B-162272, FEBRUARY 15, 1968, 47 COMP. GEN. 457

B-162272: Feb 15, 1968

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PUBLIC LIABILITY AND OTHER REQUIRED INSURANCE THAT IS REIMBURSABLE UNDER COST-TYPE CONTRACTS MAY BE PAID NOTWITHSTANDING A "NO COST SETTLEMENT AGREEMENT" THAT INCLUDED MUTUAL RELEASES. THE LIABILITY OF THE GOVERNMENT FOR THE UNPAID INSURANCE PREMIUMS IS MANDATORY AND MUST BE READ INTO THE TERMINATION SETTLEMENT. 1968: REFERENCE IS MADE TO A LETTER DATED AUGUST 11. BETWEEN THE GOVERNMENT AND HOFFMAN WHICH WERE ENTERED INTO IN DECEMBER 1952 AND JANUARY 1953. OTHER REQUIRED INSURANCE WERE RECOGNIZED AS COSTS REIMBURSABLE BY THE GOVERNMENT. APPARENTLY FIDELITY WAS NOT NOTIFIED OF THIS AGREEMENT BEFORE IT WAS EFFECTED. IN THE ABOVE REFERENCED LETTER THE POSITION IS TAKEN THAT THERE IS NO LEGAL BASIS FOR THE GOVERNMENT TO ASSUME THE INSURANCE COSTS INASMUCH AS THERE IS NO PRIVITY OF CONTRACT BETWEEN FIDELITY AND THE GOVERNMENT.

B-162272, FEBRUARY 15, 1968, 47 COMP. GEN. 457

CONTRACTS - COST-TYPE - REIMBURSEMENT COSTS - INSURANCE THE CLAIM OF AN INSURANCE COMPANY FOR UNPAID PREMIUMS ON POLICIES PROVIDING FOR THE RETROSPECTIVE DETERMINATION OF EARNED PREMIUMS COVERING WORKMEN'S COMPENSATION, PUBLIC LIABILITY AND OTHER REQUIRED INSURANCE THAT IS REIMBURSABLE UNDER COST-TYPE CONTRACTS MAY BE PAID NOTWITHSTANDING A "NO COST SETTLEMENT AGREEMENT" THAT INCLUDED MUTUAL RELEASES, AND THE LACK OF PRIVITY BETWEEN THE GOVERNMENT AND THE INSURANCE COMPANY. THE CONTRACTING OFFICER UNDER SECTION 10-554 OF ARMY PROCUREMENT PROCEDURE--- WHICH HAS THE FORCE AND EFFECT OF LAW--- HAVING THE RESPONSIBILITY UPON THE TERMINATION OR COMPLETION OF A COST REIMBURSABLE-TYPE CONTRACT TO OBTAIN INSURANCE CREDITS DUE THE CONTRACTOR OR TO ASSUME THE CONTRACTOR'S INSURANCE OBLIGATIONS, THE LIABILITY OF THE GOVERNMENT FOR THE UNPAID INSURANCE PREMIUMS IS MANDATORY AND MUST BE READ INTO THE TERMINATION SETTLEMENT.

TO THE SECRETARY OF THE ARMY, FEBRUARY 15, 1968:

REFERENCE IS MADE TO A LETTER DATED AUGUST 11, 1967, FROM THE ARMY MATERIEL COMMAND, TRANSMITTING FOR OUR DECISION THE CLAIM OF FIDELITY AND CASUALTY COMPANY OF NEW YORK FOR UNPAID PREMIUMS ON INSURANCE POLICIES ISSUED TO U.S. HOFFMAN MACHINERY CORPORATION FOR COVERAGE UNDER THE LATTER'S PRIME CONTRACTS WITH THE GOVERNMENT.

