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City May Purchase Insurance from the Municipal Liability Pool

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Reviewed Date: February 22, 2010

Original Author: 
Hemsley, Sid
Date of Material: 
Jul 24, 1998

Purchasing--Bids, proposals and specifications
Purchasing--Laws and regulations
Purchasing--Policies and procedures

City May Purchase Insurance from the Municipal Liability Pool

When the city requests bid proposals for insurance, is it required to accept the lowest bid, or can it purchase the insurance from the Municipal Liability Pool?

Knowledgebase-City May Purchase Insurance from the Municipal Liability PoolWhen the city requests bid proposals for insurance, is it required to accept the lowest bid, or can it purchase the insurance from the Municipal Liability Pool?

The answer is that it can purchase the insurance from the Municipal Liability Pool.

Under the facts your related to me, the city requested bid proposals for insurance, but subsequently purchased the insurance from the Municipal Liability Pool. Now the person who submitted the lowest bid for the insurance has made a demand upon the city for the cost of submitting its bid. You do not think the request for proposals contained a provision permitting the city to reject any and all bids. I am assuming that the request for proposals did not contain such a provision for the reason that I do not think that information is essential to the answer.

Governments need not competitively bid goods or services unless required to do so by statute. [63 C.J.S., Sec. 1005; 10 McQuillin, Municipal Corporations, Sec. 29.31; 64 Am. Jur.2d, Public Works and Contracts, Sec. 34.] Tennessee Code Annotated, section 6-56-301, et seq., generally requires municipal goods and services to be bid. However, that statute also contains some exceptions, one of which is for purchases from “instrumentalities created by two (2) or more cooperating governments such as, but not limited to, those established pursuant to the Interlocal Cooperation Act, compiled in title 12, chapter 9.” [Tennessee Code Annotated, section 6-56-303(4).] Among such instrumentalities is the Municipal Lability Pool. In addition, Tennessee Code Annotated, section 29-20-407, expressly provides that, “Any governmental entity may purchase any of the insurance authorized by this chapter, without the necessity of public bidding, as required by any public or private act or charter restriction, if such insurance is purchased through a plan authorized and approved by any organizations of governmental entities representing cities and counties.”

But where the city calls for bid proposals, then after consideration of the bids, buys the goods or services from an entity from whom it is statutorily authorized to buy without competitive bidding, does the city have any legal obligation to dissatisfied bidders? 10 McQuillin, Municipal Corporations, Sec. 29.73, says that:

Where competitive bidding is not required by applicable laws, but bids are nevertheless requested, the contract need not be let to the lowest bidder, and an award of the contract in good faith to a higher bidder ordinarily will not be set aside, except for fraud or abuse of discretion, especially where the services to be rendered and the material furnished by the opposing bidders do not cover the same ground.

It is also said in Rhyne, Charles S., Law of Municipal Contracts, that:

Competitive bidding in the granting of municipal contracts is employed for the protection of the public and in order to secure by competition among bidders the best results at the lowest price and to forestall fraud, favoritism and corruption in the issuance of contracts. In making its contracts, a municipal corporation need not advertise for bids and let to the lowest bidder in the absence of a statutory requirement, nor need it let to the lowest bidder if, in the absence of a statutory requirement it adopts a policy for advertising bids. [Emphasis is mine.]

Tennessee cases are in accord on that point. It is said in Marta v. Metro. Gov. of Nashville, 842 S.W.2d 611 (Tenn. App. 1992), that, “However, in the absence of a statute, an unsuccessful bidder’s standing extends only to equitable or declaratory relief to ensure enforcement of required competitive bidding procedures.” [At 617.] [Emphasis is mine.]
It is also said in the same case that:

Courts are wary of unwarranted judicial intrusion into the performance of ordinary governmental activities. [Citations omitted.] Accordingly, judicial review of the acts of local government administrative officials is generally confined to an examination of the evidence to determine whether “there is material evidence to support conclusions that are neither arbitrary nor unlawful. [Citation omitted.]
Since procuring goods and services is the type of routine activity that is best left to governmental officials, most courts have recognized that public procurement authorities have wide discretion with regard to accepting bids or any of the other details of entering into a contract. [Citations omitted.]
Purchasing officials must not be arbitrary, unreasonable, or capricious. [Citations omitted.] Thus, in the absence of fraud, corruption, or palpable abuse of discretion, the courts will ordinarily not interfere with governmental procurement decisions. [Citations omitted.] [At 619.]

