Through a recent judgment, identified under number 25000233600020220012201, the Third Section of the Council of State (hereinafter, the “CE”) resolved an appeal brought by certain insurers against the first-instance judgment that had ordered them, as co-insurers under a performance bond, to pay an indemnification.
The dispute centered on the declaration of default issued by a state entity against a temporary joint venture (unión temporal) with which it had entered into a contract to audit the collection functions of the contracting entity. In turn, in the same administrative act, the entity (i) declared the occurrence of the insured loss and (ii) ordered the insurance company to pay the damages arising from such default, chargeable to the performance bond that secured the state entity.
Notwithstanding the foregoing, said administrative act was challenged by the insurers before the contentious-administrative jurisdiction through the action for annulment and restoration of rights (nulidad y restablecimiento del derecho). The first-instance tribunal denied the claims of the complaint, and the insurance companies accordingly appealed the decision before the CE.
It is important to note that, prior to and during performance of the bonded contract, several difficulties arose that were flagged by the contractor, including (i) the untimely delivery of information by the state entity, (ii) deficiencies in the contracting entity’s internal planning, and (iii) liquidity problems affecting the company.
The CE resolved the appeal brought by the insurance companies and affirmed the first instance ruling based on the following considerations:
Occurrence of the loss under the regulation of article 1073 of the Colombian Commercial Code
In its initial coverage objection, the insurance companies argued that the default under the state contract had not materialized during the term of the insurance but rather had occurred before the policy took effect.
This was supported by the fact that, at the time of entering into the bonded contract, the state entity already exhibited planning deficiencies that led to the contractor’s defaults materializing during the term of the policy.
This position was based on the provisions of Article 1073 of the Colombian Commercial Code, which governs continuous or successive losses (siniestros de carácter sucesivo), that is, a loss that occurs before the insurance policy takes effect and continue after its term has begun.
The CE rejected this argument, distinguishing between (i) the risk covered by the performance bond (which consisted of the contractor's imputable default of its contractual obligations) and (ii) the breaches of the duty of planning imputable to the state entity. On this basis, the CE concluded that the state entity’s breaches did not correspond to the insured loss covered by the policy:
“The risk covered by the Insurance Companies was the default of the obligations arising from the state contract that were incumbent upon the Temporary Joint Venture. The circumstances invoked as planning deficiencies, previously dismissed as grounds for annulment, do not satisfy the factual predicate of Article 1073 of the Commercial Code. Although some of them predated the inception of the policy's term, they did not constitute the insured loss nor imply that it had begun” (underlining and boldface outside the original text).
The consequences of a material risk increase do not apply to contracts with state entities
The insurers argued that the temporary joint venture’s conduct during performance of the contract caused a material risk increase and, consequently, produced the automatic termination of the insurance prior to the declaration of the insured loss, pursuant to Article 1060 of the Commercial Code.
The CE recalled that this doctrine, which entitles the insurer to terminate the insurance contract when the policyholder aggravates the risk without disclosing it, does not apply to performance bonds taken out in favor of state entities:
“[F]or the reasons already discussed, the consequences referred to in the aforementioned Article 1060 cannot be automatically transposed to the performance bond contract in favor of public entities; rather, its reading must be undertaken in light of the nature of this class of insurance and the public-order rules that the legislature established for the protection of the public treasury (erario) that is placed at stake within the framework of state contracts, which means that this rule—like any other rule of private law (Article 13, Law 80 of 1993)—may only be applied insofar as it does not contravene the special character and purpose pursued by government contracting and, in tandem with that, insofar as it does not conflict with the rules that specially govern certain aspects of performance bonds in favor of such entities” (underlining and boldface outside the original text).