AMERICAN INSTITUTE OF MERCHANT SHIPPING Hon. EDMUND S. MUSKIE, AMERICAN INSTITUTE OF MERCHANT SHIPPING, U.S. Senate Committee on Commerce, Subcommittee on Air and Water Pollution, 221 Old Senate Office Building, Washington, D.C. DEAR SENATOR MUSKIE: The American Institute of Merchant Shipping has been following with considerable interest the Senate Public Works Subcommittee hearings on S. 523. AIMS shares your concern for the need to prevent pollution, and applauds your efforts and those of your Senate colleagues to implement comprehensive water quality legislation. It is AIMS' concern that any new legislation, in addition to being comprehensive, also should be effectual. Therefore, we are submitting for consideration and insertion in the record of Subcommittee hearings the enclosed statement in which we comment on the proposed "hazardous polluting substances" provision, in Section 8 of S. 523, and on a suggestion on your Opening Statement convening hearings on the aforesaid bill in which you propose that liability for oil pollution discharges be unlimited. Briefly, our recent experience with state water pollution laws indicates that no insurance company will provide insurance to cover unlimited liability for either oil or hazardous polluting substance discharges. Imposition of such improbable liability actually defeats any effort to achieve maximum pollution protection. Moreover, if unlimited liability is imposed, it probably would give rise to efforts to create many single-vessel corporations whose over-all maximum liability would be limited to the value of the vessel and any freight pending on the cargo as the principal corporate assets. The present high, but insurable Federal limits of liability for oil pollution are adequate, and in addition would be equally adequate if imposed for hazardous polluting substance discharges. The imposition of "punitive" unlimited liability will not prevent accidental discharges, but probably would result in a diminution of maritime trade within and with the United States. We also wish to comment on the recent proliferation of state water pollution laws which attempt to impose liability upon vessels in interstate and foreign commerce. These state statutes are of questionable constitutionality, directly conflict and interfere with the harmonious, uniform federal regulation of the merchant marine, and impose additional administrative and economic burdens detrimental to maritime commerce on both domestic and foreign vessels owners and operators. AIMS believes that to insure efficient, low-cost waterborne transportation, and to prevent retaliatory measures by foreign governments, states should be pre-empted from enacting and enforcing duplicative maritime pollution laws. In addition to existing Federal liability for water pollution, voluntary programs such as TOVALOP and CRISTAL, now afford more than adequate coverage of pollution discharges. Comprehensive international schemes of liability in the form of the 1969 Brussels International Convention on Civil Liability for Oil Pollution Damage and the proposed International Compensation Fund for Oil Pollution Damage are close to realization, and if implemented, would replace the voluntary schemes. We are grateful for your having afforded us this opportunity to comment on the legislation and proposals which your Subcommittee has under consideration. Sincerely, Attachment: JAMES J. REYNOLDS, President. STATEMENT OF AMERICAN INSTITUTE OF MERCHANT SHIPPING By JAMES J. REYNOLDS, President THE FEDERAL WATER POLLUTION CONTROL ACT Existing Oil Pollution Liabilities Adequate and Insurable. Recommended Hazardous Polluting Substances Liability Amendment is Uninsurable. Unlimited Financial Liability Provision Offers Illusory Maximum Protection and Actually Less Protection Than Does Existing Law and Voluntary Plans. Adequate Pollution Protection is Now Available and Comprehensive International Plans for Protection are Close To Realization. Pre-Emption of State Laws is Imperative. My name is James J. Reynolds, and I am President of the American Institute of Merchant Shipping, an organization commonly referred to as AIMS. AIMS is the national trade association of the American steamship industry and is composed of 35 United States companies which own and operate about 520 U.S.-flag, ocean-going vessels of all types in the foreign and domestic trades of the United States. On behalf of the American Institute of Merchant Shipping, I would like to thank you for this opportunity to make our views a part of the public record with regard to S. 523 and other legislative matters to be reviewed by this Committee following the hearings. This Committee, and other concerned Committees of Congress are to be commended for their efforts in enacting responsible legislation over the past several years to control water pollution. The American Institute of Merchant Shipping shares the concern and interest of Congress in the continuing development of responsible water pollution legislation. We wish to express our views on two proposed changes the Committee is entertaining in the Federal Water Pollution Control Act and on one change AIMS is recommending in said Act. All three proposed changes would have an important effect on ocean-going vessels in domestic and foreign waterbone trade of the United States. The changes the Committee