Let me state the committee was first formed with the idea of performing an exchange of enginering information regarding self-protection. We recognized that we had a problem on rehabilitating our plants and on drawing out electrical equipment and handling very vital machine tools and dies and that sort of stuff and we needed each other's help.

So the 35 of us got together, thinking to help ourselves first before we started talking of concerted effort. However, we since then have tried to get together as a group to give an effort on such projects as flood insurance and on flood protective works.

Last year in the Hurricane Carol, New Bedford was hit badly. Greater New Bedford itself suffered $50 million damage, and better than $10 million of that was in industrial plants alone.

Incidentally, we believe that estimate to be relatively accurate. That survey of our 35 companies was taken in April and May of 1955, long after the companies had been able to assess their damage, and we think that they knew by then pretty accurately what their damage

was.

That figure of $10 million though does not include loss of business or loss of payroll to the employees who were put out of work for as much as a month or 6 weeks.

I would like to concern myself today mainly with the industrial problems rather than the problems confronting other commercial establishments and homes, primarily because that has been my major interest.

I have here and would like to submit for your perusal and to have included in the record if you care to, sir, a copy of the testimony which was given before the Senate Public Works Subcommittee in regard to Senator Bush's bill S. 414. I bring it because in it there are some pictures showing typical damage of what happens to plants in salt water. I do not know whether you would like that as part of the testimony or

not.

Senator LEHMAN. In view of its thoroughness and completeness, we will not make it part of the record, but we will keep it in the committee and make it available to all members of the committee.

Mr. YOUNG. You would like me to turn it in?

Senator LEHMAN. Yes.

Mr. YOUNG. Mr. James Buckley, who was the vice president of Revere Copper & Brass in charge of New Bedford operations, and I were pleased to appear before this committee and assist in getting authorizations for the United States Army engineers to make studies and build flood-protective devices in areas affected by salt water rather than just fresh water.

You will find, as I stated, attached to the testimony some pictures indicating the extent of the damage in many of our members' plants. It is our impression that salt-water damage is just as bad, if not worse, than fresh-water damage, because immediately tools, dies, and other mechanical and electrical equipment start to rust. They all must be taken down within 2 or 3 hours or they are ruined completely.

Several things became obvious to us. First, with the changing weather patterns we believe the New England coastal area is now extremely vulnerable to future flooding, and the plants along the waterfront, which were built before this danger existed, are not in a posi

tion where they can move their buildings and equipment to higher ground.

Second, it is very obvious that all of the plants affected are taking precautionary measures with their own funds to make their plants as watertight as possible. With existing buildings and with the danger from heavy seas and floating objects, this is not, we feel, a satisfactory solution. Frankly, all of us have bottled up our windows and our doors and we have plugged up our drains with valves and we have got pumps in there to try to pump our buildings out. We thought we were going to have a chance to test it when Diane came along but we are very glad we didn't. But we are still curious whether it would work

or not.

Thirdly, from a survey of our 35 participating plants it was apparent that the majority do have a definite interest in flood insurance if it should become available at a reasonable cost. At the Acushnet Process Co. we have endeavored to get quotations on flood insurance and to this date have been unsuccessful in getting a proposal that is practical from the cost standpoint.

We do feel that insurance is a real necessity and, whether the United States Government realizes it or not, they do have a definite part to play in the insurance program. Each time there is a disaster, the Government loses tax income on the amount of money which was lost by each of the industrial concerns. For instance, last year Uncle Sam lost somewhere over $5 million in taxes because of the damage suffered by our concerns.

Senator BUSH. You mean just in your area?

Mr. YOUNG. Just in our area in New Bedford alone; yes.

If we are to be subjected to further floods without insurance, it is obvious that many of these companies will feel they cannot expand or continue to do business in their present location, which will mean loss of employment to the area and loss of future taxable income to the Federal Government.

As we see it, industrial disaster insurance should embody the following points, and let me repeat I am not an insurance expert, but this is what as a possible insuree we think might be a workable scheme.

1. Each plant participating should be required to purchase insurance for the full appraised value of that portion of the plant which is subject to water damage.

2. There should be a reasonable high deductible clause, probably as high as 10 percent of the insured value.

3. Even above this deductible clause we feel that the corporation should be a coinsurer with the insurance company to the extent of somewhere around 10 percent of the remaining damage.

