PAGENO="0001" AUTHORIZING A STUDY OF THE MOTOR VEHICLE ACCIDENT COMPENSATION SYSTEM (~~cX9H%o HEAR INGS BEFORE THE SUBCOMMITTEE ON COMM11~RCE AND FINANCE OF THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HOUSE OF REPRESENTATIVES NINETIETH CONGRESS SECOND SESSION ON H. J. Res. 958 TO AUTHORIZE THE SECRETARY OF TRANSPORTATION TO CONDUCT A COMPREHENSIVE STUDY AND INVESTIGATION OF THE EXISTING COMPENSATION SYSTEM FOR MOTOR VEHICLE ACCIDENT LOSSES, AND FOR OTHER PURPOSES MARQH 19 AND 20, 1968 Serial No. 9Q-3O,~... Printed for the use of the Committee on Interstate and Foreign Commerce 0 U.S. GOVERNMENT PRINTING OFFICE 92-100 WASHINGTON: 1968 k) PAGENO="0002" COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE HARLEY 0. STAGGERS, West Virginia, Cha4rm~en~ SAMUEL N. FRIEDEL, Maryland TORBERT H. MACDONALD, Massachusetts JOHN JARMAN, Oklahoma JOHN B. MOSS, California JOHN D. DINGELL, Michigan PAUL G. ROGERS, Florida HORACE R. KORNEGAY, North Carolina LIONEL VAN DEERLIN, California J. J. PICKLE, Texas FRED B. ROONEY, Penniylvania JOHN M. MURPHY, New York DAVID E. SATTERFIELD III, Virginia DANIEL J. RONAN, Illinois BROCK ADAMS, Washington RICHARD L. OTTINGER, New York RAY BLANTON, Tennessee W. S. (BILL) STUCKEY, JL, Georgia PETER N. KYROS, Maine ANDREW STEVENSON JAMES M. MENGER, Jr. WILLIAM L. SPRINGER, Illinois SAMUEL L. DEVINE, Ohio ANCHER NELSEN, Minnesota HASTINGS KEITH, Massachusetts GLENN CUNNINGHAM, Nebraska JAMES T. BROYIIILL, North Carolina JAMES HARVEY, Michigan ALBERT W. WATSON, South Carolina TIM LEE CARTER, Kentucky G. ROBERT WATKINS, Pennsylvania DONALD G. BROTZMAN, Colorado CLARENCE J. BROWN, Ja., Ohio DAN KUYKENDALL, Tennessee JOE SKUBITZ, Kansas WxLr~IAM J. DixoN ROBERT F. GUTHRIE SUBCOMMITTEE ON COMMERCE AND FINANCE JOHN B. MOSS, California, Chairmain JOHN M. MURPHY, New York RAY BLANTON, Tennessee W. S. (BILL) STUCKEY, Ja., Georgia HASTINGS KEITH, Massachusetts 0. ROBERT WATKINS, Pennsylvania W. E. WILLIAMSON,' Clerk KIThTNJITH J. PAINTER, Assist ant Clerk Prof euiona~ #S~taff (II) PAGENO="0003" CONTENTS Hearings held on-~ Page Marchl9,1968 1 March 20, 1968 59 Text of House Joint Resolution 958 6 Report of- Bureau of the Budget 8 Health, Education, and Welfare Department 9 Justice Department 9 Securities and Exchange Commission 10 Correspondence between Hon. John E. Moss, Senator Warren G. Magnu- son, and Hon. Alan S. Boyd, Secretary, Department of Transportation, relating to preparation of legislation as introduced 1-5 Statement of- Boyd, Hon Alan S., Secretary, Department of Transportation 13 Cahill, Hon. William T., a Representative in Congress from the State of New Jersey 73 Conard, Prof. Alfred, law school, University of Michigan 79 Dingell, Hon. John D., a Representative in Congress from the State of Michigan 68 Dove, Roger, vice president, National Association of Independent Insurers Eilberg, Hon. Joshua, a Representative in Congress from the State of Pennsylvania 69 Farbstein, Hon. Leonard, a Representative in Congress from the State of New York 11 Green, Hon. William J., a Representative in Congress from the State of Pennsylvania 70 Holderman, F. A., manager, legislative branch, American Mutual Insurance Alliance 115 Lemmon, Vestal, president, National Association of Independent Insurers Mackey, M. Cecil, Assistant Secretary for Policy Development, Department of Transportation 13 Meiklejohn, Kenneth, legislative representative, AFL-CIO 34 Miller, Hon. George P., a Representative in Congress from the State of California 71 Murphy, Hon. John M., a Representative in Congress from the State of New York 2~ Nangle, John, counsel, National Association of Independent Insurers - 93 Rhodes, Hon. George M., a Representative in Congress from the State of Pennsylvania 11 Sargent, David J., professor of law, Suffolk University, Boston, Mass.. 39 Smith, Wallace M., branch manager, American Mutual Insurance Alliance 115 Stark, Melvin L., manager, Washington office, American Insurance Association Tunney, Hon. John V., a Representative in Congress from the State ofCalifornia 72 Whittlesey, Robert, second vice president, Auto Body Association of America 141 (III) PAGENO="0004" rv Additional material submitted for the record by- AFL-CIO, Industrial Union Department, letter from Jack Beidler, Page legislative director 149 American Automobile Association, letter from George F. Kachlein, Jr., executive vice president, submitting resolution of the executive committee 146 American Insurance Association: Statements of- T. Lawrence Jones; president, American Insurance Associa- tion 101 Fred H. Merrill, chairman of the board, Fireman's Fund Insurance Co 105 H. Clay Johnson, president, Royal-Globe Insurance Co's. - - 110 William 0. Bailey, vice president, Aetna Life & Casualty_ - - 111 Harold Scott Baile, executive vice president, General Accident Group of Insurance Co's 113 American Mutual Insurance Alliance: "Epitaph for a Deadly Driver," article from the Journal of American Insurance 127 Supplementary statement replying to questions posed by Con- gressmen Moss and Blanton 122 Communications Workers of America, letter from Joseph A. Beirne, president, submitting statement of executive board 149 insurance Co. of North America, statement of Bradford Smith, Jr., chairman~ 143 Moss, Hon. John E.: Article from New York Times magazine, August 27, 1967, entitled "Next: A New Auto Insurance Policy" 60 Murphy, Hon. Johü M.: Article from National Observer, March 11, 1968, entitled "Everybody Is Unhappy: Why Changes Are Being Proposed for the Auto-Insurance Industry" 30 National Association of Insurance Agents, letter from Danforth Loring, president 147 National Association of Insurance Commissioners, statement of James L. Bentley, president 130 Average rates as of November 16, 1966, for private passenger cars (table) 139 Bodily injury liability rates at 10/20 limits per month, nation- wide determination of - 139 Press release, Texas State Board of Insurance, December 28, 1967, announcing adoption of guidelines for cancellation or nonrenewal of property of casualty insurance 140 State financial restrictions and funds, supplementary information on 137 Uninsured motorist laws, summary of (table) 136 Comments on summary of uninsured motorist laws 137 National Association of Mutual Insurance Agents: Letter dated January 26, 1968, from Frank K. Baker, president, to Hon. Alan S. Boyd Statement National Governors Conference, statement of Hon. Ronald Reagan, chairman, Committee on Transportation 59 Sargent, Prof. David J., curriculum vitae of 49 Transportation Department: Appropriations and expenditures necessary to carry out study and investigation proposed by House Joint Resolution 958, preliminary estimates of 19 Biography of M. Cecil Mackey, Assistant Secretary for Policy Dev~lopmeUt -- 28 PAGENO="0005" AUTHORIZING A STUDY OF THE MOTOR VEHICLE ACCIDENT COMPENSATION SYSTEM TUESDAY, MARCH 19, 1968 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE AND FINANCE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, Washington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2322, Rayburn House Office Building, Hon. John E. Moss (chairman of the subcommittee) presiding. Mr. Moss. The committee will be in order. Today, the Subcommittee on Commerce and Finance of the Com- mittee on Interstate and Foreign Commerce begins 2 days of hearings on House Joint Resolution 958. This legislation was prepared by the chairman of the Senate Commerce Committee, Senator Warren G. Magnuson, and myself, after an exchange of correspondence with the Secretary of Transportation which began on June 26, 1967. House Joint Resolution 958 was introduced on December 14, 1967, and so that the record will be complete, I am asking unanimous consent that this exchange of correspondence be inserted at this point in the hearing record. Is there any objection to the request? Hearing none, it is so ordered. (The correspondence referred to follows:) CONGRESS OF THE UNITEb STATES, Washington~, D.C., June 26, 1967. Hon. ALAN S. Bovn, Secretary of Tran~sportation, Department of Transportation, Washington, D.C. DEAR Mn. SECRETARY: We have become increasingly concerned nt evidence of major flaws in our national systems for compensatiiig ipotor vehicLe nccldent vic- tims. Our attention was first drawn to the serious problem of insolvencies among so~called "high risk" automobile insurers. But such insolvencies appear to be symptomatic of fundamental defects, both in automobile insurance underwriting and in our underlying common low and statutory system of fault liability. Sharp underwriting practices, including arbitrary cancellations and failures to renew, geographical, racial and economic blackouts in coverage, and discriminatory, esca- lating premium rates equally demand appropriate reforms. Last year, Congress addressed itself to the need for preventing and limiting the severity of motor vehicle accidents. Your Department is now charged with responsibility for carrying out the comprehensive programs of i~otor vehicle and highway safety wliichwe then authorized. Now we are equally concerned with the just and efficient compensation of those victims whom prevention has not spared. Broadly viewed, the enourmous costs to individuals, as well as to society, of the still increasing traffic toll are costs which must be allocated to our system of ground transportation. (1) / PAGENO="0006" 2 it is for these reasons that we request that you undertake a comprehensive study of compensation for motor vehicle accident losses. We have prepared, based upon our preliminary investigations, the enclosed outline of those subjects which should properly be encompassed by such study. Are you now in a position to undertake such a study with reasonable dispatch so that Congress might have the benefit of your efforts in determining the proper course of action? Sincerely, WARREN G. MAGNUSON, U.s. ~encbtor. JouN B. Moss, Member of Congres8. OUTLINE FOR A COMPREHJ~N5IVE STUDY OF COMPENSATION FOR MOTOR VEHICLE ACCIDENT LossEs I. Analysis of present U.s. system of compensation for vehicle-induced acci- dent losses: A. General description of present system. B. Extent of 1os~ incurred: Number of events ("accidents"). Character of loss: medical care, economic (foregone income), ad- ditional expense, other extent of loss: property, personal injury. Nature of events: kinds, places, causes, human factors, other cir- cumstances. C. Compensation for losses incurred: Extent of compensation: aggregate, micro (What proportion of what types and scales of accident-incurred losses was compensated?). Sources of types of compensation: Insurance-Type contractural party; Employer; Public (Government compensation, Treasury via tax deduction as casualty loss). D. Features of existing system for providing compensation: Role of legal system. Character. Concepts of fault, contributory negligence, etc. Efficiency (time, etc.). Public investment (physical court facilities, personnel including judges and other participants). Nature of the decision-making system. Role of insurance carriers. Role of the injured. Role of other parties to event. Role of others in system: lawyers, doctors. E. Appraisal of existing system for providing compensation: In terms of: efficiency, equity, time, other factors. As it effects: the injured, the legal system, the wrongdoer, the insur- ance carrier, the public generally. F. Implications of the existing system for traffic safety and overall trans- portation efficiency. II. Examination of existing public supervision of auto insurance: A. General description. B. Formal role of government: Federal, State. C. Character of present State regulation: (i) Notation of basic differences in types of State regulation; classi- fication of States by type, if possible. (ii) Economic regulation: An appraisal: Requirements for rate filing, prior approval, hearings, etc. Supervision of overall rate of return as reflected in earnings from: premium income, investment income, related income. Supervision of carrier administrative and operating expenses. Supervision of premium rate structure. Supervision of premium classification definition, insurance eli- gibility criteria, cancellation criteria. PAGENO="0007" Supervision of underwriting and financial practlces~ Supervision of related corporate operations3 including afflhiate~1 companies. (iii) Regulation of market structure and market behavior: Competition among insurance carriers: encouraged, discouraged, inhibited; role of rate bureaus. Mergers, consolidations. Intra- and inter-corporate behavior. D. Cost, administrative features, efficiency, and other attributes of ex- isting State auto insurance regulation. IlL Tbe~ existing compensation system as it affects the insured motorist. A. General description, i~elu~ing data on coverage, types of policies, etc. B. Cost of insurance premiums: changes over time, relationship to other vehicle operation expenses, etc. 0. Invocation of policy provisions: the process of settlement-its char- acter and efficiency. D. Reliability of carriers: insolvencies, defaults, and other deficienci~es. B. Continuity or modification of policy coverage: cancellation, failure to renew, reclassification, changes in rating. F. Selectivity of motorists: Policies and practices. G. Financial responsibility laws: major types, operational features, eco- nomic characteristics. II. Compulsory insurance: the Massachusetts, New York, and North Caro- lina experience. I. Uninsured motorist: funds, cost, efficiency, administrative implications. J. Overall consequences for traffic safety and provision for compensation. IV. Examination of alternatives to existing system (s) of compensation. A. Nature and basis of discontent concerning existing system: in general B. Description, analysis, comparison of major proposed compensation plans, including those of: Morris & Paul, Keeton & O'Connell, Various for- eign (England, Australia, New Zealand, and Sweden). C. Critique, in terms of general criteria (efficiency, administrative feasi- bility, fairness to participants and public, allocation of funds, etc.) of pro- posed plans. V. Conclusions and Recommendations. DEPARTMENT OF TRANSPORTATION, Washington, D.C., July 19, 1967. Hon. WARREN MAGNIJSON, U.FJ. senate, Washington, D.C. Hon. JOHN B. Moss, House of Representative8, Washington, D.C. GENTLEMEN: Your recent letter requested our views on the need for a study of automobile insurance and the present capability of the Department of Trans- portation for undertaking such astndy. We certainly share your view that prob- lems created by the present system of auto insurance are of vital importance to the American people. These problems cannot be properly assessed or resolved without a thorough and far-reaching examination of related issues. The proposed outline of such a study attached to your letter points out the major questions which would have to be answered. There may be others. The effective conduct of a study of the scope suggested would touch on areas which have been the responsibility of a number of Federal agencies and would also entail evaluation of and access to the relevant state and local institutions (e.g.5 insuTance commissions, courts). A number of issues will have to be reviewed which will raise questions as to the jurisdiction of the Department of Transportation to conduct some phases of such an investigation. For example, a detailed assessment would have to be made of our entire judicial system-Federal, state and local. This would require substantial input by the Department of Justice. PAGENO="0008" 4 We believe also that there should be a comprehensive analysis of the Interrela- tion of the auto casualty underwriting business and the investment and financial community. Here, both the Treasury Department and the Securities and Ex- change Commission would have substantial Involvement. Inquiry Into auto insur- ance advertising and promotion would concern the Federal Trade Commission, and use of the postal system for these purposes would require review by the Post Office Department. These are areas ~hjch also suggest the necessity of evaluating state and local counterpart institutions such a~ state securities and fair business practice agencies. In certain areas the skill experience and resources of other agencies of the government exceed those of the Department of Transportation. Our ability to effectively lead the study would depend on a clear Congressional expression directing us to provide such leadership. Further, it would be necessary for the Congress to provide adequate funds to staff tjie study. Our limited funds available for policy support research are already allocated for contract research in areas of transportation, including the Jmportant~area of transpottation safety, established as priorities by the Department of Transporta tion Act or its legislative history. Recognizing the Importance of the study you suggest diversion of these funds to an automObile insurance study would severely limit our ability to undertake the studies we consider to be primary to the mission Congress has assigned the Department. For these reasons we would be reluctant to undertake a comprehensive study of the automobIle' insurance problem without legislation authorizIng the Depart- ment to conduct such a study with appropriate assistance from other depart- ments and agencies of the Federal government. Such legislation should provide the Secretary of Transportation with investigative authority including the power to issue subpoenas, necessary to Insure that all relevant data can be ob- tained, and `authorize funds sufficient to adequately staff the study. We will work with you and your staff and, if legislation is enacted the Depart mont of Transportation will be pleased to conduct the study and will vigorously pursue It to a successful conclusiOn in the public Interest. Sincerely, ALAN S. Bovn, S'ecretary. CONGRESS OF THE UNITED STATES, Washington, D.C., JuZy 20, 1967. Hon. ALAN S. BOYD, Secretary of Transportation, Department of Transportation, Washington, DJJ. DEAR Mn. SECRETARY: We are, of course, pleased that you share our concern over the grave defects which have appeared in our automobile compensation system and that you are willing to undertake an investigation of such system if Congress will provide you with the necessary tools. We recognize that you will need augmented resources to carry out an investlga~ tory task of such prime significance, and we will make every effort to see that those resources are placed at your disposal. We note that you will soon appear before the Transportation Appropriations Subcommittee, on which Senator Magnuson serves, on July 27. At that time, we hope that you will have a detailed estimate of the funds necessary to get the In- vestigation promptly underway. `We are confident that you will enjoy the full cooperation of those agencies whose competencies can contribute to this task. We are .also confident that you will receive the full cooperation of the automobile Insurance industry, State and local regulatory bodies and the academic community. Should you subsequently find, however, that you are barred from obtaining any assistance or information which you deem essential, we will then consider such legislative authority as you may need. Sincerely yours, Jon~ B. Moss, Member of Congress. WARREN G. MAGNU5ON, U.S. Senator. PAGENO="0009" DEPARTMENT OF TRANSPORTATION, Washington, D.C., Jsay 28, 1967. Hon. WARREN G. MAGNU5ON,, U.S. Senate, Hon. JOHN B. Moss, House of l?epresentatives, Washington, D.C. GENTLEMEN: Thank you for your most recent letter concerning the proposed automobile insurance study Which you have requested the Department of Trans- portation to undertake. While I did highlight the need for additional financial resources iii any letter of July 19, I nevertheless am still persuaded that there are other equally important requiremen~~ that should be met before we could effectively aild re- sponsibly undertake a study of the magnitude colatemplateci. As pointed out In my letter, I believe that the passage of legislation, giving to the Department a Congressional mandate and the requisite legal authority tQ insure the produc- tion of all relevant infotmation, is essential to `the success of this proposed stticly. Without such authority I would be reluctant to commit the Departnaent to such a serious and complex undertaking. I note also the recent nOtion by the House Judiciar~r Committee undertaking a study of similar scope. There is some question whether the resources of the Government are best utilized with two separate studies on the same subject-. one by the Executive Branch aild one by the Legislative Branch. However, as I hope I clearly Stated before-the Department stân~ds prepared to undertake the study you have suggested if the tools which we believe essential to the job in the responsible way whic1~ I am confjd~nt you would want are provided by the Congress. We are ready to give whatever assistance is necessary in drafting the appropriate legislative measure. Sincerely, ______ ALAN S. Born, Secretary. DEPARTMRNT OF PRANSPORTATION, Washington, D.C., Augmtht 17, 1967. Hon. WARREN G. MAGNUSON, U.S. Senate, Washington, D.C. DEAR SENATOR MAGNUSON: It was good to talk to you the other day and to reach a conclusion on the automobile insurance study which you have asked us to undertake. Our past correspondence and our discussions clearly outline Several major questions which must be, answered prior to the time that such a study can be started. They are (1) what are the limits of such a study? (2) are there data, of public record, which will provide answers to the many questions that mttst be answered within these limits? (3) What are the sources of data which are not part of the public record? (4) what additional authority will be needed by the Department to insure that such data can be obtained? (5) what are the time limits of such a study? (6) what stafling and funds are necessary for the Department to complete such a study? As a result of our most recent discussion, I stated that I would put our a1rall~ able staff resources to work on answering the above six questions and attenipt to provide you with a definitive answer by the opening of the ne,~t sOssion of the Congress. We agreed to make a decision then as to what further step~ should be taken. Given our limited resources, at this crucial stage of the Department',~ devel- opment, I am hopeful thaat we will be able to obtain some additional apprO~ priations so that this study outline can be prepared In a satisfactory and com- prehensive manner. I would be happy to return to the Senate Appropriations Committee to explain our need for additional funding to staff this effort. Sincerely, ALAN S BOYD, Secretary. PAGENO="0010" 6 Mr. Moss.~ I was most gratified that the President in his consumer interests message to the Congress on February 6 of this year endorsed this type of legislation. The resolution authorizes and directs the Secretary of Transporta- tion to carry out a study and investigation of our system of automobile insurance. To do this, the Secretary has been given 18 months and authorized $2 million. However, in view of the critical nature of this problem, I am tending more and more to the view that 18 months is an excessive period of time to take for this study. It is my expectation that the Secretary will present to the Congress either an interim report or in his final report recommendations which will result in ending: First, the constant and staggering escalation of automobile insurance premiums; second, the oftentimes capricious refusal to issue a renewal automobile policy and arbitrary cancellation of such policy without notice or explanation; third, the gross disparity between premiums paid for automobile insurance and amounts paid out as claims; fourth, the bankruptcy of companies engaged in writing automobile insurance which has left those uninsured through no fault of their own, with great personal financial loss in many cases; and fifth, lengthy claim procedures which only result in nothing more than a loss of time and effort. So that these hearings may be conducted as expeditiously as possible and to permit members of the subcommittee to more fully explore mat- ters of importance with witnesses, I am requesting that each witness limit himself to a 10-minute summary of his statement which, of course, will be printed in full in the hearing transcript. (The bill, House Joint Resolution 958, -and departmental reports thereon, follow:) [H.J. lIes. 958, 90th Cong., first sess.]i JOINS? R1SSOLU~TION To authorize the Secretary of Transportation to conduct a com- prehensive study and investigation of the existing compensation system for motor vehicle accident losses, and for other purposes Whereas Congress finds that suffering and loss of life resulting from motor vehicle accidents and the consequent social and economic dislocations are critical national problems; and Whereas there is growing evidence that the existing system of compensation for such ross and suffering is inequitable, inadequate, and insufficient and is un- responsive to existing social, economic, and technological conditions; and Whereas there is needed a fundamental reevaluation of such system, including a review of the role and effectiveness of insurance and the existing law govern- ing liability; and ~Whereas meaningful analysis requires the collection and evaluation of data not presently available such as the actual economic impact of motor vehicle in~ Juries, the relief available both from public and private sources, and the role and effectiveness of rehabilitation: Now, therefore, be it Resolved by the ~S'en~ate and House of Representatives of the United States of Ajn,erica in Congress assembled, That (a) the Secretary of Transportation (here- inafter referred to as the "Secretary"), in cooperation with those other Federal agencies which possess relevant competencies, as provided in section 4, is author- ized and directed to conduct a comprehensive study and investigation of all relevant aspects of the existing motor vehicle accident compensation system. Such study and investigation shall Include consideration of the following- (1) the inadequacies of such existing compensation system in theory and practice; (2) the public policy objectives to be realized by such a system, including an analysis of the costs and benefits, both monetary and otherwise; and PAGENO="0011" 7 (3) the most effective means for realizing such objectives. (b) The Secretary shall submit to the Congress interim reports from time to time and a final report not later than eighteen months after the date of enact- ment of this joint resolution. Such final report shall contain a detailed state- ment of the findings and conclusions of the Secretary, together with his recom- mendations for legislation and such other action as the Secretary deems neces- sary to carry out the objectives of this joint resolution. ADMINISTRATIVE rownus SEc. 2. In order to carry out his functions under this joint resolution, the Secretary is authorized to- (1) appoint and fix the compensation of such employees as he deems neces- sary without regard to the provisions of title 5, United States Code, govern- ing appointment in the competitive service and without regard to the provi- sions of chapter 51 and subchapter III of chapter 53 of such title relating to classification and General Schedule pay rates; (2) obtain the services of experts and consultants in accordance with the provisions of section 3109 of title 5, United States Code, but at rates for individuals not to exceed $100 per diem; (3) enter into contracts with corporations, business firms, institutions, and individuals for the conduct of research and surveys and the preparation of reports; (4) appoint, without regard to the provisions of title 5, United States Code, governing appointments in the competitive services, such advisory committees as he deems appropriate for the purpose of consulation with and advice to the Secretary. Members of such committees, other than those regularly employed by the Federal Government, while attending meetings of such committees or otherwise serving at the request of the Secretary, may be compensated at rates to be fixed by the Secretary but not exceeding $100 per day, and while away from home or regular place of business they may be allowed travel expenses, including per diem In lieu of subsistence, as authorized by section 5703 of title 5, United States Code, for persons in the Government service employed intermittently. Members of such advisory committees shall, for the purposes of chapter 11, title 18, United States Code, be deemed to be special Government employees; and (5) prescribe such rules and regulations as he deems appropriate, and apply such rules and regulations to reasonable classes of corporations~ business firms, and individuals. COOPERATION OF FEDERAL AGENCIES Szo. 3. (a) The Secretary is authorized to request from any department, agency, or independent instrumentality of the Government any information he deems necessary to carry out his functions under this joint resolution; and each such department, agency, or independent instrumentality is authorized and directed to cooperate with the Secretary and to furnish such information to the Department of Transportation upon request made by the Secretary. (b) The head of any Federal agency is authorized to detail, on a reimbursable basis, any personnel of such agency to assist in carrying out the duties of the Secretary under this joint resolution. INTERAGENCY ADVISORY COMMITTEE Szc. 4. The President shall appoint an Interagency Advisory Committee on Compensation for Motor Vehicle Accident Lossses consisting of the Secretary who shall be Chairman and one representative each of the Departments of Com- merce, Justice, Labor, Health, Education, and Welfare, and Housing and Urban Development, the Federal Trade Commission, the Interstate Commerce Commis- sion, and the Securities and Exchange Commission, and such other Federal agencies as are designated by the President. Such members shall, to the extent possible, be persons knowledgeable in the field of compensation for motor vehicle accident losses. The Advisory Committee shall advise the Secretary on the preparation for and the conduct of the study authorized by this joint resolution. PAGENO="0012" 8 HEARINGS AND PRODUCTION OF DOCUMENTARY EVIDENCE SEC. 5. (a) For the purpose of carrying out the provisions of this joint resOlu- tion the Secretary, or on the authorization of the Secretary any officer or eta- ployee of the Department Of Transportation, may hold such hearings, take such testimony, sit and act at such times and places, administer such oaths, and require, by subpena orotherwise, the attendance and testimony of such witnesses and the production of such books, papers, correspondence, memorandums, con- tracts, agreements, or other records as the Secretary, or such officer or employee deems advisable. (b) In order to carry, out the provisions of this joint resolution, the Secretary or his duly authorized agent shall at all reasonable times have access to, anti for the purposes of examination the right to, copy, any documentary evidence of any corporation, businesa rirm, institution, or ihdividual havitig materials Or informa- tion relevant to the Study authorized by this,joint resolution. (c) The Secretai~y th authorized to require, by general or special orders, any cor~Oration, busines~ firm, oF individual or any d1as~ of such corporation, firm, or individuals to file, in such form. as the Secretary may prescribe, reports or ali~wers ih writing to sp~cific questions relating to the study authotized by this joint resolutiofi. Snch reports and answers shall be made undOr oath or other- wise, and shall be filed with the Secretary within such reasonable period as the B~cretary may prescribe. (d) Any of the' district couFt~ of the United States within the jurisdiction of which an inquiry is carried on may, in the case of contumacy or refusal to obey a subpena or order of the SeCretary or such officer or employee i~ssued under sub- section (a) or sub~ectlon (c) of ~bis section, issue an order requiring cOnipliance therewith; and any failure to obey such order of th~ court may be ~iunished by such court as a contempt thereof. (e) Witnessee~ summoned pursuant to, this section shall be paid the same fees arid mileage that are faid wltne~ses in the courts of the united states. TE1%~~NATION SEC. 6. The authority of the Secretary under this joint resolution shall terrn mln'ate ninety days after the submi~sion of his final report under section 1(b). APPROPRIATIONS AUTHORIZED SEC. 7. There are hereby authorized to be appropriated, without fiscal year limitation, such sums, not to exceed $2,000,000, as may be necessary to carry out the provisions of this joint resolution. EXECUTIVE OFrion OF THE PRESIDENT, BUREAU