is entertaining would effect the limits of liability for vessel pollution discharges. With regard to oil pollution, Senator Edmund S. Muskie, in his Opening Statement, page 2, item 3, convening the hearing on S. 523, March 15, 1971, recommended that the Committee entertain the idea of removing the limits of liability for oil pollution discharges (no provision appears in the bill as introduced which would effect this change). With regard to hazardous polluting substances, Section 8 of S. 523 (pages 46 and 47), if enacted into law, would impose absolute legal liability upon the owner or operator of a vessel. Also, as now worded there exists the possibility that Section 8 might be construed so as to impose liability in an unlimited amount for acidental discharges of hazardous polluting substances from vessels. If enacted and so construed, these legislative proposals would cause grave economic injury to vessel owners because most would be unable to assume the risk of a catastrophic discharge subjecting them to liability above and far beyond the evidence of financial responsibility they are able to provide. AIMS is concerned also with the increasing proliferation of confusing and conflicting state maritime vessel pollution laws. This proliferation of unnecessary duplicative state law, inconsistent with federal law, only adds to the cost of waterborne transportation without providing any additional protection against pollution. In several states the laws are so harsh they are considered uninsurable by the insurance industry. Although a vessel owner has complied with the federal requirements for certification. he can be refused his right to enter and traverse United States navigable waters over which a state is attempting to assert primary jurisdiction and to require of the vessel owner additional financial certification which he may find impossible to comply with. Ocean-going vessels in interstate and foreign commerce should be subjected only to a single, uniform law, which law according to the Admiralty Clause of the Constitution, should he within the exclusive and paramount jurisdiction of the Federal Government as administrator and enforcer. In reviewing the past lengthy deliberations of Congress, and in particular those of this Committee, with respect to the efforts which led to the enactment of the Federal Water Pollution Control Act, we have noted the care and consideration which went into fashioning the existing oil pollution liability provisions (Section 11, Control of Oil Pollution, P.L. 91-224) to make them insurable for vessel owners, and also to provide protection for cleanup to the maximum extent possible. It is our fervent hope that this carefully balanced law, with respect to liability provisions, will not be tampered with. AIMS recommends that the existing scheme of legal and financial liability for oil pollution discharges remain unchanged, except in so far as it may be amended to conform to the provisions of the 1969 Brussels International Civil Liability Convention on Oil Pollution Damage; that the same scheme of liability be imposed for hazardous polluting substances (Section 12, Control of Hazardous Polluting Substances); and that with respect to both oil and hazardous polluting substances, the law be amended to clearly indicate that states are pre-empted from passing such laws as a violation of the Constitution, and as a matter of necessity to maintain economic and administrative uniformity of law in interstate and foreign commerce. These three matters which greatly concern vessel owners are discussed below in detail. EXISTING OIL POLLUTION LIABILITIES ADEQUATE AND INSURABLE Senator Muskie, in his Opening Statement, convening hearings on S. 523, suggested the Committee consider removing the legal and financial limits from existing Section 11, Oil Pollution Control of the Federal Water Pollution Control Act (hereinafter referred to as FWPCA). The bill S. 523, as introduced, contained no such provision and there was not public hearing on the important implications of taking such a drastic step. For this reason and those stated below, AIMS urges that the Committee not accept the suggestion of the ditsinguished Senator. Vessel owners' recent experience with salt water pollution laws indicate that such laws imposing unlimited financial liability for oil pollution are uninsurable in any commercial insurance market. For example, of the 629 vessels and barges which, as of mid-March, 1971, were certificated as to financial responsibility under the recently implemented Florida Oil Spill and Pollution Prevention Act, state records reveal no vessel owner was able to obtain financial responsibility protection through the regular commercial insurance channels. (Certification under Florida law would have been impossible altogether if the State authorities had not resorted to a device of adopting certification regulations requiring a vessel owner to show only financial responsibility of $100 per gross ton, or $5 million, whichever is lesser; nevertheless, each vessel owner is liable under the state law for unlimited cleanup costs and damages.) The reasons, as best vessel owners are able to ascertain, for the refusal of maritime insurers to underwrite unlimited financial liability for vessel discharges of oil (or other substances) are as follows: (1) Unlimited Financial