Through the judgment identified under docket No. 70,848, the Third Section of the Council of State (hereinafter, the “CE”) resolved a dispute concerning the legality of the administrative acts by which the National Institute of Highways (“INVÍAS” by its Spanish acronym) declared a loss and ordered the payment of indemnification under a performance bond (in the form of insurance), which covered, among other risks, the improper amortization of the advance payment granted to a concessionaire in the context of a public works contract.

During the execution of the advance payment, one of the members of the contractor consortium entered into a business restructuring proceeding under Law 550 of 1999. Upon completion of the contract, the state entity determined that a non-amortized balance remained and, given the impossibility of its recovery, declared the loss. The insurer challenged these administrative acts, alleging, inter alia, the statute of limitations and the existence of an undisclosed modification of the risk pursuant to Article 1060 of the Commercial Code.

The following are the most relevant considerations of the CE in matters of insurance law:
 

1. Statute of limitations in the insurance contract and administrative jurisdiction
   The CE distinguished between the rules governing the statute of limitations applicable to actions arising from the insurance contract and those determining the administration’s jurisdiction to declare the occurrence of a loss. In doing so, it reiterated that the lapse of legal actions arising from the insurance contract does not entail, nor is it related to, the loss of jurisdiction of the administration to declare a breach of contract:
   
   “The authority to issue an administrative act, and its delimitation based on functional, territorial, or temporal criteria, is a matter of public law, a corollary of the principle of legality (Const., arts. 6 and 121). It materializes in the normative authorization granted to an authority, in the exercise of administrative functions, to adopt a unilateral decision that modifies the legal situation of its addressee.
   
   The commercial provisions governing the statute of limitations of actions arising from the insurance contract (C. Co., art. 1081), although they form part of the mixed legal regime applicable to performance bonds in favor of public entities, do not, strictly speaking, determine the Administration’s jurisdiction to declare the occurrence of a loss. This does not, of course, exclude that the phenomenon of extinctive prescription may affect the legality of the administrative act when it is issued in contravention of such rules; however, such circumstance does not equate to private law provisions regulating the jurisdiction to issue such acts.” (Underlining and bold in the original omitted).
    
2. Application of Article 1060 of the Commercial Code to public performance bonds
   The CE addressed the consequence provided in paragraph four of Article 1060 of the Commercial Code, concerning the termination of the insurance contract due to the failure to notify a variation in the insured risk, within the context of performance bonds (in the form of insurance) in favor of public entities. In this regard, it emphasized that, given the guarantee function performed by the insurance contract, termination of the insurance contract as a legal consequence of a modification of the state of risk is not applicable to performance bonds covering public contracts:
   
   “The Chamber does not accept this argument. The consequence provided in paragraph four of Article 1060 of the Commercial Code, concerning the termination of the insurance contract due to the failure to notify a variation in the state of risk, is not applicable to performance bonds in favor of public entities, such as the one under examination in this proceeding.” (Underlining and bold in the original omitted).
   
   Additionally, the CE recalled its position expressed in a prior judgment, in which it explained that this circumstance also derives from the fact that private law provisions cannot contravene rules of public order, insofar as public funds are involved:
   
   “[F]or the reasons already stated, the consequences referred to in Article 1060 cannot be automatically transposed to performance bonds in favor of public entities; rather, they must be interpreted in light of the nature of this type of insurance and the public order provisions established by the legislator for the protection of the public treasury engaged within the framework of public contracts. This means that this provision—as with any other rule of private law (art. 13, Law 80 of 1993)—may only be applied insofar as it does not contravene the specific nature and purpose of public procurement and, accordingly, to the extent that it does not conflict with the provisions that specifically regulate certain aspects of performance bonds in favor of such entities.” (Underlining and bold in the original omitted).

   Finally, the CE emphasized that these considerations do not affect the insurer’s interests, which always retains the possibility of being compensated for the modification of the insured risk:

   “In line with the foregoing, it must be emphasized that the interpretation set forth herein in no way seeks to place the insurer in an inequitable position in relation to the risk–premium relationship considered at the time of entering into the contract. Although, for the aforementioned reasons, it will be required to cover the damages arising from the occurrence of the loss—up to the insured amount–, even if it was not timely notified of the aggravation of the state of risk, given that the sanction of automatic termination does not operate, it remains the case that nothing prevents the insurance company from resorting to judicial proceedings in order to obtain recognition of any compensation to which it may be entitled, the accrual of which, of course, must be duly proven.” (Underlining and bold in the original omitted).
    
3. Foreseeability of risk
   The CE analyzed the modification of risk in connection with circumstances arising from the regulatory framework applicable to public contracts, such as business restructuring proceedings under Law 550 of 1999. In doing so, it held that the admission of a policyholder under a performance bond to a corporate reorganization proceeding constitutes a foreseeable contingency for the insurer:
   
   “The foregoing considerations, in their economic dimension, are relevant because, in performance bonds, the insurer assumes risks in its capacity as a professional in their identification, assessment, and management. This entails, at the time of underwriting, evaluating and quantifying the factors that affect the probability of occurrence and the magnitude of the loss, as well as the premium and the coverage conditions. Within this scope are the deterioration of the financial condition of the contractor or policyholder, along with the legal consequences assigned thereto by the legal system. In this context, the potential admission of the policyholder to a restructuring proceeding and the legal effects derived therefrom—including the impossibility of continuing the amortization of the advance payment under the originally agreed terms—constitute foreseeable and assessable contingencies for the insurer within the line of business in which it operates.” (Underlining and bold in the original omitted).
    
4. Decision
   Based on the foregoing, the CE resolved the dispute by denying the claims of the complaint and upholding the legality of the administrative acts by which the state entity declared the occurrence of the loss and ordered the insurer to pay the corresponding indemnification.