OF THE BUDGET, Washington, D.C., March 22, 1968. IJon. HARLEY 0. SFAGGERS, Chairman, Committee on Interstate and Foreign Commerce, House of Representatil,es, Rayburn House OyJlce Building, Washington, D.C. DEAR Mn. CHAIRMAN: This is in response to your request of December 19, 1967, for the views of the Bureau of the Budget on H.J~ Res. p58, a joint resolution "To authorize the Secretary of Transportation to conduct a comprehensive study and investigation of the existing compensation system for motor Vehicle accident losses, and for other purposes." H.,J. Res. 958 would implement, generally, the President's proposal for a com- prehensive study of the problems relatin.g to automobile insurance as set~ forth in his Consumer Message of February 6, 1968. In testimony before your Committee on this measure, the Secretary of Transportation recommended certain amend- ments relating ~o the time required to complete the proposed study and the necessary authorization for appropriations. We concur in the views expressed by Secretary Boyd anti recommend favorable consideration of H.3. Res. 958 with the amendments he suggested. Enactment of this legislation would be in ac~ord with the program of the President, Sincerely yours, WILFRED H. ROMMEL, Assistant Director, Office of Legislative Reference. PAGENO="0013" DEPARTMENT OF HEALTH, EDUCATION, ~ND WELFARE, Wa$J~lngton~, ~.Q.,,Karoh 21,1698. Hon. HARLEy 0. ~T4GQERS, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives, Waslthigton, D.C. DEAR Mn. CHAIRMAN: This letter is in response to your request of December 1~, 1967, for a report on H.J. Res. 958, a bill "To aiithorize the Secretary of Transportation to conduct a comprehensive study and investigation Of the exist- ing compensation system for motor vehicle accident losses, and for other pur- poses." The joint resolution would authorize the Secretary of Transportation, in co- operation with other Federal agencies, to conduct a comprehensive study and in- vestigation of all relevant aspects of the existing motor vehicle accident compen- sation system. Such study and investigation would include (1) the inadequacies of existing compensation system in theory and practice; (2) the public policy objectives to be realized by such system, including an analysis of the costs and benefits, both monetary and otherwise; and (3) the most effective means for realizing such objectives. The Secretary would be required to submit to the Congress interim reports and a final report not later than eighteen months after the d~tte of enactment of this legislation. The final report would contain a detailed statement of the findings and conclusions of the Secretary, together with his recommendations for legislation and other action the Secretary deems necessary to carry out the ob- jectives of this joint resolution. The joint resolution would also provide that the President shall appoint an Interagency Advisory Committee on Compensation for MotOr Vehicle Accident Losses consisting of the Secretary who shall be Chairman and one representative each of the Departments of Commerce, Justice, Labor, Health, Education, and Welfare, and Housing and Urban Development, the Federal Trade Commission, the Interstate Commerce Commission, and the Securities and Exchange Commis- sion, and other Federal agencies as are designated by the President. The Ad- visory Committee would advise the Secretary on the preparation for and the conduct of the study authorized by this joint resolution. Other provisions in the joint resolution would authorize the Secretary to ob- tain assistance in carrying out his functions from private organizations and from other governmental agencies. This Department is in accord with the purposes of this legislation and would have no objention to Its enactment. Since the primary responsibility for conduct- ing the proposed study would be vested in the Secretary of the Department of Transportation, we would defer to the views of that Department as to the ade- quacy of the administrative and appropriation provisions of the resolution. We are advised by the Bureau of the Budget that there is no objection to the presentation of this report from the standpoint of the Administration's program. Sincerely, WILBUR J. COHEN, Acting S'ecretary. OFFICE OF Tnn Dnru~n~ ATTORNEY GENERAL, Washington, D.C., March 18, 1988. Hon. HARLEY 0. STAGGERS, Chairman, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D.C. DEAR Mn. CHAIRMAN: This is in response to a request for views concerning H.J. Res. 958, to authorize the Secretary of Transportation to conduct a compre- hensive study of the compensation system for motor vehicle accident losses. Eased on a Congressional finding to the effect that the existing system of compensation for loss and suffering due to motor vehicle accidents is inequitable and inadequate, the resolution would authorize the Secretary, in cooperation with the heads of other relevant federal agencies, to conduct a study of all as- pects of the existing motor vehicle accident compensation system. For the pur- pose of the study the Secretary would be authorized to hold hearings and woiilcj be required to submit to the Congress a report containing his findings and his recommendations for legislation. Under the resolution the Presidept would be directed to appoint an Interagency Advisory Committee on Compensation for PAGENO="0014" 10 Motor Vehicle Accident Losses composed of representatives from federal agen- cies to advise the Secretary. H.J. Res. 958 would 1mplem~nt, generally, the proposal for a comprehensive study of the problems relating to automobile insurance set out in the President's Consumer Message on February 6, 1968. With respect to the specific details of the bill the Department of Justice de- fers to the 1)epartment of Transportation. The Bureau of the Budget has advised that there is no objection to the sub- mission of this report from the standpoint of the Administration's program. Sincerely, WARREN CHRISTOPHER, Deputy Attorney General. SECURITIES AN~ ENCHANGR Co~ti~ttSSioN, Washington, D.C., March 15, 1968. Re H.J. Res. 958, 90th Congress. Hon. HARLEY 0. STAGGERS, Chairman, Comimittee on Interstate and Foreign Co~nmerce, House of' Repre- sentatives, Rayburn Honse Office Building, Washington, D.C. DEAR Mn. CHAIRMAN: In response to your letter of December 22, 1967, request- ing the Co~nmission'S comments on H.J. Res. 958, we have examined the resolu- tion and determined that it does not appear to affect the Commission's adminis- tration of the federal securities laws. Accordingly, we have no comment on the resolution. If the resolution is adopted, we will of course cooperate to the best of our ability in discharging any responsibilities that may be assigned to us. Sincerely, MANUEL F. COHEN, Chairman. Mr. Moss. Before recognizing our first witness~ today I wonder, Mr. Keith, if you have any observations you would like to make at this point. Mr. KEITH. Thank you, Mr. Chairman. I have had a great interest in this subject for a long time. Mas- sachusetts which was the earliest State to have compulsory automobile insurance, has seen the cost of this coverage go skyhigh. It is a very great problem for the people of Massachusetts and for the other States of our Nation. It is a very healthy development that this com- mittee, the Congress and the Department of Transportation are going to try to shed light on this subject. I hope that the companies and the States will not use this study as a basis for delaying action that they might take to solve the problem in the interim period. Once again, as was the case last week when we heard from the vice president of the Equitable Life Assurance Society, I advise you of my previousnnd present interest in the life insurance industry. I might say that I am a part owner of a general insurance agency; when my brother died, I purchased his share of the business. As I stated before, I will use the personal information that I have of this business to further help the public interest in this problem. I feel certain that there will be no conflict in that relationship. In- stead it will make a contribution to a resolution of this very difficult problem which plagues i~iot only the public, but the various and sundry companies and agencies who try to service the public in this area. Thank you, Mr. Chairman. Mr. Moss. Thank you, Mr. Keith. As I observed on the ocoasio1~TI of the previous hearings, I think it is appropriate, it is in accord with the opinion I have formed of you PAGENO="0015" 11 over the years that we have worked together, that your statement dis- closing your interest is a measure of your personal integrity. I believe that I reflect the views of the committee in expressing our appreciation for your statement. As is our custom, we shall hear first from Members of Congress. This morning we have several distinguished colleagues, the first of whom is the Honorable George M. Rhodes. Please proceed Mr. Rhodes. STATEMENT OP HON. GEORGE M. RHODES, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP PENNSYLVANIA Mr. RHoDEs. Mr. Chairman, I appreciate the opportunity of making known to your committee my views on House Joint Resolution p58. A study by the House Judiciary Committee has revealed that a majority of State laws covering automobile insurance are either not enforced or are implemented only on a routine basis. The study re- vealed that arbitrary and unfair cancellations of policies and the refusal to renew policies are entirely too frequent. I have received numerous letters from citizens who have paid pre- niiums for as long as 20 years to one company, only to find that their policy could not be renewed at age 65, or their premium was raised to the extent that they could no longer afford the insurance. Many of these policyholders were never involved in an accident. My own State of Pennsylvania has been lax in taking steps to stop this practice, which has victimized many good citizens. The arbitrary cancellation of policies seems to be a practice which hits the elderly who, because of age, are no longer considered preferred risks. How- ever, I do not believe age alone is sufficient cause for cancelling a policy. I fully support the legislation before this committee. I hope it will result in legislation at the State and national level to protect policy- holders from the unscrupulous practices of some companies. Mr. Moss. Thank you for your brief statement Mr. Rhodes. If there are no questions, we shall hear next from our colleague from New York, the Honorable Leonard Farbstein. STATEMENT OP HON. LEONARD PARBSTEIN, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP NEW YORK Mr. FARBSTEIN. Thank you, Mr. Chairman, for inviting me to ap- pear before your very active and effective Subcommittee on Com- merce and Finance. All America knows of your efforts to protect the little man in our society from the great forces of industry and busi- ness over which he, as an individual, can exercise very little influence, These hearings today focus upon the need for a comprehensive study by the Department of Transportation on automobile insurance practices in the United States. As you know, Mr. Chairman, this is a subject in which I personally have been extremely interçsted for some years, and in January of 1967, together with four of my colleagues in the House of Representatives, I introduced a bill to create a Federal motor vehicle insurance guarantee corporation, ai'~d for other pur- poses. This corporation would protect policyholders and injured per~ sons against insurance company failures. Lack of such protection is one of the most inexcusable weaknesses of the present insurance sys- PAGENO="0016" 12 tern. At the `same time, on the floor of the House, I called for a broad and thorough congressional review of the present practices of Amer- ican automobile' insurance~ companies. Sixty years ago, the automobile waSa Tu~ury, a curiOsity, a conver- ~ation piece. No one depended upon it very much for getting to work, for taking the sick to a doètor, or for transporting foodstuffs and other staples' to the borne. Society, in fact, depended very little upon motorized transportation, and the laissez faire practices of the auto- bile insurance industry were quite equal to the task of that day and age and for some years thereafter. Today, however, America is motorized to an amazing degree. An automobile is an absolute essential to the great majority of Amer- icans. Approximately 80 percent of American families own a car, and 25 percent own two or more of them. The safety problems attending the spectacular growth of the motor industry are equally awesome. We now average 50,000 deaths and 4 million injuries on the high- way each year. Obviously, the motorists' need for insurance protec- tion is very great indeed in our highly urban, industrialized society of 1968. Regrettably, the management of America's automobile insurance companies has too often failed to provide the services legitimately expected by today's motoring public. The bill of particulars against them is long and impressive: 1. The cost of insurance is rising at an alarming rate, in spite of record returns to the industry from reinvested premiums; 2. Policies are often canceled, or simply not renewed, on an arbi- trary basis and with no reason furnished to the policyholder; 3. Both young and old drivers are discriminated against solely because of their ages; 4. Surcharges are often added to the premiums due to very minor traffic violations, or due to two minor accidents occurring within a short period of time; 5. Many firms refuse to write insurance in low-income areas; 6. Amputee or paraplegic veterans may find their policies have been canceled despite no change in their situation from the time the contract was issued; 7. Such diverse factors as one's marital status, occupation, and em- ployment of spouse may make a driver ineligible for coverage; 8. In a number of instances, private persons have had to hire law- yers to get a fair and prompt settlement of worthy claims from insur- ance firms; and 9. Between 1960 and 1966, 73 automobile insurance companies went bankrupt leaving an estimated 300,000 policyholders `and injured victims to attempt to recover $600 million in claims from combined company assets of oniy $25 million. In 1945, Congress gave the power to regulate insurance to the indi- vidual States and some of them have done a creditable job overall. But today, the problem of automobile insurance is too complex to be left to the separate action of 50 individual State governments. In my opin- ion, decisive congressional action is essential to bring order out of the confusion and apprehension that characterizes the automobile insur- ance situation today. PAGENO="0017" 13 Among other things, the Congress should insure that premium in- creases are fully justified by the company concerned, and that earn- ings from reinvested premiums are fully taken into account in such a determination. Companies must be required to show cause for policy cancellation or the refusal to renew, and the policyholder given an opportunity to appeal that decision to an impartial body. IDiscrim- ination based on ag~e must be stopped. Firms should be required to write insurance in low-income areas that are contiguous to their pres- ent region of operation. Special factors presently used to determine a driver's eligibility for coverage should be futly justified by the industry. Legal condi- tions should be included within each policy to penalize a firm for re- fusal to settle a worthy claim within a reasonable period of time. The insurance companies themselves must be insured, similar to the way in which the Federal Deposit Insurance Corporation insures the Na- ~ion's banks. Finally, an.d above all else, Congress must insure that the promises made by the insurance companies are clearly understood by the policyholder, that they are fair, and that they are kept. These and other specific points should be studied in depth before the Congress proceeds to enact legislation. For this reason, I have informed Mr. Staggers, chairman of the Interstate and Foreign Com- merce Committee, that I am willing to have my own bill-HI.R. 4007- held in abeyance until the study called for in House Joint Resolution 958 has been completed. This broad analysis of the policies and prac- ~ices of the American automobile insurance industry has my full sup- port, and I strongly urge that it be completed at the earliest practicable of the Department of Transportation. Mr. Secretary. Mr. Moss. Thank you for your views Mr. Farbstein. Our next witness today is the Honorable Alan S. Boyd, Secretary of the Department of Transportation, Mr. Secretary. STATE1~ENT OP HON. ALAN S. BOYD, SECRETARY, DEPARTMENT OP TRANSPORTATION; ACCOMPANIED BY M. CECIL MACKEY, ASSISTANT SECRETARY OP TRANSPORTATION FOR POLICY DEVELOPMENT Secretary BOYD. Thank you, Mr. Chairman, and members of the committee. I am accompanied today by Mr. Cecil Mackey, Assistant Secretary of the Department of Transportation for Policy Development. Thank you for inviting me to testify on House Joint Resolution 958. This resolution authorizes the Department of Transportation, working with the Federal Trade Commission and other Goverwuent agencies, to undertake a comprehensive study of the motor vehicle accident compensation system. I welcome the proposed study. Last week, the Subcommittee on the Consumer of the Senate Com- merce Committee held hearings on the Senate counterpart of the House resolution-Senate Joint Resolution 129. I am pleased by the many endorsements of this study and pledges of cooperation from the industry, the legal profession, and leading experts in this area. 92-100-68-2 PAGENO="0018" 14 In a motor vehicle oriented society like ours-where some 100 million autos, trucks, and buses are operated nearly a trillion miles a year by 100 million licensed drivers-it is absolutely essential that we have an efficient, equitable system for providing compensation to those who are injured and to the dependents of those who are killed in accidents. Since the automobile first came into use as a major form of trans- portation, we have relied on tort litigation and insurance to provide this compensattion. But increasingly, for a host of reasons, the adequacy of the tradi- tional techniques for providing compensation has come under intense challenge. As President Johnson said in his consumer interest message to the Congress on February 6: Every motorist, every passenger, and every pedestrian is affected by auto insurance-yet the system is overburdened and unsatisfactory. Auto insurance clearly has become a major national problem-one that will oniy become more so as we license more drivers, produce more automobiles, and build more roads. In recent years the Congress has enacted legislation designed to reduce the number of traffic accidents and to curtail the severity of injuries. Passage of the National Traffic and Motor Vehicle Safety Act and the National Highway Safety Act-both signed into law in 1966 by President Johnson-authorized the issuance of vehicle safety stand- ards and provided financial aid for the States in support of highway safety programs. The Department of Transportation is now at work implementing those measures. Much remains to be done, but substantial steps are being taken by my Department, by the States, and by industry to reduce the toll of human life and injury inflicted by vehicle accidents. What ever we do to check and reduce the number of auto accidents and to minimize their human consequences, however, they can never completely be eliminated. We must recognize this as a fact and take every step necessary to provide the victims with compensation for their losses. The scale and importance of the problem is made clear by recalling a few statistics. In 1966, some 53,000 people were killed in traffic accidents. According to the National Safety Council, 1.9 million suf- fered disabling injuries and, of these, 160,000 were left with some permanent impairment. This means that each day on the average there were 145 deaths and over 5,000 disabling injuries directly attributable to motor vehicle accidents. The economic loss of the injured is immense. Medical expense amounted to $600 million. Actual and ftnticipated wage losses were estimated at $2.6 billion. Property losses aggregated an additional $3.3 billion. Staggering though it is, the n~ore than $6 biliion~ in ecoi~omic losses sustained by individuals does not represent the total cost of auto accidents to society. PAGENO="0019" 15 There are other "hidden" expenses-the cost of operating the courts, investigating accidents, and regulating insurance. The National Safety Council estimates that the insurance com- panies' own administrative costs alone approached $3.5 billion in 1966. Partly because of the great expense of administration of in- surance-leaving aside the costs borne by all the taxpayers through their support of the court system-it has been estimated that only about half of the premiums collected for auto insurance is paid out in compensation. As motor vehicle accidents increase-reflecting in part the rising number of automobiles and licensed drivers, and increasing auto use-the costs of providing compensation have followed a steady upward course. The industry, according to published statistics, paid out $1 billion in accident losses in 1950 and more than $5 billion in 1965. Paralleling this rise, auto insurance premiums have soared. Auto- mobile insurance net premiums have advanced from $2.6 billion in 1950 to $9.2 billion in 1966. In some areas premiums have gone up more than 30 percent in the last half dozen years. Increases of from $50 to $100 in premiums paid by the average family have been common in the period since 1961. This has meant a sharp increase in the cost of operating an auto- mobile, placing particularly great strain on those with lower incomes. The existing auto insurance system has been criticized on other grounds. Here are a few of the principal allegations that have been made: Auto insurance policies are frequently cancelled or insurance appli- cations rejected for reasons regarded as either arbitrary or inexplica- ble. The elderly, the young, members of the military, and Negroes and other members of racial minority groups appear particularly subject to such practices. Claims for compensation are processed slowly and inefficiently, often leaving accident victims without means to pay for their medical ex- penses and to receive proper rehabilitative care. The distribution of compensation is uneven and perhaps inequitable. It has been estimated that from 14 to 23 percent of those injured re- ceive nothing. Small injury claims may be overcompensated, larger claims undercompensated. Too often recourse must be taken to litigation to receive compensa- tion. Not only is this often protracted and expensive, but it burdens the courts with a great many suits, slowing even more the pace at which disputess can be resolved. The legal concept of compensation based solely on fault is said by some critics to be outdated and in need of basic reform. Insurance company failures in recent years raise the fear in the minds of many people that they will never be able to obtain compensa- tion, however clear their right to recovery may be. Since 1961, at least 80 companies have been liquidated or have gone into receivership. A 1965 estimate, based only on 58 of these failures, indicated that 300,000 people had stated claims totaling over $600 million against insurance companies with net assets of no more than $25 million. All of these problems and allegations-the soaring premiums, delays in payment, arbitrary cancellations and rejections, insurance insol- PAGENO="0020" 16 vencies, and uncertainties about the fairness of distribution of com- pensation-are individually of great consequence. At the same time, however, th~y are closely interrelated and only by viewing them in their total perspective c~tn they be properly appraised, e~valuated, and where necessary, corrected. The comprehensive study proposed by House Joint Resolution 958 promises to yield a cohesive body of information that should provide a better, more accurate idea of how the existing system workss and how it can be improved. The scope of the proposed study will be broad and comprehensive. It will carefully consider the effectiveness of the existing compensa- tion system, explore its strengths and weaknesses, and produce appro- priate recommendations for reform. Put in this simple, summary way, the study's actual dimensions and complexities are not fully revealed. Our preliminary evaluation shows, however, that a great amount of factual information must be developed for the first time. No study of automobile insurance as comprehensive as that proposed in the joint resolution has ever been conducted in the United States. Let me give you some idea how we would propose to carry out the study if Congress sees fit to approve the joint resolution. In doing so, let me emphasize that this study outline is necessarily tentative and subject to change. I would expect the Department would seek the advice of a number of experts in defining the exact final study plan. Those details can more prudently be considered when the resolution has been adopted and the status of its funding is asssured. As we view it, the study will be divided into four major phases: organization, data collection, analysis, and the formulation of recom- mendations and a report. The first phase would take 3 to 4 months. In this critical period staff will be selected and basic organizational planning will be completed. The second phase will take approximately a year and will be devoted to the collection of basic research material. Many of the data essential to a sound appraisal of the compensation system will have to be de- veloped through extensive field work, drawing upon the work of statis- ticians, economists, and other professional personnel. Court records, insurance company statistics, and State insurance commission data, and other sources of information will be examined. As you can well appreciate, this will be a major undertaking-but I consider it absolutely essential to develop this kind of informational base so that our analysis and recommendations can be firmly grounded in the facts rather than conjecture and suspicion. Once the second phase is completed, the third or analytical phase will commence. This will require approximately 7 to 9 months. The information developed in the second phase will be evaluated and such additional information as may be needed will be collected. Special in-depth issue studies will be carried out as warranted by the circumstances. The fourth phase, running 3 to 4 months, will involve the formula- tion of recommendations and the preparation of an extensive final report. You will note that the sum of the separate periods I have indicated substantially exceeds 24 months. While the net period can be shortened PAGENO="0021" 17 by overlapping certain of the functions., we feel that an inquiry as ex- tensive as this would require 24 months. I would suggest, therefore, that s&~tion 1(b) be appropriately modi- fied to extend the date for the submission of a final report. The resources ne~ded to conduct the insurance study will consist of a central core of Government staff experts and nongovernment special- ists. Other persons with experience and specialized competence will be employed from time to time. We expect, in particular, to work ciosely with the able staff of the Federal Trade Commission. Their competence in the field of economic and market analysis is widely respected. We have already been in con- tact with Chairman Dixon and members of his staff, In addition, I would expect the appointment of several full-time nongovernment experts. They would be associated directly with th~ Office of the Secretary of Transportation and would work closely with my own staff as well as with the other departments and agencies whicl~ would form the Interagency Advisory Committee established by sec- tion 4 of the joint resolution. Although the resolution does not explicitly require it, section 2(4) authorizes the appointment of advisory groups. Section 9(o) of the Department of Transportation Act contains similar authority. Pursuant to these sections, I plan to appoint an advisory group or groups composed of representatives from the insurance industry, Qther business groups, labor, appropriate professional organizations, State insurance commissions, and from consumer and other public orga- nizations. Their views and advice will be extremely valuable and I would fully expect to make regular use of these consultative groups thronghout the study. Estimates of cost are extremely difficult to make at this early date. Based on our experience with other large research projects and our review, of the work of a number of national commissions appointed in recent years, we feel that our expenses could approximate and per- haps exceed $2 million. Most of these costs would be incurred for the full-time staff and the compensation required to support field surveys throughout the country. However, consultants will also be required, contracts may have to be let to deal with certain particular problems, some data processing will be required, and government employees detailed to the Depart- ment will have to be reimbursed. All of this adds, in our judgment, to an amount that could be at least equal to the authorization contained in section 7 of the resolution. Given this, I would suggest that the precise dollar amount identi- fied in section 7 be eliminated and that an open-ended authorization be substituted. Let me conclude by stressing once more the urgency and vital im- portance of a comprehensive study of our entire motor vehicle accident compensation system. As President Johnson said earlier this year: We must move now to streamline the automobile insurance system to make it fair, to make it simple, and to make it efficient. The Department of Transportation stands ready to carry forward the study called for by the President and authorized by House Joint Resolution 958. PAGENO="0022" 18 It is my firm conviction that this study is a prerequisite to sound reform and the development by the Congress, the States, and the in- dustry of a modern, fair, and efficient compensation system. Thank you, Mr. Chairman. Mr. Moss. Thank you, Mr. Secretary. On your last page next to the concluding paragraph, you suggest the elimination of the precise dollar amount and substitution of an open-ended authorization. Now, it has been the policy of the Commerce Committee for quite a number of years not to make open-ended authorizations. In view of this fact, would you state what in your best judgment is the necessary amount to carry out the study and investigation and would you then submit for inclusion in the record how that amount would be allocated to carry out the study and investigation. Secretary Bo~rr. The best figure we can give you right now is about $2 million. The general allocation would be as follows: Staff salary, $575,000; field salaries, $600,000; contracts, $700,000; consultants, $150,000, and administration, $150,000. The figures are, we believe, conservative. We are talking about, as I mentioned in my testimony, the automobile insurance industry which generates premiums at a rate close to $10 bil- lion a year and about a thousand companies in 50 States plus the Dis- trict of Columbia and the Commonwealth of Puerto Rico. There has been no comprehensive study of the nature we are at- tempting to undertake. I do not consider myself a conservative in ap- proach, Mr. Chairman, but I learned when I was in a previous position as Chairman of the Civil Aeronautics Board, signing off on accident reports, that it costs a great deal of money merely to develop facts to the point where we can say that we can stand on these facts. We expect a great deal of assistance from the industry, from the States and from the other Federal agencies. We a~re not in any way attempting to be extravagant in the expenditure of funds but I think t~hat here is an opportunity for the Nation to obtain an absolutely com- prehensive study of the facts of this industry, how it operates, its strengths and its weaknesses. I would hate to find us in a position where $2 million was 75 or 80 percent of what we needed to do that. As you know, an open-ended authorization would not mean that we would be able to obtain more money just because of that fact. We would still have to justify our expenditures. We are not seeking to spend as much money as we can. We are seeking to spend as little as we can. But I think this is a matter of such vital importance that we should not be subject to an arbitrary dollars limit when nobody really knows what the cost of this study will be. Mr. Moss. This is my 12th year on the Commerce Committee and during that time I can recall no instance where the committee has de- parted from its policy of requiring a specific surn~ I would doubt seriously that even if this subcommittee were to unani- mously recommend to the full committee that we would be able to secure enactment of an open-ended authorization. I would suggest, therefore, that you call upon the resources of your Department to try to come up with a figure that you feel would be adequate. PAGENO="0023" 19 I would also ask that you submit for the record a more definitive statement of the allocation of the $2 million. If you could give us, not at this time but supply it for the record, the number of staff, the type of contracts that you comprehend as being required, in other words, a fuller exposition of the requirements that you gave us a few moments ago. Secretary BOYD. We will give you our best detailed judgment with the understanding that we are also looking into the future and we can't guarantee- Mr. Moss. We recognize that. (The following information was received by the committee:) PRELIMINARY ESTIMATES OF TEE DEPARTMENT OF TRANSPORTATION OF APPROPRIA- TIONS AND EXPENDITURES REQUIRED To CARRY OUT STUDY AND INVESTIGATION SALARY ESTIMATE, $575,000 Duties: Manage, plan, supervise, study, analyze and Interpret data. Cost estimate: Man-years Phase I 4.5 Phase II 24.5 Phase III 8,0 PhaselV 5.0 42.0 Average grade of professional staff is estimated at GS-13. Average Sal- ary=$13,500. (42) ($13,500) =$567,000 Therefore about $575,000. FIELD STAFF ESTIMATE, $600,000 Duties: Personal Interviews for- New data. Verification data. Case Studies. (Possibly also for telephone interviews.) Cost Estimate: Considering extent of geographic coverage and breadth of prob- able issues, a field staff of 30 to 40 people over a year's period will be required. Estimating Technique A: (30 to 40 people) ($15,000/person) ~=$450,000 to $600,000 Note that the $15,000 per person estimate includes salary and expenses which is conservative. Estimating Technique B: Use historic proven estimate of $20 cost per interview, Estimate 4 interviews per day per interviewer and 20 days per month for 12 months. ($20) (4) (20) (12) (30 to 40) =$576,000 to $768,000 Therefore range of estimates are: (A) $450,000-$600,000. (B) $575,000-$775,000. Assume $600,000 as the best estimate. CONTRACTING ESTIMATE, $ 700,0 00 Data Processing and Collating (Sub-Total=$400,000). Requirement: (a) Storage of 20,000,000 units of data (possibly 40,000,000) categorized by about 300 parameters. (b) This data bank will be manipulated a multitude of times in order to obtain various aggregations and more important various regression analyses as well as variance analysis. PAGENO="0024" 20 (c) A time consuming and medical collating task must be undertaken with about one-half of the data bank. (This is the data from insurance companies which "theoretically speaking" is the same.) The remainder of the data bank will not be so disjointed since most of it will be new or pre- structed by the study group. Cost Estimate: Based on past projects using similar techniques, discussions with representatives from data processing organizations and careful consideration of the nature of the requirements of this study the following estimates were made: E~quipment (Mainly disks vs. tapes) -~_ $200, 000 Implementation (System design, data collation, and programming) 150, 000 Computer time 50, 000 400, 000 NoTE.