Liability for oil pollution discharges from vessels means that the party liable or the party furnishing the insurance or other evidence of financial responsibility, is not acting as an insurer covering a risk or portion thereof, but is actually acting as a guarantor to pay an unknown and unlimited sum should the occasion of a discharge require such. Insurance companies are commercial enterprises, and their officers, like any other prudent businessmen, could not contract to assume such a financial obligation of unknown proportions. Nor could they in all honesty purport to be able to do so. Only an entity having the power of taxation could take on such an obligation. (2) Capacity of the Insurance Market—This is a rather complex subject best explained by the marine insurance underwriters and the Protection and Indemnity Clubs. Suffice it to say that as financial liability for vessel oil pollution is increased, the number of underwriters willing to insure the risks diminishes. When the limit on financial liability is removed altogether, there are no underwriters who are willing to insure vessel owners against oil pollution discharges. The underwriters will direct their efforts to insuring liabilities in markets other than the maritime oil pollution market. (We also note that recent increases in both legal liability and financial liability, as effected by law, have resulted in a correspondingly significant increase in oil pollution insurance premiums. These costs must necessarily be included in the price of the delivered product to the consumer.) (3) Absolute legal liability for oil pollution discharges from vessels means that all risks have been eliminated and that all discharges of oil from a vessel, regardless of cause, must be covered by the insurer. This includes not only those resulting from the negligence of the owner, operator, or crew, but also those discharges resulting from acts over which the owner or operator have no control. These include discharges caused by acts of God (hurricanes, etc.), acts of war, acts or omissions of third parties, and even negligent acts of governments. Absolute legal liability is insurable, but only if in the law it is accompanied by a reasonable limit on financial liability. Testimony before Congress on the proposed 1970 Water Quality Improvement Act (now P.L. 91-224), by a representative of the London underwriters, who write most of the world's maritime insurance, indicated that absolute legal liability for a vessel oil pollution discharge was insurable but only with a limit on financial liability not exceeding $5 million. Presently, insurers will provide coverage for the strict and limited liability which Congress set forth in existing Section 11, Control of Oil Pollution, FWPCA. However, they will not insure unlimited financial liability as is found in some state laws and as is proposed for federal law. Therefore, to change the federal law to impose unlimited financial liability and thereby make the law uninsurable would do inestimable damage to vessel owners and operators and great economic injury not only to United States waterborne commerce, but to foreign waterborne commerce trading with this country as well. AIMS will not comment on the possible retaliatory implications by foreign governments inherent in any United States effort to enact unlimited liability legislation, but this possibility should be kept in mind. RECOMMENDED HAZARDOUS POLLUTING SUBSTANCES AMENDMENT IS UNINSURABLE AIMS is concerned with Section 8 of S. 523 which establishes a scheme of liability which we believe would be injurious to maritime commerce without conferring any additional protection or increased benefits upon the public than would a more reasonable pollution liability provision. The provision which is the basis of our concern appears on pages 46 and 47 of S. 523 as Section 8 of the bill, and it would amend Section 12, the Hazardous Polluting Substances (hereinafter referred to as HPS) Section of the Federal Water Pollution Control Act as follows: "(c) The discharge of any substance designated under this section as a hazardous substance into or upon the navigable waters of the contiguous zone is prohibited. The owner or operator of any vessel, onshore or offshore facility from which such discharge occurs is liable for damages, including costs of removal, which result directly or indirectly from such discharge without regard to negligence or wilfulness.” If enacted, this provision would impose absolute legal liability upon vessel owners or operators without any defenses whatsoever for any discharge of a HPS which might occur as a result of an act of God, war, or negligence on the part of the United States Government, or any act or omission of a third party without regard to whether it was a negligent act, all of which are defenses now included in Section 11, Oil Pollution Control. FWPCA. In addition to imposing absolute legal liability, if Section 8 were construed to impose upon vessel owners and operators unlimited financial liability for all discharges of HPS, even those occurring without negligence or fault of vessel owner or operator, for all cleanup costs and all damages (we assume both public and private), this liability would be uninsurable to the extent that it is unlimited. If enacted and so construed, this provision would impose additional