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Mr. PURDON. They may insure but the premium rate, I think, would be very high in that case.
Mr. DREWRY. I am just trying to get clear this question of whether you have the right to, whether the insurable value of the ship is based on its world value or the valuation be based on cost?
Mr. EWERS. World market valuation has no relation to cost, or a very small one. It can be much less than its cost, depending on the market.
Mr. DREWRY. When the vessel was constructed, there was a subsidy, a subsidy was granted in order to equalize the domestic cost against world cost. Now, is its insurable value the unsubsidized portion? Is that the yardstick that a commercial underwriter would use?
Mr. EWERS. I have in front of me a conventional CDS contract. Among the other impediments which are imposed as the vessel insurer we are required under our subsidy contract to keep all our vessels insured at world market or domestic market values. It is usually world market. That is because if a vessel gets into trouble abroad her general average contribution is based on world market values and that is usually the insurance value we are required to take.
In the conventional example of a $10 million ship, we insure that for in the neighborhood of $5 million. We pay the premiums. The contract provides that the Government has the right to require us to insure its interest in the ship over and above our $5 million provided the Government reimburses us for the excess premium.
Now, we don't know very much about that because it isn't done. The Government does not require us to insure its alleged interest in the vessel between the $5 million and the $10 million range. Therefore, in a marine risk loss, we would recover substantially the $5 million which we have insured our interest in the vessel for. The Government would recover nothing because it has not required us to insure its alleged interest, nor has it reimbursed us for any premiums. That portion is simply not insured.
Now, where I depart from this philosophy, when you get into the war risk concept and try to keep it up with 802, Maritime wants a participation in our interest for which it has contributed nothing by way of insurance premiums and it has failed to insure its interest in the vessel insofar as it is in excess of our interest.
Their interest in the ship, if any, and I don't want to debate whether they have any insurable interest for the difference between $5 and $10 million—but if they have any interest in the ship it is in addition to and not in derogation of our interest. Have I made that clear?
Now, in marine risk, it is very simple. The Government just does not participate at all. We pay the premium. We recover our $5 million, the Government gets nothing. Now, when you go into the war risk field, the Government says "No, we want to participate in this war risk pro rata with the CDS” although they do not follow the philosophy which they have established, themselves, in the CDS contract.
Mr. DREWRY. I think you are on the point that has been giving me trouble. I think the thing that concerns perhaps the Maritime Administration and perhaps members of the committee is whether you are asking for authority and permission to insure not only your interest but the Government's interest. That is why I asked whether
for commercial reasons the insurance on the vessel could go to its full cost or whether
Mr. EWERS. I understand in some cases a long time ago with which I am not familiar, the Government did require in a few instances that some additional insurance be taken out for their interest for which they reimburse the owner for the excess premium but in the last 10 or 15 years, when I have been documenting these transactions, I know of no instance where the Government has exercised its right under CDS contracts to require to be insured anything beyond the owner's interest. As a matter of fact, they have no appropriation with which to pay the excess premium, anyway. Maybe that is the reason.
Mr. DREWRY. I understood from Mr. Purdon's testimony what he was stating was that this ship we are talking about is his ship, it is operated in competition in world trade. The fact that there was a Government contribution which had gone to the shipyard, the Government has no insurable interest in the ship and the values that he wants to be able to insure at are simply his cost of the ship, which is the world cost of the ship and whatever ups and downs it has as times and conditions change.
Now you are telling me that the Government contends that it does have an insurable interest in it.
Mr. EWERS. The Government does contend it has an insurable interest but at least in recent times it has never attempted to require us to carry any insurance on this alleged interest, nor has it offered to reimburse us for the excess premium we would have to pay, which they are obligated to do under the contract.
I would just like to leave with you, Mr. Counsel, a conventional CDS contract with the insurance clause in it where it spells out that the Government may have an interest, I don't know, above the owner's interest, but if they do they have to insure it separately and pay a premium on it.
Now, in the war risk concept, they want a share of our interest to which they propose to contribute nothing.
Mr. PURDON. Even that, Mr. Ewers, isn't the real concern to me. In the period prior to requisition for use and during the period of requisition for use, title still vests in the owner. It is still the owner's ship. He is entitled to insure his own equity. The only place he could go to insure this is the Government because the Government is the only one big enough. Why should he not be permitted to insure what he has in the ship? It is a matter of Government policy whether they have an insurable interest and want to buy insurance or not, but as prudent businessmen, we should protect our interest at the proper values of the ship. When the Government takes the ship, by requisition for title, it is no longer our ship.