-Stora~e of 100 million cbt ~a~ters was derived as our basic estimate. £1peoii~&lized Stu,Iies: (Sub~Total=$~00,0OQ.) Objectives: Studies which serS~è tfié purpOse o~ complementing the basic study of accident cases and the compensation system. Cost Estimates: Total cost=$300,000 (5 studies ranging between $50,000 to $75,000). Typical Projects could be: Reworking existing data to make It applicable to the insurance stbdy. Interpretation, analysis~ and correlation of health lntef+iew survey data, Special surveys such as estimates of traffic court system cOsts. CONSULTANT ESTIMATE $150,000 Dutie8: fle members of advisory groups. Advise management of study design and. staff on interpretation ô~ data and knowledge. (The diversity of the expertise required should be noted. That is economic, medical, legal, social, public health, actuarial, and so forth). Cost Estimate: Assume Average Fees and l3ixpenses=$100/day. Estimating Technique A: Assume 1 man-hour of consulting for each 3 or 4 hours of staff time (a reasonable estimate considering fills study an~l our past ex- perience). Therefore (42 man-years) (260 days/year) ($100/day) (¼ or 1/4) = $244,000 or $185,000. Estimating Technique B: (~) Individual consultants: Phase I_~2* consultants per day 1/3 of time. Phase II_3* consultants per day ~ of time. Phase III_~_3* consultants per day ~ of time. Therefore: (2) ( 4 months) (20 days/mo.) (1/3)= 53 days. (3) (13 month~) (20 days/mo.) (1/4) =195 days. (3) ( 7 months) (20 days/mo.) (1/2) =210 days. 4~5 days, (485 days) ($100/day)=n$45,800 (b) Advisory groups: Ad hoc advisory groups probably 12 in number (legal, public health, management, etc.) to exist for a month or more with about 5 working days per group and 10 members per group. (12) (5) (10)=600 days (600 days) ($100/day) = $60,000 Subtotal= $105,800 Range of Estimates: (a) $185,000 to $245,000. (b) $106,000. Assume $150,000 as the best estimate. *Not the same consultants for the duration of the Phase. PAGENO="0025" 21 ADMINISTRATIVE ESTIMATE, $150,000 Duties: Secretarial/Clerical Staff. In addition, office supplies, printing services and travel expenses are included in this category. Cost Estimate: (A) 11 Clerical (2 Stenos/5 Secretaries/4 Clerks), $6,800/year for 1~ years-(1.5) ($6,000) (11) $112, 000 (B) Supplies (md. printing) 25, 000 (C) Travel 3 trips per professional at $75 trip-3~ 75X27 -- $6, 075 Per diem-25/day~2 days/tripX8l trips $4, 050 10,000 147,000 Assume an estimate of $150,000. Mr Moss. Mr. Keith. Mr. KEITH. Thank you, Mr. Chairman. It is entirely probable that no problem has vexed the State govern- ments, the insurance companies, the buying public more than this par- ticular one. I can recall, when I was in the State legislature years ago, the pub- lic's and the Massachusetts Legislature's concern. Fifteen years later, they are still wrestling with that same problem. There is so much at stake for the private insurance sector of our economy that I am sure that they have conducted many studies. There is so much at stake in the State government that they, too, must have a great deal of material that could be available. A lot of time and thought must have gone into this. What I am leading up to is not necessarily a suggestion that the time be shortened but I think that you and this committee, as we quiz suc- cessive witnesses, should try to find out just how much of an input is already available. Certainly, Professors Keeton and O'Connell can give us some infor- mation on this subject. They have been firm in their recommendations to the State legislatures regarding a solution in their view. They must have based them upon extensive studies. So, I would hope that we could come up with a more modest figure than is suggested by you in your introductory remarks. I would be interested in your views if you would care to respond. Secretary BOYD. All right, sir. First of all, I would like to say that we have been in contact with Professors Keeton and O'Connell. I know Professor O'Connell. Un- doubtedly, they have done a great deal of study. Yet their approach places more emphasis upon a plan of reform rather than the develop- ment of comprehensive fact data. However, we expect to be able to develop sufficient data in order to properly evaluate all of the pro- posed reforms. Let me give you what I think is a relevant parallel, Mr. Keith. The Interstate Commerce Commission is now in its 80th year of regulating transportation in this country. We have State regulatory commissions in every State of the Union, some of which are older than the Interstate Commerce Commission. Rail and motor carrier trans- portation have been among the most intensely regulated of industries. While there are mountains of statistics relating to these modes, an effort to try to deal with an industry-wide problem today on the basis of such information is something that can drive you out of your mind PAGENO="0026" 22 because of the difference in the way the statistics are put together by different agencies and different industries. It is literally impossible tO find out, without a mammoth amount of work, what you already have available. I think in this age of thriving technology we sometimes tend to assume that because we have computers we can take all of the books and stacks of figures and run them through a computer in order to get all of the answers. However, the computers cannot give all of the answers, believe me. No~ these are our concerns. First, we are trying to exercise a respon- sible stewardship of the taxpayer's money which is made available to the Department of Transportation in all of its activities. Second, we feel that in order to do a job on the insurance industry, a study- Mr. KEITH. You mean a job for the insurance industry. Secretary BOYD. Well, I was not speaking in the vernacular, but we are trying to do a job for the American public. We want to do one which is consonant with the quality of what we think we are doing in other areas. We do not want to be miserly and then find out in the end that we will be making assumptions which we cannot support and that we need additional information. I think this would be a great disservice to everybody involved. Mr. KEITH. I think the chairman, when he referred to your recom- mendations for an open-ended authorization, was very realistic. We have had previous experiences, as you know from your years with the Government, with agencies which have come in for additional funds after they tried to stay within their budget. If they made a good case, the funds were there. Secretary BOYD. Let me say, sir, that we are attempting to give the committee our best judgment. We will follow whatever the Congress does cooperatively and productively. Mr. KEITH. Thank you, Mr. Chairman. Mr. Moss. Thank you. Mr. Murphy. Mr. MTJRPHY. Mr. Secretary, will any of your advisory groups, any of those members receive compensation? Secretary BOTY1D. Let me throw that to Mr. Mackey. Mr. MACKEY. I think that we would expect to have the authoriza- ~tion to pay some of the advisory groups. We are not entirely sure at this point exactly what the nature of all the advisory groups would be. Certainly, the broad industry representation, the highest level, State commissioners, presidents of companies, people of this sort form- ing an advisory group, normally would not expect compensation as consultants. We also would have to have some advisory groups made up of pro- fessional, academic types, people who are really professional consult- ants. I think in order to do the job right we need both. Even when you do not pay compensation you normally pay travel expenses for the people in the advisory groups. With a large representative advisory group that meets fairly often so that it can be useful, even the travel expenses can add up quickly. Mr. MURPHY. Thank you. I have no other questions. PAGENO="0027" 23 Mr. Moss. We are very, pleased to have the ranking minority mem- ber of the committee present, Congressman Springer. Do you have any questions? Mr. SPRINGER. Mr. Chairman, if you would accommodate me for just a few minutes, I would like to ask the Secretary a few questions. Mr. Moss. Certainly. Mr. SPRINGER. Mr. Secretary, I take it that you are entering on this so-called investigation, and I anticipate you are probably going to get your money, without any previous experience or thought or precon- ceived ideas about this? Secretary BoYD. Absolutely. Mr. SPRINGER. This is not for the purpose of putting you on the spot, but do you know anything about the question of insurance and premiums with reference to automobile insurance? Secretary Boyn. Personally? Mr. SPRINGER. Yes. Secretary BOYD. Only to the extent that I did engage in the law practice for a while. It seems like many years ago, Mr. Springer. My mother was an insurance agent. Mr.. SPRINGER. You have defended insurance companies and you have been plaintiff's representative, your experience is to that extent? Secretary BOYD. Yes, sir. I have formed no conclusions except for the fact that we have a major problem which needs to be dealt with. Mr. SPRINGER. Let me ask you this: Preliminarily at this point what do you think the one, two, three problems are in the insurance business? I am talking about this insured premium idea. Secretary Bo~m. I have not attempted to rank things before but off- hand I would say that the question of rejections and cancellations which appear to be arbitrary, are major problems. In this society where we have relied so heavily on tort liability, the presence or absence of an insurance policy can have a major impact on the future life of an individual who happens to be involved in an automobile accident. Mr. SPRINGER. That is just two things you know exist, is that correct? Secretary Boim. Yes, sir. Mr. SPRINGER. You don't have any idea or preconceived notions as to what caused that? Secretary BoYD. No, sir. Mr. SPRINGER. I want to be sure because it is awful important to not get any preconceived ideas about what brought this about. I happen to know a little bit about the background and probably not a great deal more than yourself. This one question is going to arise, Mr. Secretary, and I hope you are going to go into it. You are not going to produce, I hope, out of all this program which is going to increase the cost of insurance to people generally in this country. Now that is the first thing when you come back that I am going to ask you when you come back with recommendations. So when you go out you will know what I am going to ask when you come back. Secretary BoYD. I must confess that I would be either surprised or astounded, in Noah `Webster's words, if that were the result of our study. PAGENO="0028" 24 Mr. SPRINGER. I hope you are right, Mr. Secretary, because actually, the cost is prettyhigh now. Now there is one thing which I find out and I have seen, for instance, that premiums have risen from 2.6 to 9.2, which is in the neighborhood of four times as much. My own insurance has not risen that way at all. Secretary BOYD. Of course we are, talking here, Mr. Springer, about the tremendous increase in the number of automobiles or owners coy- `ered. Mr. SPRINGER. What you are talking about is net premiums have increased from 2.6 to 9.2? Secretary Bom. Yes. Mr. SPRINGER. Are you talking about the fact that the premiums have quadrupled? I am not sure if that is what you mean. Secretary Boyr. No. If you will look at the next paragraph- Mr. SPRINGER. I see, it has gone up 30 percent in the last half dozen years? Secretary Bom. In some areas. Mr. SPRINGER. In some areas. I have inquired as to why my insurance policies have not risen be- cause I know they have in some other companies. I find that the one I' happen to belong to is a highly selective company. Therefore, I am getting a premium commensurate with this and they have so advised me under some circumstances, "We don't think we would want to insure you." Do you see what I mean? Secretary Bom. Yes, sir. Mr. SPRTNGER. Now I do not know if you have any idea here of com- ing back with one that is going to insure 100 percent of the people or is still going to give a choice to the companies to select the ones they want to insure. You are familiar with the Maryland situation, are you not? Secretary Bom. Yes, sir. Mr. SPRINGER. Do you live in Maryland? Secretary BoTit'. No, sir. Mr. SPRINGER. Does the committee know the Maryland situation ~ What, in effect, it does is that the insurance companies in Maryland insure everybody that wants to be insured that they can insure. rfhere are left over several hundred or several thousand who are so-called noninsurable. They won't take them. The Maryland Department of Insurance takes those few thousand,. divides those thousands among all the companies who insure in Maryland. Isn't that right, Mr. Secretary? Secretary Bom. That is my understanding. Mr. SPRINGER. That is the way I understand it. With the result that you do have these companies insuring a large number of what or- dinarily would be considered noninsurable. Now I think in the public interest you have to determine whether this is worth it, whether the cost should be passed on to somebody else who is the careful driver. I hope you will cover all this in your report when you do it. PAGENO="0029" 25 Now let me come to the second point if you will bear with me for just a moment. I am familiar with what Dr. O'Connell has done at the University of Illinois, which is my hometown. Now this new approach to the question of insurance, and I am not sure, maybe we should not be in the area of where we were at least thinking about a new approach to this whole thing, but I surely would want to know what it is going to cost. Secretary BOYD. Yes, sir. If I may go back for a minute, one of the things that makes me a little edgy about the money required for th~ study is that we are discussing extremely important issues. I believe it would be a tragedy if we are not able to do a thorough job of looking at all of the implications and evaluating all of the alternatives. I am very concerned that we may run out of money before we get the facts. I do not want us to come back here with a report which is in- complete in major respects. Mr. SPRINGER. May I say that insofar as I am concerned, I do not expect this to cost millions and millions of dollars, but whatever is its cost, you ought to have. If you are going to do the job, I think it ought to be done thoroughly. Secretary Boin. That will be our approach.. Mr. SPRINGER. I hope it will not come back with a lot of blame on insurance companies and nothing else. If we do not come up with more than that, that is the reason I am starting on this side over here instead of on the other body where you have a bunch of prima donnas playing this song morning and night like a violin, finding fault with the people who are in business, and nothing else. I hope you will come back, Mr. Secretary, with good, solid recom- mendations and not a blame on things that have already taken place. If we are going to correct it, let us correct it. Secretary BOYD. I agree. We are looking primarily for answers. Mr. SPRINGER. I am glad to hear that because I don't think that ought to be the approach which you take. You have always been a pretty solid citizen in the jobs yOu have held in the Government, and pretty respons- ible. I am happy that you are the one who is undertaking this. Secretary Boru. We will give this all the priority that circumstances permit in the Department. We have Cecil Mackey, Assistant Secretary, and his Deputy, both of whom are well grounded in studies of this type. We are going to put together what we think will be a fine professional staff. We will conduct it on the basis of an objective examination of the automo- bile insurance situation and its impact on the people and the various implications of different types of responsible suggestions which have been made for alternative methods of compensation. Mr. SPRINGER. Mr. Chairman, thank you. Mr. Moss. Thank you. I would just like to observe as the author of the resolution that it is . clearly my intent and desire that the study produce facts rather than assess blame and I know that because of the fact that additional: information was necessar~ Senator Magnuson and 1 determined that the best approach would be the a~enue bf ~tud~f rather than anj~ ciefii~- itive legislative proposal to deal with theproblein. PAGENO="0030" 26' Many were advanced and considered but it was obvious that we needed to have a study as a prerequisite to any sound legislative solution. Mr. SPRINGEE. Mr. Chairman, I want to commend you because I think that is the right approach. Mr. Moss. Thank you. Mr. Guthrie, I believe you have some questions. Mr. GtITHRIE. Mr. Secretary, in light of the urgency that is felt about this particular situation and the fact that you apparently are seeking a further period of time than the resolution provides for now, 24 months as I understand it, it seems to me that the record would be more useful if you could go into greater detail on what you contem- plate doing during the four phases into which you indicate you are going to divide this study and investigation. For the first phase you mention you are going to allot 3 or 4 months for staff selection and completion of basic organization and planning. Can you spell out more fully what is going to be involved there? Secretary BOYD. Yes, sir. First of all, under the Civil Service Com- mission rules while it is possible with no more effort than it takes to move mountains to go through the process in less than 90 days, you can only go to that well about once or twice in a Government career I have found. We will have to identify and talk to people. We will have to talk to the `heads of agencies, the professionals, and so forth, in order to make sure that we have an adequate and qualified staff. During this period we would also outline the future course of the study. Mr. Mackey might like to elaborate a little more on this first phase. Mr. MACKEY. The recruiting problem of identifying enough people who have the qualifications we would like and arranging for their availability will take time. People in the academic world who are knowledgeable in this area are not available immediately. People who would come from State commissions or perhaps com- pany backgrounds have to make some arrangements. So you simply can't get organized. Mr. GUTHRIE. There is a staffing problem primarily and not organi- zational planning? Mr. MACKEY. We are already doing as much as we think we can before the resolution passes. We have made contacts with all the other Government agencies. We have made contacts with a number of people in the industry. But there is a limit to what you can do before the bill is actually passed. Mr. GUTHRIE. You assign 1 year to basic collection of material, court records, insurance company statistics, State insurance commis- sion data, and so on. How do you propose to go about this? Are you just going to send investigators out to accumulate this material? What do you propose to do in this area? Mr. MACKEY. I think the first thing is to remember that we really can't answer the questions nearly as precisely as you would like or as we would like. We do not know the exact nature of the data which does exist in the States or in the companies. It would only be after we get a qualified staff together who can make some determination regarding what data PAGENO="0031" 27 is available and its form that we can really get the investigation underway. Secretary BOYD. Let me add one thing, too, if I may, Mr. Guthrie. We are `confident from their statements that the State commissioners, the industry, and other interested parties, are going to cooperate fully. It is entirely possible, however, that as you get into the heart of the issues there may be some variations on what is meant by cooperation. I do not in any way mean to imply less than full cooperation but we may feel that we need things which they feel are not within the purview of what they expressed as cooperation. We really cannot find out until we get to the study itself. Mr. G1JTHRIE. Just taking one facet of the information you are going to seek, court records. How would you relate court records to some of the conceivable recommendations you might make at the end of this particular study and investigation? Mr. MACKEY. Certainly one of the problems that has been identified is the delay in the courts. We have only limited information as to what types of cases cause the delay and what parts of the process are really involved. I think if you are going to examine the compensation system you have to look with much more detail into what goes on from the time of the accident until the actual settlement. A settlement of a case may take 2 years; and, in some cases, 4 or 5 years. The problem apparently differs from city to city, and State to State, as to `the nature of the delay and what causes it. Mr. GTJTHRTE. The third phase, 7 to 9 months assigned for the evalua- tion of data and collection of needed additional information. Are you anticipating computerizing the information you acquire? Mr. MACKEY. I would certainly think that a great deal of it would have to be put on computers. Mr. GUThTRIE. It is just a reaction, I confess, but it seems to me a long period of time, 7 to 9 months, to evaluate this data. Mr. MACKEY. We have not found any real shortcuts to thorough analysis, unfortunately. Mr. GUTURIE. Are there other things that you contemplate doing that would explain this period of time? Mr. MACKEY. We would certainly expect some overlap as the data begins to come in. As phase two is underway you can begin some of the analysis, so that you do not finish one period and then pick up another. Again, there is a limit to how much you can compress. Secretary Bon. As I mentioned in my testimony, Mr. Guthrie, a lot of these are separate items but they are clearly interrelated. There may well be a number of these items, on which, as we move along, we can issue interim reports. We fully expect to do that to the extent that we can. On the 7-month period for evaluation, however, one of the things we anticipate is that as we start putting this mass of data together we will find that there are some gaps in our information. We will then have to find some way to plug these gaps, in order to have the kind of comprehensive fact analysis we are discussing. Mr. GUTHRIE. Then the last phase is 3 to 5 months assigned to the formulation of recommendations and preparation of the final report. PAGENO="0032" 28 I would assume that your recommendations would be coming up in interim reports that are provided for in the joint resolution. Secrøtary Boyn. In some cases. But when we get to the final report we will have to coordinate the views of a number of the advisory committees and those of the intergency committee I tell you sincerely it will take a lot of time to coordinate the draft with these groups, to review their conclusions and to do the redr~fting and editing ot a final draft. Mr. GUTHRIE. Am I taking too much time, Mr. Chairman? Mr. Moss. No; if you have more questions, go right ahead. Mr. GUTHRIE. I wonder, Mr. Secretary, if you are in a position to state to the subcommittee some of the reasonable alternatives as far as recommendations are concerned that might result from this study and investigation. Secretary BorD. I have no idea, Mr. Guthrie. Mr. Moss. Are there any further questions? If not, Mr. Secretary, I want to express the appreciation of the com- mittee for your appearance this morning and yours, also, Mr. Mackey. I assure you your views will be given very careful consideration. I would appreciate receiving at the earliest possible moment the data figures as a substitute for the open end and the additional information requested of you. (See p. 19.) Secretary Bom. Thank you, Mr. Chairman. I must confess that I had not added up my totals. The figure that I gave you tota~Es $2,175,- 000. Inflation has struck again. Mr. Moss. I thought you were a little above the $2 million. I wonder if you will submit also for the, record and for the informa- tion of the committee a biography of Mr. Mackey. Secretary Bo~u. Yes, sir; we will be very happy to. Mr. Moss. It will be included at this point in the record. (The biography requested follows:) BIOGRAPHY OF M. CECIL MACKEY, ASSISTANT SECRETARY FOE PoLICY DEVELOPMENT, DEPARTMENT OF TRANSPORTATION M. Cecil Mackey is an Assistant Secretary in the Department of Transporta- tation. He is charged with the responsibility of developing overall policies, plans and programs to assure balanced development in the Nation's transportation sys- tem. This includes the development of research projects, policy studies, and pro- gram planning. Mr. Mackey is a native of Montgomery, Alabama. He attended the University of Alabama, where he earned the A.B,, M.A., and LL.B. degrees, and the Uniter- sity of Illinois, where he received a Ph. D. in economics. He.~is a membet of the Alabama bar. He has been an Assistant Professor at the trniversity of Illinois an Associate Professor of Economics at the U.S. Air Force Academy, and an A~sistant Pro- fessor of Law at the U~versity of Alabama lie also spent a rear at the Harvard Law School as a Ford Foundation teaching f~l1ow. Prior to his present appointment, he was with the Office of the Under Secretary fOr Ttansport.ation in the Department of Commerce. as Director of the Office of Transportation' Policy. ` ,. Mr Mackey was sworn In as Assistant Secretary of Transportation on March 8, 1907. Mr. Moss, Mr. Secretary, we ,~gainappreçiat~ your ~ppe.arance, and you gentlemen ~re excused Secretary Boru Thank yo1~, Mr Chairman and committee members PAGENO="0033" 2 Mr. Moss. Our next witness is our colleague, the Honorable John Murphy, from the 16th District of New York. Mr. Murphy. STATEMENT OP HON. JOHN, M. MURPHY, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP NEW YORK Mr. MURPHY. Thank you, Mr. Chairman, for the opportunity to testify in support of House Joint Resolution 958, to authorize the Sec- retary of Transportation to conduct a comprehensive study and inves- tigation of the existing compensation system for motor vehicle acci- dent, losses. The automobile has had more influence on this Nation than any other machine. Its use has reduced the size of the Nation to where traveling hundreds of miles a day is a common experience. The auto- mobile has given us freedom and. mobility unequalled in any other nation. But the price of this convenience and freedom has been high. More than a million and a half people have been killed in automobile acci- dents in the United States since the first automobile was invented; 50,000 people will die on our highways this year alone. Of the more than 100 million cars roaming our highways this year one in four will be damaged in an accid~nt. Our first concern should be to present these accidents, and the Na- tional Traffic and Motor Vehicle Safety Act of 1966 is a significant step in the right direction. Under this act, the Secretary of Transportation is authorized to establish safety standards for all motor vehicles. A second law, the Highway Safety Act, will assist State govern- ments in upgrading highway design standards and driver licensing and training requirements. Even the perfect safety legislation will not prevent all accidents, however, and thus we will always have the need for a system of auto- mobile insurance. Today, there are 900 of these automobile insurance companies in the United States competing for more than $~~/2 billion in premiums paid by drivers each year. Recently, public attention has been focused on the operations of this industry. Increased accident rates, soaring repair costs, and in- tensive competition are beginning to strain the economic strength of the industry. Consumers are complaining about rapidly rising insurance rates, what to many seem to be arbitrary cancellations and failures to renew, claims settlement policies which are often ineffective and unfair, and a growing number of failures among high-risk companies. Committees in both the House and Senate have conducted studies of these problems which have uncovered a number of abuses in the industry. Just last year the staff of the House Judiciary Committee made the statement that- By any objective standard performance of the auto Insurance business in the United States Is unsatisfactory. The system is slow, incomplete and expensive. 92-iOO-68---3 PAGENO="0034" 30 The companies and organizations involvj~ig furnishing this service to the public in many respects do a poor job. One major problem is the discriminatory underwriting practices which appear to exist to a significant degree. Committee files are full of complaints covering a wide range of abuses, including arbitrary cancellation, failures to renew, geographical, racial and economic blackouts in coverage, discriminatory premium rates, and unfair claims settlement practices. Mr. Chairman, in the National Observer a writer named Mark B. Arnold had an article published called "Everybody Is Unhappy: Why Changes Are Being Proposed for the Auto-Insurance Indus- try." In that article he details many of the abuses I just mentioned and some specific cases. I would ask for the edification of this subcom- mittee that this article be submitted for printing in the record. Mr. Moss. If there is no objection, and hearing none, the item will be included at this point in the hearing record. (The article referred to follows:) [From the National Observer, Mar. 11, 1968] EVERYBODY Is UNHAPPY: WHY CHANGES ARE BEING PROPOSED FOIl THE ATJTO-INSIJRANOE INDUSTRY (By Mark R. Arnold) WASHINGTON, D.C.