B-134535, FEBRUARY 6, 1958, 37 COMP. GEN. 511

B-134535, FEBRUARY 6, 1958, 37 COMP. GEN. 511

MARITIME MATTERS - WAR RISK INSURANCE - AS PROCUREMENT OF INSURANCE FOR GOVERNMENT RISKS - INSURANCE BROKERS - FEE VIOLATION A REQUIREMENT THAT SHIPBUILDERS OBTAIN BUILDER'S RISK INSURANCE, INCLUDING WAR RISK INSURANCE, WHICH IS PROCURABLE MAINLY FROM THE GOVERNMENT, IS NOT A DEVIATION FROM NORMAL COMMERCIAL PRACTICE AND DOES NOT TRANSFER THE SPECIFIC LIABILITY OF THE SHIPBUILDER TO THE OWNER FOR LOSS OF THE VESSEL TO THE GOVERNMENT SO AS TO BE REGARDED AS THE PROCUREMENT OF INSURANCE BY THE GOVERNMENT CONTRARY TO THE PRINCIPLE THAT THE GOVERNMENT MUST ASSUME ITS OWN RISKS. A REQUIREMENT THAT SHIPBUILDERS OBTAIN BUILDER'S RISK INSURANCE, INCLUDING WAR RISK INSURANCE, DOES NOT MAKE THE COST OF INCLUSION OF INSURANCE PREMIUMS IN THE BID PRICE A BROKERAGE FEE ACCRUING TO THE SHIPBUILDER IN VIOLATION OF SECTION 1209 (C) OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1289 (C), WHEN THE INSURANCE IS REQUIRED TO BE TAKEN OUT IN THE NAME OF THE SHIPBUILDER, THE OWNER AND THE UNITED STATES.

TO BETHLEHEM-1SPARROWS POINT SHIPYARD, INC., FEBRUARY 5, 1958:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF JANUARY 10, 1958, CONTENDING THAT CERTAIN PROVISIONS OF THE PRO FORMA CONTRACT ISSUED IN CONNECTION WITH AN INVITATION FOR BIDS OF AMERICAN EXPORT LINES, INC., DATED OCTOBER 12, 1957, PRECLUDE A LAWFUL AWARD TO ANY BIDDER. YOU REFER SPECIFICALLY TO ARTICLE IX OF THE PRO FORMA CONTRACT WHICH READS, IN PERTINENT PART, AS FOLLOWS:

ARTICLE IX. INSURANCE ON THE VESSEL AND MATERIAL. UNTIL THE VESSEL HAS BEEN COMPLETED AND SAID VESSEL PHYSICALLY DELIVERED AND ACCEPTED BY THE OWNER, THE VESSEL AND ALL MATERIALS, OUTFIT, EQUIPMENT AND APPLIANCES TO BE INSTALLED ON OR IN THE VESSEL, INCLUDING ALL MATERIALS, OUTFIT, EQUIPMENT AND APPLIANCES PROVIDED BY THE OWNER FOR AND USED, OR TO BE USED IN THE CONSTRUCTION THEREOF, SHALL AT THE EXPENSE OF THE CONTRACTOR, BE KEPT FULLY INSURED UNDER FULL FORM MARINE BUILDERS RISK POLICIES, INCLUDING LOSS OR DAMAGE CAUSED BY STRIKERS, LOCKED-OUT WORKMEN, OR PERSONS TAKING PART IN LABOR DISTURBANCES, OR RIOT OR CIVIL COMMOTION, WAR RISK POLICIES AND PROTECTION AND INDEMNITY POLICIES OR CLAUSES, INCLUDING LOSS OF LIFE AND PERSONAL INJURY. ( ITALICS SUPPLIED)

