLIC LIABILITY ------------------ 9,285 1,857 7,428

(ONE POLICY--- COVERING HERCULES

POWDER CO., MASON AND HANGER

CO., AND THE U.S. GOVERNMENT.)

TOTAL ------------------------ 119,285 23,857 95,428 - ----

(FOOTNOTE TO ABOVE CHART: AT LEAST THIS PERCENT DIVIDEND HAS BEEN PAID BY LIBERTY MUTUAL INSURANCE COMPANY IN EACH YEAR SINCE THE COMPANY WAS ORGANIZED IN 1912.) ------

THESE FIGURES ARE ESTIMATES BASED UPON THE BEST AVAILABLE INFORMATION AND ARE PREDICATED UPON AN EXPECTED DIVIDEND IN THE PERCENT INDICATED. AS IS CUSTOMARY IN POLICIES ISSUED BY MUTUAL INSURANCE COMPANIES, WE MUST ASSUME THE RISK OF A POSSIBLE MAXIMUM ASSESSMENT OF 100 PERCENT OF THE PREMIUM UNDER EACH TYPE OF POLICY IF WE ACCEPT LIBERTY MUTUAL INSURANCE COMPANY'S OFFER. SINCE THIS COMPANY REINSURES ALL LOSSES IN EXCESS OF $50,000.00, WE BELIEVE THAT THE RISK OF SUCH AN ASSESSMENT IS SLIGHT. WE MUST STATE, HOWEVER, THAT THE TABULATED QUOTATION ABOVE, BECAUSE OF THESE FACTS, IS NOT THE LOWEST GUARANTEED NET COST FOR THE INSURANCE COVERAGE DESIRED.

AFTER A CAREFUL CONSIDERATION OF ALL THE FACTS AVAILABLE, HOWEVER, WE WOULD CHOOSE LIBERTY MUTUAL INSURANCE COMPANY'S OFFER AS A SOUND BUSINESS RISK. WE RECOMMEND, THEREFORE, THAT THE INSURANCE BE PLACED WITH THAT COMPANY AND WE HEREWITH REQUEST YOUR AUTHORIZATION THAT WE ENTER INTO CONTRACTS OF THE TYPES INDICATED ABOVE AND ASSUME THE RISK INHERENT IN THE SAME.

BY THE TERMS OF THE CONTRACT INVOLVED THE HERCULES POWDER CO. IS AUTHORIZED TO ACQUIRE A SITE, DESIGN, CONSTRUCT, EQUIP, AND OPERATE A PLANT FOR THE MANUFACTURE OF NITROCELLULOSE SMOKELESS POWDER AT RADFORD, VA. THIS AGREEMENT WAS ENTERED INTO PURSUANT TO THE TERMS OF THE ACT OF JULY 2, 1940, PUBLIC, NO. 703, SEVENTY-SIXTH CONGRESS, WHICH PROVIDES IN PERTINENT PART:

THAT (A) IN ORDER TO EXPEDITE THE BUILDING UP OF THE NATIONAL DEFENSE, THE SECRETARY OF WAR IS AUTHORIZED, OUT OF THE MONEYS APPROPRIATED FOR THE WAR DEPARTMENT FOR NATIONAL-DEFENSE PURPOSES FOR THE FISCAL YEAR ENDING JUNE 30, 1941, WITH OR WITHOUT ADVERTISING, (1) TO PROVIDE FOR THE NECESSARY CONSTRUCTION, REHABILITATION, CONVERSION, AND INSTALLATION AT MILITARY POSTS, DEPOTS, STATIONS, OR OTHER LOCALITIES, OF PLANTS, BUILDINGS, FACILITIES, UTILITIES, AND APPURTENANCES THERETO * * * FOR THE DEVELOPMENT, MANUFACTURE, MAINTENANCE, AND STORAGE OF MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES, AND FOR SHELTER; (2) TO PROVIDE FOR THE DEVELOPMENT, PURCHASE, MANUFACTURE, SHIPMENT, MAINTENANCE, AND STORAGE OF MILITARY EQUIPMENT, MUNITIONS, AND SUPPLIES * * *: PROVIDED, THAT * * * ANY STATUTORY LIMITATION WITH RESPECT TO THE COST OF ANY INDIVIDUAL PROJECT OF CONSTRUCTION, SHALL BE SUSPENDED UNTIL AND INCLUDING JUNE 30, 1942, WITH RESPECT TO ANY CONSTRUCTION AUTHORIZED BY THIS ACT * * *: PROVIDED, FURTHER, THAT THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION; BUT THIS PROVISO SHALL NOT BE CONSTRUED TO PROHIBIT THE USE OF THE COST-PLUS-A-FIXED FEE FORM OF CONTRACT WHEN SUCH USE IS DEEMED NECESSARY BY THE SECRETARY OF WAR.