-Everybody is unhappy with auto insurance. Those who sell it, about 900 insurance companies, complain they can't make a profit on it. Those who buy it, the motoring public, bemoan the increasing cost of the premiums. And those who lay claim to its benefits, the auto-accident vic- tims, say it takes too long to collect. What's more, the system gets less efficient, more expensive year by year. This year 100,000,000 cars will roam the nation's highways. One out of four will be damaged in accidents. The result: more claims, longer delays, higher settlements, increased premiums. How will it all end? Probably in some radical changes in the concept of auto insurance-but don't expect them until the 1970s. SENATE HEARINGS OPEN This week the Senate Commerce Committee, besieged with complaints from irate motorists, puts auto-insurers' practices on the line in three days of hearings. Chairman Warren G. Magnuson of Washington, who is fashioning a role for himself as a champion of consumers, argues that discriminatory and sharp underwriting practices exist "to a significant degree." The hearings may ignite some sparks, but the fires will smolder for at least another two years. Only one measure is on the legislative calendar, and it should pass Congress almost unanimously, It authorizes, at President Johnson's request, a two-year study by the Department of Transportation into "all aspects" of the auto-insurance industry. Its expected cost: $2,00O,000~ Most lawmakers favor de- laying any action until the report is in. What's wrong with auto insurance? A day spent flipping through the Magnuson panel's voluminous files turns up complaints like these: An Auburn, Wash., youth, 19, with a perfect driving record learns his coverage has been canceled when he enlists in the Air Force. He can give up driving or take a policy with a high-risk company, at twice the price. A Lantana, Fla., man, injured permanently~nine years ago when his car was struck in two separate accidents, can't collect on either claim because both com- panies maintain the disability was incurred in the other accident. A Palos Vercies Estates, Calif., family had its insurance rates raised $200 after a speeding, drunken driver operating at night without lights crossed a divided highway and struck their car head on. PAGENO="0035" The insurer of a Sibley, Iowa, farm couple in their 70s, refuses to renew their policy. The husband had one claim last year, the couple's first in 35 yearn with the company. CONTROVERSIAL, BUT LEGAL Industry spokesmen insist these cases are not typical. still, such examples abound, and many of the most controversial practices are legal under the laws of many states. A survey of the $lO-million-a-year auto-insurance industry last year by staff members of the House Judiciary CQmmittee concluded: "By any objective standard, performance of the auto-insurance business in the ljriited States is unsatisfactory. The system is slow, incomplete, and expensive. The companies and organizations involved in furnishing this service to the public lu many respects do a poor job." The rising chorus of complaints, plus the failure of 70 "high-risk" Companies since 1960 (leaving 300,000 people, many of theni badly injured, with $100,000,000 in unpaid claims), has strengthened calls for Federal regulation of an industry that is now subject only to state control. But the larger question this week's hear- ings will raise is whether an insurance system based on the concept that benefits should be awarded only upon a finding of negligence is adequate to meet the needs of a nation on wheels. The distinguishing feature of this nation's auto-insurance system is that its basic coverage does not protect the insured against his own loss. He can elect to have loss coverage (fire, theft, collision, medical payments) added to his p~il~y but the basic coverage protects him not from loss but only from liability. His polièy, simply stated, is a commitment from his company to cover the losses of the other party to an accident if the insured caused them by reason of negligence. The operative word is negligence: No negligence, no payment. A motorist with basic coverage is not protected against injuries sustained in an accident in which no one was at fault-if for example two cars skid on icy pavement and collide- or if he is in an accident in which both drivers are equally at fault. Similarly, if a driver has a heart attack and loses control of his vehicle, causing injuries to someone in another vehicle or to a pedestrian, the injured party cannot collect unless it can be proven that the first driver had reason to anticipate a heart at- tack. PROBLEMS OF THE SYSTEM The implications of this system are worth considering. First, because benefits are paid only in the event of proven negligence, many accident victims are not compensated at all. Furthermore, because the relationship between victim and his source of redress-the other party's insurer-is an adversary one, settlements sometimes depend as much on one's ability to pay the high costs of litigation as on the justness of the claim. In practice, studies show, small losses tend to be overcompensated, and large losses often go unsatisfied. In addition, so clogged are courts by the mounting volume of personal-injury accident suits that the average case is on the calendar 31 months (six years in Chicago) before it is heard. The result is waste and inefficiency. So great are outlays for legal fees, in- vestigation, court costs, and administration, for example, that it cost companies an average of $2.20 in 1967 to pay an accident claimant $1. By comparison, it cost Blue Cross $1.07 to process $1 in benefits. Reinforcing these shortcomings are others attributable not to the system lrnt to practices within the industry. One prime target of criticism is selective under- writing. There was a time, at least in textbook theory, when Companies would bind anyone licensed to drive. Rates would be set, in accordance with the classical definition of insurance as a sharing of risks, so that the contributions from each insured would raise enough money in the pool to protect any Insured from hardship. PRESSURES OF COMPETITION Competitive pressures in the postwar years have changed all that. In- creasingly, companies find that to remain competitive they have to develop tech- niques for evaluating the potential hazard each client represents. And so they set up "pools within pools," with rates adjusted accordingly. Today the compet~- PAGENO="0036" tion for "preferred-risk custoniers"-tbose who don't drive much and never luive aceldehts--ls ~o keen that whole occupations are treated with suspicion. One West Coast company, the Automobile Club of Southern California, told a congressional committee it advises agents not to write policies on athletes, entert~dners, auto salesmen, persons wo have moved three or more times In two years, students, or r&dio-television personalities. According to congres- sional testimony; another company, Continental Insurance, wants to avoid sports Cars ("They `are nct purchased by the sedate, cautious, and defensive type per- sons"), while other companies charge higher rates or refuse to underwrite divorced women (`they're considered unstable), clergymen (preoccupied), long- shoremen, barbers, bartenders, unmarried servicemen, or people with nicknames like Scotty or Shorty. Insurance companies, of course, have been discriminating against certain categorien of motorists for years, with few outcries. Teen-agers, for example, who-the companies can show statistically-tend to have higher accident rates. But questionnaires sent by the House Judiciary Committee in the course of its 1967 study, elicited admissions from several companies that they cannot statis- tically support some of their occupational exclusions. PROTESTS OVER NONRENEWAL Similar controversy surrounds the question of cancellation or nonrenewal of a policy by an insurer. The files of state insurance commissioners bulge with letters from irate motorists whose companies no longer want their business. The most comthon reason that companies drop motorists (aside from such reasons as nonpayment Of premiums) is an excessive claims record. Often, how- ever, companies refuse to give any explanation for failing to renew a policy. Moreover, many motorists complain they have been dropped as a result of accidents deemed by police to be `the fault of the other party. One insurer, pressed for an explanation by a motorist who was dropped after an accident for which he was not liable, wrote: "It has been established beyond the shadow of a doubt that the individual who is involved in auto accidents, regardless of whether he appears to cause them or not, is much more likely to have accidents in the future than Is the person who is accident-free . . . [Studies have shown] that involvement in an accident, regardless of who was at fault, was the important consideration." What makes the plight of a policy-holder dropped for reasons beyond his con- trol even more troublesome is the fact that other companies often adopt a hands-off policy toward motorists whose insurance has been Canceled or not renewed, regardless of the reason for the action. States the Hou~e Judiciary Committee repoft: "Some com~utie~' have rigid standards against accepting, for a period of three years . . . a policy-holder who has been canceled by another company. If insurance is obtainable at all, it frequently is obtainable only at an increase in rates and with linlitations in coverage." EXAGGERATION CHARGED Industry spokesmen argue that sharp and discriminatory underwriting prac- tices are often exaggerated. They cite figures indicating that cancellations and nonrenewals affect only 1 per cent of the policies, written. Senator Magnuson, on the other hand, points out that with 90,000,000 insured motorists on the road, a 1 per cent nenrenewal rate Is significant, He is distressed further that the -industry has never offered figures showing the percentage of cancellations and nonrenewals among motorists who have had claims filed against their policies. Many Americans, while deploring discriminatory underwriting practices, neverthelegs defend them with the argument that business, after all, has a right to choose its customers. Critics of the auto-insurance industry, on the other hand, say the right cannot be absOlute in situations in which the customer has no choice but to buy while the seller can choose not to sell. And auto insurance or its equivalent is compulsory in all states. In theory the imbalance between buyer and seller introduced by compulsion is righted by the existence of state insurance commissions. Critics, however, argue that most commissions have been less than zealous in protecting buyers' inter- ests against arbitrary industry practices. The House Judiciary Committee report found evidence of "co-operative arrangements" between state regulators and in- PAGENO="0037" 3~3 surance companies that, it said, probably "can not be attributed solely to sym- biosis." Whether the answer to the industry's ills lies in Federal regulation is a matter the Department of Transportation will spend the next two years in trying to de- termine. Even at this early date, however, it is apparent tl~at the system Is in for some changes. BASIC PROTECTION PLAN The most talked-about proposal for change i~ a~ plan put forward by two law-school professors that would transform the auto-insurance system from one that protects against liability to one that protects against loss. The Basic Pro- tection Plan of Professors Robert B. Eeeton of Harvard and Jeffrey O'Connell of the University of Illinois is a system of direct compensation in whi~h auto- insurance claims would be paid out the way health and accident claims are paid out-by ai~ insured's own company without regard to fault. The victim of an accident would forward his medical and other bills to his company and be recompensed. The plan has two immediate advantages. It creates a mutual self-interest-_pEompt, equitable settlement-~between the insured and his source of redress the company that insures him and it avoids the time consuming and often fruitless search for negligence. As insurance critic Daniel P. Moynihan has pointed out: "Much of the time it is impossible to determine who, if anyone, was to blame for the accident, but It Is always possible to find out who gets hurt." Automobile accidents are caused by human drivers acting heedlessly They yemain private wrongs by private citizens. No compelling reason exists to abolish private responsibility . . . ." And so the gre&t auto-Insurance debate continues. And premiums sonr. In Bos- ton, the policy that sold for $264 seven years ago now costs $528. In Manhattan, $700 a year premiums are common Nationwide private passenger liability insur *ance rates have risen almost 30 percent since 1960, reflectIng the rise `in hospital expenses, repair bills, jury awards-and a traffic-injury toll climbing 60 percent faster than motor-vehicle registrations. Insurance men find it harder and harder to push rate increases past state in- surance commissioners not noted for their hard-nosed attitudes toward the indus- try in the past. "We're taking a hell of a beating, financially and psychologically," one insurance representative confided in Washington the other day. "Something's going to have to give, or our product is. going to become so expensive that no one will be able to pay the price." Mr. Mrnipny. It is only fair to put the problems in perspectfve, how- ever, and industry sources point out that only 1 percent of total policies are canceled or not renewed. But as Senator Magnuson pointed out in a recent SenatB speech, 1 percent of 90 million is not insignificant. In six major cities across the Nation a recent study found that rates have been rising at 5 to 6 percent a year, or two to three times the cost of living. `This hits hardest at low- and middle-income families who are least able to afford the high rates. `Today, approximately 30 million of 102 million licensed drivers are classified as high-risk drivers. Insurance companies can sometimes cite statistics to show that some types of drivers are more costly to insure, but the study of the House Judiciary Committee showed that often statistics do not support high-risk classifications. A second major problem revolves around the obvious flaws in our national system for compensating motor vehicle accident victims. For example, in 1967, it cost most companies an average of $2.20 to pay an accident claimant $1. By comparison, it costs Blue Cross $1.07 to proc- ess $1 in benefits. The disparity is alarming. In addition, the legal machinery to handle personal liability cases is not sufficient to cope with the increasing number of these cases. An PAGENO="0038" `34 average case is on the calendar for 31 months-6 years in Chicago-h before it is heard. There is an additional problem today resulting from the failure of many high-risk companies. Since 1960, 70 of these high-risk companies have failed, leaving 300,000 people, many of them badly injured, with $100 million in unpaid claims. All of these flaws and abuses in our present system of automobile insurance are now focused at the national level. Under the McCarron- Ferguson Act, States were given the jurisdiction to regulate and supervise the insurance industry. But today there is an obvious need for a national review of the entire system. Pressure has come, not from past congressional studies, but from an increasingly loud and de- manding public. Today this subcommittee is answering that .publ~c outcry. You are being asked to consider House Joint Resolution 958, which would authoriw the Secretary of Transportation to conduct a comprehensive study and investigation of the existing compensation system for motor vehicle losses. The comprehensive study authorized by this joint resolution will provide the information on which the Congress may determine na- tional policy in this vital area of consumer interest. I see no reason why such. a study~ would not be welcomed by responsible elements of the insurance industry as well as théa~itomobile driver, and the public in general, because both suffer from the inadequacies of the present system. I urge this subcommittee to take prompt, affirmative action on this legislation. Mr Moss Thank you very much, Mr Murphy Mr. Keith? Mr. KEITH. No questions, Mr. `Chairman. Mr. Moss. I have no questions at this time but I do want to com- mand you for an excellent statement and express my personal appre- ciation for the clear commitment to support the resolution. Mr. MURPHY. Thank you, Mr. Chairman. Mr. Moss. Our next witness will be Mr. Ken Meiklejohn appearing on behalf of the department of legislation of the AFL-CIO. Mr. Meiklejohn. STATE1VLENT OP KENNETH MEIKLEJ'OHN, LEGISLATIVE BLEPRE- SE,NTATIVE, AMERICAN PEDERATION OP LABOR AND CONGRESS OP INDUSTRIAL ORGANIZATIONS Mr~ MEIKLEJOHN. Mr. Chairman, Mr. `Biemiller who was scheduled to testify, wanted me to express his regret that he could not be here. He is unavoidably `detailed. He asked me to appear in his stead. My name is Kenneth Meiklejohn. I am a legislative representative of the American Federation of Labor and Congress of Industrial Organizations. As Mr. Biemiller would have done if he had' been here, I appear here on behalf of the AFL-CIO. We appreciate this opportunity to testify in support of House Joint Resolution 958, authorizing a comprehensive investigation of PAGENO="0039" 35 the automobile insurance industry by the Department of Transpor- tation. I am sure, Mr. Chairman, I do not need to review in detail for the members of this subcommittee the prima facie case that has already been made in behalf of such a study: the widespread criticism of the prices and underwriting practices of the industry, and the importance of establishing an efficient and equitable system of automobile insur- ance for the motoring public and for all citizens who may ever be involved in an automobile accident. Let me just mention a few of the kinds of abuses that have been developing, in part summarized from the Congressional Quarterly, material we have received from members of Our unions and m~tterial we have obtained from other sources. Let us suppose an elderly man is driving down a suburban street. Suddenly he is hit in the eye by a BB shot from a gun fired by an un- identified child. The man swerves off the road and hits a little girl. Who was to blame? A boy with a BB gun whom the police never found. But under the current method of distributing insurance claims, unless the boy is found and his parents sued, no one gets any insur- ance money from the accident. Or suppose you are a recent divorcee, a Negro, a barber, or even a clergyman. In such circumstances .you might not be holding an in~ur- ance policy in the first place. Some insurance companies have been shying away from thes~people as too great a risk. Or, if you live in Chicago and go to court to obtain compensation for damages, it may be 6 years before a decision is reached in your ease, no matter how meritorious it may be, Courts throughout the Nation have a huge backlog of cases. Or, if you are involved in an accident-even a relatively minor one-you may find that your policy is canceled. Or, perhaps more frequently than anything else, when you open your next premium notice you may find that you will have to pay more. for the same insurance. Insurance rates have risen dramatically in the last decade. Working people are among those hardest hit by soaring car insur- `ance costs and arbitrary cancellations. With factories now so widely dispersed and beyond the reach of obsolete public transit systems, their car is for many workers the lifeline to their jobs. But insurance `companies can, and all too often do, threaten that lifeline through their ability to withhold insurance, or at least to extract crushing fees for it. On such a record, we believe, clearly the performance of the auto- mobile insurance business in the United States is unsatisfactory. The system is slow, inadequate, and expensive. We have the right to expect far better performance from the companies and organizations involved in furnishing this essential service to thepublic. The President of the United States in his consumer message of February 6, called for the major study such as would be authorized by Tilouse Joint Resolution 9~8. He succinctly summarized the principal faults of our present automobile insurance system: rising premiums; ~arbitrary coverage and policy cancellations; collapse of high-risk in- PAGENO="0040" 36 surance companies; unfair compensation to accident victims; and the clogging of the courts with automobile insuraiice lawsuits taking an average of two and a half years just to get to trial. The AFL-CIO Executive Council called for a thorough investiga- tion of the insurance industry and the development of Federal legis- lative remedies in a statement on February 24, 1967. This call was reinforced by a policy resolution of the AFL-CIO colrv%ntion in December 1967. This resolution on consumer protection reads in pftrt as folloWs: Congres~ ~hould undertake a general, investigation of the Insurance industry iii all its aspects, with a view to enacting remedial legislation for abuses and bringing the entire industry under Federal regulation. In the automobile in- surance field, proposals for revising the liability basis for insurance payments shouhi be given definite cotisideration along with other possible remedies. While we feel, Mr. Chairman, that it is time that the entire insur- ance indtlstry was brought under Federal regulation in the public interest, the proposed investigation of automobile insurance practices would be a significant response in the insurance area of greatest im~ mediate concern to the ~ublic. State AFL-CIO bodies have been efigaged in continuing, though rarely successful, efforts to fight the spiraling rate increases sought by the in~uranee industry from State insurance departments. Raters ~e~i~e raised in 24 States in 1q64, 40 `States in 1965, 23 States in 196'6, aild the trend crn*inned in 19~7. By December 1967, according to the Consumer Price Index, auto insurance rates were up 48.1 percent over the average f~r the 1~957-5~ period, in oontI~ast ta a rise of 1~.2 percent for all items priced for the inde~. In some areas auto insurance bills are reported ~to have jumped as much as 200 percent in the last 10 `years. It has been reported that in at least 20 states,' auto iflsurance rate changes are made without public hearings, and in some eases without public kno~iedge i~ntil after t~ie insurance commissioner has acted on the request foF a rate increase. Rising ~remiulns ha~re invited serious questions as to the validity of underwriting losses claimed by insurance companies as a basis for the constant rate increases. In particular, attention has focused on the failure to take adequately into account any part of the investment income of the insurers in ratemaking. An analysis published in Forbes magazine (Oct. 15, 1967) indi- cated that the 16 largest publicly held casualty companies earned over $1.5 billion in investment income, while reporting underwriting losses of some $500 million. The proportion of the automobile premium dollar that goes into claims payments has been shown to be shockingly low, primarily be- cause of high administrative costs, including salesmen's commissions and excessive costs for claims adjustment. It has been estimated that actual compensation to accident victims amounts to little more than 50 cents on the premium dollar, and some estimates run much lower. This contrasts with 97 cents on social se- curity contributions, 93 cents on Blue Cross hospitalization premiums, and 83 cents on group accident and health insurance. Automobile insurance today is a practical necessity for anyone licensed to drive a car. But the problem of obtaining and keeping in- PAGENO="0041" 37 surance coverage, and especially of obtaining it at reasonable cost2 is becoming increasingly difficult for large categories of the 102 milhQn licensed drivers in the United States. It has been reported, for example, that 30 million drivers are classi- fled as substandard risks by the insurance industry, although many of these people have never had an accident. Much publicity has attended the revelation of esoteric risk classifica- tions. Age, race, occupation, marital status, what a jury might think of the person in a court case, residence in a slum area, sports car owners as against those with sedate sedans and other classifications have be- come notorious as devices for refusing to insure or for insuring only at high cost. Complaints of arbitrary cancellations and failures to renew msur- ance coverage, together with the prospects of Federal investigation and regulation, have already resulted in moves by the insurance com- panies to moderate abuses in this particular area. The effort by the large insurers to cream the market for preferred risks has fostered the growth of unsound co panies specializing in high-risk insurance. One of the early results of congressional probing into the auto insur- ance industry was a finding that in a period of G years~ some 80 auto insurance companies had gone bankrupt, leaving more than 300,000 policyholders and accident victims high and dry, with an estimated loss of over $100 million. The first remedial proposallor Federal legislation in the auto insur? ance field was introduced in the form of a bill to establish a Federal guarantee fund to make good on the claims against insolvent insurers. The mounting grievances over the unsatisfactory performance of the automobile insurance system have now reached a full head of steam. Few so-called consumer issues touch the lives of such a large proportion of American families, including the~ 14 million families of workers represented in the trade union movement. The ocoupatious of working people include many of those apparent- ly most suspect to insurance companies__such as unskilled workers, stevedores and warehousemen, aircraft workers, barbers, beauticians, bar and liquor store employees, entertainers and even union repre- sentatives. We recognize that the industry does have problems. Medical costs are up nearly 30 percent since 1958, and the insurance industry pays some amount of 4 mil]ion medical bills a year. Car repair costs have doubled in 10 years. Jury awards increase in size constantly. Insur- ance men complain that nearly 90 percent of drivers' claims are fraud- ulently inflated by dishonest repairmen, policyholders themselves, doc- tors and lawyers. Proposals for fundamental reform are now being put forward ranging from opening up group insurance coverage to revision of the entire system of tort liability along the lines of the Keeton-O'Con- nell plan, including direct Federal operation of a basic automobile insurance program. We cannot pretend to superior wisdom as to the best solution to the ills of the auto insurance industry, but we are frank to say that we have little confidence that these problems can be ultimately resolved by PAGENO="0042" voluntary action on the part of the insurance industry or by action of the 50 separate States. In the investigation of proposals for basic alteration of the auto in- surance system, we would urge that full advantage be taken of the ex- perience under workmen's compensation legislation, a system admir- able in concept but with many drawbacks in actual practice. We would~ hope that any new system of accident compensatIon would represent a distinct improvement over the past. Mi~. Chairman, in behalf of the AFL-CIO, we heartily endorse I-louse Joint Resolution 958, and urge its speedy approval. Mr. MOss. Thank you,Mr. Meiklejohn. Mr. Keith. * Mr. KEITH. Thank you, Mr. Chairman. Mr. Meiklejohn, have you any experience in the insurance business, or are you just speaking as one of Mr. Biemifier's staff? Mr. MEIKLEJOHN. I am speaking as one of Mr. Biemiller's staff and appearing in effect on his behalf. Mr. KEITH. My experience in the general insurance business and in the automobile insurance is essentially as an insured-a premium- paying insured-who shares the concern of this committee and this Congress and this country.. I do think that in the case you point out here, about the boy with the BB gun who is to blame, and perhaps a later witness can speak to this point; but it is my recollection that perhaps, in some States there is a medical payment policy that could be purchased providing for protection of the innocent bystander that was hurt. I believe that I have such coverage on my policy that would have protected me against any liability that I might have incurred there. I think this is the same philosophy that is expressed in the Keeton-O'Connell plan. I think it has been made applicable in cases like this in some States. Mr. MEIKLLTOHN. Yes. 1 was not trying to use this illustration as being a universal rule but this kind of situation does arise. As a matter of fact, this kind of situation happened to a member of my family. My father was hit under similar circumstances while be was riding in a car and the same problem arose. Fortunately, there was no subsequent injury to anyone on that o~cathon. Mr. KEITH. The point I am trying to make is that this really under- girds the argument for such a study. Mr. MEIKLEFOHN. Yes, that is right. Mr. KEITH. Because I believe that there are policies available now, and there should be more information disseminated about them so that the alternatives could be understood by the insurance-buying public. And those of us who think we have a pretty good policy because the premium is low may in reality have an expensive policy. We shall have saved the premium but exposed ourselves to a liability. Mr. MEIKLEJOHN. Yes, I think that is right. As I say, we are not trying to generalize too much from this particu- lar insurance but simply to illustrate the kind of situation that can arise. Mr. KEITH. Thank you, Mr. Chairman. Mr. Moss. Mr. Meiklejohn, I have no questions. I want to thank you for appearing here on behalf of Mr. Biemiller and the AFL-CIO, and you are excused. PAGENO="0043" 39 Mr. MEIKLEJ0HN. Thank you very much, Mr. Chairman. Mr. Moss. Our next witness is David J. Sargent, professor of law, Suffolk University, Boston, Mass., member of the advisory panel on the Keeton-O'Connell plan. Mr. Sargent, we are very pleased to have you here. STATBMENT OP DAVID 1. SARGENT, PROFESSOR OP LAW, SUFFOLK UNIVERSITY, BOSTON, MASS. Mr. SARIENT. Thank you very much, Mr. Chairman. I am very happy to appear before this committee in support of the house joint resolution calling for a broad-scale investigation of auto- mobile insurance. I agree with everything that has been said here this morning con- cerning the necessity for such a study. I agree that there are problems today with regard to arbitrary as- sigñment, the failure to renew, cancellations, fully funded insurance companies and high rates. But as a member of the Keeton-O'Connell Advisory Panel, I am in the, somewhat unusual position of being irrevocably opposed to the Keeton-O'Connell approach to solving these problems. As a matter of fact, I don't think that the Keeton-O'Connell plan even purports to solve any of these problems with the possible excep- tion of rates. It is my opinion that they do not succeed in this endeavor and that rates under the Keeton-O'Connell plan would be much higher than they are today. Now my remarks which you have a copy of are considerably longer than the time you have indicated you would like your witnesses to re- strict themselves to and, therefore, if I can- Mr. Moss. How long would it take to read your statement ~ Mr. S4RGENT. I would like to simply go over it in a summary way and not detain you too long. As all of you know, there is a great deal of compulsion in the United States today to buy automobile liability insurance. In 47 States this compulsion is in the form of so-called financial responsibility laws. In three States, New York, Massachusetts, and North Carolina, this compulsion is complete. Now, Professors Keeton and O'Connell propose something that they call compulsory basic protection. I am afraid that the public may well think that all we are talking about is the substitution of one form of compulsory insurance for another. But the change is much, much greater. From the very beginning of this country if a man was injured in any way other than in a work- man's compensation type case and he sought recover,y from someone else, he had to prove that the person from whom he was to recover was at fault, that he, the claimant, was free from fault, and that the in- juries of the claimant were