4. We believe individual rates should be established for each plant, depending upon the degree of risk and protective measures taken. In other words, if a company spends a lot of its money to try to fortify themselves and reduce the risk, of course, there wouldn't be as much risk in the first place, but we feel they should possibly get a better rate too.

And there is a fifth point I do not have in my testimony, but we believe in order to build up funds that it would be necessary to have some minimum amount of time which a participating company could buy this insurance, say 5 years or something like that, so they couldn't buy

the insurance the day before the flood and then get rid of it the day afterward.

We believe that the above five points would prevent companies from building in vulnerable locations without getting adequate physical protection and that the dollar cost to the insurance company would, thereby, be reduced appreciably.

If the above points were followed, we feel that the private insurance companies could justify the issuing of insurance themselves, as long as there is a proviso for reinsurance by the Federal Government to prevent economic failure of the insurance companies in the event of a widespread national disaster. It would appear reasonable to us that the insurance companies should be in a position to withstand the first $50 million of damage per disaster and that insurance above this figure should be obtainable from the Federal Government. We would definitely recommend keeping the Federal Government out of the primary insurance business and feel that their participation should be in the form of reinsurance only.

It is obvious that the broader the base of this insurance program, the better will be the diversification and the quicker the insurance companies can build up funds to withstand disaster. It is, therefore, our recommendation that this insurance cover all types of natural disasters, not manmade, rather than merely flood damage, and, of course, that would be disasters not already covered by existing insurance policies.

I believe it was pointed out this morning there are some disasters which are coverable at the present time.

We recognize that insurance is not the only answer to our problem, As proposed, it will not reimburse the plants for all of the damage, nor will it pay for the loss of buiness to the company during shutdown, or wages to the thousands of employees involved. During the 1954 Hurricane Carol, this loss of wages to employees threw a tremendous handicap on the economy of New Bedford when the whole city was least prepared to stand it. We feel it is imperative that each plant be given as much incentive as possible to take their own protective measures.

One of the biggest handicaps at the present time to this self-protection program is the fear that the protective measures must be capitalized even though they do not add to the productive capacity of the plant nor do they improve the facilities. And I might point out in. the case of the plants in New Bedford there they have spent an awful lot of money, and they are not equipped to produce a pound more of material than they could before, and their buildings are not as good as they were before. We have ruined the ventilation. We have ruined the light. We have made the buildings much less flexible than they were before. Yet we have put the money in merely to protect ourselves and not to increase our ability to make goods.

It is our understanding that this is under discussion by the Commissioner of Internal Revenue at the present time, and we strongly urge that the companies which will spend money to protect themselves be allowed to write off the cost of protection immediately unless there is an improvement to their property.

In addition to this self-protection, it is obvious that physical protection in the form of dams, causeways and bulwarks, et cetera, are of prime necessity along the rivers which are vulnerable to fresh water

flooding and along the seashore where you have estuaries which are subject to salt-water flooding during hurricanes. We are pleased to know that the Federal Government has recognized the salt-water problem and has authorized the Army engineers to study salt-water flooding. We believe these studies and projects should receive the same amount of attention as the fresh-water control projects.

Until insurance is available from private companies, it is our recommendation that the tax laws be revised, as a stop-gap measure, to allow industrial concerns to set up a reserve for self-insurance which could be deductible from income. I understand that was one of the provisos of the 1954 Internal Revenue Code, and, as you know, it was since repealed. Obviously if insurance was available the companies would be allowed to deduct the premium cost of that insurance from their profits before taxes as a reasonable business expense, but it is not permissible to build up a fund to cover yourself in the event of disaster. It appears to us if insurance is not available that corporations should be allowed to build up this self-insurance reserve.

We believe that obviously some limits should be set on the rate at which this reserve could be set up, and as a guess we picked a figure of not over 10 percent of income before tax, and that the maximum size of the reserve per company should be set up possibly not more than 50 percent of the appraised value of the capital assets which are vulnerable to flooding. Obviously some people would take advantage of such a reserve provision unless there was some control put on it.

I appreciate very much this opportunity of expressing my views, Mr. Chairman.

I do have one other thing I would like to say. Mr. William Flack came up here with me from New Bedford and was prepared to present a statement. His name did not get on the agenda. I realize you are running short of time, and he asked that I request his statement be included in the record also.

