B-151876 April 24, 1964

B-151876 April 24, 1964

The Honorable Robert H. Michel House of Representatives

Dear Mr. Michel:

By letter dated March 31, 1964, acknowledged April 6, you wrote to our office concerning an announcement by the Department of Agriculture that the Commodity Credit Corporation would assume certain risks which heretofore had been covered by casualty insurance under-written by commercial insurance carriers. This announcement, which was made in Department of Agriculture press release dated January 10, 1964, (USDA 98- 64) stated that the new policy was in the interest of economy and was in keeping with the Governmental policy of being its own insurer. The assumption of risks was to be on commodities owned by the Government and those pledged as collateral on price-support loans which are in commercial storage. The risks involved are against the wide distribution of commodity holdings by the Commodity Credit Corporation accomplished the same spreading of risk which individuals obtained from insurance. The new policy was to take effect on the renewal date of the present Uniform Grain Storage Agreement, July 1, 1964, the current cotton storage contracts, August 1, 1964, and other storage contracts covering rice, beans, and oils.

You specifically asked to be advised whether the Department of Agriculture was going beyond the governmental policy of self-insurer when it applied such policy to commodities pledged as collateral on price-support loans.

While you undoubtedly are aware that the Department of Agriculture in a press release dated March 24, 1964, (USDA 956-64) announced the recession if its announced position of January 10, 1964, we would like to take this opportunity to explain the Government's long-standing policy of self- insurer and the application of such policy to commodities in commercial storage which are pledged as collateral on price-support loans.

As far back as February 9, 1892, First Comptroller of the Treasury Matthews advised the Department of State that "it is not the policy of practice of the Government to insure its property." In numerous decisions of the various Comptrollers of the Treasury and Comptrollers General of the United States this policy has been restated and followed. By was of specific example, Assistant Comptroller General of the Treasury Mitchell referred to this long-standing policy in his decision reported at 13 Comp. Gen. 779 to the Secretary of the Interior dated May 10, 1907, In that decision Assistant Comptroller Mitchell held that monies available for the purchase of supplies for use in the education of natives in Alaska were not available for the payment of premiums for insurance of such supplies en route to Alaska.

The theory behind this rule is well stated in decision of April 15, 1942, to the Chairman of the Board of Directors of the Virgin Islands Company (Corporation), reported at 21 Comp. Gen. 928,929. In that decision it was stated:

"* * * it is the general policy of the Government to assure its own risks of loss, upon the theory that the magnitude of the Government's resources makes it more advantageous for the Government to carry its own risks than to have them assumed by private insurers at rates sufficient to cover all losses, to pay their operating expenses (including agency or brokers commissions) and to leave such insurers a profit. * * *"

Of more direct application to the question of carrying insurance on commodities used as collateral on price-support loans, is unpublished decision B-59941, October 8, 1946. In that decision the Administrator, War Assets Administration was advised that the wide distribution of its risks was a factor to permit the Government to assume its own risks.

It should be pointed out that the Government's practice of self-insurance is one of policy and not of positive law. When the economy sought to be attained under this rule would be defeated, when sound business practice indicates that a saving can be effected or when services or benefits not otherwise available can be obtained by purchasing insurance, an exception to the general rule has been recognized. For example, in unpublished decision B-35379, July 17, 1943, to the Secretary of Commerce there was recognized the need for an exception in allowing the purchase of hull insurance on aircraft where the insurance companies had needed expert appraisers and adjusters and the War Training Service did not, nor could not recruit, and adequate force of personnel to handle the appraisal of damages in fixing the liabilities of certain contractors.

Congress has given tacit approval to the self-insurance policy here discussed on several occasions by enacting laws which grant exceptions to this rule. Noteworthy among such exceptions are the Government Losses in Shipment Act, approved July 8, 1937, ch. 444, 50 Stat. 479, 5 U.S.C. 134 et seq., and the act of August 1, 1956, ch 841, 70 Stat. 890, 5 U.S.C. 170h(a), which gave the Secretary of State authority to purchase insurance to cover the Government's possible tort liability arising from the operation of Government automobiles in foreign countries.

With the foregoing background on the policy of the Government to be self- insurer of its own property, we now turn to the application of such policy to commodities in commercial storage which are pledged as collateral on price-support loans.