THE CLAIM STEMS FROM TWO COST REIMBURSABLE TYPE CONTRACTS, DA 36 034-ORD- 1133 AND 1190, BETWEEN THE GOVERNMENT AND HOFFMAN WHICH WERE ENTERED INTO IN DECEMBER 1952 AND JANUARY 1953, RESPECTIVELY. UNDER THESE CONTRACTS PREMIUMS PAID BY THE CONTRACTOR FOR WORKMEN'S COMPENSATION, PUBLIC LIABILITY, AND OTHER REQUIRED INSURANCE WERE RECOGNIZED AS COSTS REIMBURSABLE BY THE GOVERNMENT. THE POLICIES ISSUED BY FIDELITY TO HOFFMAN INCLUDED ENDORSEMENTS PROVIDING FOR PREMIUMS THEREON TO CONFORM TO THE NATIONAL DEFENSE PROJECTS RATING PLAN (NDPRP) WHICH PROVIDED FOR RETROSPECTIVE DETERMINATION OF EARNED PREMIUMS ON THE BASIS OF ANNUAL AUDITS OF LOSS EXPERIENCE IN ACCORDANCE WITH A FORMULA SET OUT IN THE ENDORSEMENTS.

THE RECORD INDICATES THAT ON APRIL 16, 1963, THE GOVERNMENT AND HOFFMAN ENTERED INTO A "NO COST SETTLEMENT AGREEMENT" (COMPLETE TERMINATION) COVERING SUBJECT CONTRACTS (AS WELL AS SIX OTHERS) WHICH INCLUDED MUTUAL RELEASES OF ALL OBLIGATIONS AND LIABILITIES OF EITHER PARTY TO THE OTHER UNDER THE CONTRACTS. APPARENTLY FIDELITY WAS NOT NOTIFIED OF THIS AGREEMENT BEFORE IT WAS EFFECTED; HOWEVER, FIDELITY CANCELLED ITS POLICIES WITH HOFFMAN ON JULY 11, 1963 (RETROACTIVE TO MARCH 23, 1963), AS SOON AS IT BECAME AWARE OF THE TERMINATION OF THE PRIME CONTRACTS. IT APPEARS THAT HOFFMAN MADE FOUR PAYMENTS ON ACCOUNT OF OVERDUE PREMIUMS DURING 1964 AND 1965, AND SOME TIME THEREAFTER WENT OUT OF BUSINESS. THE CLAIM APPEARS TO REPRESENT THE BALANCE OF PREMIUMS ACCRUED ON THE POLICIES FOR SEVERAL YEARS PRIOR TO THE TERMINATION, ADJUSTED IN ACCORDANCE WITH THE PLAN TO THE TERMINATION DATE.

IN THE ABOVE REFERENCED LETTER THE POSITION IS TAKEN THAT THERE IS NO LEGAL BASIS FOR THE GOVERNMENT TO ASSUME THE INSURANCE COSTS INASMUCH AS THERE IS NO PRIVITY OF CONTRACT BETWEEN FIDELITY AND THE GOVERNMENT.

BY LETTER OF DECEMBER 11, 1967, WE BROUGHT TO YOUR DEPARTMENT'S ATTENTION A PROVISION IN SECTION 10-554 OF THE ARMY PROCUREMENT PROCEDURE, 1957 EDITION, CHANGE 34, JANUARY 31, 1962, WHICH WAS IN EFFECT AT THE TIME THE REFERENCED PRIME CONTRACTS WERE TERMINATED, AND WHICH APPEARS TO BE MANDATORY IN ITS TERMS, REQUIRING THE CONTRACTING OFFICER TO TAKE APPROPRIATE ACTION, AT THE TIME OF CONTRACT SETTLEMENT, TO INSURE THAT ANY REMAINING CREDITS DUE THE PRIME CONTRACTOR IN CONNECTION WITH INSURANCE OF THE TYPE HERE INVOLVED WOULD BE PAID TO THE GOVERNMENT AND ANY OUTSTANDING OBLIGATIONS OF THE CONTRACTOR WITH RESPECT TO INSURANCE WOULD BE ASSUMED BY THE GOVERNMENT. WE NOTE THAT SECTION 10-554 OF THE CURRENT APP EDITION ALSO REQUIRES SUCH ACTION BY THE CONTRACTING OFFICER. ACCORDINGLY, WE REQUESTED THE VIEWS OF THE DEPARTMENT AS TO THE LEGAL EFFECT OF SUCH MANDATORY REGULATION UPON FIDELITY'S CLAIM.