Senator LEHMAN. We are very glad to have it. Without objection, it will be included.

Mr. YOUNG. Fine.

Senator KENNEDY. I know how much work Mr. Young and his committee have done down in southeastern Massachusetts, and I think his testimony is very helpful, because they have had as much experience as anyone with this business of salt-water flooding. So I am glad he had a chance to testify today.

Mr. YOUNG. Thank you, Senator.

Senator LEHMAN. Thank you very much for coming, Mr. Young. Mr. YOUNG. I appreciate it very much, sir.

(The prepared statement of Mr. Flack follows:)

STATEMENT OF WILLIAM E. FLACK, CONTROLLER, ACUSHNET PROCESS CO. My name is William E. Flack. I am the controller of the Acushnet Process Co. It is my understanding that the primary subject of this hearing is flood insurance. I will, therefore, limit my testimony principally to that topic.

Flood insurance has been considered and the possibilities of writing such a coverage reviewed by the major insurance companies several times in the past. There have also been previous bills in Congress and I believe that most of them have died in committee. When one understands the underwriting problems created by flood insurance, it is easy to understand why previous efforts to establish such coverage have been unsuccessful. The principal underwriting difficulties are:

1. Adverse selection of risk (purchase of coverage only for property with a severe flood exposure).

2. The magnitude of potential losses.

3. The concentration of loss (usually losses are limited to a few communities).

It would seem that proper legislation could eliminate the last two of these difficulties by providing adequate reinsurance facilities to the private insurance companies. The first problem presents greater difficulty. If the program is confined to flood insurance alone, it appears likely that only those with severe flood exposure would purchase the coverage and that, as a result, the rates for such insurance would become prohibitive. On the other hand, if the coverage is broadened to include all natural disasters, it is feared that it will degenerate into a relief program rather than insurance. Probably the solution lies somewhere between these extremes.

The present extended coverage endorsement which is available on most fireinsurance policies is a good illustration. This extended coverage endorsement covers such widely assorted risks as sprinkler leakage, windstorm or hail, explosion, falling aircraft, smoke, riot and civil commotion, vandalism, and destruction of property at the order of civil authorities. Some of these risks certainly present opportunities for adverse selection. It would seem to me that it would be possible to add fresh- and salt-water flooding and possibly some other risk such as earthquakes to the risks presently included under the present coverage endorsement. In my opinion, it is much more desirable to add perils to the present extended coverage endorsement than to write a totally new coverage. In many flood losses there is also wind damage and it becomes difficult to distinguish between wind and flood damage. If the risks are covered by the same insurance carrier, this problem is eliminated. Should it be found that it is not practical to add flood insurance to the present extended coverage endorsement, it seems to me that a new endorsement covering flood and a limited group of other perils could be developed.

To summarize I believe that our insurance companies should be able to develop an insurance package which would include flood insurance and that the Federal Government should supply the necessary reinsurance support for such a program.

In conclusion I would like to emphasize that flood insurance is only one means of alleviating the hardships caused by floods. Direct physical protection should be provided by Federal flood-control programs wherever it is economically feasible to do so. It is hoped that the surveys now being made by the United States Army engineers will establish a basis for such flood-control programs in New England. Private flood-control programs should also be encouraged by tax-relief measures.

I very much appreciated the opportunity to express my views before this hearing.

Senator LEHMAN. Mr. Belanger, president of the New England conference of CIO councils.

I understand he has been delayed for a few moments. We will pass over him for the time being.

Mr. Kenneth J. Kelly, secretary-treasurer of the Massachusetts Federation of Labor.

Senator KENNEDY. I think that is also true of him.

Senator LEHMAN. We will pass over Mr. Kelly for the time being and call him later if we have time.

Mr. Walter P. Muther, Associated Industries of Massachusetts.

STATEMENT OF JARVIS HUNT, GENERAL COUNSEL, ASSOCIATED INDUSTRIES OF MASSACHUSETTS

Mr. HUNT. Mr. Chairman, Senator Bush, and members of the committee, I am Jarvis Hunt, general counsel of the Associated Industries of Massachusetts. Mr. Muther, whose name appears, is my assistant who reserved the opportunity of representing a brief here

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