I am not sure that is addressed to your question. Mr. ALLEN. I was trying to get at the reasoning behind the principle that two parties to an insurance policy can state a value which may or may not be the actual value and have it paid. Mr. WILLIAMSON. And pay a premium accordingly, I suppose. Mr. ALLEN. Yes. Mr. WILLIAMSON. I do not know why that could not be done here. I understand it to be so that the Maritime Commission fixes that stated value. The owner cannot do much about it but just argue. Mr. ALLEN. In other words, the value is agreed upon at the outset? Mr. WILLIAMSON. As I understand it at present it is an administrative act. The Maritime Commission could fix that valuation and then the owner has it. That is all there is to it. This is to give him. a chance to have a court review of the justice of such a determination. Mr. ALLEN. I presume the stated value was actually based on an appraisal. Mr. WILLIAMSON. It would be here, as I understand the present law, the opinion or judgment of the Maritime Commission. Mr. ALLEN. On page 3 of your statement, in the first sentence, you state: The effect of these provisions of the present law and the appropriation act riders is that vessel war-risk-insurance valuations are an unacceptable alternative to outright requisition. Would you elaborate on that statement for me a little bit? I did not quite understand what the alternatives were. Mr. WILLIAMSON. Well, I believe what is intended by the language is this: You would be better off not to sit down and make an agreement with the Government under present law. You would be better off if they would peremptorily requisition your boat. Mr. ALLEN. In other words, if they requisition your vessel ultimately you would get just compensation? Mr. WILLIAMSON. I think it is quite clear under the present law that if you were requisitioned and you were not happy with determination of loss you could go and have a court review. Mr. ALLEN. I presume that would be under the constitutional provision that property may not be seized without just compensation. Mr. WILLIAMSON. I think the law provides for that quite clearly, if you are requisitioned. Mr. BONNER. Any other questions? Mr. VAN PELT. No questions. Mr. RAY. No questions. Mr. PELLY. No questions. Mr. BONNER. Does counsel have any questions? Mr. ZINCKE (Counsel). I have one question. Mr. Williamson, this bill as it stands provides that the premiums paid by the owner shall be based upon the valuation fixed by the Government. In the event that the owner rejects the valuation fixed by the Government, would there be any objection to an increased premium based upon the owner's valuation? Mr. WILLIAMSON. Are you referring to the situation at the time the contract is being made; when the policy is being drawn up? Mr. ZINCKE. The provision of this war-risk-insurance policy is that within 60 days after determination of such valuation by the Secretary or within 60 days after the attachment of insurance under the policy the owner has the right to reject the valuation fixed by the Government. In the event the owner does reject the valuation have you any objection to an increased premium based upon the owner's valuation? Mr. WILLIAMSON. I would not think you could have. Mr. ZINCKE. Thank you, sir. Mr. BONNER. Our next witness is Mr. Rice, from the American Merchant Marine Institute. STATEMENT OF ALBERT E. RICE, COUNSEL, AMERICAN MERCHANT MARINE INSTITUTE, INC. Mr. RICE. Mr. Chairman, my name is Albert E. Rice. I should like to address myself to the question which counsel asked the prior witness. The bill now provides that in the case there is a suit for just compensation and there is a different amount fixed from the amount originally stated in the policy that the premiums shall be adjusted in accordance with whatever the final determination is. Mr. BONNER. The counsel was talking about paying the premium at the time the owner claims a higher valuation. Mr. ZINCKE. Mr. Rice, your point is that the way the bill reads now the owner does not pay a premium on the amount of insurance he believes proper unless and until there is a loss. Mr. RICE. That is right. Mr. ZINCKE. In the event there is no loss he is in the position of claiming a higher valuation but not paying a premium for that higher valuation. Mr. RICE. That is right; yes, sir. That is true. Mr. ZINCKE. Is there any objection to his paying a premium on his claimed valuation? Mr. RICE. If he has any figure I suppose he should. Mr. ZINCKE. We assume if he rejects the Government's valuation he must have something in mind, do we not? Mr. RICE. He thinks he has a right to just compensation. I assume he would not do that unless he thought it was higher than the stated valuation, but there is no certainty that he is right. I do not know how he would fix any price on the just compensation. Mr. ZINCKE. In other words, you feel that the owner should have a wide open gamble? Mr. RICE. No. Mr. ZINCKE. He can just say to the Government: "I do not think your value is right, but I want to gamble on what somebody else will give me." Mr. RICE. No, sir. I agree fully with you that if there is any higher determination he should pay it. I just say as a practical matter I do not think he can put any price on what he believes it should be or what the court will do. Mr. ZINCKE. Does he not have to state his belief when he finally goes to court? Mr. RICE. NO. He sues for just compensation. Mr. ZINCKE. And he does not produce an expert or anybody else to put a figure on just compensation? He merely goes into court and says: "Judge, I want just compensation.' Mr. RICE. No; he