Insuring ghost projects

The continuing exposé and unraveling of flood control projects discovered as either totally nonexistent or utterly substandard has raised a fervent discussion on who should be at fault. The finger-pointing that ensued has reached the highest levels of government, to the extent of one branch issuing a statement against another. This column does not intend to meddle in this.

One thing mentioned in the first Senate hearing is whether insurance companies must be held liable for ghost projects and substandard projects. Under the Government Procurement Law (RA 9184), contractors are required to procure a performance bond for the contractor’s obligation until final acceptance by the government agency, and a warranty bond to repair structural defects or failures for one year from the date of final acceptance. These bonds are issued by insurance companies acting as sureties or bonding companies.

This type of insurance has its legal limits. Article 2052 of the Civil Code states there can be no guaranty or surety unless there is a valid obligation to begin with. In other words, a performance bond is only an accessory; it follows the fate of the principal contract, which is the construction agreement. If that principal contract is void or illegal, then the bond is equally without force. The Supreme Court, in Stronghold Insurance Co. v. Republic (G.R. 147561, 8 June 2006), ruled that the liability of a surety is “co-extensive with that of the principal debtor.”

Thus, if the contractor has no enforceable obligation because the project was a sham or fraudulent, then the surety company cannot be made to pay either. Further, if the project has been completed and the DPWH has issued a Certificate of Final Acceptance, which would trigger the release of public funds, then the insurance companies would be released from their obligations and no longer be liable.

In the first Senate hearing, Senator Raffy Tulfo asked about insurance, and Insurance Commissioner Reynaldo Regalado correctly discussed the jurisdiction of the Insurance Commission and that the DPWH can go to them since these bonds are “callable on demand,” as stated in the law. However, the DPWH has not approached the Insurance Commission on any of these fictitious or substandard flood control projects for reasons you may know.

It bears mentioning that none of this means insurance and surety are useless. When applied properly, surety bonds are vital safeguards in the development of our country. Performance bonds ensure that real projects get finished, and insurance cushions the losses of businesses and families when typhoons, floods, and other calamities strike.

Let’s continue to keep a close eye on the ongoing Senate investigation. We are on to something that may lead to systemic change in our beloved country. Ghost projects thrive only when oversight is weak and accountability absent, but if we demand honesty, prosecute fraud, and strengthen institutions, then bonds and insurance can work as financial protection for the people.