(C) WHENEVER, PRIOR TO JULY 1, 1942, THE SECRETARY OF WAR DEEMS IT NECESSARY IN THE INTEREST OF THE NATIONAL DEFENSE, HE IS AUTHORIZED, FROM APPROPRIATIONS AVAILABLE THEREFOR, TO ADVANCE PAYMENTS TO CONTRACTORS FOR SUPPLIES OR CONSTRUCTION FOR THE WAR DEPARTMENT IN AMOUNTS NOT EXCEEDING 30 PERCENTUM OF THE CONTRACT PRICE OF SUCH SUPPLIES OR CONSTRUCTION. SUCH ADVANCES SHALL BE MADE UPON SUCH TERMS AND CONDITIONS AND WITH SUCH ADEQUATE SECURITY AS THE SECRETARY OF WAR SHALL PRESCRIBE. IT WILL BE NOTED THAT THE QUOTED ACT VESTS A BROAD DISCRETION AND AUTHORITY IN THE SECRETARY OF WAR WITH RESPECT TO THE MAKING OF NATIONAL DEFENSE CONTRACTS OF THE TYPE HERE INVOLVED.

THE PRESENT CONTRACT, AWARDED ON A COST-PLUS-A-FIXED-FEE BASIS, PROVIDES IN ARTICLES II-C, III-C, AND V-C THAT THE CONTRACTOR SHALL RECEIVE (1) REIMBURSEMENT FOR EXPENDITURES MADE, (2) RENTAL FOR EQUIPMENT FURNISHED, AND (3) A FIXED FEE AS COMPENSATION. AMONG THE EXPENDITURES OF THE CONTRACTOR FOR WHICH THE UNITED STATES AGREES TO MAKE REIMBURSEMENT "WHEN APPROVED OR RATIFIED BY THE CONTRACTING OFFICER" ARE: (I) PREMIUMS ON SUCH BONDS AND INSURANCE POLICIES AS THE CONTRACTING OFFICER MAY REQUIRE; THE COST OF ALL PUBLIC LIABILITY, EMPLOYER'S LIABILITY, WORKMEN'S COMPENSATION, FIDELITY, FIRE, THEFT, BURGLARY, AND OTHER INSURANCE THAT THE CONTRACTING OFFICER MAY APPROVE AS REASONABLY NECESSARY FOR THE PROTECTION OF THE CONTRACTOR (ARTICLE VI-A, 1.)

