B-83676, JUN. 23, 1964

B-83676, JUN. 23, 1964

TO THE MARITIME ADMINISTRATOR, DEPARTMENT OF COMMERCE:

THE FORMER ADMINISTRATOR'S LETTER OF AUGUST 29, 1963, AND ENCLOSURES, RELATE TO A DEMAND OF THE MARITIME ADMINISTRATION AGAINST CERTAIN INSURANCE COMPANIES FOR AN ACCOUNTING FOR, AND REFUND OF, CERTAIN INVESTMENT INCOME ARISING INCIDENT TO INSURANCE AGREEMENTS BETWEEN THE UNITED STATES AND THE COMPANIES.

THE FACTS IN BRIEF ARE AS FOLLOWS:

BETWEEN DECEMBER 1, 1942 AND JUNE 30, 1947, THE UNITED STATES OF AMERICA, REPRESENTED BY THE ADMINISTRATOR, WAS SHIPPING ADMINISTRATION, ENTERED INTO THREE BASIC CONTRACTS, AND EIGHTEEN AMENDMENTS, WITH SIXTEEN INSURANCE COMPANIES (UNDERWRITERS) COVERING AN INSURANCE PROGRAM IDENTIFIED AS WAR TIME PROTECTION AND INDEMNITY INSURANCE(WARTIME P AND I). THIS PROGRAM WAS UNDERTAKEN BY THE WAR SHIPPING ADMINISTRATION FOR THE PURPOSE OF SUPPLYING WARTIME PROTECTION AND INDEMNITY INSURANCE (P AND I) BY THE GOVERNMENT, SINCE SUCH INSURANCE WAS NOT AVAILABLE ON THE COMMERCIAL MARKET. THE UNDERWRITERS WERE ENGAGED TO ISSUE POLICIES AND TO MAINTAIN THE CLAIM SERVICING ORGANIZATIONS TO HANDLE THE THOUSANDS OF CLAIMS OF THIRD PARTY NATURE TO WHICH THE GOVERNMENT AS THE OWNER OF THE VESSELS WOULD BE SUBJECTED.

UNDER THE VARIOUS AGREEMENTS AND AMENDMENTS THERETO THE UNDERWRITERS AGREED TO PROVIDE PROTECTION AND INDEMNITY INSURANCE AGAINST MARINE RISKS TO THE UNITED STATES, ITS GENERAL AGENTS, AGENTS, BERTH AGENTS, SUBAGENTS AND OWNERS, COVERING VESSELS OWNED BY OR BAREBOAT CHARTERED TO THE UNITED STATES. THE UNITED STATES AGREED TO PAY A SPECIFIED PREMIUM RATE PER TON FOR THE INSURANCE, THE PREMIUMS TO BE PAID QUARTERLY IN ADVANCE OR ANNUALLY, DEPENDING ON THE AGREEMENT. THE AGREEMENTS ALSO PROVIDED THAT THE PREMIUMS PAID BY THE UNITED STATES WOULD BE SUBJECT TO READJUSTMENT AS PROVIDED THEREIN.

UNDER THE FIRST AGREEMENT, DECEMBER 1, 1942, THE UNDERWRITERS WERE LIMITED TO 10 PERCENT OF THE NET PROFITS OF ANY INSURANCE UNDER THE AGREEMENT, BUT AT THE SAME TIME THEY WOULD BEAR ONLY 10 PERCENT OF ANY LOSSES. UNDER DATE OF JANUARY 1, 1945 (ADDENDUM NO. 2), THE FIRST AGREEMENT WAS AMENDED, EFFECTIVE FROM ITS INCEPTION, SO AS TO LIMIT THE PROFIT OF UNDERWRITERS TO 10 PERCENT OR $300,000, WHICHEVER PROVED TO BE THE SMALLER. NO CHANGE WAS MADE IN THE APPORTIONMENT OF LOSSES, SO THAT THE UNDERWRITERS WERE STILL EXPOSED TO 10 PERCENT OF ANY LOSSES UNDER THE INSURANCE, WITH NO CEILING ON THE AMOUNT.

