COMMISSION ON AUDIT CIRCULAR NO.

79-112 August 30, 1979

TO : All heads of Ministries, Chiefs of Bureaus and Offices of the National

Government, Managing Heads of Government-Owned and/or Controlled
Corporations, Chief Accounts, Provincial Governors, City and Municipal Mayors,
Provincial and City Treasurers, COA Regional Directors, Ministry, Bureau,
Corporation, Unit, Provincial and City Auditors, and All Others Concerned.

SUBJECT : Insurance of all government properties with the General Insurance Fund under
Republic Act No. 656 as amended by P.D. No. 245 and securing of
Surety/Performance Bond required in government contracts from said Fund
administered by the Government Service Insurance System

There are reports reaching this Commission to the effect that notwithstanding the
reminder in General Auditing (now Commission on Audit) Memorandum Circular No. 546, dated
June 2, 1966, that under Section 5 of Republic Act No. 656 every government, except a
municipal government below first class, is required to insure its property with the General
Insurance Fund against any insurable risk therein provided and pay the premiums thereon, and
the directive therein contained, that existing insurance contracts, if any, with private insurance
companies should not be renewed after the expiry date thereof, many government offices have
not insured their properties with said Fund. Such flagrant violation or evasion of the mandate of
the law has apparently persisted despite Memorandum Circular No. 634 of the Office of the
President dated May 10, 1973, that -

"In order to conserve the resources of the Government, all departments,

bureaus, offices, agencies and instrumentalities of the Government, all provincial,
city and municipal governments, and government owned or controlled
corporations are hereby directed to insure all property and other assets
belonging to the Government, its agencies, and political subdivisions in
accordance with the Property (now General) Insurance Law."

Moreover, in Opinion No. 31, dated April 18, 1979, on the question of whether the
MWSS can allow a private contractor who had a contract with the former to obtain its
performance bond from a private bonding company or from the General Insurance Fund
(formerly Property Insurance Fund) administered by the GSIS, it was held:

"x x x. Posting of bond does not have to depend upon expediency and
convenience of the contractor but is principally a matter that concerns protection
of the interests of the MWSS. Understandably, in the bid and other contract
documents, the indispensable condition imposed is that the bond must be
acceptable to the MWSS.

"While indeed obtaining of a performance bond from the GSIS was not
one of the bidding conditions imposed by the MWSS, the reservation is clearly
provided that the surety or bonding
company putting up the bond must be acceptable to the MWSS. Consequently,
the acceptability of the bond is ultimately determined by MWSS.
 "Be that as it may, the Property Insurance Law, RA No. 656, as amended,
requires all properties of the Government, including government-owned or
controlled Corporations to be insured with the Property Insurance Fund
administered by the GSIS. To further enforce implementation of the aforesaid
law, Memorandum Circular No. 546 dated June 2, 1966 was issued by the
Auditor General directing non-renewal of existing insurance contracts with private
insurance companies and discontinuance of payment of premiums. This was
subsequently followed by Memorandum Circular No. 634 dated May 10, 1973
from the Office of the President, 'directing all departments, bureaus, offices,
agencies and instrumentalities of the Government, all provincial, city and
municipal governments, and government-owned or controlled corporations to
insure all property and other assets of government with the Property Insurance
Fund' otherwise non-compliance therewith would subject officials concerned to
penalties provided in the aforesaid law as well as other laws.

"Government projects and public works are among those embraced within
the sphere of applicability of the Property Insurance Law. The Government has
insurable interest in construction projects or civil works awarded to private
contractors as such projects and works are basically financed by the
government, the contractor only contributing labor and engineering skill. The
usual requirement in government construction contracts of posting a surety or
performance bond is primarily for the protection of the interests of government.
Its purpose is to indemnify or compensate the government for any damage to or
loss arising out of or from the non-completion of projects or non- performance of
contracts. Section 3 of RA 656, as amended by PD 245 has empowered and
authorized the GSIS to issue surety and/or performance bonds to effectuate the
purposes of the aforesaid law. Conformably with the spirit and letter of the law,
we should require contractors to post surety and/or performance bonds obtained
from the GSIS if only to adequately protect the interests of government in said
contracts.

"More importantly, it may be pointed out that in practically every

performance bond issued by a private surety company even by the most
reputable one, MWSS has found it difficult to obtain a relief from the surety
company for liability arising from violations by the contractor of its obligations. x x
x. "

Accordingly, for the insurance protection of government properties and/or the

government's insurable interests therein, all heads of ministries and chiefs of offices concerned
should require the government properties referred to in RA 656, as amended, except those
specifically mentioned as not covered thereby, to be insured with the General Insurance Fund of
the Government Service Insurance System.