Mr. DoWNING. Mr. Purdon, I just want to ask that question. On your $50,000 C-3 tanker, suppose the Government requisitions that ship for title, what would it pay you?
Mr. NEMEC. It would pay the $50,000 and this would be an exercise of the vested sovereign power of the United States. But as long as they don't take that ship, as long as title remains in the hands of the owner, as long as that ship is private property, as long as it is subject to all of the commercial exposures, whether these be under charter or otherwise, under those conditions we say we ought to be treated the
same as everybody else, no different, no worse, nothing more, nothing less.
Mr. DoWNING. I have trouble in my own mind and so does the Comptroller General in distinguishing the difference between acquisition for use and acquisition for title.
Mr. NEMEC. There is a very clear break. On the one hand, the Government owns the ship; on the other hand, it takes it for employment. It becomes the manager of that ship's operation and the form which that charter agreement may take will vary with the circumstances, but it requisitions the use of the ship as distinguished from acquiring the ship and owning it thereafter. This is the final, absolute move. But there is a big break.
Mr. DoWNING. Do you requisition for use?
Mr. NEMEC. We have obligations to the ship. We are the owners of the ship. The degree to which the obligations are covered will vary with the charter party. The variation of our exposures will vary with the charter pary:
Mr. PURDON. If it is lost during this period it is our ship that is lost. Mr. DoWNING. Thank you. The CHAIRMAN. Are there any further questions? Do you wish to continue with your statement? Mr. PURDON. I don't think it is necessary to read the balance of my statement because most of it has been covered during the questioning, but I will just conclude by saying that we appreciate the opportunity of appearing before you.
We think that what we are asking for is fair and equitable, and we are not seeking anything more than that.
The CHAIRMAN. Thank you very much. Without objection, I will include in the record at this point a statement from the American Institute of Marine Underwriters and a letter dated July 10, 1963, from the American Merchant Marine Institute, Inc., urging enactment of H.R. 6814.
If the committee receives any other material we will place it at this point also.
(The material referred to follows:)
STATEMENT ON BEHALF OF THE AMERICAN INSTITUTE OF MAINE UNDERWRITERS
The American Institute of Marine Underwriters is made up of 125 member companies admitted to do a marine insurance business in the various States of the United States. The institute, which maintains offices at 99 John Street, New York City, N.Y., is the authorized spokesman for the American marine insurance market.
This institute favors H.R. 6814 which would eliminate certain provisions of section 1209 (a) (2), Merchant Marine Act, 1936, as amended, that appear prejudical to one group of shipowners. The inequity to which we refer is the stipulation that vessels built with construction subsidy may not be insured under the Government's war risk insurance program for amounts exceeding the section 802 values to which these owners would be entitled if their vessels were purchased or requisitioned by the Government. We feel that such provision is in fact inconsistent with the objectives and purposes of title XII of the Merchant Marine Act, 1936, as amended.
H.R. 6814 would strike out the first proviso of the first sentence of section 1209(a) (2) of the Merchant Marine Act, 1936, as amended. This would make two changes with respect to the war risk insurance valuation of a vessel built with construction subsidy:
(1) For the period of insurance prior to requisition for title or for use, the normal valuation would no longer be reduced by the proportion that the construction subsidy bears to the entire construction cost; and
(2) For the period of insurance after requisition for use, the normal valuation would no longer be limited to the amount payable if requisitioned under section 802 of the 1936 act. The amount payable under section 802 is the actual depreciated construction cost less the depreciated amount of
construction subsidy. It must be emphasized that none of the changes to be made by H.R. 6814 would affect in any way the right of the Government to requisition vessels built with construction subsidy and to pay only section 802 values therefor.
H.R. 6814 would also strike out the first proviso of the second sentence of section 1209(a) (2), which sentence deals with a situation where there is no agreed valuation and the insured who has suffered a loss goes to court to recover the equivalent of just compensation. The deletion of the first proviso would remove a limitation on just compensation in the case of vessels built with the aid of a construction subsidy. Here again, the amount payable to the insured, both before requisition for title or use and after requisition for use, is now limited in the same manner as that described above.
On many occasions Congress has declared that it is our national policy to develop and preserve a strong American merchant marine. Implementing this congressional mandate, the Maritime Administration has contracted with major American-flag operators to enter into replacement programs, pursuant to which their war-built tonnage is presently being supplanted by more modern and far more costly vessels. It seems inconsistent with this policy to impose any artificial impediments which will make it more difficult or perhaps impossible for the American operator to carry out this program. This is particularly true when it is remembered that the subsidized operator must place insurance recoveries in his reserve funds from which he finances his replacement program.