approximately caused. If he proved these three things he was entitled to recover for all of his medical expenses, all of the loss of his wages, and for all of his payments suffered without any deduction. By the same token, if he could not prove that the person from whom he sought to recover was at fault, he was not entitled to recover a penny. PAGENO="0044" 40 Now Professors Keeton and O'Connell would change all this. They would substitute for our concept of negligence, the philosophy that it does not matter how you drive ~rour car, you are still er~titl~d to recover. Under the Keeton and O'Connell plan the drunken driver, the dope addict, the criminal who is trying to escape from the police and crashes his motor vehicle, the man who intentionally runs through a red light, the teenager who participates in a drag race on a crowded highway, all of these people are entitled to recover. I think it only fair to ask yourselves the question, how are you going to finance this kind of system? The answer is very simple. You are going to take money away from innocent victims and put it in the hands of those who perpetrate the disaster. This violates the principles of fairplay and responsibility. Professor Keeton says there is nothing immoral about compensating wr-ongdoers, and I agree. I am not at all opposed to a system whereby the wrongdoer recovers in addition to the innocent, but I am opposed to the ~ystemt whereby the wrongdoer recovers instead of the innocent and that* is exactly what happens under the Keeton and O'Connell plan. Some have described the Keeton and O'Connell plan as a ~ew and revolutionary idea but it is neither. The idea for compensating victims on a nonfault system was first proposed in 1932 in something called the Columbia plan. I think it interesting to note that in the ensuing 36 years not a su~gle American juristic has seen fit to adopt any of the other compensation plans. One reason for this is that every plan that was proposed until Keeton and O'Connell was vastly more expensive than the present system. Now Professors Keeton and O'Connell have attempted to eliminate the expense objection in a very direct and simple manner. They have taken away all tue-benefits. .N~w it is obvious that you can sell cheaper insurance if you want to reduce the benefith that are payable under the terms of the policy. Under the Keeton and O'Connell plan, all motorists would be re- quired to buy an accident and health policy even though most Ameri- cans already have accident and health coverage. - So for most people this would be a duplication of coverage. You would be entitled to recover something if you were injured in a motor vehicle accident, you would recover~ from your own insurance carrier regardless of fault, -something called net economic loss. But in the determination of net ecOnomic loss you first compute what your lost wages were and you add to this the- cost o~f. medical expenses and then you deduct all amounts which you either receive or which you are eligible to receive from collateral sources. That means you deduct Blue Cross, Blue Shield, union fringe bene- fits, accident health policies .of any other nature, social security, medi- care, medicaid, Government employee benefits, all of these must be deducted. - - - And in excess of the deductions for collateral sources you deduct $100 of the wage loss in excesa of collateral sources. You t~hen deduct 15 percent additionally of the -wage losses and finally you deduct everything for pain and suffering. PAGENO="0045" 41 Now if the objective is to provide cheap insurance you can certainly do it by putting the same deductibles into a liability system and I think that policy would cost extremely little because almost no one would be entitled to be paid. I have a great objection to the deduction for collateral sources. I would suggest to you the analogy of a man who, perhaps, works as a union employee and at some. time during the course of his employment it is agreed that instead of an extra $5 a week in his pay en~velope he will receive some kind of accident and health protection, some kind of sick leave benefits, and suppose that this man who has now worked in this job long enough so that he has accumulated $2,000 worth of accident and health coverage and he has also accumulated 5 weeks qf sick leave. Suppose some Sunday morning he is on his way to church and his neighbor is coming home from a night on the town in an intoxi- cate.d condition and before he leaves the curb the union employee is hit in the rear end so that there is no question about fault. If this union employee has damages of less than 5 weeks out of work and his medical expenses do not exceed $2,000, he will not recover a penny from automobile insurance premium dollars. He cannot re- cover against his own insurance company because he has collateral sources and he can't recover from the wrongdoer because each person automatically has an exemption from liability to the extent of the first $10,000 worth of special damages and the first $5,000 worth of pain and suffering. But on the other hand, consider the case of the drunk who hit him. Suppose this man is irresponsible not only in the way he drives his car but he is also irresponsible in that he flever bothered to put $5 aside for a rainy day~ The insurance company will say to him in effect: "Step right up, Mr. Irresponsible, you are just the kind of man we want to take care of. We don't care about all those innocent people you injured. This system is designed for just the likes of you, people who .are both bad drivers and who fall into the approximately 25 percent of the popu- laüon who do not have collateral sources." Another deduction that I think is most unfair is the deduction of the right to recover for the first $100 worth of economic loss in excess of collateral sources. This may seem to be a trivial sum but remember this deduction ap- plies to each and every person who is injured. So if a man is again out for a Sunday ride with his wife and three children and he is hit by an intoxicated man, if you will, and all five are injured, this man who is the head of the household, assuming they are all seriously in-. jured, will have a loss of $500 in a motor vehicle accident that was: not his fault. But again, take th~ case of the drunk. He will recover for all of his loss in excess of that first $100. So I thiii~ it only fair to say that a great deal of the $500 which the innocent do not recover is used in order to pay the claim to the wrongdoer. We are so concerned, supposedly, in the Pease of the automc~bjJe about, the, drunken driver. The argument is made that h,e, probably is a very nice fellow and that he cert~inly has a lovely family and he PAGENO="0046" 42 has mortgage payments and it is too bad for him to get into difficulty for this reason, but I suggest to you that if the drunk should fall down in the tavern, no one is going to bother to take care of the problems that he may have financially. If he staggers out into the street and falls down in a defect in the public highway, his intoxication will prevent him from recovering. We now have a system under Keeton and O'Connell that if he can just hang on until he gets to his automobile then his problems are over because he* does not have to do anything other than hit his head as he enters his car because Keeton and O'Connell agree to pay you for all injuries which arise out of the ownership, maintenance, and use of a motor vehicle. You don't have to have an accident in the ordinary sense of that word. Now I think that this is most unfair and most unusual. We have spent millions of dollars in this country trying to convince the public that alcohol and gasoline don't mix. Here comes a plan which says that the one safe place for the drunk is in his motor vehicle. If you want to reduce the cost of insurance, then get the drunk off the highway. In England, when they recently adopted some rather stringent breathalyzer tests, the accident rate dropped 42 percent in one month. If you reduce the number of accidents by 42 percent, then certainly you will have a drastic reduction in the cost of insurance. The Director of the National Safety Bureau, Dr. Haddon, said on Friday of last week when he testified in Boston, that the intoxicated driver accounts for more than 50 percent of all highway fatalities. He said that this was truly sick driving. He was not talking about social drinkers. He said he was talking about people, and to quote him, "who had consumed a pint or more shortly prior to getting into their motor vehicle." I think it is unusual that where everyone agrees that the drunk is a major cause of our accident problem we are now going to have a system which says the automobile is the place where the drunk is the safest he can possibly be. Another objection that I have to the Keeton-O'Connell plan is that it does not allow a recovery for pain and suffering. Now the alleged argument for this is that pain and suffering is just too intangible, you can't measure it, you can't relate in dollars the value of pain. Now I, at least, understand this argument but Keeton and O'Connell are not very consistent, I think, on this point. They never allow you to recover for pain and suffering against your own insurance com- pany but they will allow you to recover for pain and suffering against the alleged wrongdoer if the pain and suffering exceeds $5,000. So what happens, in effect, is that if a jury returns a verdict of $4,900 for just the pain and suffering, the judge has to turn to the jury, in effect, and say: "You don't know what you are doing, you can't measure pain and suffering in that amount and you, Mr. Claimant, who has heard the jury say that his pain and suffering is worth $4,900, you get absolutely nothing." And yet if a jury comes back and says that the pain and suffering is worth $5,100, you are now in the area where even Professors Keeton PAGENO="0047" 43 Sand O'Connell admit you can measure pain and suffering, this claim- ant does not get $5,100, he gets $100. I don't think you will ever convince the American public that when they have $5,100 worth of pain and suffering and a jury has deter- mined that that is what they in fact endured, that all they are really entitled to get is $100. Perhaps my greatest objection to the Keeton-O'Connell plan is that millions of Americans will be deceived into believing that they have some kind of liability protection. Today, if a person has a minimal liability policy, as Congressman Keith knows, en masse our com- pulsory coverage is only $5,000 and $10,000, but if a man has a minimal policy he knows that he is entitled to a complete defense in the event that suit is brought against him, meritoriously or not. He knows that the insurance company will investigate for him, that they will try the case if it ultimately comes to trial and the insurance company at their expense will bring in medical experts for the purpose of trying to minimize the amount of the damages. But under the Keeton and O'Connell plan, millions of Americans will *buy that which they are compelled to buy and when suit is brought against them the insurance company will say, "You have an accident and health policy with us2 go out and investigate the case yourself. Hire your own lawyers, bring in your own medical experts." You have no one to defend you in the event suit is brought against you. True, you have an exemption from liability to the extent of $10,000 worth of economic loss and $5,000 worth of specials but you do not have anyone who is going to defend you for the purpose of trying to determine whether the amount of damages is in excess of that exemption. Now much has been said today about the problem of court conges- tion. I agree that where it exists it is a terrible problem but you can determine that court congestion is not a problem in those areas that have enough judges. For example, Florida, where is a constitutional guarantee that there will be one superior court judge for every 50,000 population. But whether that is the answer to court congestion, I would simply point out to you that court congestion will be a further problem and a greater problem under the Keeton and O'Connell plan because under Keeton and O'Connell there is the possibility of two separate jury trials. One, a jury trial against your own insurance company on the corn- ~pensation case and; two, a claim against the alleged wrongdoer for damagees in excess of the amount of the exemption. And finally, something has been said today about the fraudulent claim. I think that all lawyers and everybody associated with this problem are very conscious of fraudulent claims and they would all like to avoid them, but under the Keeton and O'Connell plan fraud will be even easier to perpetrate than it is now. As a matter of fact, the former registrar of motor vehic1ers in Massachusetts, now a judge in the probate court, James Lawton, has said the Keeton-O'Connell plan would be a "fraudulent claims bo- nanza." As an example of what I think he has in mind, let me suggest to you a case of a man who is injured bowling or something of this PAGENO="0048" 44 nature, shoveling snow, and he fraudulently wants to get some insur- ance company dollars, automobile insurance company dollars, to help him out during his period of disability. Today, he has to either stage an accident or get another fraudulent friend to say there was an accident and the other person was at fault. Today under the adversary system, you have to convince someone that there was another motor vehicle which was guilty of negligence. Under the Keeton-O'Connell plan there is no necessity for this fab- rication. If a man injures his back bowling, under the Keeton-O'Con- nell plan all he has to do is to say in his own privacy he felt a twinge in his back as he was washing his car, putting a battery in the car, changing the tires, because again, under Keeton and O'Connell, you do not have to prove an accident, you only have to prove there was an injury which arose out of the maintenance, operation or use of a motor vehicle. So I think these are some of the things I find particularly objection- able to the Keeton-O'Connell plan. I am sure that this committee is aware of the fact that many of the national news media have indicated that the objection of the organized bar associated to the Keeton- O'Connell plan is that it is going to result in a loss of income so far as attOrneys are concerned. I would like to J)Oint out to you that, first, I do not actively practice law, I am riot a nrnmber of the American Trial Lawyers Association, which has been most active in the fight against the Keeton-O'Connell plan, and I would admit, and I think they will admit that the Keeton- O'Connell plan is a bad plan for lawyers, but that is not a very good reason to oppose it. I think that the Keeton-O'Connell plan perhaps may be a bad plan for casualty insurttnce companies but that is not a much better reason for opposing it, either. MOst imoprtantly, I truly believe that the Keeton-O'Connell plan would be a disaster for the public of America if it is ever enacted. I, therefore, welcome this study and I urge its enactment. Thank you very much. Mr. Moss. Thank you, Dr. Sargent. * ~(Professor Sargent's prepared statement and curriculum vitae follow:) STATEMENT OF DAVID J. SARGENT, PRoi~irssoR OF LAW, SUFFOLK UNIVERSITY, Bosrox, MASS. There is no doubt that there must be changes in the automobile iflsurance laws and a broad scale study must be made of the entire issue by Congress. There have been many proposals to solve th.i~ problem and one of the most dangerous, exploding on the horizon of America, is an old and discarded auto insurance idea, dressed up in frills atid sent forth to confuse and charm an unsuspecting public. This is the so-called Keetoh-O'Oonnell Plan which, if adopted, will perpeti~at&a disaster on the entire public and destroy our concepts of justice. This disaster walks in the guise of "social reform" and "revolutionary improve- ~ment," It is neither. It is, in fact, reactionary and regressive. At present the rash of public complaints of abuses of our auto insurance system has led to this and other Congressional committees demandipg a full investigation by federal agencies. The Keeton-O'Connell plan does not answer the complaints of arbitrary assigned risks, refusal to renOw, non-explained cancellations, block assignment by race, creed and color, discrimination by age and occupation, involuntary PAGENO="0049" 45 bankruptcies, and discriminatory underwriting practices. ~he Keeton-~O'Oonneil proposal, far from stemming the flow of these complaints, will create such tremendous public dissatisfaction as to cause a flood of complaints resulting in almost certain federal regulation of the insurance industry. The system of justice, under which our nation has existed from its earliest days, i~equires that when a man is injured and seeks recovery for his injuries from another, he must prove the other person guilty of negligence, he (the claimant) free from contributory negligence and the injuries caused by the defendant. If be proves these three essential elements, he is entitled to recover for all medical expenses (without any deductions), his loss of earning capacity (with- out any deductions) and for all his pain and suffering (without any deductions.) If the defendant was not at fault, the claimant is not entitled to recover a penny. This system recognizes the philosophy that a man should not profit from his own wrong. The Keeton-O'Connell plan would abolish the concepts of negligence and contributory negligence. They would substitute the philosophy that it does not matter how you drive your car, you are still entitled to recover. Thn Federal government and private organizations have spent millions and millions of dollars to educate the public that drinking and driving do not mix. But the Keeton-O'Connell plan would eliminate this concept and encourage a disregard for safety-on-the-road principles~ For example, the drunken driver, the criminal who crashes his car while fleeing from the police, the dope addict, the hot-rodder who participates in a drag race on a crowded highway, the man who intentionally runs through a red light or stop sign-all are entitled to recover under the Keeton-O'Connell Plan, even though they may have caused grevious injury to innocent persons as well as to themselves. OLD PLAN REVISED It is only fair to ask: How are we to finance payment to those people who now do not recover under our system justice? The answer is simple: Keeton and O'Connell would take money out of the hands of innocent victims and put it into the pockets of wrongdoers who per- petrated the disaster upon the innocent. To me, this violates the most basic principles of personal responsibility and fair play. Some have described the KeetomO'Connell Plan as "new and revolut3ionary." But, in faet~ it is truly a stripped-down version of the Columbia Plan, first proposed in 1932. If the Columbia Plan is, in fact, the basis for the Keeton- O'Connell Plan~ one may well wonder, if it is truly so attractive, why not a single American jurisdiction in the ensuing 35 years has seen fit to adopt it? The answer is: The Columbia Plan and all other plans proposed since then have been vastly more expensive than our present system of liability insurance. Keeton and O'Connell have attempted to eliminate the "expense" objection by removing all the benefits. The Keeton-O'Connell compulsory accident and health policy requires all claimants to deduct: 1. All amounts actually received, or which they are eligible to receive, from collateral sources (Blue Cross, Blue Shield, union fringe benefits, sick leave, Medicare, Medicaid, wage income protection, etc.). 2. The first $100 of net economic loss (in excess of deduef ions in 1.). 3. 15% of the actual wage loss in excess of amounts deducted prevIously in both 1. and 2. 4. All payment for pain and suffering. It is obvious Y~u can reduce insurance costs by reducing benefits A $1 000 life insurance policy sells for a. smaller premium than a $10,000 policy. One can easily see if the same deductions were taken awa~y from the present liability insurance policy; the cost would be almost nothing becadse there would be virtu4lly no benefits. The cheapest insurance is no insurance: `YOu pay nothing and you get nothing. VIRTUALLY NO DENEFITS The KeetOn-O'Oonnell compulsory insurance plan will be sold for a substantial premium, but will provide most claimants with virtually no benefits. Professor Keeton argued in Masssachusetts the cost of his compulsory accident and health plan would be 15 to 25% less expensive tbiui'the present $5,000I~1O.ooo 92-l0O-68---4 PAGENO="0050" 46 compulsory liability insurance~ lie bases his contention on an actuarial study by Mr. Frank Harwayne of New York City. But, Mr. Harwayne's study is at best an estimate, since there is no reliable experience on which to base a definite conclusion of costs. In fact, there are other actuarial estimates that Indicate the cost of the l~eeton-O'Connell compulsory accident and health policy will be even more expensive than the cost of a $5,000/ $10,000 liability policy. Dr. Calvin Brainard, Chairman of `the Department of Finance and Insurance, University of Rhode Island, has stated; If I were advising the motoring public, I would have to separate the good drivers from the bad. I would tell the good drivers to abhor the Bill because it would cost them more and give them less benefits. But I would tell the bad drivers to embrace the Bill because it is made to order for them. Dr. Brainard did a one-year study on the economic feasibility of the Keeton- O'Connell Plan under a grant from the Walter E. Meyer Foundation of Hartford, Connecticut-the same Foundation which sponsored and underwrote the Keeton- O'Connell study. M. G. McDonald, Chief Actuary for the Commonwealth of Massachusetts, has determined the cost of the Keeton-O'Connell compulsory. policy (accident and health) would be 19% more expensive than the cost of a $5,000/$10,000 liability policy. Robert Bailey, Director of the Actuarial Division, State of Michigan, has indi- cated there are many fallacies in Mr. Harwayne's basis for stating there would be a reduction in cost. But, whether the cost is to be less-as Harwayne estimates-or more, as other experts indicate, we must consider what the public is getting for its premium dollar. Undoubtedly, there is not a subscriber to this publication who would receive a penny from the Keeton-O'Connell insurance carrier for medical expense even if he were hit in the rear at a red light by a drunk. The reason for this is the plan repiires that in the determination of net eco- nomic loss, you must deduct all of the other insurance benefits which you receive or are eligible to receive. For example, let us consider the case of a union member whose union arranges that instead of an additional $5.00 weekly raise, he would receive, in lieu, certain sick leaue benefits and an accident and health policy. This employee, in effect, puts away $5.00 a week for a rainy day. And, at the end of a given number of years, he has accumulated five weeks of sick benefits and a $2,000 accident and health policy. If this employee is injured when his car is struck by a drunk driver and he is out of work for five weeks and has medical bills of less than $2,000, he will re- cover not a cent from his automobile insurance. THE IRnESPON5IBLE DRIVER Let's consider the drunk who hits the union member and who, himself, is in- jured. Let's assume that this man is irresponsible, not only in the way he drives, but in failure to buy income wage protection and an accident and health policy. He never bothered to save the $5.00 a week for a rainy day. To that man the insurance company will say: "Step right up, Mr. Irresponsible, you are just the man we wiant 13o take care of." Professor Keeton maintains there is nothing wrong with this. A man is not entitled to make a profit from an injury. BUt the innocent driver paid two premiums. The Keeton-O'Connel philosophy penalizes a man for being prudent. Virtually no one will benefit under Keçton-t~'Co~inell, except those who are ir- responsible in the way they drive their cars and lrresponsi~le. in falling to protect themselves and their fatinilies against the pitfalls of life., Let's consider the analogy of life insurance. One man chooses tO buy a $10,000 policy and when he dies his estate is paid ~iQ,00O. lnt his. neighbor buys two ~10,000 policies and be dies. We don't say to his estate, "You are only entitled to $10,000." - The holder of these two policies bought and paid for this additional coverage. Social Security is considered one of the greatest social reforms in American life. The Keeton-O'Connell Plan also purports to be a social reform. PAGENO="0051" 47 But let's contrast them: Under Soeial Security, two neighbors earn the same salaries. But `one lives a frugal life and manages to save $20,000. His neighbor spends what he earns and has no savings. When both reach 65, the Social Security Administration doesn't say to the frugal man: "You must use up your $20,000 before we pay you your benefits." Let's assume again that a man is injured by a drunk in January and is com- pelled to exhaust his sick leave benefits and accident and health benefits. If this same man becomes disabled in June, due to a non-automobile* related disability and incurs medical expenses and suffers lost time from work, he has no protection to fall back on since he was compelled to exhaust his benefits for an automobile injury which was not his fault. Again-to show the injustice `of the Kedton-O'Oonnell ~ompulsory plan-let's consider the obligatory deduction of the first $100 of net economic loss usually, for example, lost wages and medical expenses in excess of siek leave benefits and accident and health insurance. This deduction may appear to be small, but It applies to each and every person injured in a car accident. That means, if the innocent driver is riding with his wife and three children, and all five are hurt and each incurs medical costs over $100, the total loss to the family head (policy- holder) is $500 for an accident not his fault. But the drunk who bit him can recover for all of his medical expenses and wage loss in excess of $100. Obviously, the $~00 which was not paid to the innocent victims is in large measure paid to the drunk `who `hit them. The compulsory Keeton-O'Conflell policy pays absolutely nothing for pain and suffering-i.e., loss of a leg, an eye, or disfigurement by facial scarrings. Keeton and O'Connell explain this exclusion by contending that pain and suffering is so intangible it can't be measured, They say, "It is impossible to determine how much a headache Is worth." Or, if n `man is stretched out on a Striker frame for three weeks, you can't determine the worth of his pain and suffering in dollars. So they won't pay him anything. If this argument has any validity, if pain and suffering really is not measur- able, then it is never measurable. But if it Is ever measurable, then it is always measurable. But Keeton and O'Connell are inconsistent on this point for they do not allow any payment for pain and suffering under their compulsory policy, but they do allow recovery for pain and suffering against tIi~ wrongdoer in excess of $5,000. What is so magical about the figure of $5,000? Who has the right to set that or any other figure? Why is it, if a jury finds in a suit against the wrongdoer that pain and suffering is valued at $4,900, the court has to, in effect, say to the jury: "You don't know what you are talking about, pain and suffering is `too intangible' to determine." But, if the jury should award $100 for pain and suffering, then the judge must say: "You now know what you are doing and you can determine with certainty the value of rain `and suffering." And then the judge has to turn to the innocent victim and tell him that, al- though the jury determined his pain and suffering was worth $5,100-and nithotigh this means the jury is in the magical area where admittedly it can de- termine with certainty the worth of pain and suffering-the recovery is not going to be $5,100 `but only $100. But what is perhaps the greatest misconception is that the public is unaware that the compulsory Keeton-O'COnnell policy is NOT a liability insurance policy, but is essentially an accident and health plan, which, for the vast majority of most Atnericans, is an unnecessary duplication of the insurance coverage they have already purchased. Keeton and O'Coirnell does give an exemption from liability to the first $5,000 worth of pain and suffering and the first $10,000 of other damages. BUT, it does not EXEMPT a person from being sued and, if a compulsory Keeton-O'C'onnell policyholder is sued, he must retain his OWN lawyers, his own investigators, and his own medical e~perts-a1l at his own expense even if it develops that the claimant's damages are not in excess of the amount of the exemption. Imagine public reaction when so many people buy pretty much the minimum coverage (and experience has shown they're going to buy this kind of policy), PAGENO="0052" 48 and they come to an attorney with a writ and are told this is going to cost $1 000 to defend, even though he may win the suit. Professor Keeton states that he doesn't recommend that anyone take only basic protection. He says one should take additional liability coverages as any well insured person would today. A well insured person doesn't get by on $5,000 or $10,000 worth of liability coverage. Professor Keeton alleges that the cost of this additional liability Would be the same as the cost of what one now pays for a corresponding amount of excess liability coverage. But, there is no basis for Professor Keeton's contention. For example, in Massachusetts the minimum compulsory liability has a $5,000/ ~l0,000 limit. To double this amount-$10,000/$20,000-costs only 15% more than the $5,000/$10,000 policy price. The reason for this is simple: a large portion of the premium dollar in the original $5,000/$10,000 liability package is for the cost of investigation and defense. Thus, to be insured for twice as much as be- fore, the cost of administration and the probable cost of defending the suit has already been figured. It doesn't cost the insurance company more money to d& fend a case in which the damages are $10,000 than it does to defend the case in which the damages are $~,000. Since the costs of administration and defense have already been figured, the additional 15% simply covers their exposure to additional liability, but practi- cally no additional cost of administration. But although the Keeton-O'Connell policy provides for an es,eniption from liability for the first $5)000 of pain and suffering, it is not a liability policy. Therefore, if one wishes to secure liability protection again~t suit from the $5,000 exemption on upwards, one can not buy, fo~ example, the additional $5,000 worth of liability at the small cost of 15%. One must buy a brand new liability policy into which the entire cost of ad- ministration and defense must be figured. This will be much more expensive. Thus, for the per~on who is well inspred b~cause he has purchased 4 liability policy, as well as the compulsory Keeton-O'Connell accident and health policy, the composite cost of this package is greater than the cost o~ an equal amount of straight liability insurance. Yet, with this added cost, he will, if he is jnjured by a wrongdoer, lose: 1. The benefit of collateral sources. 2. The first $100 of net economic loss beyond his collateral sources. 3. The first 15% of his wage loss in excess ~f 1 and 2 above. 