FEDERAL DISASTER INSURANCE

THURSDAY, FEBRUARY 16, 1956

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES,

Washington, D. C.

The subcommittee met, pursuant to recess, in room 301, Senate Office Building, at 11 a. m., Senator Herbert H. Lehman (chairman of the subcommittee) presiding.

Present: Senators Lehman, Robertson, and Bush.

Senator LEHMAN. Gentlemen, before I call the first witness, Mr. Meistrell, I want to read a short statement with regard to the hearings which are now to be resumed on disaster-insurance legislation. This is a hearing of the Securities Subcommittee of the Banking and Currency Committee on the subject of disaster-insurance legislation.

The legislation that has been introduced on this subject has been referred to this subcommittee, following the broader hearings held during the recess by the Banking and Currency Committee as a whole, over which I was privileged to preside as acting chairman. These hearings were held in Washington, D. C., New York City, Goshen, N. Y., Boston, Mass., Hartford, Conn., Providence, R. I., and Raleigh, N. C., between October 31 and December 19 of last year.

These hearings covered the entire field of catastrophic disaster, with special reference to the impact of the flood disasters of last summer and early autumn. Our special field of exploration was into the possibility of some form of insurance to protect businessmen and homeowners against the risk of financial loss from these disasters.

Upon the request and urging of some members of this committee, including Senator Bush and myself, the committee chairman, Senator Fulbright, instructed the staff to prepare a staff study of disaster insurance. That study, a most excellent and useful one, prepared under the direction of a committee counsel, Mr. McKenna, was completed and has been printed as a committee document.

There were some legislative proposals before the Banking and Currency Committee during its hearings last fall, but they were largely informal and tentative.

The committee at that time--and I will not rehash that matter extensively now-did not have the specific recommendations of the administration on the pending matter. It slowed us up. The administration's original bill was introduced on January 5, and then a substitute version was introduced on January 18. Wanting to have the full benefit of the administration's legislative formulations, I, for instance, was slowed up in the redrafting of my own bill which I completed and introduced on February 6.

906

Now these two bills, as well as all other pending legislation on the subject, have been referred to this subcommittee. These will be, of course, legislative hearings, with the aim and purpose of reporting out an effective bill on this subject.

The bills before us now are: The administration bill, introduced by Senator Bush, S. 2862, and an amendment to that bill in the nature of a substitute; a bill S. 3137, introduced by me along with 10 cosponsors, including Senator Kennedy, Senator Morse, who is a member of this subcommittee, and Senator Sparkman who is a member of the full committee; and finally the original Kennedy-Saltonstall bill, S. 2768. All these bills; a sectional analysis of S. 3137; a sectional analysis of S. 2862; a comparative analysis of the differences in the bills; and a critique of S. 2862 will be inserted in the record at this point. (The material referred to follows:)

[S. 2768, 84th Cong., 2d sess.]

A BILL To provide for national flood insurance and reinsurance, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "National Flood Insurance Act of 1956".

DECLARATION OF PURPOSE

SEC. 2. It is the purpose of this Act to promote the national welfare by alleviating the widespread economic distress suffered from time to time within the United States, its Territories and possessions, as a result of floods, and the attendant impairment of the free flow of interstate and foreign trade and commerce, by providing direct governmental insurance of certain flood risks or by making insurance of such risks available through private insurance companies by means of governmental reinsurance.

FUNCTIONS

SEC. 3. (a) To carry out the purposes of this Act, the head of whichever executive department or agency is designated by the President to administer this Act (hereinafter referred to as "the Administrator") is authorized to provide, upon the payment of such premiums and subject to such terms and conditions as he may establish, either insurance or reinsurance, or both insurance and reinsurance, against damage to or loss of privately owned real property, including commercial, industrial, and residential property and privately owned business inventories, due to any flood as defined by the Administrator (including damage due to hurricane-driven tides and tidal waves, and other high-water damage from either salt or fresh water) occurring within the limits of the United States, its Territories and possessions, with such general exceptions as the Administrator may deem advisable, whenever in the opinion of the Administrator such insurance or reinsurance cannot be obtained at reasonable rates or upon reasonable conditions from approved companies authorized to do insurance business in any State, Territory, or possession of the United States: Provided, That such program of insurance shall be so administered as not to serve as an inducement for unwarranted acquisition of facilities in areas which are subject to recurring floods.

(b) The Administrator shall from time to time prescribe (1) premium rates for each type of insurance and/or reinsurance which he shall make available under authority of this Act for each type or class of property to be insured, and (2) the terms and conditions under which and the areas and subdivisions thereof within which each rate shall be applicable. All such rates shall be based insofar as practicable upon consideration of the risks involved and shall to the extent deemed practicable by the Administrator be adequate to cover all administrative and operating expenses arising under this Act, as well as reserves for probable losses. The Administrator may receive from or exchange with any State or Territorial insurance commission or agency or with any private corporation or association engaged in the writing of insurance against property loss within

the United States such loss experience and other information as may be neces sary for the establishment of such premium rates.