UNDER THE FIRST AGREEMENT, DECEMBER 1, 1942, THE UNDERWRITERS WERE ENTITLED TO PARTICIPATE IN 25 PERCENT OF ANY PROFITS FROM THE INSURANCE AND WOULD BEAR 25 PERCENT OF ANY LOSSES. BY ADDENDUM NO. 3 TO THIS AGREEMENT, DATED JANUARY 1, 1945, IT WAS AMENDED, EFFECTIVE FROM ITS INCEPTION, TO LIMIT ANY PROFITS OF THE UNDERWRITERS TO 7-1/2 PERCENT OF 25 PERCENT OF THE GROSS PREMIUMS PAID UNDER THE AGREEMENT. NO CHANGE WAS MADE IN THE SHARING OF LOSSES AND THE UNDERWRITERS WERE STILL EXPOSED TO 25 PERCENT OF THE RISK.

UNDER THE THIRD AGREEMENT, JANUARY 1, 1945, THE UNDERWRITERS WERE ENTITLED TO PARTICIPATE IN ANY PROFITS FROM THE INSURANCE IN AN AMOUNT EQUAL TO 5 PERCENT OF THE GROSS PREMIUMS, LESS RETURNS, OR $750,000, WHICHEVER PROVED TO BE THE LESSER AMOUNT. LOSSES WHICH COULD BE SUFFERED BY THE UNDERWRITERS WERE ALSO LIMITED TO 5 PERCENT OF THE GROSS PREMIUMS, LESS RETURNS, OR $750,000, WHICHEVER PROVED TO BE THE LESSER AMOUNT. UNDER THE THREE EXTENSIONS TO THE THIRD AGREEMENT, THE PERCENTAGES OF PROFIT OR LOSS REMAINED THE SAME, BUT THE MAXIMUM FIGURE OF $750,000 WAS AMENDED. UNDER THE FIRST EXTENSION (ADDENDUM NO. 2), COVERING THE SIX- MONTHS PERIOD FROM JANUARY 1, 1946 TO JULY 1, 1946, THE MAXIMUM PROFIT OR LOSS WAS FIXED AT $300,000; UNDER THE SECOND EXTENSION (ACCOMPLISHED BY ADDENDA NO. 4, 5, AND 6), COVERING THE PERIOD JULY 1, 1946 TO JULY 1, 1947, THE MAXIMUM PROFIT OR LOSS WAS FIXED AT $400,000; UNDER THE THIRD EXTENSION (ADDENDUM NO. 7),COVERING THE PERIOD FROM JULY 1, 1947 TO MARCH 1, 1948, THE MAXIMUM PROFIT OR LOSS WAS FIXED AT $100,000.

IN CONNECTION WITH PREMIUM READJUSTMENTS EACH OF THE AGREEMENTS CONTAINED PROVISIONS REQUIRING THE UNDERWRITERS TO MAKE CERTAIN COMPUTATIONS BASED ON "RECEIPTS" AND "EXPENDITURES.' "TOTAL RECEIPTS" AND "TOTAL EXPENDITURES" WERE DEFINED IN DETAIL IN EACH AGREEMENT. IF "TOTAL RECEIPTS" WERE FOUND TO EXCEED "TOTAL EXPENDITURES" (BY MORE THAN A STATED AMOUNT UNDER THE THIRD AGREEMENT/--- THE EXCESS BEING CONSIDERED PROFITS-- - A DEBIT WAS REQUIRED TO BE SET UP AGAINST THE UNDERWRITERS FOR THE PURPOSE OF READJUSTING PREMIUMS. IF, ON THE OTHER HAND,"TOTAL EXPENDITURES" WERE FOUND TO EXCEED "TOTAL RECEIPTS" (BY MORE THAN A STATED AMOUNT UNDER THE THIRD AGREEMENT/--- THE EXCESS BEING CONSIDERED LOSSES--- A CREDIT TO THE UNDERWRITERS WAS REQUIRED TO BE SET UP FOR SUCH PREMIUM READJUSTMENT. EACH AGREEMENT CONTAINED PROVISIONS FOR PERIODIC RECOMPUTATIONS OF ,TOTAL RECEIPTS" AND "TOTAL EXPENDITURES.' EACH AGREEMENT ALSO CONTAINED PROVISIONS FOR FINAL ACCOUNTING AND SETTLEMENT AND SUCH ACCOUNTING AND SETTLEMENT WAS TO BE ON THE BASIS OF THE COMPUTATIONS AND RECOMPUTATIONS MENTIONED ABOVE.