4. The first $5,000 worth of pain and suffering. Thus, as Dr. Brainard has aptly said: "The good driver pays more and get less benefits." Professor Keeton, in talking of fraud, has indicated that there is more fraud than there should be. I am certain that every lawyer and every citizen regrets it. We do not want it; we'd like to do something about it. Let's examine the Keeton-O'Oonnell Plan and see if it t~~1y *lievigtes the problem of fraud. Today, if a man injures his back bowling or shoveling snow, and "wants" to find somebody to pay for the injury, our adversary system compels him to charge that someone else hit him in a motor vehicle and that the other person was `at fault. Professor Keeton may talk about the phantom auto accident cases all he wants but the fraudulently inclined man still has to indicate in law that there was someone else involved. The fraud may have to go to a friend and stage a dummy accident, or at least say they had one. But, under the Basic Protection Plan, onp is not `compelled to do that. The Basic Protection Plan covers one for economic b~ss arising out of the ownership mainte- nance, or use of a motor vehicle. It Covers the drunk when he stumbles getting into the car or when he stumbles out. If he hurts himself at this time he's covered. If one hurts his back polishing his car, he is covered. If one injures himself putting in a new battery he is covered. If one is hurt opening the car door he is covered. ` Now where is the greater opportunity for' fraud-in an adversary system where one must convince a court that somebody else struck him gad, the other person was at fault? Or in a system where the~per~on need only aliege'that_4n his own privacy-he got a twinge in his back polisbingbls ear? PAGENO="0053" 49 In Massachusetts, the former Registrar of Motor Vehicles and now Probate ~u~ge ~ rlyipouth Cotinty, James R. Lawton, has characterized the Keeton- O'Connell Pja~ as "A Fra~iclt~lent Claims Bonanza." Profe~or Kecton sayC that court conge~tlop i~ ~ big problem. In many metro- politan areas, there is no question hut that It Is, In Massachusetts, however7 the Chief Justice cif the Superior Court, 1. Joseph Tauro, took a public st~tnd on this pertion of the Keeton-O'Oonndfl Plan to state that "there's nothing which indicates that the Keèton-O'Connell Plan will in any way reduce litigation." Ih fact, court congestion will be compounded. In the Kaeton-O'Connell pro- po~tI, there is the possibility of having two caae~ whenever there ia any kind of ~erl~u~ injury. One may have One ~ttit against his own Insurance company, and then a second suit against the' alleged wren~doer, 4nd, one may have a right to a juty trial iii both cases. Professor Keeton points to the small claIm. He sa~s (and I hope I'm hot para- phrasing him incorrectly) that these small claims are almost a blackmail on the insurance compani-p~ople say that they were hurl~ when, in fact, they really weren't-or they say that the other person wa~ responsible when, in fact, he really wasn't. I'~eeton' adds that, on this basis, the insurance company will pay $300 to $400 just to get out'from under because they know it would cost them $1,000 to defend the suit. Yet that problem will still exist, except that instead of art insurance company it will now be the individual who will bear the expense of the lawsuit. For example, an individual is involved in a motor vehicle accident. He has just th~ basic protection policy, a compulsory joliey, and someone brings suit against him. He knows he wasn't at fault. He, knows if the case is tried to cortclusior~, l~e's going to win. But, he also knows that it's going to cost him $1,000. As a matter of fact, If i~ costs an Insurance company $1,000 to defend ~ case, worklhg on a mhss hasi~ hrith full-time lawyers and ftill-tlme Investigators, and doetor~ who, probably work on a cheaper rate hulk than they d~ on Individual eases, what is it going to cost an individual? Isn't there-if one wants to think that .there are some people who will black- mail-the same opportunity to blackmail Uridei~ the Keeton-O'Oonnell Plan as under the present system, except that the blackmail is against the individual, since the money (where there is nothing but the, basic' protection plan) must ~come Qu~t ~of the pocket of the individual rather than out of the insurance ~o1~pany? Phe only person who stands to' benefit under this Cystem is the bad driver who is also an irresponsible citizen in that he has failed to meet his obligations to himself and his family by `not having purchased~ acCident and' health instirance and wage income protection. As the former Lt. Governor an~l Attorney General of the Commonwealth of Massachusetts l~ranci~ B. Kelly, has said: "This Bill should not be called Basic `Prot~ctioti, It' should be named the `Drinkers and Reckless Drivers Protection Bill.'" CURRICTJI~UM VITAs o~' PROFESSOR DAVID J. SARG~wT Professor David J. Sargent `was appointed by Prof. Robert Keeton of Harvard T1Tniversit~t School of Law for three years `as an unpaid member of the important Advisory Panel for the Keetot1~O'Connell Basic Insurance Plan. Known both. as a scholar and an authority on~ automobile insurance plans, Professor ~Sargent has lectured `before bar associations and other inter~~ted groups throughout the nation and has authored basic papers used in research on the subject. He has appeared before numerous state legislative bodies in- cluding the New York Joint Legislative Committee on Insurance as well as legislative committees in Massachusetts, Connecticut, and Rhode Island. A teacher at Suffolk University Law School-one of the five largest accredited law schools in the nation-since 1955, Professor Sargent was named to a full professorship in 1962. He is responsible for courses ih tort law, trusts, wills and agency. ` During the administration of former Attorney General for the Commonwealth of Massachusetts Edward W. McCormack, Professor Sargent served on the PAGENO="0054" 50 major Advisory Committee on Public Charities charged with the responsibility of revamping the statutes governing public charities dating back to Colonial Days. The Committtee's work has become a referring standard for State regu- lation of public charities in the majority of the 50 states and has been used by Foundations specializing in this field. Professor Sargent received his pre-legal training at the University of New Hampshire and was graduated from Suffolk University in 1954, mâgna cum laude and president of his class. He was admitted to practice in the New Hampshire Bar after receiving offi- cial notice of the highest mark recorded in a bar examInation in that state. He was admitted a short time later to the Massachusetts Bar. lIe is an ac- tive lawyer and a frequent consultant by members of the Massachusetts Bar. He is a member of the American Bar Association, Massachusetts Bar Asso- ciation, Mt. Vernon Lodge, A.F. and A.M. and the Alpha Delta Law Fraternity (whose most noted member is the Retired U.S. Supreme Court Justice, Tom C. Clark). Mr. Moss. As I indicated in my remarks following the questions; of the very distinguished Member from Illinois, Congressman Springer, it was because of the conclusion reached by me and by Sen- ator Magnuson that we introduced the resolution calling for a study~ The conclusion that there were not sufficient facts upon which t~ base any legislation. So, of course, we are not considering as a legis- lative vehicle the Keeton-O'Connell plan. I believe that we sought, as the other body did, `the views of the representative of that plan on the wisdom of a study. It is in a sense in the context of the study only that we are interested in any plans or proposals because until that study is made, I do not think we would be qualified to make the kind of judgments as to whether or not there is, a need for Federal legislation or the nature of that legislation which might ultimately be required. Mr. Keith. `Mr. KEITli. Thank you, Mr. Chairman. * I concur in the sentiments which the chairman has just expressed with reference to the mission of this committee at this stage of. the game. I do think that it' is helpful to get some education of the sort that you have offered because it is going to be a long and slow process: whereby we become qualified to sit in judgment of the recommenda- tions of the Commission 2 years from now more or less. It is my understanding that no State has thus far authorized the Keeton-O"Connell approach. Is thatcorrect ~ Mr. SARGENT. That is true. As you undoubtedly know, it passed the house of representatives in Massachusetts very surprisingly and it `was then sent to the senate where it was, after 3 weeks of study, and there had been no study in the house, defeated or at least there was an adverse recommendation by the ways and means committee, 9 to 1, ultimately it was defeated on thG floor of the senate 28 to 10. But I think that the problem with the Keeton-O"Connell plan is that a plan which promises to pay both the innocent and the guilty and cost less money than a system that pays just to the innocent has greater lure. It is awful difficult to be opposed to that kind of plan. As `you undoubtedly know, in `Massachusetts when the bill did pass the house of representatives, the Governor, John Volpe, said that despite the fact he had a plan of his own, the Keeton-O'Connell plan had considerable merit. PAGENO="0055" 51 Yet 5 days later, the Governor had to say that if it passed the Senate he would veto it because he, too, I think, was confused by the promise of the plan as opposed to what it actually gave. Mr. KEITH. You heard my exchange with the representative who preceded you? Mr. SARGENT. Yes, I did. Mr. KEITH. Is the medical payments feature of the insurance that is: offered in the State of Massachusetts in a way in keeping with the Kee- ton-O'Connell philosophy? Mr. SARGENT. It might be termed something of a baby Keeton- O'Connell because under your own medical pay if you were injured in. the example that the previous speaker suggests, the man who was hit by the BB gun, he could recover from his own insurance company for his injuries. Mr. KEITH. Would not the third party recover? Mr. SARGENT. Under the normal med pay coverage, no, there would. be no recovery, although the insurance companies are at least discover- ing the possibility of something called the third-party med pay where- by~aiF people you hit would ~ entitled to compensation regardless of fault. Mr. KEITH. This is one of the great concerns of this committee, this innocent third party, and I would think that the insurance companies could use some ingenuity and come up with some solution to that kind of problem. Mr. SARGENT. As a matter of fact, I think they can do it and save money in the process, because today if you and I insure ourselves~ on. med pay and we collide with one another, we recover against our own insurance company so far as the medical isconcerned, and then we may have to fight it out against each other so far as total recovery. But if we have policies whereby my company automatically pays you and your company automatically pays me, so for as med pay is concerned at least, then that in effect is really only a compulsory advance payment. What is paid out is ultimately credited to the amount that you* are entitled to on a tort basis. So I think they can save money, they can avoid a duplication of paymei~t for the same claim and yet I think do it at a very slight increase in cost, if any. Mr. KEITH. As I mentioned in my preliminary remarks, this is a very old problem in the State of Massachusetts. When I was in the State senate my constituents were concerned about automobile insurance coverage and costs. I asked some people who were professionally well qualified in the insurance business and some members of the public who had been preeminent in their express- ing of concern for civic problems of this sort, to meet with me and to discuss ways of solving this problem. My proposal was based upon the experience that I had had with a catastrophe policy that was written to cover hospital and surgical insurance. This was at that time a new concept, first, that the in- surance companies had brought onto the market shortly after World War IT. It provided, in the case of hospital and surgical insurance that an individual could buy a policy to pay only major hospital and surgical bills. It was based upon the recognition that in the smaller claims a large proportion of the expense involved was in administra- PAGENO="0056" 52 tion. And so there should be a substantial deductible clause; second, there should be a coinsurance clause so that the insured would have an interest in the settlement of the claim. This' coinsurance clause and deductible clauses eliminated a great many of the smaller claims. It would give the parties involved if it were applied to auto insurance, a feeling that the insured was himself carrying some of the risk. The insured and the injured parties would have an interest in keeping the claim costs down. This, in turn, would keep the premium down. My father, who had been in the State senate, said, "Well, Hastings, if you offer that plan, they will say you are in cahoots with the insur- ance companies, you are not looking out for the policyholder"; so, too, did Governor Herter. They advised me against this thing. I, inciden- tally, was not in the general insurance business but I was associated with it, in that my father and brother were in that business. One of my colleagues in the State senate, Richard Lee, who bad won by 10,000 or 11,000 votes in 1952, thought that it was a good plan and he filed a bill in the State legislature which would have provided a study of th~ proposal that I have just outlined. His opponent did ex- actly aS Mr. Herter and my father said they would. This was the chief campaign issue in the campaign that followed. Lee won but only after a recount. , I w~ld like, however, forgetting the political overtones `that we have discussed here, to have you comment as to whether or not ,the~e is any merit in the application of this approach which I sugg~s.ted at that time to'theproblern that confronts us `today. Mr. SARGE~P. Yes, Congressmai~ `I think there is great merit in the possibility of doing either of'two things. You certainly could cut down appreciably on the cost of insurance by writing a policy whereby the person who was injured had a certain deductible which he had to en- dure the cost of, himself. ` , , , How much' this would be~ .1 don't know. How much, it would be eroded~ over the years by juries and judges simply adding onto the amount of recovery because they knew there was the exclusion for the first $100. or $200 or $300 in the form of deduction, but at least that is one possible approach. . Another approach is the one you suggested, in effeêt you are `not in- suring a person against liability for the first $100, $200, or $300 worth of damages which may be assessed against him. You are making him be a self-insurer with regard to that loss. I think there is no question but what this, No. 1, would result in greater highway safety and; No. 2, it is certainly going to result in a consider- ably smaller insurance premium charge~ By the way, on that same `point, I am sure you are familiar with a proposal made by yOur colleague, Congressman Cahill from New .Jer- sey. We had a seminar- Mr. Moss. We will hear from hi'm tpmorrow. - Mr. SArGENT. ~Ie, I am sure, will give you another suggestion deal- ing with the problem of the small claim whicih I think is a very novel and very interesting one. Mr. KEITH. Thank you, Mr. Ohairman. Mr. Moss. Mr. Guthrie. ` . ` Mr. GunIniE. Dr. Sargent, you have indicated that von find a study desirable. You have endorse~I House Joint Resolution 958. Conse- quently, you apparently feel there are some problems in this area. PAGENO="0057" Mr. SAItGENT. Oh, certainly I do. Mr. GUTHRIE. It would seem to me desirable, Mr. Chairman, if Dr. Sargent were willing, to have him submit for the record what he re- gards as being the problems in this area and reasonable alternatives for solving them. I gather you feel that the Keeton-O'Connell plan is not of much benefit as applied to these problems. What solutions do you see as being reasonable dries? Mr. SARGENT. One thing that I certainly thInk has to be taken care of is the problem with regard to arbitrary cancellations and arbitrary refusal to renew automobile ins irance policies. I `would suggest as one method of curin~ this legislation either by the States and by the way, the commissioner of insurance of the State of ~ermont, Mr. Hunt, has already made a proposal in Ver- mont to do this, which provides that once an insnmnce policy is writ~ ten by a eompai~y it cannot be canceled except for motor vehicle vio- lation cohviction or for nonpayment of premium. Now I think that cures the problem tosorne extent. ~ow the Keeton-O'Connell plan does not approach it in this way and in my opmlon does not do anything on that problem When the argument is made that there is a problem with regard to insurance rates, with regard' to the fact that not enough people are compensated, I would say that if there are inequities in the present system, then cure the inequities rather than abolish the entire system I would strongly advocate `the adoption where they do not already have it as part of their law, of comparative negligence, whereby if a person is injured and he is at least partly at fault he recovers some- thing, depending upon the proportion which his negligence bears to the total amount of Eegligence rather than the `rather harsh rule' that if you are even 1 percent at fault ,you are entitled to recover nothing. I think something ought to be done w~th regard to the problem of the young driver and the aged driver. I think that the system is grossly unjust which says, in effect., that when you are the least able to afford to pay for insurance we will charge you the' most and i'n the years when you are most able to afford it we will charge you the least. I think there is much to, be said for the fact that all of us-assum- ing we will have a normal life span-will be young, middle age and aged, and that it is far better to spread the loss of insurance evenly throughout those years because I think it is an undue burden on young drivers and on aged drivers. I certainly would recommend that you consider the possibility'of insuring the driver rather than insuring the motor vehicle. I think that when you now have a system whereby tens of millions of drivers pay nothing for insurance, this is unfair. I think you could spread the base by insuring drivers and I think it ~ouid be much more equitable. I think that the one suggestion that was made concerning auto rnsur- ance by Mr. Moynihan in an article you may have read in the New York Time~ a few weeks ago, one thing he said which impressed me considerably was that the amount you pay for motor vehicle injuries ought to have some relation to the amount of driving that you do. his thought was that you would finance all of the injury payments oi~t' of social security and fund it by a'dding a few pennies onto the gasoline tax. PAGENO="0058" Now the theory of that to me ma1~es some sense, but I suggest that you might accomplish the same thing by insuring the driver, because if I, in most instances at least, own ~ motor vehicle and I am single and I have no other close members of my family living with me, I think in the normal course of events my car is going to be, on the high- way less and exposed to the hazards of the highway less than the motor vehicle of my neighbor which. is owned by one man but he drives, his wife drives, and he has three teenage children that drive. That, car will be on the highway a considerable greater amount of time than mine is. I think that is something at least to be considered. It may have drawbacks `but on~ great adyantag~ to it is that, I. am strongly opposed to rating people, `either because of. their race~ the red lining, of certain. nonwhite areas, or age, youth or advanced age, but I am strongly in `favor of rating people based on personal driving experience. I think it is an awful lot easier to ~do, this if you are going to rate individual drivers than if you try to rate a car. The car does nOt do the injury, the driver does. Therefore, I think that that is something that at least ought to be. considered. Mr. GUTHRIE. Your thoughts on this subject are very provocative. If you could draw back and perhaps submit in writing all of the prob- lems you `see in this particular area and alternative solutions to them, it would be very.helpful. Mr. SARGENT. I would bemorethanbappy to. Mr. Moss. If that is agreeable, we will hold the record at this piiut to receive the response in writing. Mr. SARGENT. Fine. (The information requested was not. available at time of printing.) Mr. Moss. I have no further questions. Mr. Keith, have you any questions? Mr. KEITH. `No questions, Mr. Chairman. Mr. Moss. I want to thank you very much. I feel that your statement was very thought provoking and very informative. Mr. SARGENT. Thank you. Mr. Moss. Thank you for your appearance. I ask unanimous consent now that there be included in the record `at this point a statement from Mr. William A. Stringfeflow, ge~ eral manager of the National Association of Mutual `Insurance Agents. Is there objection? Hearing none, the statement will be included in the record at this point. (The statement referred to follows:) STATEMENT OF NATIONAL AssociATioN OF MUTUAL INSURANCE AGENTS Mr. Chairman and gentlemen of the committee, on January 26, 1968, our Presi- dent wrote to Secretary Alan S. Boyd offering ortr assistance in the study con- lemplated by this resolution, when and if it was authorized. We should like to repeat the offer to this committee and to also offer our full support. (See letter following statement.) The statement of the chairman of the Senate Commerce Committee in support of the resolution which appears in the Congressional Record for Thursday, De- cember 14, 1967, is in our judgment a careful and constructive review of the cir- cumstances and problems that have brought about this proposal. We particularly `applaud that portion of Senator Magnuson's statement in which he said "What is clear, howei~er, is the need for a comprehensive, objective and nonpartisan study. PAGENO="0059" 55 The issues which we have been discussing are fundamental and must not become enbroiled in a narrow partisanship, for if they are to be resolved, we need solid information and facts, not emotional charges and counter charges." We think it is also important to emphasize another portion of his statement, to the effect that ". . . the t~oaring rate of accidental death and injury on the Nation's highways" statement in the fifth paragraph is part and parcel of this problem and we would hope that the Department of Transportation in making its study would not confine itself exclusively to the inSurance and/or compensation problem per se, but Include accidents, their cause and efforts t~ reduce both their frequency and severity as they relate to this problem, which the able Senator has well described. May we suggest that on page 2 of the resolution under line 16 item (3) the words "the most effective means for realizing such objectives" may well give to the Department of Transportation the privilege if not the mandate to determine to what extent the tragically high frequency and severity of automobile accidents is complicating this aireadydifficult problem. We would further, Mr. Chairman, like to point out specific measures which have been taken, either by segments of the industry or the industry at large, toward an improvement of this situation, efforts which have been significant and costly. The assigned risk programs which the Industry has provided in all states to take care of thOse who were not eligible for voluntary insurance have served an extremely valuable and needed purpose at a very considerable cost to the in- dustry. The cost to the companies can be measured in excessive loss ratios, bnt our members and other independent agents have served the administrative needs of these unfortunate members of society at a cost far below the level of satisfac- tory operation because of the relatively low commission paid and the necessarily burdensome service procedures. 1. short, the servicing of assigned risk business by the agency system and other segments of the industry has been a public service. Our national association and our thirty-six state and regional associations have consistently supported automobile inspection laws, driver education 1aw~ or voiuuntary driver education programs, better licensing laws and the more rigid reinforcement of safety and licensing regulations. We have also sup- ported the uninsured motorists provisions in automobile policies, including coverage against the insolvency of the carrier for the adverse car. It is to the credit of the industry that the very liberal nature of the basic automobile liability policy has contributed to its increasing cost. The automobile liability insurance policy in almost all forms has been broadly liberalized over the years to where it offers what we believe to be all needed protection by policyholders. This significant progress in our business toward the better protection and ~erv- icing of the public has been supported by our associations and our members (as well as other segments of the industry). These efforts and this progress should not be ignored at times like these when there is a tendency to criticize both the companies and the agents for what we alleged to be faults in the system. We suggest that it might also be well considered that althougb~ the processes of government move slowly at the state level as well as the Federal, that there has been enormous progress in the areas previously cited here as well as others. For example, rigid cancellation laws are becoming more and more the rule rather than the exception, and they are being supported essentially by most seg- ments of the industry, including our association. The concept of advance pay- ment in liability cases and rehabilitation is moying apace and our Association has supported these constructive, changes and trends. The fact that they do not take place all at once is a credit to the good sense of the industry, which after all is the trustee of the funds of the policyholders as well as the servant of the public. Even today a group of ten companies are experimenting with a very liberal guaranteed benefits payment program in one state and are contemplating other states, all designed to better serve the interest of the policyholder. Our Associa- tion is considering carefully these experiments and as soon as our Board meets again we will in all probability lend support to these very constructive efforts. If one may ask why we have not done all these things long ago, then we would say that the problem has been an evolving one. In the realm of human affairs it has not been an enormously long time since the first liability policy was issued on a wagon team. That the industry, state legislatures and state regulators PAGENO="0060" 56 have not solved all of the problems of compensating victims of automobile acci- dents in a perfect way, is in our judgment, not surprising. The industry's good name is a part of our concern, and so our support of the resolution is based on the premise that while we have not been perfect in our efCorts, the evidence will show that the industry, compan~y and agents alike, ~hns. made very valiant efførts to cop~ with a sky-rocketing probl~m, arising largely from cIreumstance~ beyond its control. We refer to the st~ti5ticl in pour ~tatement of December 14th to the effect that there have beeb 1.6 million people killed sincO the coming of the automObile, that over 5O~OOO will die this. year and that 100,000 will die In 1975 unless the death rate in arrested. Without suggesting tbat we have dçuie all that we might, we do suggest to you that here is the root of the problem and we cite these figures to support: our proposition that this atu~y should include the efficacy of safety regulations at 1~oth th~ state abd federal leveL We feel free tooffer. this cOiuinent; Mr. Ohairmfln, because wewereperhaps the first national tcrganl~átlon to support the national tfaffic and Motor Yebicle Safety act of 1966, which gave to the secretary. of Transport0tlqn authority to estab1i~h ~eafety stthidards fol-~áutomob11e vehicles rand the companion meaSfire which was' de~igned to assIst ~tate go~ermtients in upgrading highway design standards and driver ilceasing and training requirements. We would be the last to criticise the necessarily slow pace of the prog~ams tanderthese laws ahd we ar~e glad that they are slow enough to be prudent and wise, but We suggest that their effectiveness can have a very dirOct bearing on this ~tu~1y and on the need for Such Changes (if any) as may apfear desirable I~i the present compensation system; We would cite to you . the efforts of the Tnsni~ance Iti~tItute Of ~1ighway Sa~ety, which we have always supported and c~ntinue to suppOrt, but ~(Are know `that much will b~ said about that from uther `soufces, since it Isfihianced by ~ll of the Insurance cdmpanles. In Offei~ing the s~ipport of our assceiation, Mr. Chaifinan, we suggest that ourS is a~ñ `ofg5~ht5atI&ti of ap~rO~dthate1y 1TOO0ind~pehdent ageats, very close to tbO grass roots reaction of the problem cited by your resolution. These ard' home town agents, integral pttrt~ of their Iod~i 5b~ieti0s and economies and a very basic part of our American free prltate ~nt0rprfse systeth. While gmiei~àlly speak- Ing, inSurance companies wilibe the soi1r~e'of th~ormktion anti assistance of a technical nature, it is our 4iew that our m~mbers may by $~Irtheof th~1r Intimacy With the local problems be hclpfttl to the Debartment of &nsportatI~n in this effort. May we suggest that we are concerned at what sometimes appears to be a wholesale condemnation of the O~isting tort liability systeni. Tt Is' not pbrfect, but it has' served the insuring public for a treat many years and it has not yet been demonstrated that the system per se is at fault. We do not necessarily take the position that hO Other systeth will do' the jOb, but wO suggest that an Im- provement of the existing systeth could Well be a much thore d~sirablO a~proacb to the problem. Its basic principles are tried and proven over many years. As a result the procedures and institutions under which It fnnetions are established and understood. If our court system does (as is sometimes alleged) become in efficient, who among us would say that we should discard the system? It is our tentative thinking that we might best repair the house rather than tCar It down. Finally, Mr. Chairman, let me suggest that our membership has a great stake in the results of this study. We too are citizens. We too are members of the public. We too have dedicated our lives to serving the members of the American public with professionalism and with fairness. If we are to continue to do our job well and to improve on it by overcoming some of the difficulties which have grown up as this phenomenon visited Itself on us, then whatever changes if any are made should take into consideration the very unique fiduciary relationship of an agent to his policyholder, which has characterized our business for many years. If we have not been perfect,' we think it can be said that there have been no major scandals in our business for many, many years, and the few that did trouble us many years ago were not related to the automobile insurance busi- ness. We have been regulated by the legislatures, we haye been adjudicated by the courts and we are iv~w bein~ trb~1 by ~i'hljc niijnjon. This is fair enougti for an industry as large as ours, bitt we ask that our membership have its day in court before your committee at such time as the final report is made as Well as during its completion, it is important to `our 17000 members, their approxi- mately 50,000 employees and the literally miflions of policyholders they serve, PAGENO="0061" 57 While we believe this study can best be conducted at the national level, our sup- port of the resolution should not suggest that we have any reservation about the continuance of state regulation of our business. We are unequivocally dedicated to the proposition that this is an activity that can best be regulated by the states. The many remedial measures already taken, or in the process of being taken by the state legislatures and state insurance departments, is evidence of their aware- ness and ability to deal with the problem where it should be dealt with, at the lo- cal level. We also commend and support the efforts of the National Association of Insurance Commissioners, with whom we also cooperate. In conclusion, may be repeat our support of Senate Joint Resolution 129 for a study by the Department of Transportation. May we offer our full cooperation and may I thank you Mr. Chairman and members of the committee for this op- portunity to express our views. NATIONAL AssoCIATIoN OF MUTUAL INSURANCE AGENTS, Washington, D.C., January 26, 1968. Hon. ALAN S. BOYD, Secretary of Transportation, Washington, D.C. DEAR Mu. SECRETARY: President Johnson's call for "a major study of automo- bile insurance" in his recent State of the Union address was received by our as- sociation with great interest. As you may recall, on July 31, 1967, we wrote Senator Magnuson commending his request for a comprehensive study of auto- mobile insurance by the Department of Transportation. A copy of that letter was sent you. Since it now appears that your department will be undertaking this study, I have been authorized to reaffirm our association's commendation and offer of assistance to you and your staff in this vast undertaking. Our members-more than 16,500 independent mutual property and casualty insurance agents-are dedicated to serve their policyholders and the American public in the most effec- tive manner possible. In fact, we feel it Is our obligation to do so. The interest shown by you `and the President is therefore most gratifying to us. It is our hope that this comprehensive and impartial study will have the un- ~ua1ified support of the Congress and the automobile insurance industry. You may be assured that the National Association of Mutual Insurance Agents stands ready to help. Sincerely, FRANK K. BAKER, President. Mr. Moss. The committee will now stand in adjournment until 10 o'clock tomorrow morning. (Whereupon, at 12:15 p.m. the subcommittee adjourned, to recon- vene at 10 a.m., Wednesday, March 20, 1968.) PAGENO="0062" PAGENO="0063" AUTHORIZING A STUDY OF THE MOTOR VEHICLE ACCIDENT COMPENSATION SYSTEM WEDNESDAY, MARCH 20, 1968 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE AND FINANCE, COMMITTEE ON INTERSTATE AND FOREIGN COMMERcE, Wa$hington, D.C. The subcommittee met at 10 a.m., pursuant to notice, in room 2322, Rayburn House Office Building, Hon. John E. Moss (chairman of the subcommittee) presiding. Mr. Moss. The committee will be in order. I would like to have the record reserved at this point to receive a statement from the Honorable Ronald Reagan, Governor of the State of California, on behalf of the National Conference of Governors in support of the resolution. Is there any objection? Hearing none, it isso ordered. (The document referred to follows:) STATEMENT BT Ilox. RONALD REAGAN, GOVERNOR OF CALIFORNIA, OHAIRMAN, COMMITTEE ON TRANSPORTATION, NATIONAL GOVEENGES CONFERENCE Mr. Chairman, I appreciate this opportunity to submit a statement concerning the auto insurance study proposed in EL.J. Res. 958. In my capacity as Chairman of the Transportation Committee of the National Governors' Conference, I can report that the Transportation Committee adopted a policy statement supporting the auto insurance study by the Department of Transportation. The Committee expects further reports and possibly will take further action at their Annual Conference in July. This action was taken at the Governors' recent Mid-Year Meeting in Washington, D.C. The Committee recommends that the states offer their full cooperation to the Department of Transportation in the proposed study. I have noted that several witnesses before this Subcommittee have called attention to the auto insurance laws of California. They have described them as being progressive and as a model for other states to follow. I am pleased that California Is setting this example of excellence. Our com- petitive insurance rate law in widely regarded as a model and has worked successfully. Rate setting by a political body in a business where several com- panies compete is contrary to our Nation's free enterprise system. Auto insurance is not like a public utility requiring certain government regulation. It ought to be free to offer the best services in a competitive market. We have found in California that the citizen consumer is the one who benefits. We are pleased that last year Florida, Georgia, and Indiana enacted new rating legislation closely modeled after our law. States can lead the way in developing more workable auto insurance legislation. Each of the fifty states have served as a laboratory of government testing vari- ous forms of insurance regulation. Some have worked very well, as in California. We have a special study commission in California looking Into ways in which we can improve our own laws. Mr. Chairman, I would like to leave with you a few recommendations for consideration: 59) PAGENO="0064" 60 1. The resolution should be amended to allow for representation of state Governors, state insurance commissioners, and state legislators on the advisory eommittee proposed in Section 4. Or else a separate state officials advisory com- mittee should be formed. On January 23, 1968, following an announcement of the proposed Department of Transportation auto insurance study, I sent a telegram to Secretary Boyd requesting that a repre~ntatlve of the Governors be appointed to any task force or committee conducting the study. By virtue of the McCarran-Ferguson Act, passed by Cougress in 1945, the states have specific jurisdiction to regulate and supervise the insurance industry. Therefore, any investigation or study, af auto insurance will, to a large extent, be an investigation of the adequacy and effectiveness of state insurance laws and regulation. It becomes mandatory, therefore, that tXie states participate in a meaningful way in the Department ~of Transportation insurance study. The state officials should be represented. 