On pages 10 and 11 of our report to the Congress submitted November 10, 1959, on our audit of the New Orleans Commodity Office of the Commodity Stabilization Service we made the following recommendation:

"As previously stated, CCC followed the policy of not insuring Government- owned cotton but required that warehouseman carry fire insurance on cotton stored by producers as collateral for price-support loans.

"In August 1956, we recommended to the Administrator of CSS that (1) a study be made of the costs of insuring loan cotton and of insurance proceeds in previous years and (2) that consideration be given to the feasibility of adopting alternative methods of providing protection against losses on loan cotton which would result in lower costs.

"In February 1957, we were informed by the Administrator of CSS that the New Orleans office had started compiling statistics on inventory cotton with respect to fire losses as compared with insurance premium savings and that the statistics and data obtained from the study could also be used to make a similar comparison with respect to loan cotton.

"In March 1959, the New Orleans office advised the Duty Administrator of CSS that a study of estimated savings accruing as a result of not insuring acquired (inventory) cotton for the period July 1, 1956, through June 30, 1958, had been completed. The net savings were estimated to be $3,059,344 for the 2-year period.

"Based on the demonstrated savings of over $1.5 million a year accruing as a result of not insuring inventory cotton, we believe that CSS should determine whether similar savings could be accomplished with respect to loan cotton by adopting alternative methods of providing protection against losses."

We would like to point out that our office has not made similar recommendations concerning the other commodities pledged as collateral on price-support loans.

In his justification for the announced policy of January 10, 1964, of the Government assuming the risks attending commodities pledged on price- support loans, the Acting Secretary of Agriculture stated:

"The economic justification cited by the Comptroller General for not permitting the expenditure of appropriated funds for insurance on Government-owned property applies with particular force to the widely distributed storage holdings of the Commodity Credit Corporation.

* * * *

"Assumption by CCC of its own risks of losses would result on substantial monetary savings to the government. Studies of operations during fiscal year's 1957, 1958, and 1959, demonstrated that out of every dollar of insurance premiums paid by warehousemen under the Uniform Grain Storage Agreement, only 28 cents was collected by CCC in payment of insured losses. Similar information complied for the fiscal years 1962 and 1963 shows that for every dollar of insurance premiums paid by warehousemen under the Uniform Grain Storage Agreement only 27 cents has been paid to CCC as a result of insured CCC losses. * * *"

* * * * *

"Under the present cotton price support program docket, payment is authorized for insurance on cotton during the loan period which is acquired by CCC but the insurance is dropped after cotton is acquired. For the period July 1, 1958 through June 30, 1963, CCC shows estimated savings of $3,569,575.00 in assuming its own risk on owned-cotton. These are net savings to CCC since, in computing this total, administrative and other overhead costs were taken into consideration. It is logical to assume that very substantial additional savings would accrue to CCC if CCC were to assume the risk of loss on loan cotton also. * * *"

We feel that the policy of the Government as self-insurer of its property should apply as well to commodities pledged as security for price-support loans. The economic justification is identical and we know of no legal distinction that should be drawn. While a mortgages has an insurable interest on the mortgaged property to the extent of the debt secured, 44 C.J.S., Insurance, sec. 187b., p. 884, we know of no law -- absent contractual requirements -- which would require a mortgages to insure his interest.

As previously pointed out, exceptions have been made to the Government's policy as self-insurer of its property. Inasmuch as we view that policy as equally applicable to commodities held as security on price-support loans, the standards for exception to such policy apply as well. Those standards for exception are repeated here as follows:

(1) Where the economy sought by self-insurance is defeated.

(2) Where sound business practice indicates that a savings can be effected, or

(3) Where services or benefits not otherwise available can be obtained by purchasing insurance.

It is apparent from the findings made by the Department of Agriculture that neither of the first two reasons for exception apply in this consideration. We are not aware of any basis for applying the third reason for exception in this matter.

Consequently, we believe that the Department of Agriculture's decision as stated in the press release of January 10, 1964, that the Commodity Credit Corporation would assume its own risks on Government-owned commodities and commodities held by it as security on price-support loans, was in accord with the Government's policy to self-insure.

Sincerely yours,

Joseph Campbell Comptroller General of the United States