IN SUBSTANCE, IT APPEARS TO BE YOUR VIEW THAT SINCE THE ABOVE-QUOTED ARTICLE, IN ADDITION TO REQUIRING ORDINARY BUILDERS RISK INSURANCE, ALSO REQUIRES THAT THE SHIPBUILDER SHALL SUPPLY WAR RISK INSURANCE FOR THE PROTECTION OF MARITIME AND OTHER CONTRACTING PARTIES, SUCH FEATURE OF THE CONTRACT PREVENTS A LAWFUL AWARD OF THE WORK TO ANY BIDDER. IN SUPPORT OF THIS CONTENTION, YOU REFER TO OUR DECISIONS REPORTED IN 18 COMP. GEN. 285, PERTAINING TO THE GENERAL PUBLIC POLICY AGAINST CONTRACT STIPULATIONS REQUIRING CONTRACTORS TO INSURE BEYOND "USUAL STANDARDS OF RESPONSIBILITY," AND 19 COMP. GEN. 798, IN CONNECTION WITH A PROHIBITION AGAINST THE FEDERAL GOVERNMENT PROCURING INSURANCE TO COVER ITS POSSIBLE TORT LIABILITY. YOU FURTHER CONTEND THAT SINCE THE COST OF SUCH PREMIUMS ARE INCLUDED IN THE BID PRICE, A PORTION OF WHICH IS PAYABLE BY THE GOVERNMENT, SUCH A REQUIREMENT IS IN VIOLATION OF SECTION 1209 (C) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1289 (C), WHICH PROVIDES IN PART AS FOLLOWS:

EXCEPT AS AUTHORIZED IN SUBSECTION (D) OF THIS SECTION, NO INSURANCE BROKER OR OTHER PERSON ACTING IN A SIMILAR INTERMEDIARY CAPACITY SHALL BE PAID ANY FEE OR OTHER CONSIDERATION BY THE SECRETARY BY VIRTUE OF HIS PARTICIPATION IN ARRANGING ANY INSURANCE WHEREIN THE SECRETARY DIRECTLY INSURES ANY OF THE RISK INVOLVED.

YOU ALSO POINT OUT THAT IT IS IMPOSSIBLE FOR A SHIPYARD TO COMPLY WITH ARTICLE IX OF THE PRO FORMA CONTRACT WITHOUT BUYING A MAJOR PART OR ALL OF THE WAR RISK COVERAGE FROM THE MARITIME ADMINISTRATION ITSELF PURSUANT TO TITLE XII OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1281. IN VIEW OF THIS SITUATION, YOU ARE UNDER THE IMPRESSION THAT SINCE THE PREMIUMS FOR WAR RISK INSURANCE ARE INCLUDED IN THE BID PRICE OF THE SHIPBUILDER AS AN ELEMENT OF COST IN HIS BID, A CERTAIN PERCENTAGE OF PROFIT REALIZED UPON SUCH COSTS, INCLUDING THE INSURANCE PREMIUMS, WOULD AMOUNT TO A BROKERAGE FEE ACCRUING TO THE SHIPBUILDER, WHICH WOULD BE IN VIOLATION OF SECTION 1209 (C) OF THE MERCHANT MARINE ACT, AND ALSO AGAINST THE PRINCIPLES ENUNCIATED IN OUR DECISIONS WITH RESPECT TO A PROHIBITION AGAINST GOVERNMENT AGENCIES INSURING THEMSELVES.

GENERAL ORDER NO. 75, ISSUED BY THE FEDERAL MARITIME BOARD AND PUBLISHED ON PAGE 1175 IN THE FEDERAL REGISTER ON FEBRUARY 28, 1957, INDICATES THAT IT IS NOT A DEVIATION FROM NORMAL COMMERCIAL PRACTICE TO REQUIRE A SHIPYARD TO INSURE AGAINST WAR RISKS. FURTHERMORE, ARTICLE 16 OF THE GENERAL PROVISIONS OF THE PRO FORMA CONTRACT PROVIDES THAT TITLE TO THE VESSELS VESTS IN THE OWNER TO THE EXTENT THAT WORK IS COMPLETED, BUT NOTWITHSTANDING ANY PROVISIONS WITH RESPECT TO PASSAGE OF TITLE, RISK OF LOSS REMAINS IN THE SHIPBUILDER UNTIL THE COMPLETED VESSEL IS DELIVERED TO AND ACCEPTED BY THE OWNER. IT IS THEREFORE APPARENT THAT THE SHIPBUILDER IS LIABLE TO THE OWNER FOR LOSS OF THE VESSEL, AND, SUCH BEING THE CASE, IT DOES NOT FOLLOW THAT THE FEDERAL MARITIME BOARD IS AUTHORIZED TO ASSUME THE SHIPBUILDER'S RISKS. HENCE, THE PAYMENT OF CONSTRUCTION-DIFFERENTIAL SUBSIDY, INCLUDING A PART OF THE WAR RISK BUILDER'S INSURANCE, INVOLVES NO DEPARTURE FROM THE PRINCIPLE THAT THE GOVERNMENT SHALL ASSUME ITS OWN RISKS. FURTHERMORE, ARTICLE IX OF THE PRO FORMA CONTRACT CONTINUES AS FOLLOWS:

* * * ALL POLICIES OF INSURANCE SHALL BE TAKEN OUT IN THE NAME OF THE CONTRACTOR AND THE OWNER AND THE UNITED STATES OF AMERICA, AND ALL LOSSES UNDER SUCH POLICIES SHALL BE MADE PAYABLE TO THE BOARD FOR DISTRIBUTION BY IT TO ITSELF, THE OWNER AND THE CONTRACTOR AS THEIR RESPECTIVE INTERESTS MAY APPEAR. * * * ( ITALICS SUPPLIED.)

IN THE LIGHT OF THE FOREGOING, IT MUST BE CONCLUDED THAT THE PROVISION IN THE PRO FORMA CONTRACT REQUIRING THE SHIPYARD TO PROCURE WAR RISK AND BUILDERS RISK INSURANCE TO COVER ITS OWN RISKS OF LOSS CANNOT BE CONSIDERED IN VIOLATION OF THE PROSCRIPTIONS OF SECTION 1209 (C) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, NOR AGAINST THE PRINCIPLES SET FORTH IN OUR DECISIONS REFERRED TO ABOVE.

RESPONDING TO THE QUESTION PRESENTED IN YOUR TELEGRAM OF FEBRUARY 3, 1958, AS TO WHETHER THE MARITIME ADMINISTRATION AND/OR AMERICAN EXPORT LINES, INC., MAY, IN THEIR DISCRETION, REJECT ALL BIDS AND READVERTISE, YOUR ATTENTION IS INVITED TO SECTION 505 (A) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1155, WHICH READS, IN PERTINENT PART, AS FOLLOWS:

ALL CONSTRUCTION IN RESPECT OF WHICH A CONSTRUCTION-DIFFERENTIAL SUBSIDY IS ALLOWED UNDER THIS TITLE SHALL BE PERFORMED IN A SHIPYARD WITHIN THE CONTINENTAL LIMITS OF THE UNITED STATES AS THE RESULT OF COMPETITIVE BIDDING, AFTER DUE ADVERTISEMENT, WITH THE RIGHT RESERVED IN THE APPLICANT TO REJECT, AND IN THE COMMISSION TO DISAPPROVE, ANY OR ALL BIDS.

ADDITIONALLY, ARTICLE 10 (A) OF THE INVITATION FOR BIDS PROVIDES:

THE OWNER RESERVES THE RIGHT IN ITS SOLE DISCRETION TO REJECT ANY AND ALL BIDS, WHOLE OR IN PART; TO CALL FOR NEW BIDS; * * * AND TO MAKE AN AWARD AS MAY BE DEEMED MOST ADVANTAGEOUS OR WILL BEST SERVE THE PURPOSES OF THE OWNER AND THE GOVERNMENT.

ACCORDINGLY, THE QUESTION OF WHETHER ALL BIDS SHOULD BE REJECTED AND NEW BIDS REQUESTED IS A MATTER STRICTLY FOR DETERMINATION BY THE MARITIME ADMINISTRATION AND AMERICAN EXPORT LINES, INC.

IN COMPLIANCE WITH THE TELEPHONIC REQUEST OF YOUR COUNSEL, THERE IS ENCLOSED A COPY OF THE REPORT FURNISHED US BY THE MARITIME ADMINISTRATION.