2. I suggest that the Department of Transportation study determine the actual extent of the problem of the high cost of auto inSurance. There are some logical reasons for higher costs such as normal inflation and more and better coverage in the form of higher liability limits, theft and towing charge coverage, medical payments, uninsured motorist protection, etc. We also know that automobile costs 4 and values have greatly increased and naturally have affected insurance costs. 3. I recommend that the Department of Transportation consult with the stateS on the existent tort-liability systems. They should look, into the non-fault type of system which is now being studied by the American l3ar Association. Since the tort-liability system is a basic part of our American system of justice, care- ful study is needed before any drastic changes are proposed. Many states are eager to improve their auto Insurance systems. There are several bills pending in state legislatures to incorporate eew ideas atid `new systems of insurance. My committee is willing to give its full cooper~ation to the Department of Transportation study. We realize that ultimately the responsibility to d~al,with the problems of the auto insurance industry, and the policy holder, and the acci- dent victim rests with the state governrnents~ We are willing to carry this responsibility. Thank you. Mr. Moss. I would also, at this time, `like to submit for the record an article from the New York Times magiwine section entitled "Next: A New Auto Insurance Policy" by Daniel P. Moyn4han. (The article referred to follows:) [Fmm the New York Times magasine, Aug. 27, 196fl NEXT: A Nuw AUTO INSURANCE Ponic~ (By Daniel P. Moynihab) (N0TE.-Daniel P. Moynihan is director of the Joint ~t~nt,er for Urban Studies of M.I.T. and Harvard, and chairman of the Secretary's advisory Comr~iittee on Traffic Safety Research of the Department of Health, Education; and `Welfare.) In a decade during which considerably more In the way of purposeful social change has been promised than has been delivered, it may Well trn~n out' that one of the most important developments was one net ~lt all ifiter~l~d, ~car~ely noticed, and even now barely appreciated. Somehow, during this time, America began to be sensible about the automobile.~ Given the other problems that face the nation, this may seem a modest event. But in the aftermath of a half century during whIch those problems were all but systematically neglected in the face of any demand, howsoever irrational, made in the name of the automobile, it suggests a change in attitudes of fairly large consequence. By the end of the nineteen-fifties the autonlobile was causing `four distinct sets of problems, all of which were getting out of control, and none of which was seriously being attended to. First, the cars were not always carefully built, and in terms of crash-injury protection often hideously designed. Dr43~er training and licensing verged on the PAGENO="0065" 61 superstitious. The result was a massive public-health problem; something like one vehicle in three was ending up with blood on it. Second, automobile exhaust fumes had become a major source of air pollution, a matter then approaching the point of crisis. Third, Federal highway construction was radically altering the design and function of American cities, usually to the sharp disadvantage of the inner-city poor, but with no means for taking such effects into account. Fourth, the system of accident insurance and claims litigation was steadily paralyzing the American legal system, and at immense cost to everyone involved. In a series of swift and decisive moves, Congress imposed Federal controls over each of the first three sets of problems. (In the case of highways It was essentially a matter of redirection.) Only the last remains untouched, and clearly this issue also is now being joined. Congressional hearings are about to begin; automobile insurance is about to become a national issue. The new era in traffic safety, in air pollution and in highway construction came quietly, almost stealthily. Starting in 1964, Congress began enacting legislation having to do with safety features for Government-purchased vehicles, tire stand- ards, automotive exhaust controls and the like. No great notice was taken until President Johnson in the 1966 State of the Union message proposed a general measure providing for safe cars. Then in a rush of events ending in a Rose Garden ceremony nine months later on Sept. 9, 1966, the decisive battle was fought and won. The largest manufacturing complex on earth, which into the sixth decade of the 20th century bad persisted as an utterly unregulated private enterprise, was of a sudden subjected to detailed and perma- nent Government regulation. Next, a Department of Transportation was established, making highway design a matter of Cabinet-level responsibility, with a clear mandate to end the mindless obsession of the Bureau of Public Roads with pouring concrete regardless of the consequences to the urban environment. Nothing comparable has occured since the estabishment of railroad regulation in the late 19th century. But the process was essentially different. The establish- ment of the Interstate Commerce Commission in 1887 was the result of basic changes in the political attitudes of the nation, preceded by decades of contro- versy. The National Traffic and Motor Vehicle Safety Act of 1968, by contrast, was preceded at best by a few dozen articles in small magazines and professional journals, and perhaps three books written almost simultaneously with the legislation. Probably not 50 men in the United States were even aware that President Johnson was going to send up a highway safety proposal. (And not one of them would have predicted it would pass the House of Representatives unanimously!) These were essentially apolitical events. Thus, not one but two traffic safety bills were passed in 1966. The second of these, the Highway Safety Act of 1966, established pervasive Federal regulation of the traffic safety activities of state governments. Driver licensing, traffic laws, emergency medical services, driver training, all these previously exclusive state concerns fell under Federal control. It was surely the largest single transfer of authority from the state to the Federal level of this generation, indeed one of the largest in American history, but It passed almost without comment. Similarly, official attitudes toward highway construction have pro!foun~1ly, bnt almost silently ~hanged. "Half the pedple in this building" an Assistant Secretary of Tra~portation remarked recently, "will die happy if we never again build a foot of urban highway~ The construction of urban highways will continue, but the era when government viewed them as an unquestionable good is over, What happened was that people changed their minds about the automobile. Or rather the people who have the power to direct such matters in America did so~ The scientist Michael Polanyi has called attention to how much more common this process is than is generally recognized. One day a society appears to be oper- ating within a well-established and untroubled system of belief, the next day it turns out to have abandoned its old convictions in favor of entirely new ones. (Walter Lippmann suggests something of the same process in his "law of accumulated grievances.") The point is that the private automobile, as authors Alan K. Campbell and Jesse Burkhead say, "is undoubtedly the greatest generator of externalities that civilization has ever known." Its only possible rival, they add, would appear to be 92-100-68--5 PAGENO="0066" 62 warfare among n'atibns. One day the country woke up and found it had decided many of those externalities simply did not have to be tolerated indefinitely. Something just like this is now happening with respect to the automobile insurance system. The problem is precisely parallel to that of automobile safety. The system is not working well as such, and its secondary effects are wasteful and expensive. On either ground change is in order, and given both, change is as near to urgent as a world of competing sorrows will permit. The presumption that the automotive companies knew more about their busi- ness than did their critics went on for a prolonged period of time, and then sud- denly was reversed. That same onset of disbelief is now happening to the insur- ance companies. Change is upon us. What is involved, however, is not just the insurance system, but the business system. The automobile industry let free enterprise down pretty badly: it did nothing serious whatever about the problem of vehicle safety until its freedom to do so on its own was taken away. If the insurance industry does no better, we shall doubtless end up with im- proveid liability arrangements, but in the process we are likely to have discredited the integrity and competence of American business management to a point that liberals and conservatives alike must view with dismay. There are two senses in which the automobile insurance system is not working well. First, it is an extremely costly system. Twice as much is paid out in insur- ance premiums as is received back in insurance benefits. Moreover, the cost of the system would appear to be especially heavy for the poor, and others who can least afford it. Second, it is a grievously incomplete system, which fails `to cover many of the most serious accidents. The present system is, for the most part, based on the concepts of tort liability that developed a century ago. In essence, an Individual buys protection against the risk that he will negligently dau'se an accident that will injure another person, or damage another person's property. If that should occur, his insurance ~ompany is responsible for compensating the victim, up to the amount of insurance cover- age. The company, as it were, goes to court and argues the case. The problem with the system starts right there, at the beginning. It has to do with the nature of traffic accidents. If they were orderly, discrete events, in which cause and effect could be clearly discerned and ascribed to this person or that, then the present insurance system would work well enough. But accidents are nothing of the sort. In the present stage of motor-vehicle transportation, acci- dents, perhaps specially minor ones, typically involve a whole range of contribu- tory factors for which the concept of a single "cause" or "negligent party" is very near to absurd. There are something like 13,600,000 automobile accidents per year in the United States. Given the present driving population, automc~b'ile stock, iurd road sys- tem, it is unlikely that any but a fraction of these accidents co~uld `be prevented, and impossible in the case of a great number to state with any certainty who is responsible. Moreover, as the number of automobiles increases, it can be stated with confidence that the number of automobile accidents will also increase. The result is an insurance system that is inherently unstable. The number of accidents goes up and up, and so does the number of claims and counterclaims. No one involved has any incentive to moderation or reasonableness. The victim has every reason to exaggerate his losses. It is some other person's insurance company that must pay. The company has every reason to resist. It is somebody else's customer who is making the claim. Delay, fraud, contentiousness are max- imized, and in the process the system becomes grossty inefficient and expensive. A study of traffic accidents in Michigan has shown that "for every $1 actually paid into the hands of the injury victim, $2.20 must be contributed by insurance policyholders and taxpayers." By contrast, group health programs such as Blue Cross and Blue Shield can deliver a dollar of benefits for only $1.07, and the Social Security Administration can do so for $1.02 (not counting, it Is true, employers' costs in collecting social security taxes). Moreover, scholars such as Alfred F. Oonard have shown that while settle- ments of small claims are if anything overly generous, just the opposite is the case where serious injuries and losses are involved: "The plain fact," he writes, "is that if one suffers large economic losses from lost wages and extended medical treatment, he cannot expect to recoup these losses from tort law." Just as cer- thinly, the system Is biased against the poor, who are least able to wait out the years of litigation which insurance companies are free and able-and all too often anxious-to use as a bargaining weapon. PAGENO="0067" 63 In their monumental study, "Automobile Accident Costs and Payments," Pro- fessors Conard and James Morgan quote persons who have found themselves caught up in the personal injury automobile accident claim process. "They were trying to humiliate me for a quick settlement." "If I had been financially able, I would have held out longer." "It was too long to wait for a settlement. It seems like insurance companies prolong cases too long." "It was pretty miserable-justice isn't for the little man. I've had enough of courts. If you have [a] sharp lawyer, you're all set." "It just dragged and dragged. It threw me from being a self-supporting woman, so that I'm dependent on others." "The settlement was unfair, but the lawyer said take it or you might get nothing." "[My lawyer] wanted me to say something that wasn't true. I wouldn't tell a lie for money." Autombile accident litigation has become a 20th-century equivalent of Dickens' Court of Chancery, eating up the pittance of Widows and orphans, a vale from which few return with their respect for justice undiminished. If the system is stacked somewhat against the traffic victim who is poor and cannot wait out litigation, or who is stigmatized in some way that will deprive him of sympathy before a jury (e.g., a teen-age "hot rodder"), it is also true that the insurance companies are in an equally difficult position. Given the present system, they are by definition the enemy of the victim: it is the role of the com- pany to argue that the victim's injuries, no matter how hideous, are not as seri- ous as he claims, etc., etc. Not exactly a lovable role, nor necessarily a persuasive one given the disparity in the resources between the giant corporation and the lone individual. Moreover, given the system as it is, other than by beating down claims, the only way the companies can compete with one another is by seeking out "pre- ferred" clients who presumably will have fewer accidents than average. There appears to be some basis in fact for the notion that certain classes of drivers will have a lower rate of accidents than others. People appear to drive as they live, and some live more dangerously, less responsibly than others. The problem, how- ever, is that it is rarely possible to identify such persons individually; it is ab- surd to think of denying them insurance en masse. In any event, it is socially necessary that automobile insurance be as near universal as possible. Nonethe- less, insurance companies-some more than others-seek to "cream" the market, with results that verge on outrage. For a decade now, students of the subject have been convinced that groups such as Negroes, teen-agers, divorced women and others are significantly discriminated against in the writing of automobile insurance. Perhaps more significantly, many companies writing automobile insurance appear to make it a practice to cancel policies of drivers who have accidents or otherwise get involved With the law. The New Republic writer James Ridgeway reports the experience of a North Carolina man whose policy was canceled. Asked why, the company said, "Investigation reveals that your automobile coverage was terminated due to circumstances surrounding a parking ticket which your wife received recently." The woman had protested the ticket to the police, because, she said, the meter was broken. Nonetheless she paid the fine.~ (In this case, the best guess is that by protesting the ticket, she gave the com- pany an opportunity to define her as an unsuitable customer.) A sociological phenomenon of sorts appears to be at work. Insurance agents are for the most part careful middle-class persons who are suspicious equally of working-class (not to mention lower-class) types who might tend to get into trouble, and educated types who might cause it. Occasionally the categories over- lap. A University of California professor on his way back from a world tour stopped in Cambridge last spring to give a series of lectures. He and his wife took a small furnished apartment, and bought a car, thinking to drive back to Berke- ley. He applied for insurance at a nearby Sears, Roebuck branch, but unaccount- ably was turned down. Several days later, a stranger mailed the professor the re- jected application form. It apparently had been thrown away by the insurance agent, who had written across it in ball point pen, "Lives on Wrong Side of Ma~- sachusetts Avenue." For some time evidence has been mounting that a very large proportion of persons whose licenses are revoked or suspended continue nonetheless to tirive. PAGENO="0068" 64 And there is hardly any question that this is the case with a great number of those who merely lose, or do not obtain, insurance. This is the beginning of the incompleteness of the present system: the large number of drivers who have no liability insurance, either because their state does not require it, or because it has been canceled. The uncompen~ated accident victim had become a social problem as early as the nineteen-thirties, when probably fewer than half the cars on the road were insured and when, as one student put it, "Accident insurance [was] the privilege of those with some surplus income." Some of the most appalling cases of incomplete coverage, however, arise not from the failure of drivers to insure themselves, but from the concept of negli- gence as the operative principle behind liability. As applied to traffic accidents, the concept is obviously flawed. For example, in a line of 20 cars, car No. 1 suddenly brakes. A disturbance is generated in the line of cars behind it. The disturbance grows more instable. Finally, car 14 rams into the rear of car 13. Which driver is responsible? Nonetheless, the system mauages through various conventions and, fictions to point to some guilty party in most cases. But there are many instances hi which clearly neither party is at fault, and as a result neither party is liable. A California bar report, soon to be published, recounts a number of such cases: Two cars, properly driven, collide on a skiddy road without the fault of either. One driver loses his eyesight and the other has to have both legs amputated. Each carries heavy body injury liability insurance. Neither can recover. Reason: No recovery unless the plaintiff can prove the defendant to have caused the injury by his negligence. Here neither was negligent. One party is traveling down a freeway at `T5 miles an hour; the other at the moment decides to change lanes and does so without signaling. The resulting smashup demolishes both cars and sends one man to the hospital with a broken pelvis and the other is killed. Each carried full bodily injury and property dam- age insurance. Neither can recover for personal injury or damage to the car. Reason: Each party was guilty of contributory negligence. Defendant runs his car across a sidewalk and smashes into the front room of a simple cottage, killing the grandmother and crippling for life the little children. The cause of the accident was that the driver was hit in the eye with a bullet from a B-B gun shot by someone unknown. The driver carried public lia- bility insurance, but the injured persons cannot recover. Reason: The injuries were purely accidental; the driver wasn't to blame. Finally, there is an increasing problem of insurance companies that go bank- rupt. There is no reason to doubt the general validity of the industry claim that over the past decades they have lost something like $1-billion. One result is that, of the 3,000-odd companies that sell some form of property and liability insur- ance, 73 have failed during the past five years, leaving the policyholders without protection. In consequence there is now a growing number of cases in which accident victims are left helpless. The plight of the victims, if never standard, has nonetheless a consistency to it: the promising high-school athlete, the smashed school bus, the endless operations and deformed limbs~ the mortgaged farm arid ruined parents. The firm that had insured the truck bad gone bankrupt. As stated earlier, the secondary effects of the present insurance system are wasteful and onerous. The most ironic-and absurd-of these secondary effects is that the liability system has worked in such a way that the influence of the insurance industry in the field of traffic safety has been almost entirely negative. The central myth of the pre-scientific stage in this field was that drivers are responsible for accidents and can be made not to have them. This view harmonizes so well with the tort system of adjudicating traffic acci- dents on the basis of who was at fault that over the decade preceding the Im- position of Federal safety regulation, the insurance industry was steadfastly in- different to or even opposed to all serious proposals made in the field. In logic, those in the insurance Industry should have been at the forefront of traffic safety research and development. In fact, with the honorable exception of the Liberty Mutual Company, their voice was indistinguishable from the chorus of Yahoos in Detroit bellowing about the "nut bebind the wheel." They set up the usual trade associations, staffed with the usual incompetents, and spent much of their time conferring citations on one another. The most serious secondary effect of the existing insurance system, however, lies in its impact on the courts. This process begins with the use of the police to enforce the traffic laws, as a result of which the incidence of arrest by armed PAGENO="0069" 65 police in the United States is the highest of any society in history. (In 1965 the California Highway Patrol made two million arrests.) The jam starts there, and is followed by a flood of accident litigation cases that derive, in part at least, from the original criminal case. We have now reached the point where accident litigation accounts for an estimate~l 65 to 80 per cent of the total civil court cases tried in the United States. This in turn has brought us to the point where delays in justice here are the longest of any democracy on earth. It now takes an average of 30.1 months to obtain a jury trial in the metropolitan areas of the nation. In Westchester and Kings Counties, it is 50 months plus. In Chicago it is 69 months plus. A legal expert in the field, James Marshall, has argued that persons involved in or witnessing an automobile accident are not really capable of reconstructing it in court. The event is too complex, and levels of perception too low. (How would a witness to a shooting respond to a question as to which way the bullet was traveling?) A fortiori the attempt to reconstruct such an episode three, four or five years afterward is nigh impossible. Thus the question must be asked whether a social concern of the highest order-the administration of justice- is not being sacrificed to one of a much lower priority, the reenactment of traffic accidents. (As indeed the whole cops-and-robbers, shoot-em-up paradigm for man- aging the road system must be questioned. It was not just chance that the riots in Watts and Newark began with police arresting a motorist.) There is little likelihood, however, that greater efforts toward the administra- tion of justice-more judges, or whatever~-would change matters. A New York survey has shown that of 220,000 annual claims of victims seeking to recover damages caused by another's fault, only 7,000 reach trial, and 2,500 reach verdict. Given the number and rate of accidents In the existing transport system, a kind of Malthusian principle governs the courts: the number of litigated cases will automatically increase to use upall the available judicial facilities and maintain a permanent backlog. At the time when issues of justice, violence and civic peace are of immediate and pressing concern, to devote the better part of the judicial (and an enormous portions of the legal) resources of the nation to managing the road system is the kind of incompetence that societies end up paying for. Only one adult response is possible: the present automobile insurance system has to change. S Two courses are open. Given the profit-and-loss record (which doubtless is more complicated than we know), it would on present appearances be a favor to the insurance industry to get it out of the traffic accident business altogether. A simple means of doing this would be for the Federal Government to begin automatically providing all licensed drivers with a minimum amount of insur- ance against injuries and property loss that they might suffer. Claims could be adjusted in much the same manner as the workmen's compensation system that has been operating for a half century in most states. Awards would be made on the basis of loss rather than fault, and much of the vast, clumsy apparatus of claim, counterclaim, litigation, delay and evasion might be done away with. Financing such a system might be the easiest part of all. The Federal High- way Trust Fund obligated $3.4-billion in highway-user taxes in 1966 solely for the construction of the Interstate Highway System, which is scheduled for com- pletion in 1973. We are therefore approaching the point when we must decide to go on pouring concrete at the enormous pace of the past decade even after the InterState System is finished or whether to taper off somewhat. One alternative use for the taxes that were imposed to build the Interstate System would be to finance an insurance system. Automobile liability premiums came to $8.3-billion in 1965; given the egregious wastefulness of the present system, the sums are not disparate. For an extra penny or so in gasoline tax, an eflk4ent national system of accident compensation could be established, modeled perhaps on the existing accident compensation system for Federal em- ployes. This would involve considerable dislocation for those now employed by or involved with the private insurance Industry, but these are, generally speak- ing, valuable workers for whom an orderly transition could be arranged. By this all too familiar process, government would reform industry. The alter- native is for industry to reform itself. A proposal to do just this was put forth last year by Robert B. Keeton of the Harvard Law School, and Jeffrey O'Con- nell of the University of Illinois College of Law In their. book, "Basic Protec- tion for the Traffic Victim: A Blueprint for Reforming Automobile Insurance." After a definitive exposition of the ways in which~ and the reasops why, the present system does not work, they propose a substitute that is simplicity itself. PAGENO="0070" 66 As Keeton and O'Connell see it, the basic flaw in the present system has to do first with the concept of liability in traffic accidents, and, second, with the rela- tionship between the insurance company and the driver. As stated, for most accidents liability is an elusive and unproductive question. With 103,000,000 licensed drivers, there are going to be an enormous number of accidents regard- less. The larger social need is to compensate those who are injured, or whose property is damaged, in such a way as not to bankrupt those who are putatively responsible. Hence they propose a system which would suspend the issue of liability for the first $10,000. The insurance companies would routinely pay up to $10,000 per victim for out-of-pocket losses, which consist principally of med- Ical expenses and wage losses. Much of the time it is impossible to determine who, if anyone, was to blame for an accident, but it is always possible to find out who gets hurt. The key difference between the Basic Protection plan and the old workman's compensation system is that the new plan eliminates the need to make the often very difficult judgment as to what a sprained back, etc., Is worth. The victim is simply paid, by his insurance company, whatever his actual losses in wages and medical expenses and property damage are. Under this system, persons would still go to court when the injury is perma- nent and serious-i.e., costing more than $10,000 and, it is hoped, involving someone else's responsibility. But the overwhelming number of small cases would be handled quickly and efficiently out of court. In that way the danger is avoided that in the effort to make settlements prompt, but moderate, some vic- tims with large and legitimate claims will be forced to settle for less than a jury would award. The second and crucial element in the Keeton and O'Oonnel Basic Protection plan has to do with the relationship between the insurance company and the driver. As they see it, much of the present misery derives from the fact that this relationship is, with but rare exceptions, an adversary one. The company wants to pay as little as it can; the victim wants to get as much as possible. 