To give effect to the intent and purpose of the law, all payments of premiums on
government properties shall be subject to pre-audit and all Auditors are hereby enjoined to
disallow in audit any proposed payments of such premiums to any private insurance company.

Also, for the better protection of the insurable interest of the Government in all its
construction projects or civil works awarded to private contractors, and considering the difficulty
being encountered by the Government in obtaining relief from private surety companies for the
liability arising from violation of the contractor from its obligation and in the light of the opinion,
supra, of the Government Corporate Counsel, it should henceforth be a permanent feature of all
government contracts, which require the posting by the contractor of a surety or performance
bond, that such bond should be secured from or issued by the Government Service Insurance
System under Section 3 of RA 656, as amended by PD No. 245. All Auditors are hereby
directed to strictly enforce this bonding requirement in government contracts.

For ready reference and the convenience of all concerned, quoted hereunder are the
pertinent provisions of Republic Act No. 656 as amended by PD No. 245:

"Sec. 3. For the effectuation of the purpose of this Act, the Administration
of the Fund is hereby placed under the Government Service Insurance System
with the following powers and authority: (a) to engage in the business and
Operation of all kinds of insurance and reinsurance and all other forms of
undertakings to indemnify any person or party against loss, damage, or liability,
including third party liability, arising from unknown or contingent events, except
life insurance, subject to pertinent Central Bank rules, regulations and policies;
(b) to reinsure with and accept reinsurance from insurance and reinsurance
companies in the Philippines and abroad, under such terms and conditions that
may be mutually agreed upon any excess risk the System may deem advisable,
subject to pertinent Central Bank rules, regulations and policies; (c) to issue
policies denominated in any foreign currency, provided that a certain minimum
percentage to be determined by the System in consultation with the Insurance
Commission shall be reinsured abroad and provided that the Fund's liability in
any foreign currency shall be covered by a minimum amount of foreign exchange
assets, which may include forward purchases of foreign exchange from the
Central Bank, in accordance with rules and regulations to be formulated by the
System in consultation with the Insurance Commission and subject to pertinent
Central Bank rules, regulations and policies; (d) to issue surety and/or
performance bonds both in Philippine peso and/or in any foreign currency,
provided that the amount of the bond to be issued on any one risk or undertaking
shall be limited to ten per centum (10%) of the net worth of the Property
Insurance Fund, and that the excess ever said limit shall be reinsured with
domestic and/or foreign insurance and reinsurance companies; provided, that the
Fund's bonding exposure in any foreign currency shall be covered by a minimum
amount of foreign exchange assets in accordance with rules and regulation to be
formulated by the System in consultation with the Insurance Commission subject
to Central Bank rules, regulations and policies; (e) to insure all insurable assets
serving as collaterals for loans extended by government financial institutions not
otherwise authorized to issue insurance policies; (f) to prescribe necessary rules
and regulations, including such incidental powers as are necessary for its
operation; (g) to appoint personnel, who are certified as eligibles by the Civil
Service Commission, prescribe their duties and fix their remuneration. Section
fifteen of Commonwealth Act Numbered One Hundred Eighty- Six shall not be
applicable to the personnel of the Fund."

"Sec. 5. Every government, except a municipal government below first

class, is hereby required to insure its properties, with the Fund against any
insurable risk herein provided and pay the premiums thereon, which, however,
shall not exceed the premiums charged by private insurance companies:
Provided, however. That the System reserves the right to disapprove the whole
 or a portion of the amount of insurance applied for: Provided, further, That such
property or part thereof as may not be insurable or acceptable for insurance may
be insured with any private insurance company. A municipal government below
first class may upon application insure its properties in the Fund under such rules
and regulations as the System may prescribe."

"Sec. 6 x x x.

(b) Penalties. - Any Cashier, Treasurer or any government official

responsible for the collection and/or remittance of the premiums hereinabove
prescribed, who refuses or habitually neglects to comply with the instructions of
the System and to collect or accept payments of the said premiums, issue
receipts therefor, and/or remit the same within the time prescribed by the System
shall be held liable for the payment of said premiums and shall pay to the System
a fine of two per centum per month of said premiums from their due dates until
received by the System."

(SGD.) FRANCISCO S. TANTUICO, JR., Acting Chairman