Report of the Commission on Government ... - Bayhdolecentral

96
<strong>of</strong> postacceptance rights makes it difficult for
<strong>the</strong> Government and its contractors to determine
<strong>the</strong> adequacy or reasonableness <strong>of</strong> product
liability insurance coverage or its costs.
The present structure <strong>of</strong> product liability insurance
premiums reflects a loss experience
with <strong>the</strong> Government acting as a self-insurer
for loss <strong>of</strong> or damage to Government property
occurring after final acceptance <strong>of</strong> supplies delivered
to <strong>the</strong> Government. Any Government
action that alters or tends to reverse this selfinsurance
policy will increase <strong>the</strong> premium costs
refiected in <strong>the</strong> contract prices paid by <strong>the</strong>
Government to its suppliers. The extent <strong>of</strong> such
increases would relate directly to <strong>the</strong> loss experience
on Government property, and any substantial
increase in loss experience and <strong>the</strong>
amount <strong>of</strong> recoveries for loss <strong>of</strong> or damage to
Government property would tend to limit <strong>the</strong>
available insurance coverage.
Fur<strong>the</strong>r, because premium costs for insurance
are based on loss experience (that may
or may not include projected risk exposure)
plus <strong>the</strong> administrative costs and pr<strong>of</strong>it for <strong>the</strong>
insurer, <strong>the</strong> total actual cost <strong>of</strong> providing private
insurance for Government property would
exceed <strong>the</strong> amounts received by <strong>the</strong> Government
for its loss and damage or <strong>the</strong> available
insurance market would be withdrawn. Such a
conclusion derives from <strong>the</strong> simple fact that
capital funds will flow from an unpr<strong>of</strong>itable to
a pr<strong>of</strong>itable market.
From a purely cost-effective standpoint, it is
cheaper for <strong>the</strong> Government to act as a selfinsurer
than it is to shift <strong>the</strong> risk <strong>of</strong> loss or
damage to private contractors. The contractors
simply would pass on to <strong>the</strong> Government <strong>the</strong>
cost <strong>of</strong> private product liability insurance premiums,
including <strong>the</strong> addition <strong>of</strong> applicable indirect
expenses and pr<strong>of</strong>it.
Our recommended general policy <strong>of</strong> Government
self-insurance could include <strong>the</strong> following
elements:
• First, such policy would not cover claims
and losses caused by <strong>the</strong> willful misconduct
or lack <strong>of</strong> good faith on <strong>the</strong> part <strong>of</strong> <strong>the</strong> directors,
<strong>of</strong>ficers, or principal <strong>of</strong>ficials <strong>of</strong> contractors,
subcontractors, and suppliers.
• Second, such policy would not apply to
standard commercial items, such as automobiles,
generators, etc., where it is <strong>the</strong> custom
---------
Part H
<strong>of</strong> <strong>the</strong> trade not to relieve <strong>the</strong> manufacturers
from liability as may arise out <strong>of</strong> products
<strong>of</strong> defective manufacture.
• Third, <strong>the</strong> Government would retain its
rights from contract warranties that provide
postacceptance remedies, such as repair
or replacement <strong>of</strong> defective supplies or equitable
adjustments in contract prices when
defects or deficiencies are discovered prior
to <strong>the</strong> loss or damage.
• Fourth, all such postacceptance remedies
would be expressly set forth in one provision
or clause in each Government contract. Such
remedies should be exclusive (both in contract
and tort) to, and not cumulative with,
any o<strong>the</strong>r express or implied warranty or
action for negligence. Contract prices should
not include any costs or allowances for warranty
contingencies, or product liability or
insurance premiums which are not consistent
with <strong>the</strong> postacceptance obligations expressly
imposed by contract.
• Fifth, <strong>the</strong> Government's policy <strong>of</strong> selfinsurance
for defects would not include assumption
<strong>of</strong> responsibility for, or liability for
injury to, or wrongful death <strong>of</strong>, third parties,
including military and civilian employees,
nor loss <strong>of</strong> or damage to property <strong>of</strong> third
parties, except as may be provided by indemnification
legislation applicable to cata-'
strophic accidents arising out <strong>of</strong> Government
programs (discussed in Chapter 3).
These elements include exceptions to <strong>the</strong> general
policy, such as those under Defense Procurement
Circular No. 86. We support such
appropriate exceptions, but we recognize that
fragmentation <strong>of</strong> a policy <strong>of</strong> Government selfinsurance
by numerous exclusions, limitations,
or qualifications is self-defeating because it
necessitates some continuation <strong>of</strong> product lia-,
bility insurance protection for <strong>the</strong> risk exposure"
that <strong>the</strong> Government has not assumed. Adop-'
tion <strong>of</strong> a policy that holds contractors expressly
liable for loss or damage in those circumstances
stated in exclusions, limitations, or
qualifications will eventually increase costs to'
<strong>the</strong> Government. We <strong>the</strong>refore recommend that
a central <strong>of</strong>fice, such as <strong>the</strong> Office <strong>of</strong> Federal
Procurement Policy, be designated to screen
and approve requested exceptions to <strong>the</strong> policyi
fJ,!'
"'"