IN RESPONSE TO OUR REQUEST YOUR DEPARTMENT IN ITS LETTER OF DECEMBER 28, 1967, STATED THAT:

"APP 10-554 IS AN INTERNAL ARMY REGULATION, PART OF A GENERAL SECTION PROVIDING GUIDANCE AND INSTRUCTIONS PERTAINING TO REQUIREMENTS FOR BONDS AND INSURANCE AND HOW TO ADMINISTER SUCH MATTERS UNDER VARYING CIRCUMSTANCES. THE PARTICULAR REGULATION CITED PROVIDED INSTRUCTION AND GUIDANCE ABOUT WHAT TO DO ABOUT INSURANCE COSTS AND CREDITS IN THE EVENT OF TERMINATION OF A COST REIMBURSEMENT TYPE CONTRACT. IN FACT, THE REGULATION REQUIRES THE CONTRACTING OFFICER TO DO NO MORE THAN THAT WHICH HE WOULD HAVE TO DO UNDER THE PROVISIONS OF THE STANDARD TERMINATION ARTICLE IN A COST-REIMBURSEMENT CONTRACT. HOWEVER, THE U.S. HOFFMAN CONTRACTS WERE NOT UNILATERALLY TERMINATED BY THE ARMY IN ACCORDANCE WITH THE CLAUSES IN THE CONTRACT SO PROVIDING. THE CONTRACTS IN QUESTION WERE TERMINATED BY MUTUAL AGREEMENT OF THE PARTIES AT NO FURTHER EXPENSE TO THE GOVERNMENT. ACCORDINGLY, APP 10-554 IS NOT APPLICABLE AND AFFORDS NO ASSISTANCE TO THE CLAIMANT INSURANCE COMPANY.'

WE FEEL REQUIRED TO TAKE A DIFFERENT POSITION IN THIS MATTER. THE REGULATION CITED ABOVE IS NOT RESTRICTED IN OPERATION TO TERMINATION SETTLEMENTS BUT APPLIES TO ACTION ON "TERMINATION OR COMPLETION" OF COST- REIMBURSEMENT TYPE CONTRACTS. THIS REGULATION WAS PROMULGATED PURSUANT TO CHAPTER 137, TITLE 10, UNITED STATES CODE (SEE 22 F.R. 7179 AND 7181 - SECTIONS 599.555, 556, AND 752), IS CONSISTENT WITH ITS STATUTORY PURPOSE AND INTENT, AND HAS THE FORCE AND EFFECT OF LAW, CF. G.L. CHRISTIAN AND ASSOCIATES V UNITED STATES, 312 F.2D 418, REHEARING DENIED, 320 F.2D 345, CERT. DENIED, 375 U.S. 954. ALSO SEE J.W. BATESON COMPANY, INC. V. UNITED STATES, 162 CT. CL. 566. FOLLOWING THE RULE THERE ANNOUNCED, WE BELIEVE THAT THE REGULATION IN EFFECT WHEN THE CONTRACT WAS TERMINATED IS BINDING UPON BOTH THE ARMY AND HOFFMAN AND THAT THE REQUIRED ASSIGNMENT AND ASSUMPTION OF LIABILITY WITH RESPECT TO THE INSURANCE PREMIUMS MUST BE READ INTO THE TERMINATION SETTLEMENT AGREEMENT. CONSEQUENTLY, WE CONCLUDE THAT THE GOVERNMENT IS LIABLE FOR THE PREMIUMS DUE AND THAT PAYMENT THEREFOR SHOULD BE MADE SUBJECT TO VERIFICATION OF THE AMOUNT DUE.

THE ENCLOSURES RECEIVED WITH YOUR DEPARTMENT'S LETTERS OF AUGUST 11, 1967, AND DECEMBER 28, 1967, ARE RETURNED.