tween any of the following countries: United States of America, United Kingdom (or any other member of the British Commonwealth), France, the Union of Soviet Socialist Republics, and the Peoples Republic of China. These automatic termination clauses also exclude from the coverage of the commercial policies any loss, damage, or expense arising out of any prior hostile act by any of the foregoing countries which within 90 days of its happening results in the outbreak of such a war.

The Maritime Administration, under delegation of authority from the Secretary of Commerce, has made the statutory finding that upon such termination of commercial coverage commercial war risk insurance is not available. We have issued binders which will place Government war risk insurance in effect upon termination of the commercial coverage.

The existing law limits the amount of Government war risk insurance that can be granted with respect to a vessel, and in establishing this limit the existing law takes into consideration any burden in the way of restrictions on the title to the vessel to be insured, because any such burden affects the value of the vessel. The burden that is of chief importance in regard to these Government war risk insurance values is the right of the United States to requisition such vessels for title during a national emergency and the price at which such vessels can be requisitioned.

Section 902 of the Merchant Marine Act, 1936, provides that during a national emergency the Secretary of Commerce is authorized to purchase or requisition any vessels owned by citizens of the United States. If the vessel was not built with the aid of construction-differential subsidy, the purchase or requisition price is just compensation which is equivalent to the current domestic market value of the vessel. If construction-differential subsidy was granted to aid in the construction of a vessel, however, the purchase or requisition price of the vessel (as provided in sec. 802 of the act) is its current domestic market value, but not exceeding its depreciated cost to the owner.

To illustrate, if the current domestic market value of a vessel that was not built with the aid of construction-differential subsidy is $6 million (though its depreciated book value is only $500,000) and the vessel is requisitioned during a war emergency, the requisition price is the $6 million. If, however, there is an identical ship which was built at the same time, but with the aid of constructiondifferential subsidy, its requisition price is the depreciated book value; namely, $500,000. The fact that one ship is burdened but the other is not would affect their market values. When war appears to be really imminent, a buyer would be willing to pay $6 million for the unburdened vessel because he would receive this amount from the Government if the vessel were requisitioned, but a buyer would be willing to pay only $500,000 for the other vessel because the Government might requisition the vessel for this amount the day after he made the purchase. Under these circumstances, these vessels have very different market values. In fixing values for Government war risk insurance purposes, the fact that one vessel is burdened and the other is not are vital considerations, because Government war risk insurance does not come into effect until the outbreak of war between the powers mentioned except for damages resulting from an act committed within 90 days of the outbreak of war which led to the outbreak of war. The United States promotes a merchant marine for commercial and national defense reasons. One of the advantages the United States gets out of furnishing construction-differential subsidy is the right to requisition the vessel for national defense purposes at the section 802 price. A construction-differential subsidy ship is not wholly the ship of the operator. The ship is burdened with this section 802 right of the United States which the operator agrees to when he applies for construction-differential subsidy. This affects the market value of the ship, especially when war appears to be imminent.

The foregoing considerations with regard to the vaue of ships are reflected in the existing law with respect to the valuation of ships for war risk insurance purposes.

Section 1209 (a) (2) of the 1936 act limits the amount of Government war risk hull insurance that may be issued with respect to any vessel. With respect to

a vessel that has not been built with the aid of construction subsidy, this amount is the just compensation that would be payable if the vessel had been requisitioned for title under section 902 (a) of the act. This is equivalent to the current domestic market value of the vessel which is not burdened by the section 802 requisition price.

With respect to a vessel that has been built with the aid of construction-differential subsidy, section 1209(a) (2) provides one limit on the amount for which it can be insured for the period prior to the time that it is requisitioned for use; and a different limit on the amount for which it can be insured for the period after it is requisitioned for use. The first limit (for the period prior to requisitioning for use) is the current domestic market value of the vessel (with its sec. 802 burden) reduced by the proportion that the construction subsidy paid bears to the entire cost of the vessel. The second limit (for the period after requisitioning for use) is the amount that would be paid if the vessel were requisitioned at the section 802 requisition price. This latter amount is the current domestic market value of the vessel, but not exceeding the depreciated acquisition cost of the vessel to the original private owner, or scrap value, whichever is greater.

The bill would amend section 1209 (a) (2) by striking out the provisos that provide for different valuations on construction subsidy ships than on other ships. We understand that the intention is to provide that the stated valuation of construction subsidy ships shall be their current domestic market value determined without recognizing the section 802 burden on the vessels. We are opposed to this change in the law because we believe that the only realistic way of valuing ships is to recognize the burdens on them. The market would do this. We think, however, for the reasons hereinafter stated, that the law with respect to the stated valuation of construction subsidy ships for the period prior to their requisition for use should be amended to provide that such valuation shall not be less than the section 802 requisition price.