(c) The Administrator shall by regulation provide for the determination of (1) the types and location of property with respect to which insurance and/or reinsurance shall be granted, (2) the nature and limits of loss or damage in any area or subdivision thereof which may be covered by such insurance or reinsurance, (3) rates, terms, and conditions of such insurance or reinsurance, and (4) such other matters as may be necessary to carry out the purposes of this Act. The Administrator may decline such applications and risks and may establish from time to time such regulations with respect to the classification, limitation, and rejection of applications and risks as he shall deem advisable in order to carry out the purposes of this Act.

(d) In providing insurance and/or reinsurance, the Administrator may by contract arrange for the financial participation of any person or company authorized to do insurance business in any State of the United States in the underwriting of risks assumed, and for their proportionate participation in premiums and in any profits or losses realized or sustained. The Administrator shall utilize the facilities and services of private insurance companies, established insurance agents and brokers, and established insurance adjustment organizations to the fullest extent possible, consistent with minimum cost of providing insurance protection.

(e) The aggregate amount of insurance issued by the Administrator covering the loss of or damage to any single piece of real property shall not exceed $250,000. No claim shall be approved in an aggregate amount which exceeds the actual cash value or the cost of replacing, repairing, or rebuilding the damaged property with material of like kind and quality (less depreciation at the time of damage), whichever is lower: Provided, That the approved amount of any claim shall be reduced by $300 plus 10 per centum of the remainder, or by such larger amount or percentage as may be prescribed by the Administrator in the insurance contract. The Administrator shall prescribe such regulations applicable to reinsurance as he may deem appropriate to give effect to the intent of the limitations in this subsection. The Administrator may from time to time prescribe such regulations regarding coverage available to subsidiary and affiliated corporations as he shall deem appropriate to effectuate the purpose of this subsection.

(f) The Administrator, on and after the first day of the sixth month following the enactment of this Act, may provide insurance or reinsurance in an aggregate amount not to exceed $500,000,000 outstanding and in force at any one time, which limit may be increased, with the approval of the President, by further amounts of $500,000,000 each on July 1, 1957, and July 1, 1958.

FINANCING

SEC. 4. (a) To carry out the functions authorized by this Act, there is authorized to be established in the Treasury of the United States a National Flood Insurance Fund (referred to hereinafter as the "Fund"). The capital of the Fund shall consist of such amounts as may be advanced to it from appropriations. Such sums as may be required are authorized to be appropriated without fiscal year limitations for the purposes of the Fund.

(b) Advances shall be made to the Fund from the appropriations made therefor only when requested by the Administrator, with the approval of the President. The Administrator shall pay into miscellaneous receipts of the Treasury, at the close of each fiscal year, interest on such advances at a rate determined by the Secretary of the Treasury, taking into consideration the average rate on outstanding interest-bearing marketable public-debt obligations of the United States.

(c) Premiums paid to the Administrator for insurance and reinsurance under this Act, interest earned on investments of the Fund, and receipts from any other operations under this Act, including salvage operations, shall be credited to the Fund. The Fund shall be available for the payment of liabilities under such insurance and reinsurance and for payment of all expenses of the Administrator under this Act.

(d) Whenever any capital in the fund is determined by the Administrator to be in excess of its current needs, such capital shall be credited to the appropriation from which advanced where it shall be held for future advances. After liquidation of all outstanding advances, any cash in excess of current needs may be invested or reinvested by the Administrator in interest-bearing obligations of

the United States or in obligations guaranteed as to interest and principal by the United States. The proceeds from the sale or redemption of the obligations held by the Administrator pursuant to this Act shall be credited to the Fund.

PAYMENT OF CLAIMS

SEC. 5. Under such regulations as the Administrator may prescribe, he shall adjust and pay valid claims either directly or through agents for losses covered by insurance and reinsurance under this Act. The Administrator shall collect from participating insurance companies such amounts as they may be obligated to contribute toward such losses.

COORDINATION WITH OTHER PROGRAMS

SEC. 6. (a) In carrying out the functions authorized in this Act, the Administrator shall consult with other agencies of the Federal Government and interstate, State, and local agencies having responsibilities for flood-control and flood-damage prevention in order to assure that the insurance facilities offered are consistent with the programs of such agencies, and shall utilize the facilities and services of these and other public agencies to the fullest extent possible.

(b) No insurance or reinsurance shall be issued (1) for risks eligible for insurance provided by other Federal programs, or to the extent that coverage is available on reasonable terms from other private or public sources, or (2) for properties whose use is in conflict with State or local flood zoning laws.

(c) Any department or agency of the Federal Government engaged in making direct loans or advances, or in participating in, insuring, or guaranteeing loans made by private lending institutions, for the construction, modernization, repair, or purchase of property eligible for insurance under this Act may require as a condition for such future financial assistance that such property be insured against flood damage to the extent such insurance is available.

INSURANCE ADVISORY COMMITTEE

SEC. 7. The Administrator shall appoint an advisory committee, consisting of not less than six individuals experienced in the writing of insurance against property loss, to advise him with respect to the execution of his functions pursuant to this Act.