financial and administrative burdens and complications on vessel owners and operators of vessels carrying HPS cargoes. It would especially affect those who could not self-insure, and who, for economic and business reasons, would be unable or unwilling to assume the risk of financial liability beyond any limited liability HPS insurance they might have. Therefore, AIMS recommends that Hazardous Polluting Substance liabilities be dealt with in a separate bill to enable all parties to give adequate and carefull consideration to the problems involved. Also, we recommend that the anticipated development of Section 12, Hazardous Polluting Substances, of the FWPCA, should conform to the existing principles of Section 11, Oil Pollution Control, of the FWPCA, especially with regard to strict liability and with a limit placed on financial liability in absence of wilfull or negligent conduct within the privity of the owner. Since the scheme of liability implemented by Section 11 represents both a workable, insurable approach, we further recommend that the simplest method of implementing the liability provisions covering HPS, is to add the term "hazardous polluting substances" to existing Section 11 at the appropriate places. UNLIMITED FINANCIAL LIABILITY PROVISION OFFERS ILLUSORY MAXIMUM PROTECTION AND ACTUALLY LESS PROTECTION THAN DOES EXISTING LAW AND VOLUNTARY LIABILITY PLANS To reiterate our previous statement, vessel owners' recent experiences with state water pollution laws indicate that such laws imposing unlimited financial liability are uninsurable through the commercial insurance market. Under the recently implemented Florida Oil Spill and Pollution Prevention Act, most shipowners with large fleets trading in Florida waters could and did meet the statutory financial responsibility requirements qualifying as self-insurers but thereby subjecting the entire assets of their corporations to the risk of liability for cleanup costs and damages. Many small fleet shipowners could qualify under the Florida Act by posting a bond purchased for very high cost premiums (with coverage only up to $100 a gross ton of the vessel and not exceeding $5 million) for which their entire assets were pledged. Many vessel owners, both large and small, were reluctant to assume such a tremendous risk, and several vessel owners refused to trade in Florida waters. It is our firm belief that the imposition of extreme and uninsurable maximum liabilities such as those found in the Florida Oil Spill and Pollution Prevention Act and in Section 8 of S. 523 afford less protection to governments and private parties than do reasonable (and insurable) liability provisions such as those found in Section 11, Oil Pollution Control, of the FWPCA. Belief that unlimited financial liability for oil pollution will provide ultimate financial protection for damaged parties is highly illusory. Under such a scheme of liability conventional insurance is completely unavailable and the total burden of supplying financial protection falls upon each individual company. Protection of the government and public is actually limited to the extent of the total attachable assets of each vessel company. At best this is uneven and undependable protection. This is especially true in a situation where a company with few assets may be the unfortunate victim of an unintentional but negligent discharge which otherwise could have been more than adequately covered if commercial insurance was available. Thus, financial protection for cleanup and damages under so-called unlimited financial liability for oil pollution may be far less than the protection normally available through the commercial maritime insurance market to cover laws with strict liability and a ceiling on financial liability. At best we can say that a law with unlimited financial liability for oil poilution makes the amount of prevailing financial protection less certain than a law with a high but insurable ceiling on financial liability. At worst, such a law can deprive a vessel owner of vital insurance coverage and the right to use his vessel in waterborne commerce. Contrast the foregoing potential insurance and financial protection problems with the protection currently available to vessel owners and operators under Protection and Indemnity Club coverage for liabilities for oil pollution discharges. Under a P & I Club policy of insurance for oil pollution discharges from insured vessels, the indemnitor P & I Clubs, for all pollution claims, both governmental and private, arising out of any single pollution incident, provide vessel owners and operators with maximum coverage of $14,400,000. The amount of P & I Club coverage available is not limited by vessel tonnage. For example, in the case of a 10,000 gross ton tanker, the P & I Club covering the tanker's oil pollution liability will have issued a certificate of insurance as approved by the Federal Maritime Commission for $1,000,000 ($100 x 10,000 grt) in compliance with the financial responsibility requirements of Section 11, P.L. 91-224. If the P & I Club were called upon to pay the U.S. Government the full $1,000,000 for costs of cleanup, the vessel owner would still have $13,400,000 available to cover other legitimate oil pollution claims, including any foreign governments, any states or municipalities, and any private parties. |