The existing law is that for the period after the vessel has been requisitioned for use, its stated valuation shall be the amount that would be payable under section 802 if the vessel had been requisitioned for title. Since at any time that a vessel is requisitioned for use we are in a situation where war appears to be imminent and any buyer would understand that we will probably requisition the ship at the section 802 value, we see no reason why the United States should ignore the burden on the vessel and pay more if a vessel that is requisitioned for use is lost through a war risk than we would have paid if the vessel had been requisitioned for title. We think the owners are not equitably entitled to the entire current domestic market value (without regard to the burden on the vessel) as the stated valuation for the period prior to or after requisition for use in view of the Government's contribution to the capital costs of constructing the vessel. The increased premium would be a cost of operating the ship after it is requisitioned for use and would thus ultimately be paid by the United States in its charter hire.

Even if the bill were amended to provide that, as a condition to providing this increased insurance, the owner must agree that the increased premium cost would not be passed on to the Government, the United States could not be sure that it would be made whole with respect to premiums collected and losses paid. Whether it would in fact be made whole would depend on a number of factors, one of which is the duration of the war, i.e., that any large initial loss might be recouped through continuing premium collections which are not absorbed by continuing losses. Section 1202(b) of the act provides that any insurance issued under the act "shall be based, insofar as practicable, upon consideration of the risk involved." This, as hereinabove indicated, does not purport to guarantee a break-even or profitable program to the Government. There was a similar provision in the World War II legislation, and I am advised that the United States made an overall profit on that insurance, but that the hull portion of the insurance resulted in a loss to the United States. It should be noted that World War II lasted for several years, and in its later stages the submarine menace was conquered. During that war, the United States was a self-insurer of vessels that were under requisition for use, but the amount for which the United States undertook to compensate the owner of a construction-differential subsidy vessel upon its loss was the section 802 value.

For the period prior to requisition for title or use, the existing law provides that the stated valuation of construction subsidy ships shall be their current domestic market value reduced by the proportion that construction subsidy paid bears to the entire cost of the vessel. Thus, if the construction subsidy was 50 percent of the U.S. cost, the owner is entitled to 50 percent of the just compensation under section 902(a). Since at any time that a vessel is lost through a war risk which is covered by Government insurance, we are within 90 days of the outbreak of war (when all vessels presumably will be requisitioned for title or use), we think this gives the owner a reasonable participation in the

increased value of the vessel. In any event, we do not think the owner is entitled to the current domestic market value (without regard to the burden on the vessel) for this period, because this may greatly exceed the section 802 value.

We believe, however, that for the period prior to requisition for title or use the owner should be assured of at least the section 802 value. Existing law does not provide this floor value.

Attached is a substitute text for the bill which we recommend. It would provide a section 802 floor for the stated valuation of construction subsidy ships for the period prior to their requisition for title or use. Attached also is a comparative text showing the changes in existing law that would be made by our proposed substitute text.

We would like to answer some of the arguments industry made last year on behalf of an identical bill. One of these arguments is that we require commercial marine hull insurance on the America in the amount of $6,400,000 but that the America is eligible for Government war risk insurance only at the amount of about $450,000, and that these values are disproportionate. We think these different values reflect different conditions with regard to the probability of war and, therefore, with respect to the probability of the requisitioning of the ship at the $450,000 price.

Commercial war risk insurance is terminated upon the outbreak of war between the powers mentioned and it excludes loss resulting from an event that occurs within 90 days of the outbreak of war which leads to the war. The war risk on the commercial insurers, therefore, is considerably less than the war risk on the United States. The reason for this is that the risk only comes to us when it is too great for commercial insurers to bear. When the risk comes to us, conditions with respect to war are very different than when such risks are on commercial insurers. The same conditions that cause a shift of the risk to us cause a considerable change in the value of ships that have a section 802 requisition price on them. We have under reconsideration our requirements on the subsidized operators for commercial insurance. This, nevertheless, is the consideration that led us to require commercial marine hull insurance on the vessel in the amount of $6,400,000, and the consideration that leads us to believe that a value of $450,000 for war risk insurance purposes after the ship has been requisitioned for use is the correct value.