has to produce evidence. Mr. ZINCKE. And the evidence is a figure? Mr. RICE. There will be various figures, I assume. As a practical matter, I do not think he can put a price on it. If he put a price on it and paid the premiums they would have to be adjusted later in case of loss. There is no objection there. As a matter of fact, originally, I think, when the first act came up in 1950, when it was claimed they should be able to put their own valuation on it, the idea was that they pay the premiums; this is a business transation and they should pay for it. Mr. ZINCKE. Thank you, sir. Mr. RICE. Yes, sir. (The full statement by Mr. Rice follows:) STATEMENT OF ALBERT E. RICE, REPRESENTING THE AMERICAN MERCHANT MARINE INSTITUTE, INC. My name is Albert E. Rice. I am counsel of the American Merchant Marine Institute, Inc., an organization representing the owners of a substantial majority of American-flag shipping of all categories, dry cargo, liners, contract carriers, industrial carriers, and subsidized lines. We are appearing in support of S. 1833 on war-risk insurance. I am authorized to say that this testimony has been reviewed by the Committee of American Steamship Lines who join with us in this position. As a result of experience in World War II, it has been recognized by Congress that the national interest requires the Government to provide marine war-risk insurance at times when private war-risk insurance becomes unavailable or prohibitively expensive. With this need in mind, in 1950 Congress enacted the present war-risk insurance law, which was continued until 1960 under the extension enacted last year. This law authorizes the Secretary of Commerce to provide war-risk insurance in a variety of situations, two of which, affecting insurance on private vessels, are of importance in the consideration of this bill. They are: First, the period after the outbreak of a major war but before requisition of private vessels by the Government, and secondly, the period after requisition. In the first situation, private war risk insurance would become unavailable as a practical matter within 48 hours, and yet it would be imperative at such a time that private operation of vessels continue uninterrupted until a decision is made that requisition for Government use is necessary. In the second case, after requisition, the owners of vessels are entitled to just compensation in case of a loss and are not directly involved in the question of insurance. The amount and type of war-risk insurance then becomes a matter of governmental adjustment. We are only concerned, therefore, with the first situation when it is in the national interest that privately owned vessels continue to sail the seas. Under existing law the Secretary of Commerce is permitted to provide warrisk insurance during this critical period, but the amount of such insurance is fixed by the Secretary as his determination of the fair and reasonable value of a vessel at the time the insurance becomes effective. There is no adequate remedy for vessel owners if such determination is arbitrary, and the situation is further complicated by the fact that riders to recent appropriation bills have limited any payments to vessel owners to an amount determined by the General Accounting Office to be "just compensation." The shipping industry has not, and does not now, ask that war-risk insurance furnished by the Government be excessive or unreasonable, but only that they be adequately protected when operating ships at a time when such operation is in the best interest of the Nation. After hearings in 1954, the Senate passed a bill, S. 1878, amending the War Risk Act in accordance with suggestions by the General Accounting Office, but in the closing days of the session the bill could not be considered by this committee. As introduced during this session, S. 1833 was identical to the bill previously passed by the Senate. However, at the hearings in the Senate in March further suggestions for changes were made by the Maritime Administration, the GAO, and by industry. As reported out by Senator Magnuson's committee and passed by the Senate, S. 1833 represents a jointly worked-out program designed to meet what each interested group considered essential to a reasonable, efficient war-risk insurance law. S. 1833 will end the confusing situation as to war-risk insurance valuation, and will permit a vessel owner who disagrees with the war-risk valuation determined by the Secretary to ask for a court determination of just compensation. As in the case of requisition this procedure insures that no arbitrary and inadequate payment will result. In the light of present world conditions, the entire shipping industry urges that this committee give favorable consideration to S. 1833. I would like to highlight one important change made by the Senate because I believe it emphasizes the essential fairness of the bill before you. Under the present language of S. 1833, vessels built with the aid of a construction-differential subsidy, and subject to the provisions of section 802 of the Marchant Marine Act in the case of requisition, would not be limited as in requisition to a war-risk insurance valuation equivalent to book value of the vessel (i. e., construction cost, less construction subsidy) depreciated to the date of loss, but would be entitled to true "just compensation" on the basis of the private investment in the vessel. The original proposal for a strict section 802 valuation for these vessels rested upon a miscomprehension of both the nature and purpose of war-risk insurance as provided by the Government during