Prior to the nuclear era, underwriters were able to provide commercial war risk protection during periods of conflict at rates commensurate with anticipated risk. Confronted with potential catastrophic war losses (life, hull, and cargo) which might readily exceed the ability of commercial underwriters to respond, it became evident that in times of crisis only Governments could assume liabilities of such magnitude. This has been done by all leading maritime nations.
The decision of Congress, when it enacted title XII of the 1936 act, to provide insurance against loss or damage by war risks, was not based on the magnitude of potential liabilities alone. Rather it was based on the realization that shipowners deprived of such needed coverages would not expand and modernize their fleets. Without adequate protection from war risks, to which shipping is particularly vulnerable, capital would not favor shipping but would seek other avenues of investment. It was recognized that the operation and the strengthening of such fleets is vitally important to the national defense. It was also apparent that the outbreak of a major conflict anywhere in the world, even though the United States be not involved, would make it impossible for the American operator to secure adequate commercial war risk insurance. Shipowners could not be expected to risk their investments by putting to sea under these circumstances and our foreign commerce would suffer. Therefore, war risk protection provided in advance by our Government under title XII was intended to assure the free venturing of ships and new investment in ships to preserve the free flow of cargoes essential to our foreign commerce and our national defense.
Only if this insurance is to be made available in realistic amounts by the Government in accordance with commercial practice will the public interest and the original intent of title XII be served. Certainly, when one considers that premiums will be payable on the basis of these realistic valuations, that premium rates will be determined solely by the Maritime Administration and that at least for coverage at inception and immediately thereafter rates will be determined after the fact, there appears to be no reason why the owners of the vessels built with construction subsidy should not be eligible to buy from the Government insurance in amount equivalent to just compensation which is available to all other owners.
We support H.R. 6814 and urge you to recommend enactment.
AMERICAN MERCHANT MARINE INSITITUTE, INC.,
Washington, D.O., July 10, 1963. Hon. HERBERT C. BONNER, Chairman, Committee on Merchant Marine and Fisheries, House of Representatives, Washington, D.O. : DEAR MR. BONNER: The American Merchant Marine Institute, Inc., a national trade association composed of U.S. steamship companies operating a substantial majority of U.S.-flag vessels in the foreign and domestic trades of the United States, favors enactment of H.R. 6814 which your committee is considering. We take occasion to present our views in this form in order to avoid intervention on the committee's time and schedule. .H.R. 6814 would amend title XII of the Merchant Marine Act of 1936 to remove certain limitations with respect to war risk insurance issued thereunder.
The bill would strike out the provisos which provide for different valuations for war risk insurance purposes of vessels built with the aid of constructiondifferential subsidy and those built without subsidy.
Existing legislation results in a grave injustice to the owners of constructionsubsidized vessels because it limits the Government war risk valuation to the vessel's cost less depreciation, regardless of its then normal commercial value. If a construction-subsidized vessel is 20 years old, and has been written down to its residual value, the maximum permissible Government insurance is the vessel's residual or scrap value.
On the other hand, a vessel built without construction subsidy would be eligible for Government war risk insurance at its just compensation value.
The limitation imposed tends to defeat the basic purpose of the Merchant Marine Act of 1936-encouragement of the building and maintenance of an American merchant marine, since it provides only a minute fraction of the amount necessary for financing of new replacement tonnage.
Therefore, for reasons herein stated and those covered in greater detail by other witnesses appearing in person before your committee, we urge enactment of this proposed legislation which would permit the owner of constructionsubsidized vessels to adequately insure them in the event of emergency. We ask that this letter be made a part of the written record of H.R. 6814. Yours very truly,
AMERICAN HULL INSURANCE SYNDICATE,
New York, N.Y., July 10, 1963. Hon. HERBERT C. BONNER, Chairman, Committee on Merchant Marine and Fisheries, House of Representatives, Washington, D.C.
DEAR MR. BONNER: A statement in support of your bill, H.R. 6814, has been mailed to you today on behalf of the American Institute of Marine Underwriters. I have read this statement and I am in full accord with the views expressed therein.
May I ask that this letter be incorporated in the record of the hearings, thereby supporting favorable action on H.R. 6814. Very truly yours,
C. G. CORNWELL, Manager.
July 8, 1963.
DEAR SIR: I am pleased to write to you in regard to the hearings, before your committee on H.R. 6814, and I respectfully request that this letter be made a part of the record.
Prior to each renewal of the commercial marine and war risk hull insurance on ODS vessels, the Maritime Administration sends regularly to vessel operators letters in which they advise the minimum amounts of hull insurance that will be acceptable at that time.