IT APPEARS FROM YOUR LETTER AND ITS ENCLOSURE THAT WORKMEN'S COMPENSATION AND PUBLIC LIABILITY INSURANCE CAN BE PROCURED BY THE CONTRACTOR FROM THE LIBERTY MUTUAL INSURANCE CO. AT AN ESTIMATED NET COST OF FROM $17,000 TO $26,000 PER YEAR LESS THAN THE COST OF SAID INSURANCE IF PROCURED FROM THE TRAVELERS INSURANCE CO. OR THE AETNA CASUALTY AND SURETY CO. HOWEVER, THESE LOWER NET COST COMPUTATIONS UNDER LIBERTY MUTUAL INSURANCE COMPANY POLICIES TAKE INTO CONSIDERATION CERTAIN SO-CALLED "DIVIDENDS" NORMALLY DISTRIBUTED TO POLICYHOLDERS; ALSO, THESE NET COSTS ARE COMPUTED UPON THE BASIS THAT NO ADDITIONAL ASSESSMENTS, WHICH ARE PERMISSIBLE UNDER CERTAIN CIRCUMSTANCES, SHALL BE LEVIED BY THE COMPANY. IF NO DIVIDENDS SHOULD BE DISTRIBUTED AND AN ASSESSMENT SHOULD BE MADE IT IS UNDERSTOOD THAT THE COST OF INSURANCE PURCHASED BY THIS COMPANY WOULD BE GREATER THAN THE COST OF POLICIES WHICH COULD BE PROCURED FROM THE TRAVELERS INSURANCE CO. OR THE AETNA CASUALTY AND SURETY CO. IN OTHER WORDS, THE LIBERTY MUTUAL INSURANCE CO. DOES NOT OFFER THE LOWEST GUARANTEED COST FOR THE DESIRED INSURANCE PROTECTION.

HOWEVER, IT APPEARS FROM YOUR LETTER AND THE LETTER OF THE HERCULES POWDER CO., THAT OVER A LONG PERIOD OF YEARS THE LIBERTY MUTUAL INSURANCE CO. HAS CONSISTENTLY PAID "DIVIDENDS" RESULTING IN A NET PREMIUM COST OF NOT LESS THAN 20 PERCENT LOWER THAN THE ORIGINAL DEPOSIT PREMIUM PAID TO THE COMPANY, AND THAT THE LIKELIHOOD OF AN ACTUAL ADDITIONAL ASSESSMENT IS SO REMOTE AS TO BE PRACTICALLY NEGLIGIBLE.

IT IS CHARACTERISTIC OF INSURANCE POLICIES ISSUED BY MUTUAL INSURANCE COMPANIES THAT THE NET PREMIUM COSTS, IN THEORY AT LEAST, SHALL BE SOMEWHAT CONTINGENT UPON THE ULTIMATELY DETERMINED COST TO THE COMPANY OF CARRYING THE RISK. AS STATED BY JUSTICE BRANDEIS IN PENN MUTUAL CO. V. LEDERER, 252 U.S. 523, 525-6---

* * * IN A MUTUAL COMPANY, WHATEVER THE FIELD OF ITS OPERATION, THE PREMIUM EXACTED IS NECESSARILY GREATER THAN THE EXPECTED COST OF THE INSURANCE, AS THE REDUNDANCY IN THE PREMIUM FURNISHES THE GUARANTY FUND OUT OF WHICH EXTRAORDINARY LOSES MAY BE MET, WHILE IN A STOCK COMPANY THEY MAY BE MET FROM THE CAPITAL STOCK SUBSCRIBED. IT IS OF THE ESSENCE OF MUTUAL INSURANCE THAT THE EXCESS IN THE PREMIUM OVER THE ACTUAL COST AS LATER ASCERTAINED SHALL BE RETURNED TO THE POLICYHOLDER. SOME PAYMENT TO THE POLICYHOLDER REPRESENTING SUCH EXCESS IS ORDINARILY MADE BY EVERY MUTUAL COMPANY EVERY YEAR; * * * SEE, ALSO, MUTUAL BENEFIT LIFE INSURANCE CO. V. HER OLD, 198 FED. 199.

IN SPITE OF THE CONTINGENT ELEMENT, HOWEVER, MUTUAL COMPANIES ARE GENERALLY RECOGNIZED AS PROVIDING A SATISFACTORY AND DEPENDABLE FORM OF INSURANCE PROTECTION.