IN ARTICLE VII-A OF THE FIRST AND SECOND AGREEMENTS, THE TERM "TOTAL RECEIPTS" WAS DEFINED AS FOLLOWS:

"/A) THE TOTAL RECEIPTS SHALL COMPRISE THE FOLLOWING ITEMS:

"/I) ALL PREMIUMS PAID BY THE UNITED STATES, OTHER THAN PURSUANT TO THE READJUSTMENT PROVIDED FOR IN THIS ARTICLE;

"/II) ANY AMOUNTS REFUNDABLE OR RECOVERABLE UNDER THE TERMS OF EXCESS OF LOSS RE-INSURANCE POLICIES.'

IN ARTICLE 8-A OF THE THIRD AGREEMENT AND THE THREE EXTENSIONS THEREOF, THE TERM "TOTAL RECEIPTS" WAS DEFINED AS FOLLOWS:

"/A) THE TOTAL RECEIPTS SHALL COMPRISE THE FOLLOWING ITEMS:

"/I) ALL PREMIUMS PAID BY THE UNITED STATES AND BY THE OWNERS OF TIME CHARTERED VESSELS;

"/II) ALL AMOUNTS RECOVERED OR RECOVERABLE UNDER THE TERMS OF EXCESS OF LOSS RE-INSURANCE POLICIES;

"/III) ALL AMOUNTS PAID BY OR RECOVERABLE FROM THE UNITED STATES IN ACCORDANCE WITH ARTICLES 4 AND 12.'

THE COMPUTATIONS, AND THE DEBITS AND CREDIT RESULTING THEREFROM, WERE USED TO DIVIDE ANY ULTIMATE INSURANCE PROFIT OR LOSS BETWEEN THE UNDERWRITERS AND THE GOVERNMENT BY WAY OF PREMIUM READJUSTMENTS.

PURSUANT TO THE ABOVE AGREEMENTS, SEPARATE WARTIME P AND I POLICIES, DEFINING THE INSURANCE COVERAGE WERE ISSUED FOR EACH TIME-CHARTERED VESSEL COVERED, AND A MASTER POLICY AND SEPARATE CERTIFICATES WERE ISSUED FOR THE GOVERNMENT-OWNED AND BAREBOAT CHARTERED VESSELS. THESE WERE PRINTED POLICIES AND CERTIFICATES, APPROVED BY THE WAR SHIPPING ADMINISTRATION, INC., AND WE ARE INFORMED, CONFORMED TO THE NORMAL PRACTICES OF THE P AND I INSURANCE BUSINESS.

THE RECORD INDICATES THAT REFUNDS TO THE UNITED STATES INCIDENT TO READJUSTMENT OF PREMIUMS HAVE BEEN MADE BY THE UNDERWRITERS IN CONFORMANCE WITH THE AGREEMENTS AS AMENDED.

ALL PARTIES ARE AGREED THAT THE BASIC AGREEMENTS AND AMENDMENTS THERETO ARE SILENT AS TO INVESTMENT INCOME EARNED ON THE PREMIUMS PAID BY THE GOVERNMENT UNDER THE INSURANCE PROGRAM. IN OTHER WORDS NO SPECIFIC PROVISION WAS MADE IN THE AGREEMENTS WITH RESPECT TO PARTICIPATION BY THE UNITED STATES IN EITHER PROFITS OR LOSSES FROM THE INVESTMENT BY THE UNDERWRITERS OF THE PREMIUMS PAID BY THE GOVERNMENT.

YOU STATE THAT WHILE THE WARTIME P AND I INSURANCE PROGRAM WAS IN FORCE THE UNITED STATES ACTING BY AND THROUGH THE WAR SHIPPING ADMINISTRATION ADVANCED, MADE AVAILABLE AND/OR PAID AS ,INSURANCE PREMIUMS" TO THE UNDERWRITERS THE SUM OF APPROXIMATELY $150 MILLION. YOUR LETTER INDICATES THAT $18 MILLION WAS EARNED AS INVESTMENT INCOME BY THE UNDERWRITERS ON THE PRIMIUMS PAID BY THE GOVERNMENT.