Another argument industry made last year is that we furnish Government war risk insurance to foreign-flag vessels at greater values than we grant for American-flag construction subsidy ships. In return for the Government war risk insurance which we grant to foreign-flag ships we get a commitment that these ships will be made available to the United States in time of emergency, and our reason for furnishing this insurance is to get this commitment. We obtain the right to requisition construction subsidy ships at the section 802 price in the contract entered into when we agree to pay construction-differential subsidy. We do not think we should pay twice for this right by granting Government war risk insurance at values in excess of the value of the ship at the time when the insurance goes into effect.

Another argument industry made last year is that we grant Government war risk insurance at greater values for ships sold under the Merchant Ship Sales Act of 1946 than we do on construction subsidy ships and that this is incongruous. We do not think this is incongruous. It reflects the fact that ships sold under the Merchant Ship Sales Act of 1946 are not subject to section 802 of the Merchant Marine Act, 1936, and that construction subsidy ships are subject to that section. This difference between the two classes of ships is reflected in the values of the ships at the time the Government war risk insurance goes into effect. We believe the reason Congress did not subject vessels sold under the Merchant Ship Sales Act of 1946 to section 802 of the Merchant Marine Act, 1936, is that vessels were sold to both citizens and to aliens under that act, that such a restriction could not reasonably be imposed on ships sold to aliens, and, therefore, should not be imposed on ships sold to citizens. We think that if ships were to be sold only to citizens under that act that Congress would have imposed section 802 restrictions.

In conclusion, we believe that, with the amendment we have proposed, war risk insurance values for construction subsidy ships under the Merchant Marine Act, 1936, would be equitable both to the shipowners and to the United States. The Bureau of the Budget advises there is no objection to the submission of this report from the standpoint of the administration's program.

Sincerely,

ROBERT E. GILES.

THE DEPARTMENT OF COMMERCE'S PROPOSED SUBSTITUTE TEXT FOR H.R. 6814 That section 1209(a)(2) of the Merchant Marine Act, 1936 (46 U.S.C. 1289), as amended, is amended as follows:

"(a) By striking out of the first proviso in the first sentence thereof, after the words for the period of insurance prior to requisition for title or use, the valuation', the words 'so determined shall be' and inserting in lieu thereof the following: 'shall be (A) the amount so determined'.

"(b) By inserting in the first proviso in the first sentence thereof immediately after the close of the parenthesis the following: 'or (B) the amount which would be payable under section 802 in the case of requisition for title, whichever is higher'.

"(c) By striking out of the first proviso in the first sentence thereof the words 'or use' immediately before the second proviso.

"(d) By inserting in the first proviso in the second sentence thereof immediately after the words 'the valuation determined by the court as such just compensation for any period of insurance prior to actual requisition for title or use of the vessel shall be' the following: (A) the foregoing just compensation amount'.

"(e) By inserting in the first proviso in the second sentence thereof immediately after the close of the parenthesis the following: 'or (B) the amount which would be payable under section 802 in the case of requisition for title, whichever is higher'."

COMPARATIVE TEXT SHOWING THE CHANGES THE DEPARTMENT OF COMMERCE'S PROPOSED SUBSTITUTE TEXT FOR H.R. 6814 WOULD MAKE IN THE FIRST PROVISO IN THE FIRST SENTENCE AND THE FIRST PROVISO IN THE SECOND SENTENCE OF SECTION 1209(a)(2) oF THE MERCHANT MARINE Act, 1936, as AMENDED

[Deletions are shown by black brackets; insertions are shown by italics]

The first proviso in the first sentence:

“Provided, however, That in the case of a construction-subsidized vessel, for the period of insurance prior to requisition for title or use, the valuation [so determined shall] shall be (A) the amount so determined reduced by such proportion as the amount of construction subsidy paid with respect to the vessel bears to the entire construction cost and capital improvements thereof (excluding the cost of national defense features) or (B) the amount which would be payable under section 802 in the case of requisition for title, whichever is higher, and for the period of insurance after requisition for use the valuation so determined shall not exceed the amount which would be payable under section 802 in the case of requisition for title [or use]:".

The first proviso in the second sentence:

“Provided, however, That in the case of a construction-subsidized vessel, the valuation determined by the court as such just compensation for any period of insurance prior to actual requisition for title or use of the vessel shall be (A) the foregoing just compensation amount reduced by such proportion as the amount of construction subsidy paid with respect to the vessel bears to the entire construction cost and capital improvements thereof (excluding the cost of national defense features) or (B) the amount which would be payable under section 802 in the case of requisition for title, whichever is higher, and for any period of insurance after actual requisition for use, the valuation determined by the court shall be the amount which would have been payable under section 802 in the case of requisition for title:".