[S. 2862, 84th Cong., 2d sess.]

A BILL To provide for an experimental national flood indemnity and reinsurance program, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "National Flood Indemnity Act of 1956".

CONGRESSIONAL FINDINGS AND DECLARATION OF PURPOSE

SEC. 2. The Congress hereby finds and declares that the recurrence of disastrous floods in the United States interferes with the production of goods and furnishing of services, impairs the free flow of interstate and foreign trade and commerce, causes widespread hardship and economic distress, and has a general adverse effect on the Nation's welfare. The Congress hereby further finds and declares that at present there is not generally available to the people of the United States any program through private enterprise which is adequate to provide reimbursement for damage to and loss of property as a result of such floods. It is therefore the purpose of this Act to promote the national welfare by (1) making available, in cooperation with the various States, a program of indemnities with respect to certain types of property damaged or lost as a result of floods and (2) making available a program of reinsurance by the Federal Government of private insurers who underwrite certain flood risks.

DEFINITIONS

SEC. 3. As used in this Act the term

(a) "Administrator" means the Housing and Home Finance Administrator; (b) "Person" means an individual or group of indviiduals, corporation, partnership, association, or any other organized group of persons, including State and local governments and agencies thereof;

(c) "Real property" means land, interests in land, and improvements on land which are permanently affixed to the land;

(d) "Insurable interest" means any right, title, interest, or other property right, legal or equitable, in and to property and any other interest, benefit, or advantage with respect to property which, in the determination of the Administrator, is an insurable interest for the purpose of this Act by reason of being of such nature that any loss or destruction of or damage to such property would result in an immediate and direct pecuniary loss to the person having such other interest, benefit, or advantage; and

(e) "United States", when used in a geographical sense, means the several States, the Ditsrict of Columbia, the Territories of Alaska and Hawaii, the Commonwealth of Puerto Rico, and all other territories of the United States.

(f) "State" includes the several States, the District of Columbia, the Territories of Alaska and Hawaii, the Commonwealth of Puerto Rico, and all other Territories of the United States.

TITLE I-INDEMNITIES

SEC. 101. Subject to the provisions of this Act and such terms and conditions as the Housing and Home Finance Administrator may prescribe, the Administrator is hereby authorized to issue indemnity contracts obligating the United States to indemnify persons for damage to or loss of real property, business inventories, stored agricultural commodities, household effects, and such other personal property as he may determine, as a result of floods occurring within the limits of the United States. For purposes of this Act, the term "flood" shall include rising water caused by tide, wind, or rain and shall have such further meaning as prescribed by regulation of the Administrator.

SEC. 102. Indemnity contracts issued under this Act shall be subject to the payment of fees established by the Administrator. Such fees shall be based on consideration of the risks involved and the desirability in the public interest of providing indemnity protection at reasonable cost, and shall be uniform throughout the United States for similar risks: Provided, That in establishing such fees the Administrator shall set up "estimated rates" which would be necessary to provide adequate reserve to pay all claims for losses over a reasonable period of years: And provided further, That no indemnity contract shall be issued for a fee less than 60 per centum of such "estimated rate", nor unless the State, in which the property covered by the indemnity contract is located, has paid into the Federal Flood Indemnity Fund (hereinafter created), to the extent of such contract, an amount equal to 50 per centum of the difference between the fee so charged and the "estimated rate". The United States shall pay into such fund an amount equal to the State's contribution, for each indemnity contract issued, appropriations for which are hereby authorized. All administrative expenses of the Federal Government under this Act shall be paid from funds appropriated by the Federal Government as authorized in section 304.

SEC. 103. The Administrator shall, by regulation, provide for the determination of (1) the types and location of property with respect to which indemnities shall be provided; (2) the nature and limits of losses or damage which may be covered by such indemnity contracts; (3) the fees, terms, and conditions of such indemnity contracts; and (4) such other matters as may be necessary to carry out the purposes of this Act. The Administrator may decline any application or risk and may issue from time to time such regulations with respect to the classification, limitation, and rejection of risks, and such regulations regarding coverage available to joint owners and subsidiary and affiliated corporations as he shall deem appropriate to effectuate the purposes of this Act.

SEC. 104. No indemnity shall be provided under this Act, (1) to any person without an insurable interest in the property covered; or (2) if insurance covering such property from the risk of floods is obtainable at reasonable rates and upon reasonable conditions from companies authorized to carry on insurance business in any State or if such insurance is provided by any public program. SEC. 105. No indemnity contract or contracts shall be issued to any person obligating the United States in exces of $250,000 in the aggregate. The approved amount of any claim under an indemnity contract shall be reduced by $300, plus 10 per centum of the remainder, or by such larger amount or percentage as may be prescribed in the indemnity contract.

SEC. 106. The aggregate amount of obligations under indemnity contracts outstanding and in force at any one time under this title shall not exceed $1,900,000,000, except that, with the approval of the President, such aggregate