YOU ADVISE THAT THE MARITIME ADMINISTRATION, AS SUCCESSOR TO WAR SHIPPING ADMINISTRATION, AND THE UNITED STATES MARITIME COMMISSION, IS NOW CALLED UPON BY THE UNDERWRITERS FOR AN ACCORD AND SATISFACTION AND A CLOSING AGREEMENT ON THE WARTIME P AND I INSURANCE PROGRAM. YOU ADVISE THAT THE MARITIME ADMINISTRATION IS UNWILLING TO CONCLUDE THESE INSURANCE MATTERS DUE TO THE UNSETTLED AND UNRESOLVED QUESTION AS TO WHETHER THE $18 MILLION IN INVESTMENT EARNINGS OF THE UNDERWRITERS SHOULD BE ACCOUNTED FOR AN REFUNDED TO THE GOVERNMENT.

IN AN EFFORT TO RESOLVE THE QUESTION YOUR ADMINISTRATION REVIEWED THE CONTRACTS AND RECORDS AND ISSUED A REPORT IN THE MATTER DATED DECEMBER 4, 1962. IT IS CONCLUDED IN THE REPORT THAT THE UNDERWRITERS WERE "AGENTS" OF THE UNITED STATES, AND, AS SUCH, THEY WERE AND ARE OBLIGATED TO ACCOUNT FOR ALL MONEYS HAD AND RECEIVED IN CONNECTION WITH THE CONTRACTS AND THE INSURANCE PROGRAM COVERED THEREBY, AND THE UNDERWRITERS WERE SO ADVISED.

THE UNDERWRITERS TAKE THE POSITION THAT THE GOVERNMENT IS NOT ENTITLED TO ANY PORTION OF THE INVESTMENT EARNINGS UNDER THE WARTIMEPANDI INSURANCE AGREEMENTS AND HAVE ADVISED YOU THAT IF THE GOVERNMENT INSISTS ON AN ACCOUNTABILITY, THE ISSUE CAN BE SETTLED ONLY BY JUDICIAL DETERMINATION BEFORE A COURT OF COMPETENT JURISDICTION.

YOU ADVISE THAT YOU HAVE REVIEWED YOUR DECEMBER 4, 1962, REPORT, IN LIGHT OF THE INSURANCE COMPANIES' POSITION IN THE MATTER AND PARTICULARLY IN LIGHT OF A STATEMENT MADE BY A REPRESENTATIVE OF THIS OFFICE IN 1950 BEFORE A HOUSE SUBCOMMITTEE TO THE EFFECT THAT THE UNITED STATES HAS NO LEGAL RIGHT TO RECAPTURE ANY OF THE INVESTMENT INCOME. YOU STATE THAT ON THE BASIS OF YOUR REVIEW YOU NOW FEEL THAT THE CLAIM AGAINST THE UNDERWRITERS FOR AN ACCOUNTING OF THE INVESTMENT EARNINGS ON THE PREMIUMS PAID BY THE GOVERNMENT UNDER THE WARTIME P AND I INSURANCE AGREEMENTS IS OF DOUBTFUL VALIDITY. HOWEVER, IN VIEW OF THE SUBSTANTIAL AMOUNT OF THE POTENTIAL CLAIM YOU FEEL YOU SHOULD NOT EXECUTE A FINAL ACCORD, SATISFACTION AND SETTLEMENT WHICH WOULD RELIEVE THE UNDERWRITERS OF ANY FURTHER RESPONSIBILITIES IN THE MATTER WITHOUT A FORMAL OPINION OF THIS OFFICE.

ACCORDINGLY, YOU REQUEST A DECISION AS TO WHETHER THE MARITIME ADMINISTRATION SHOULD CONTINUE TO DEMAND AN ACCOUNTING OF THE INVESTMENT INCOME RECEIVED BY THE UNDERWRITERS UNDER THE WARTIMEPANDI AGREEMENTS.