the limited period between the outbreak of war (and termination of private insurance) and actual governmental requisition. During this period, war-risk insurance is a real business activity. Premiums are paid to the Government depending upon the risks involved. Vessels and cargo are still a matter of private operation, and if they are to sail there must be a fair insurance valuation. It is ridiculous to insist that at a time when every national interest requires continuation of all-out-waterborne commerce one vessel would be able to operate under private ownership covered by war-risk insurance equal to its unenhanced market value, while another similar vessel, merely because it was subject to section 802 when and if requisition occurred, would have to operate with a war-risk valuation based upon a much lower depreciated value. Although required to replace underwriting which has become too risky for limited private resources, war-risk insurance is, by no means, a governmental gift. During World War II, premiums on war-risk insurance exceeded claims by more than $130 million. In such a situation, it is not unreasonable to provide that an owner who is willing to pay premiums calculated on the risk should be able to insure his own investment in a section 802 vessel for the same unenhanced market or "just compensation" value as the owner of a similar vessel built without construction-differential aid. During the critical period prior to requisition the Government is in the same position as any private insurance underwriter. It is receiving premiums calculated to cover the costs of whatever claims may arise. It is immaterial, therefore, what war-risk insurance valuation is established for any vessel as long as such valuation does not exceed the ordinary measure of just compensation. The bill before you provides equity between shipowners on this point. As stated in the report of the Senate Comittee on Interstate and Foreign Commerce: "In other words, any enhancement or increase in value due to world market economic factors (and not prohibited by sec. 902 (a)) would accrue to nonconstruction subsidy vessel owners alike, percentagewise, on the basis of their investment in the ship." As a result of another statement in the report of the Senate committee, it is not entirely clear that the special proposal wih respect to section 802 vessels is intended to apply only until actual requisition. We believe this point should be clarified, and accordingly recommend that the bill be amended by the changes suggested in the appendix attached hereto, and that this committee report S. 1833 favorably. Mr. RICE. The Senate indicated that this extra privilege for section 802 vessels would continue after requisition. That is not the purpose of it. Therefore we are recommending changes in S. 1833, as set forth in the appendix attached hereto. (The appendix referred to is as follows:) APPENDIX SUGGESTED AMENDMENTS OF S. 1833 I. Change the amendment of the commencement of section 1209 (a) (2) to read: "(2) In respect of hull insurance, the valuation in the policy for actual or constructive total loss of the vessel insured shall be a stated valuation determined by the Secretary which 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 the attachment of the insurance under said policy: Provided, however, That in the case of a construction-subsidized vessel, for the period of insurance prior to actual requisition for use, the valuation so determined 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 (excluding the cost of national defense features), and for the period of insurance after actual 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:** *” II. Change the amendment of clause (2) providing for court determination of just compensation for construction subsidized vessels to read: "*** 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 use of the vessel 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 (excluding the cost of national defense features), 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: * * *” Mr. RICE. The changes are underlined, and you will see that up until requisition a nonconstruction subsidy vessel and a subsidy vessel would get whatever proper enhancement they would be entitled to for the amount of money they have in the vessel. After requisition the section 802 vessel would go right down to the section 802 valuation, which presumably would be lower. Mr. BONNER. Mr. Allen? Mr. Rice, you use the words on page 6, in the quotation: In other words, any enhancement or increase in value due to world market economic factors and so forth. Would that enhancement include the enhancement arising out of the cause of seizure or requisition? Mr. RICE. No; it would not. The idea is that whatever enhancement anybody is entitled to is the enhancement he would be entitled to under section 902 as just compensation, and no more. Mr. ALLEN. No more? Mr. RICE. If I may explain, in the case of a nonconstruction subsidy vessel, let us assume it cost $2 million and had been depreciated for 10 years, so that its depreciated value was $1 million. The just compensation value, let us say, would be $1.5 million. That would be just market costs going ahead, not having anything to do with the war. That man would receive $1.5 million under just compensation. Now, in the case of a construction subsidy vessel, let us say that that also cost $2 million and that there had been, for convenience, let us say, a 50 percent subsidy, so that the owner had $1 million in it. Now, the vessel has been depreciated for 10 years, so that his investment there |