IT IS TRUE THAT AS A GENERAL RULE GOVERNMENT OBLIGATIONS MUST BE SUSCEPTIBLE OF DEFINITE MEASUREMENT IN ADVANCE. IN THIS CONNECTION SEE SECTIONS 3648, 3679, AND 3732 OF THE REVISED STATUTES AS AMENDED. HOWEVER, AS INDICATED IN YOUR LETTER, ALTHOUGH AN ELEMENT OF CONTINGENCY IS NECESSARILY INVOLVED IN A MATTER SUCH AS HERE PRESENTED, THE EXPERIENCE AND PRACTICE OF THE COMPANY OVER A LONG NUMBER OF YEARS AND ITS PRACTICE OF REINSURING RISKS IN EXCESS OF $50,000 SERVE FROM A PRACTICAL STANDPOINT VIRTUALLY TO REMOVE ANY ELEMENT OF UNCERTAINTY AND TO REDUCE THE INVOLVED COST TO AN ASCERTAINABLE AMOUNT. FURTHERMORE, IT SEEMS CLEAR, FROM A CONSIDERATION OF THE TERMS OF SECTIONS 3648, 3679, AND 3732 OF THE REVISED STATUTES, AND THE PURPOSE WHICH SAID SECTIONS WERE DESIGNED TO SERVE, THAT IT WAS NOT CONTEMPLATED THAT THEY WOULD PROVIDE ANY PROHIBITION OR RESTRICTION AGAINST THE USE OF PUBLIC FUNDS FOR MAKING REIMBURSEMENTS WITH RESPECT TO ESSENTIAL ITEMS OF EXPENSE, EVEN THOUGH CONTINGENT IN NATURE, WHEN INCURRED BY A CONTRACTOR UNDER THE TERMS OF A CONTRACT SUCH AS THE ONE HERE INVOLVED. THERE IS NOT INVOLVED HERE A QUESTION OF WHETHER THE UNITED STATES MAY ENTER INTO A CONTRACT WITH AN INSURANCE COMPANY ON A CONTINGENT COST BASIS; RATHER THERE IS PRESENTED THE QUESTION OF WHETHER FEDERAL FUNDS MAY BE USED TO REIMBURSE A CONTRACTOR FOR AN AMOUNT EXPENDED FOR INSURANCE, WHICH CONSTITUTES BUT ONE OF MANY ITEMS OF COST UNDER A LARGE CONTRACT, AND WHICH IS PROCURED ON A BASIS WHICH WILL, IN THE ABSENCE OF A REMOTE AND UNEXPECTED CONTINGENCY, RESULT IN THE LOWEST NET REIMBURSEMENT COST TO THE UNITED STATES. IT IS PROVIDED IN THE CONTRACT THAT THE GOVERNMENT WILL BEAR THE COST OF PREMIUMS ON SUCH INSURANCE POLICIES AS THE CONTRACTING OFFICER MAY REQUIRE AND APPROVE. CONSEQUENTLY, IF THE CONTRACTING OFFICER BE OF THE OPINION THAT ADEQUATE INSURANCE PROTECTION UNDER THE CONTRACT MAY BE FURNISHED BY A MUTUAL INSURANCE COMPANY AT A LESS COST THAN BY A STOCK INSURANCE COMPANY, THERE APPEARS TO BE NO LAW OR INTEREST OF THE GOVERNMENT REQUIRING THAT THE CONTRACTING OFFICER MUST, NEVERTHELESS, INSIST UPON A STOCK COMPANY POLICY MERELY BECAUSE THE MUTUAL COMPANY PREMIUM COST INVOLVES SOME ELEMENT OF UNCERTAINTY AS TO AMOUNT.

I HAVE TO ADVISE, THEREFORE, THAT, ON THE BASIS OF THE FACTS HERE PRESENTED, THERE IS NO LEGAL OBJECTION TO THE USE OF THE PUBLIC FUNDS INVOLVED FOR MAKING REIMBURSEMENT TO THE CONTRACTOR OF AMOUNTS EXPENDED FOR INSURANCE PREMIUMS UNDER OTHERWISE PROPER POLICIES PROCURED FROM THE LIBERTY MUTUAL INSURANCE CO.

THE ENCLOSURE TRANSMITTED WITH YOUR LETTER IS RETURNED HEREWITH AS REQUESTED.