AS INDICATED ABOVE, THE AGREEMENTS SPECIFICALLY PROVIDED THAT THE UNDERWRITERS WOULD PROVIDE ,PROTECTION AND INDEMNITY INSURANCE" AND THAT THE GOVERNMENT WOULD PAY "PREMIUMS" FOR SUCH INSURANCE. MOREOVER, UNDER THE AGREEMENTS THE UNDERWRITERS WERE SUBJECT TO A RISK OF LOSS, ALTHOUGH SUCH RISK WAS LIMITED. ALSO, UNDER THE AGREEMENTS THE UNDERWRITERS WERE REQUIRED TO, AND DID ISSUE SEPARATE WARTIME P AND I POLICIES DEFINING THE INSURANCE COVERAGE FOR EACH TIME-CHARTERED VESSEL COVERED, AND A MASTER POLICY AND SEPARATE CERTIFICATES FOR THE GOVERNMENT-OWNED AND BAREBOAT CHARTERED VESSELS. THE AGREEMENTS AND AMENDMENTS THERETO, OTHERWISE CONTAINED TERMINOLOGY GENERALLY FOUND ONLY IN INSURANCE AGREEMENTS. THUS, IT WOULD APPEAR THAT UNDER THE AGREEMENTS IN QUESTION THE RELATIONSHIP BETWEEN THE UNITED STATES AND THE UNDERWRITERS OR INSURANCE COMPANIES WAS THAT OF INSURED AND INSURER (OR AS PROVIDED IN THE POLICIES SUED,"ASSURED" AND "ASSURER"). THE FACT THAT BOTH THE PROFITS AND LOSSES OF THE INSURER WERE LIMITED UNDER THE AGREEMENTS AND THAT THE AGREEMENTS PROVIDED FOR THE DEDUCTION OF A FIXED AMOUNT PER GROSS TON AS AN ALLOWANCE FOR MANAGEMENT, SUPERVISION AND CLAIMS SERVICE, IN DETERMINING UNDERWRITING PROFITS, DOES NOT REQUIRE A DIFFERENT CONCLUSION. IN ANY EVENT WE FOUND NOTHING IN THE AGREEMENTS TO INDICATE THAT THE PARTIES CONTEMPLATED A PRINCIPAL-AGENT RELATIONSHIP.

UNDER THE AGREEMENTS THE UNDERWRITERS ARE REQUIRED TO ACCOUNT TO THE GOVERNMENT FOR A DEFINED PORTION OF THE "EXCESS" OF THE "TOTAL RECEIPT" OVER THE "TOTAL EXPENDITURES.' THE AGREEMENTS SPECIFICALLY DEFINE THE TERM "TOTAL RECEIPTS" TO COMPRISE ONLY "PREMIUMS PAID," RECOVERIES UNDER ,EXCESS OF LOSS REINSURANCE POLICIES" AND (IN THE THIRD AGREEMENT) ADDITIONAL AMOUNTS "PAID BY OR RECOVERABLE FROM THE UNITED STATES.' INVESTMENT EARNINGS ON PREMIUMS PAID BY THE GOVERNMENT ARE NOT INCLUDED IN THE TERM "TOTAL RECEIPTS" AS DEFINED IN THE AGREEMENTS. IN FACT THE RECORD DISCLOSES THAT THE QUESTION OF INTEREST AND OTHER INVESTMENT EARNINGS ON PREMIUMS WAS CONSIDERED DURING NEGOTIATION OF THE AGREEMENTS BUT THAT THE UNDERWRITERS WOULD NOT AGREE TO GOVERNMENT PARTICIPATION IN INVESTMENT INCOME UNLESS THE GOVERNMENT WOULD AGREE TO SHARE IN INVESTMENT LOSSES. THE GOVERNMENT NEGOTIATORS APPARENTLY WERE NOT WILLING TO AGREE TO SUCH A PROPOSAL. THUS, THERE WAS NOT INCLUDED IN THE CONTRACT A PROVISION FOR GOVERNMENT PARTICIPATION IN INVESTMENT INCOME EARNED ON PREMIUMS.

IN VIEW OF THE FOREGOING WE REMAIN OF THE VIEW, AS STATED BY A REPRESENTATIVE OF THIS OFFICE IN TESTIFYING BEFORE THE SUBCOMMITTEE ON MARITIME AFFAIRS OF THE HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES ON JULY 20, 1950, THAT THERE IS NO LEGAL BASIS TO DEMAND AN ACCOUNTING OF THE INVESTMENT INCOME RECEIVED BY THE UNDERWRITERS ON PREMIUMS PAID BY THE GOVERNMENT ON INSURANCE POLICIES ISSUED PURSUANT TO WARTIME P AND I AGREEMENTS. HOWEVER, SINCE THERE IS A VERY SUBSTANTIAL AMOUNT INVOLVED YOU MAY WISH TO OBTAIN THE VIEWS OF THE ATTORNEY GENERAL AS TO WHETHER IN HIS OPINION THERE IS A SUFFICIENT LEGAL BASIS TO LITIGATE THE MATTER BEFORE EXECUTING A FINAL ACCORD, SATISFACTION AND SETTLEMENT.