In a recent 2025 decision, the Council of State (hereinafter, the “CE”) resolved a dispute between a government entity contracting for the execution of a public works project and the insurer that issued the performance bond in the form of insurance (here in after, “performance bond”) securing the contract. 

The contracting entity entered, in 2008, into a public works contract backed by a performance bond. During the performance of the contract, the government entity declared the termination for default and determined the occurrence of several insured events related to breach of contract and mismanagement of the advance payment.

The insurer filed an action seeking the annulment of the administrative acts through which the contracting entity attempted to enforce the performance bond. At first instance, the Administrative Tribunal of Cundinamarca denied the insurer’s claims; however, on appeal, the CE partially modified that decision by declaring the partial nullity of the administrative acts, based on the following considerations:

1. Difference between statute of limitations and caducity
   
   The expiration of actions (caducity) is a matter of public order that limits the period within which administrative contentious actions may be brought. In cases seeking the annulment of an administrative contract, the limitation period is two years, running from the date on which the contract was executed. 
   
   By contrast, the statute of limitations applicable to actions arising from an insurance contract pertains to substantive rights and concerns the extinction of the insured’s right to claim indemnity due to the passage of time. Furthermore, the statute of limitations cannot be declared ex officio by the court. 
   
   The CE reiterated that the statutory period applicable to insurance contract actions does not preclude the application of the expiration term in proceedings involving such contracts, as these are distinct legal institutions that may coexist within the same case.
    
2. Existence of a coinsurance agreement
   
   The plaintiff insurer argued that it had not assumed 100% of the risks arising from the breach of the government contract, as another company had participated as a coinsurer in underwriting the policy. 
   
   The CE found that the other insurer had assumed 15% of the risk under the coinsurance structure authorized by Article 1095 of the Colombian Commercial Code. Consequently, the claimant insurer was only liable for 85% of the indemnity amount, rather than for the full amount as determined by the contracting entity through its administrative acts.
    
3. Coexistence of insurance policies and coinsurance
   
   The CE reaffirmed that coinsurance is a multilateral contractual arrangement under which two or more insurers jointly assume responsibility for an insurable risk. It further reiterated its jurisprudence holding that coinsurance constitutes a specific form of coexistence of insurance contracts, stating: 
   
   “It is, therefore, both a contract and a form of coexistence of insurance, characterized by the identity of the insured interest and of the risks involved, and by the participation of multiple insurers who distribute the risk among themselves until the entirety of the risk is covered. This is different from the concurrence of insurances, in which several distinct contractual relationships exist, even though each seeks to cover in full the same interest, without any distribution of risk among the insurers.” 
    
4. Coinsurance was opposable to third parties
   
   The CE emphasized that the contract under examination constituted a true coinsurance agreement, not merely an internal or private arrangement between insurers. The contracting entity was aware of the existence of the coinsurance and therefore could not allege that it was not opposable to it. Additionally, the coinsurance clause had been expressly included in the policy submitted by the contracting entity as evidence in the proceedings. Accordingly, the insurer was liable only for its proportional share of the risk (85%). 
   
   Based on these findings, the CE declared the partial nullity of the administrative acts that had required the claimant insurer to pay 100% of the indemnity.
    
5. Willful misconduct and gross negligence of the contractor are covered risks
   
   The CE clarified that the contractor’s willful misconduct or gross negligence is not excluded from the coverage of a performance bond, since such conduct constitutes the core risk that this type of insurance is designed to cover. 
   
   To hold otherwise would undermine the fundamental purpose of performance bonds, which is to transfer to the insurer the financial consequences arising from the contractor’s non-performance, including those resulting from willful or grossly negligent behavior.
    
6. Conclusions
   
   With this ruling, the CE reaffirmed that:
    
   • The main purpose of a performance bond is to protect the contracting entity against the contractor’s default, even when such default results from gross negligence or willful misconduct, as this is precisely the object of the bond.
   • The action for nullity of an insurance contract is subject to a two-year expiration term, which coexists (without replacing) the statute of limitations established under Article 1081 of the Colombian Commercial Code.
   • A properly agreed and disclosed coinsurance arrangement is opposable to third parties, which in this case justified the partial nullity of the administrative acts ordering the insurer to pay the full indemnity.