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, July 9, 1963.

B-83676.

Hon. HERBERT C. BONNER,

Chairman, Committee on Merchant Marine and Fisheries,
House of Representatives.

DEAR MR. CHAIRMAN: Further reference is made to your letter of June 10, 1963, acknowledged on June 13, requesting the comments of the General Accounting Office concerning H.R. 6814, 88th Congress, 1st session, entitled "A bill to amend title 12 of the Merchant Marine Act, 1936, in order to remove certain limitations with respect to war-risk insurance issued under the provisions of such title."

The proposed legislation pertains to the amounts payable in the event of actual or constructive total loss of vessels covered by war-risk insurance under title 12 of the act. Section 1209 (a) (2) of title 12 presently provides that the valuation in the policy for actual or constructive total loss of the vessel insured shall be a stated valuation determined by the Secretary of Commerce which shall not exceed the amount that would be payable if the vessel had been requisitioned for title under section 902(a) of the act at the time of the attachment of the insurance under the policy. This amount would be so-called just compensation. However, section 1209 (a) (2) further provides that in the case of a construction-subsidized vessel, for the period of insurance prior to requisition for title or use, the valuation so determined by the Secretary shall be reduced by such proportion as the amount of construction subsidy paid with respect to the vessel bears to the entire construction cost and capital improvements thereof, and for the period of insurance after requisition for use the valuation so determined shall not exceed the amount which would be payable under section 802 in the case of requisition for title.

It is the latter provisions of section 1209(a) (2) which H.R. 6814 would eliminate, in which case the stated valuation of a construction-subsidized vessel for the period prior to requisition would be at the section 902 (a) value without reduction. Likewise, with the removal of the aforementioned restrictions, the stated valuation for the period after requisition for use would be the entire section 902 (a) just compensation price, rather than the depreciated cost to the owner under section 802 as presently provided by title 12 of the act.

We heretofore have not agreed with somewhat similar proposed legislation primarily on the premise that the proposed basis of valuation for war-risk insurance for a subsidized vessel would be inconsistent with the basis of compensation allowed for the same vessel if requisitioned for title pursuant to section 802 of the act. However, upon further consideration of the matter, and particularly with reference to the pending bill, we have concluded that certain changes in our views are warranted for the reasons hereinafter set forth.

It is our understanding that one of the primary objectives of title 12 of the act, and specifically section 1209, was to encourage continuance of regular private maritime service during periods of hostile action in order to sustain U.S. foreign commerce and the interests of the Government in such hostile areas. It would appear, therefore, that the attachment of Government insurance upon termination of commercial insurance due to events not controllable by shipowners should not operate to place the shipowners in a different position from the standpoint of collectible insurance in the event of loss from that existing when they were under commercial insurance coverage. Accordingly, we believe that repeal of that portion of section 1209(a) (2) of the act requiring the reduction of insurance valuation for the period prior to requisition for use would be equitable and proper.

With respect to the period of insurance subsequent to requisition for use, we believe that the circumstances of such requisition are essentially the same as those underlying requisition for title. That is to say, ordinarily, a ship requisitioned for use is no longer carrying on commercial business for the shipowner in its regular trade service. To the contrary, the vessel is completely under the jurisdiction of the Government for purposes of operation. Thus, in terms of physical possession and operating control, the status of a vessel requisitioned for use and one requisitioned for title appear to be analogous. In our opinion, to fix an insurance valuation on a ship requisitioned for use different from the value which would be given the same ship if it should be requisitioned for title would be inconsistent with section 802 of the act. Therefore, we do not favor the repeal of that portion of section 1209(a)(2) limiting the insurance valuation of a construction-subsidized vessel for the period after requisition for use to an amount not in excess of that which would be payable under section 802 in the case of requisition for title.

Aside from the foregoing, and recognizing that the question whether legislation of this type is necessary is a matter of policy for determination by the Congress, we have no further recommendation to offer. In the event, however, it should be decided by your committee to adopt H.R. 6814 in its present form. your attention is invited to the fact that there would remain effective that portion of section 1209(a) (2) which provides that "the valuation *** shall not exceed the amount that would be payable if the vessel had been requisitioned for title under section 902 (a) at the time of attachment of the insurance under said policy:". Section 902 (a) provides for the payment of just compensation. but with respect to construction-differential subsidy vessels, section 902(b)