The U.S. Sixth Circuit Court of Appeals declared in Owen of Georgia, Inc. v. Shelby County, 648 F.2d 1084(1981), a case interpreting a competitive bidding law that applied to Shelby County, that “it is beyond cavil that the primary objective [of the competitive bidding statute at issue] is to promote the public interest by obtaining the lowest possible price that competition among responsible bidders can secure.” The Court also agreed with Shelby County’s argument that “competitive bidding requirements of contracts for public works exist to protect the public rather than the bidders.” [At 1091.]

From those cases and authorities, it can be concluded that competitive bid laws are designed to protect the public rather than bidders and that a municipality is not liable for its refusal to accept the lowest bid where it is not required by statute to competitively bid for the goods or services in question.

The Court in Owen of Georgia did award an unsuccessful low bidder the cost incurred in its unsuccessful participation in the competitive bidding process, and in its successful attempt to have the award to another bidder rescinded as having been made in violation of the statute. The competitive bid law there required awarded to be made to the lowest bidder, except for “good cause.” The contact was not awarded to the lowest bidder because another firm was a local firm and had a higher proportion of minority employees. The Court found those reasons did not constitute “good cause” as contemplated by the competitive bid law. However, the underpinning of the award of damages was the existence of the competitive bidding statute that required awards of bids to the lowest bidder, unless the bid was rejected “for cause.” The Court reasoned that:

Shelby County promised to award the contract to the lowest financially responsible bidder in the event it awarded the contract at all, and in reliance on this promise Owen submitted its bid. This created a type of informal contract, requiring neither consent nor consideration between Shelby County and Owen (as well as the other bidders) to award the contract to Owen as the lowest responsible bidder unless it rejected all bids. Consequently, Owen became entitled to damages when Shelby County breached this informal contract by awarding the contract to Pidgeon-Thomas. [At 1095]

However, the “promise” in Owen derived from the statute requiring competitive bidding on the contract in question. In fact, the Court in declaring that Owen had a remedy said:

This conclusion, [that competitive bidding requirement protect the public rather than bidders] does not leave Owen without any remedy for the violation of the Act’s competitive bidding section by Shelby County. By virtue of those bidding procedures, the County invited bidders to respond. Those procedures protect the local government’s interest as well as the interests of those who respond to the County’s invitation... [At 1095.] [Emphasis is mine.]

Continued the Court, “In its solicitation of bids pursuant to the Restructure Act, Shelby County clearly promised to award the contract to the lowest financially responsible bidder if it awarded the contract at all.” [At 1095.] The Tennessee Supreme Court spoke at length about the meaning of competitive bidding and the requirement for fairness in that process in State ex rel. Leech v. Wright, 622 S.W.2d 807 (Tenn. 1981).

However, in Owen it was the competitive bidding statute that promised the award of the contract to the lowest financially responsible bidder. Leech spoke specifically in the context of a private act, and generally in the context of a general statute, requiring a competitive bidding process. In your case, the Municipal Purchasing Law expressly exempts cities from purchasing insurance through competitive bids if the insurance is purchased from the Municipal Liability Pool. For that reason, there is no “promise” to buy insurance from the lowest bidder, let alone a promise comparable to the one found in Owen. As I understand the facts, even the bid proposal itself did not promise to award the contract of insurance to the lowest and best bidder. The city was entitled to cast its net to see what it might catch in the insurance market, throw back its catch, then buy from the fish store, in this case the Municipal Liability Pool.

Most bidders who bid on municipal insurance are well aware that municipalities can buy insurance from the Municipal Liability Pool. I do not know if the unhappy bidder in your case was one of those, but even if he was not, he had statutory notice of that reality.

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