1~eeton and O'Connell argue that this is inevitable given that the company insures the other fellow. They propose to solve it by the simple process of hav- ing the company Insure the victim. This is exactly what happens, for example, with fire insurance. Householders buy their own insurance. If their house catches fire, regardless of who is responsible (barring fraud), their company compensates them. The settlement process involves a relationship between a busi- ness firm and one of its clients. Thus, the many hundreds of thousands of fire insurance claims are settled each year with nothing like the turmoil accompany- irig automobile claims. It is hard to fault the Basic Protection scheme. The authors are right in their facts, and right in the all-important perception as to what it is Americans are good at. We are good at maintaining business relationships once a basis for mutual self-interest is established. The Basic Protection plan would establish one. Mofeover, they are right in seeing the insurance issue as part of the general issue of Taming the Automobile, to use the title of a long law review article by O'Connell which proposed many of the present Federal safety programs. (His book, "Safety Last," written with Arthur Myers, was judged by Lewis Mum- ford to be the best of its kind, in competition even with Halph Nader's redoubt- able "Unsafe at Any Speed.") Professor Conard has written of Basic Protection that it is "surely one of the most important law books of the current decade. . . . To find legal effort on a similar scale, one would have to go back over 30 years to the famous study by Frankfurter and Green of the labor injunction." Variations on the Keeton- O'Connell proposal are certainly possible. Thus the Massachusetts Democratic Advisory Council has proposed a mixed system, with Basic Protection for per- sonal injuries and liability insurance for property damage. But in all its essen- tials, it is hard to deny the fundamental rightness of the Basic Protection plan. Nor is it difficult to see that it provides the private insurance industry with a means for insuring that their business stays private. What then has been their reaction? The ominous and manifest fact is that the reaction so far has been not very different from-has been very near identical to-that of the automobile indus- try to the criticism of vehicle design that began in the mid-nineteen-fifties and ended a decade later with Federal regulation. Let it be clear that the rather small group of persons who formulated what are now the general outlines of public policy in traffic safety did not at first assume that Government regulation // PAGENO="0071" 67 was inevitable or even desirable. Almost to the last moment it was fully within the powers of the industry to take on the task itself. Detroit is now routinely ascribing higher prices to safety regulations, and industry spokesmen recurrently offer dark forecasts of their future under socialism. The conservative economist Milton Friedman has deplored the whole development, stating. "Time and again, laws passed to protect the consumer have ended up by restricting competition and so doing the consumer far more harm than good. Is it too much to hope that one of these days we shall learn this lesson before we enact a new law rather than after?" A fair point. (Although how much competition there is in an oligopoly such as automobile manufacturing and just how much profits can be hurt in conse- quence, remains to be seen.) But it is also fair to ask if private industry will ever learn to listen to responsible criticism before it is too late. Anyone who went through the battle of automobile design will have doubts. Somehow, with the giants such as Ford, Kettering and Sloan gone, the industry fell into the hands of hired managers with a deficient sense of personal respon- sibility, and possibly also of personal influence. Interestingly, the one company that did take some chances in the name of traffic safety was Ford, which had remained under family direction. But in general the executives in Detroit had little but disdain for their critics, dismissing them as busybodies, Democrats or worse. (Actually, some were solid Republicans, motivated more by a sense of professional ethic than of social reform, but if anything more effective for that reason). The industry listened instead to those who assured it nothing was the matter, and paid fortunes to public-relations advisers who merrily marched them off the cliff. Some insurance industry executives have given Keeton and O'Connell a hear- ing. Once again the place of honor goes to Liberty Mutual, with the Aetna and the Kemper companies also playing a role. But by and large the reaction of the Industry has been rather like that of the ancient regime, hoping to live out their own careers and resigned to the deluge that follows. This may be good enough for executives in Hartford getting on toward retirement. It is not good enough for the nation. We are paying a great cost for our present mental slovenliness in this area, which we certainly should not and probably cannot afford. What is to be done? The first and obvious step is the opening of Congressional hearings, a matter under preliminary study by Representative Emanuel Celler of New York, and others. The role of the Congress in enacting the safety legis- lation was superb: there is probably not another democratic legislature in the world that could have taken on a private interest the size of the automobile industry and legislated as calmly and effectively in the public interest. It is to be noted that Congressional involvement in this area began with the Inter- state Commerce Committee hearings of Representative Kenneth Roberts of Alabama in 1956. Congress was far ahead of both the public and the executive branch, and when the time came to legislate did so with immense competence and style. As a second step, it is altogether reasonable to ask that the professional busi- ness schools of the nation involve themselves with this issue. In the decade that preceded the imposition of Federal regulation on the automobile industry they remained silent. It was a time of moral crisis, but the great complex of business-oriented academics, with their unparalleled access to the business world, maintained their neutrality. The views of Dante and President Kennedy on auch persons are well known. But America, as David Riesman reminds us, is a land of the second chance. The business schools have such a second chance: to take on the issue of automobile insurance and develop a community of opinion as to what can and should be done. Similarly, the American bar has a responsibility here. Apart from the Ameri- can Trial Lawyers Association, the legal profession contributed almost nothing to the effort to obtain safer automobiles. With respect to automobile insurance, not just the responsibility of the legal profession is at stake, but also Its Integ- rity. As much as half the Income of American lawyers Is earned In accident litigation. For the bar to remain silent about, or actively o `~` ~ In~ irance system would h PAGENO="0072" 68 Mr. Moss. I am pleased at this time to welcome a colleague from our full committee, the Honorable John Dingell. Please proceed as you see fit, Mr. Dingell. STATEMENT OP HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS PROM THE STATh OP MICHIGAN Mr. DINGELL. Mr. Chairman and members of the subcommittee, for the record, my name is John D. Dingell; I am a Member of Congress from the 16th District of Michigan. I wish to thank the Chair and subcommittee for giving me the opportunity to testify in behalf of House Joint Resolution 958. Mr. Chairman, I wholeheartedly endorse and urge prompt passage of House Joint Resolution 958, which would authorize a much- needed and long-overdue comprehensive study of automoblie insurance practices. As you know, the President in his consumer message last month recommended that the Department of Transportation, in co- operation with the Federal Trade Commission, undertake an investi- gation of the automobile insuranc~ industry. The pending bill provides for just such a study, under the direction of the Department of Transportation, but with the full cooperation of other agencies, including the Federal Trade Commission. The problems of the automobile insurance industry, and of more and more Americans with the industry, are mounting daily. Time in its January 26, 1968, issue headlined its "Time Essay" of that week, "The Business With 103 Million Unsatisfied Custqmers." In this essay it is stated that "there is no question that the U.S. auto-insurance sys- tem is a model of expensive inefficiency." In 10 years the average premium has gone up 55 percent. The cost of automobile insurance for many families, especially those with teenage drivers, has become almost prohibitive-but at the same time practically unavoidable as well. Yet in spite of these skyrocketing rates, insurance companies have been facing growing losses. Car repairs keep getting more and more expensive, but medical costs and bodily injury claims have been rising even faster. And in their efforts to protect their investments, one com- pany after another has taken advantage of policyholders, canceling policies with little or no justifiable cause and raising rates on others. Claims, particularly those involving court action, are taking longer and longer to process and are often far from satisfactory in their resoultion. Many proposals have been put forward to resolve these critical prob- lems, ranging from having the Federal Government get directly into the automobile insurance business to revisions of private insurance so the victims, rather than negligence lawyers and other middlemen, become the true beneficiaries of insurance. Of course, we must also in- tensify our efforts to preventihese costly acëidents which are the main reason for the insurance predicament we find ourselves in. Under the traffic safety and automobile safety laws passed in 1966, the Department of Transportation is already engaged in efforts to promote the safety of our highways ahd of our automobile vehicles. It is highly appropriate, therefore, that the Department undertake a study on automobile insurance and all related aspects of accident corn- PAGENO="0073" 69 pensation systems. This is an essential first step in bringing about reforms in a situation that is causing uncounted agonies for thousands upon thousands of our citizens, a situation we cannot allow to continue. I therefore urge prompt approval of this resolution. Mr. Moss. Thank you for your views Mr. Dingell. If there are no questions we shall hear next from another colleague, the Honorable Joshua Eilberg. STATEMENT OP HON. JOSHUA EILBERG, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP PENNSYLVANIA Mr. EILBERG. Mr. Chairman, there is no facet of business today which affects the American public, either directly or indirectly, more `than automobile insurance. Automobile insurance is a giant business today. Complete figures concerning automobile accidents and insurance are not available for later than 1966, but I feel sure they have increased since. In that year of 1966, there were 102 million drivers licensed to oper- ate 96 million vehicles in the United States. There were 13,600,000 accidents in which 53,000 persons were killed and 3,700,000 were in- jured. In these accidents, 24,300,000 automobiles were damaged. During the same year, automobile insurance companies collected $9.2 billion in, premiums. And what do we find? This past January, Time magazine termed auto insurance "The business with 103 million unsatisfied customers." I have been inundated, as I am sure each Member of the House has been inundated, with complaints from constituents concerning auto- mobile insurance. The public has been victimized in various manners and the public is without protection on the Federal level. In my own State, Pennsylvania, thousands of motorists have fa]len prey to unscrupulous insurance operators. In good faith, the motor- ists have paid insurance premiums and thought they were covered. But after becoming involved in accidents, they found the companies had disappeared, leaving their claims and the claims against them unpaid. In the same manner, others who had purchased automobile insur- ance in good faith from mutual companies, found themselves assess- able when the companies mysteriously went out of business. There are many other complaints. There are arbitrary cancellations because of age, health, or accidents. There have' been mammoth in- creases in premiums as a result of a single accident-whether or not the motorist was responsible. In fact, disregarding these instances, the average premium has in~ creased 55 percent in the past 10 years. In view of these facts, in January 1~67, I introduced H.R. 4006, which calls for the establishment of a Federal Motor Vehicle Insur- ance Guaranty Corporation, which would operate in the same fashion as the Federal Deposit Insurance Corporation. H.R. 4006 would not only protect the motorist from damages if and when his insurer failed, but it would provide for Federal exam- ination of insurance companies to make sure the public is protected from fly-by-night, opportunistic, and dishonest insurance `companies. PAGENO="0074" 70 But what is being considered here today, gentlemen, is House Joint Resolution 958, authorizing a comprehensive study of the automobile insurance industry by the U.S. Department of Transportation, in co- operation with other appropriate agencies. Similar to my many colleagues, I believe that what functions can be left to the discretion of the several States, indeed should be left within the jurisdiction of the States. But, Mr. Chairman, I believe it is eminently clear that automobile insurance is a business involved in interstate commerce. Further, it has been shown that many States cannot or will not perform the necessary investigation and regulation of automobile insurance. If my colleagues feel more investigation is necessary before pro- ceeding with needed legislation in this field, I cannot be a naysayer. Action in this field is not only justified, it is long overdue. Therefore, Mr. Chairman, I urge without reservation speedy enact- ment of House Joint Resolution 958, so that we can at last move for- ward to execute our responsibilities to the public which we serve. I thank you. Mr. Moss. Thank you Mr. Eilberg. Our next witness is another colleague, the Honorable William Green. STATEMENT OP HON. WILLIAM J~. GREEN, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP PENNSYLVANIA Mr. GREEN. Mr. Chairman, as one of the first Members of the House of Representatives to urge a full airing of the practices, finances, and policies of the automobile insurance industry, I am pleased that we are making progress. Less than a year has past since Representative Cahill and I spoke on the floor of the House urging a congressional inquiry. I think it is commendable that the Department of Transportation will be undertaking such a study, but I also think it is necessary for the House to investigate every facet of this problem, and as soon as possible. We are dealing here with a problem that has grown for more than a decade to the point where it affects millions of Americans daily- through constant pressure for rate increases, through discriminatory practices, through the cancellation and nonrenewal of policies. What's more, there is the question of fairness to the companies themselves. They claim that they cannot survive in the fact of the constantly rising cost of accidents. In order to make ends meet, they have raised the cost of premiums by 100 percent, 200 percent and even 400 percent in some places in the country. In my home State of Pennsylvania, we have another serious prob- lem. More than 20 fly-by-night mutual companies have ceased to oper- ate, and they have left individual policyholders responsible for the millions of dollars of debt they incurred. While admittedly, these sums are not as great as the more than $4 billion the insurance com- panies paid out in claims, they fall much harder on the individuals who must bear them. There is, too, the serious question of insurance companies' bookkeeping methods, which would go unchallenged~ Through their own method of computing statistics and through keep- ing profits from investment separate from income, companies have PAGENO="0075" 71 been able to picture themselves on the brink of financial disaster in order to get State approval for rate increases. These are all serious questions which will go unanswered for several years if the Depart- ment of Transportation alone conducts the study. Secretary BOyd indicated that it would require some time to hire staff, to set the guidelines and to get his probe underway. I think it would be a minimum of 2 years before we have any meaningful report from him if he is to do the job that is necessary. But the problems I have mentioned in brief face the American automobile owner daily and want attention right now. I was pleased to learn that Senator Hart is holding hearmgs in the Senate Anti-Trust Subcommittee. I think it is important for the House of Representatives also to provide some light in this area. Mr. Moss. Thank you for your views Mr. Green. We shall hear next from the Honorable George Miller of California. Please proceed, Mr. Miller. STATEMENT OP HON. GEORGE P. MILLER, A REPRESENTATIVE IN CONGRESS PROM THE STATE OP CALIFORNIA Mr. MILLER. Mr. Chairman, I am very appreciative of having been afforded this opportunity to express my support for House Joint Reso- lution 958 which will authorize an intensive study by the Department of Transportation into the tragic consequences, physical and economic, suffered by those injured in automobile accidents and the adequacy of our present system in the compensation and protection of our citizens. The present system, which applies the common law principles of negligence and is administered by our civil courts with the extensive use of jury trials, has shown signs of great strain under the enormous volume of litigation. In many areas this has resulted in extended trial delay and high costs of adjudication. Another criticism has been that widely varying amounts of damages are awarded for similar injuries depending upon location of trial, makeup of the jury and other factors not relevant to the merits of the case. Also, the award for damages is a one-time lump sum payment with no provision for continuing medi- cal care or allowance for either future improvement or further de- terioration in the physical condition of the claimant. It also appears that in the modern automobile accident many times there is a highly complicated fact situation where events often take place involving mere seconds of time and calling for highly sophisti- cated judgments and quick physical responses. It is extremely diffi- cult, if not impossible, to apply the traditional common law standards as to what constitutes negligence, reasonable care, and prudent con- duct in such cases. I know that members of the bench and the bar together with the automobile insurance industry have worked diligently in their at- tempts to establish an orderly, responsive, and uniform system of com~ pensation and protection on behalf of our citizens. However, the prob- lem is of such magnitude so as to necessitate a national effort toward arriving at its solution. This investigation will give all interested groups the opportunity to contribute toward a comprehensive evalua- tion of all aspects of this increasingly serious national probleth which PAGENO="0076" 72 is so costly in terms of human suffering and consequent economic hardship. Mr. Moss. Thank you for your brief statement, Mr. Miller. We have yet another Member to hear from today. Our next witness is the Honorable John Tunney. STATEMENT OP HON. JOHN V. TUNNEY, A REPRESENTATIVE IN CONGRESS PROM THE STATh OP CALIPORNIA Mr. TUNNEY. Mr. Chairman, first I would like to commend you and the other members of your committee for the outstanding work you have done in this field. I feel that House Joint Resolution 958 to direct the Secretary of Transportation to conduct a comprehensive study and investigation of all relevant aspects of the e~dsting motor vehicle accident compen- sation system, should be enacted. Second, as you know, I cosponsored a previous bill which you in- troduced to establish a Federal Motor Vehicle Insurance Guarantee Corporation. This bill would protect all those who hold auto insur- ance policies from losing the protection offered by the company in- suring them if it goes into, bankruptcy. The proposed new Federal corporation is patterned closely after the Federal Deposit Insurance Corporation which protects the sav- ings in bank accounts, and who have a claim against a bankrupt com- pany would be paid. This legislation would be particularly helpful to those senior citi- zens whose insurance policies are canceled after they reach a certain age and who must seek out high-risk companies. The rate of bankruptcy is much higher with these companies. It will aTso help our servicemen who have difficulty getting companies to insure them and who must also rely on high-risk companies. Most military posts require that a serviceman's car be insured. According to the Senate Antitrust Subcommittee, servicemen lost hundreds of thousands of dollars to fly-by-night insurance companies. I believe that the passage of this legislation will help the States to regulate the auto insurance business and protect policy holders. The legislation would reinforce but not replace State insurance regulation. Significant facts, showing the need for this legislation have been brought forth during hearings held by the Senate Antitrust and Monopoly Subcommittee in May of 1965. The hearings showed that over a 6-year period, 73 companies writing' motor vehicle insurance had been placed in liquidation or receivership. These companies were chartered in 22 States and over half were writing auto insurance poli- cies in States other than their home State. This resulted in a loss of over $100 million to over 300,000 policyholders and accident victims. Between 1945 and 1959, approximately 98 property and casualty in- surers have been declared insolvent and liquidated. According to the Senate Antitrust Subcommittee the estimated public loss was $150 million. The purpose of this legislation is to guarantee the contractual per- formance of insurers issuing motor vehicle insurance pohcies in inter- state corntnerce. It also provides coverage for insurers issuing inter- state policies if they desire to apply for guarantee status. PAGENO="0077" 73 As the people of California in particular know, the automobile can no longer be considered a luxury but is a necessity. And as all automobile owners know, auto insurance is also a necessity. In 1966, for example, $9 billion in premiums were paid by over 100 million drivers owning over 80 million vehicles. I believe that this legislation represents a very moderate and reasonable solution to a very serious and complex problem. I hope that this legislation will be one of the matters which will be considered once House Joint Resolution 958 is enacted. Once again, I would like to commend your efforts and lend my support to House Joint Resolution 958. Mr. Moss. I am pleased to welcome as our next witness this morning a very distinguished colleague, the gentleman from New Jersey, the Honorable William T. Cahill. STATEMENT OP HON. WILLIAM T. CAHILL, A TtEPItESENTATIVE IN CONGRESS PROM THE STATE OP NEW J~ERSEY Mr. CAHILL. Thank you, Mr. Chairman and members of the com- mittee, I shall try to be brief, recognizing as I do the work of this subcommittee and recognizing also that I have expressed my views before the other body. Mr. Chairman, while I do recognize the need for an in-depth study of the automobile liability insurance industry, based upon what I am sure has already been ample testimony before your subcommittee indicating the soaring rates, the arbitrary coverage and policy can- cellation practices of the various companies, the great number of in- solvencies that have occurred throughout the country, the congested court calendars, and so forth, I do not believe that this is the proper route to take. I do not thing that this resolution assigning this task to the Depart- ment of Transportation is best. I say that beause I feel that au of these problems are so well known to all of the representatives of the people here in Congress and there is ~o much objective testimony available to prove the abuses, that really what we need n~w are some immediate remedies. And I have to believe that to give this assignment to the Transporta- tion Department for a period of 2 years at a cost estimated, I see by this morning's paper, by the Secretary of $2 million will not as I see it do anything except compile additional statistical data arid prolong the deliberations of your committee or any other committee of the Congress until that study is completed. It seems to me, Mr. Chairman, in all candor, that either your com- mittee or some other appropriate committee of either the House or the Senate should assume this resl~onsibility and conduct this investiga- tion, directing, as it will, a priority system so that, i~s the testimony is adduced, and as the facts are develoiied, legislation can be proposed arid hopefully enacted into law. Now as you know, the Judiciary Committee did conduct a staff study. They estimated that the cost of conducting an investigation, an appropriate, adequate investigation, would be approximately $313,000 as compared to $2 million. They estimated that it could be completed within 1 year. PAGENO="0078" 74 Now this is a legislative committee and hopefully those who would serve on it would devote the necessary time to it. They would be asso- ciated with adequate and qualified staff. So that when the facts, as I think they would, demonstrate the need for immediate legislation, these members could hopefully prepare and present such legislation to the entire Congress. So that from the standpoint of cost, from the standpoint of time, from the standpoint of having a committee that is a legislative com- mittee here in the first instance, the testimony, to become knowl- edgeable so that having determined what is necessary, could imple- ment it without too much delay. It seems t6 me that the proper route to take here would be a con- gressional committee. I would also say, Mr. Chairman and members of the committee, that last week when I appeared before the committee headed by the Senator from Washington, that the Senator from Michigan publicly stated, and this was confirmed by the chairman, Senator Magnuson, that in spite of this assignment to the Department of Transportation his subcommittee was going to continue its investigation from the standpoint of making a determination, as I understand it, whether or not the insurance industry should in fact be placed under the antitrust laws of the United States. So, as I view it, all that the Department of Transportation can do and will do is to compile a great number of statistics, which I would assume they will get in the first instance from the insurance companies themselves, from the Association of Insurance Companies, from the ratemaking biireaus, all of which is readily available to any committee of the Congress. So, in summary, for the reason that I think, No. 1, it will be less costly, and, No. 2, it will be done more quickly, and No. 3, with no intention of being critical of the Transportation Department, I really believe that a committee of this Congress would be more qualified to do the work and, therefore, would have the research at its command the same as the Department of Transportation, but would have the added quality of being able to implement forthwith what was necessary. It seems to me that the Congress should do this work. Now the Supreme Court has said that it is a congressional responsi- bility. We have to make this determination what, if anything, is to be done in relation to the automobile liabilities insurance industry and not the Department of Transportation. As you known, this problem began originally back in 1944 when the Congress I believe really, concerned as they were in that year with international problems, hastily, and I think without sufficient in-depth study, enacted the McOarran-Ferguson Act, which eliminated the effect of the Supreme Court's decision in relation to automobile lia- bility, and, in fact, all insurance. Therefore, Mr. Chairman, I would suggest that some thought be given by this committee to assuming, itself, if it would, or perhaps as I know the chairman has done in the past, conferring with appro- priate other committee chairmen, for the purpose of making a deter- mination whether or not this work could be done by an appropriate committee of this Congress; PAGENO="0079" 75 I think, Mr. Chairman, there are three or four things that are very essential that should be considered almost immediately. First is whether or not the insurance industry can really today effectively op- erate under the existing system of State regulation, with 50 different commissioners coming up with 50 different types of regulation, and with all of these companies basically involved in interstate commerce, how they can really effectively, in spite of their very best effort, do the job that has to be done, confronted as they are with 50 different regulatory agencies. Second, it seems to me that there ought to be some minimal standards almost immediately as far as policies of insurance are concerned. As you undoubtedly know, policies are issued in some States in this Nation which only insure the driver of the car and only protect the public for accidents that occur within that State. So, we have the situation today where a man may be insured in Massachusetts but if he goes across the line to Connecticut and is in- volved in an accident the person injured in Connecticut is not covered and the driver of the Massachusetts car is not protected. We have, as has been evidenced in Pennsylvania, flagrant violations, it seems to me, and I am sure the gentleman from Pennsylvania is aware of the number of insolvencies that we have had. This all indicates to me inadequate investigation in the first instance of the capital structure of the company and inadequate supervision of the continued operations of the company in the second instance so as to insist that adequate reserves be present. These things, it seems to me, cry out for immediate attention. I think there should be some minimal standards on policies, there should be some minimal standards on capitalization; there should be some mini- mal Federal involvement for the purpose of insuring that these com- panies continue to have adequate funds to write the policies that they are writing. I think as far as insolvency is concerned, we need some legislation, perhaps along the lines of the FDIC so that we can protect our public. Mr. Chairman, you know better than I, because I know how inter- ested you are in all matters that come before your committee, that this is indeed, today, with over a hiuidred million automobiles, a social problem of great magnitude. I commend you and all of your mewbers for your interest in this matter and want to assure you that while I oppose the assignment of this responsibility to the Department of Transportation for the rea- sons I have given, I nevertheless applaud the interest that is evidenced here because I think it is something that the Nation really needs. hope- fully, when the matter is discussed on the floor of the House, a great deal of facts can be presented which I think will recommend the procedures that I have outlined; namely, an investigation by a legisla- tive committee of the Congress. Thank you very much, Mr. Chairman, for this opportunity of ap- pearing before you. Mr. Moss. Thank you, and I want to assure you that the commit- tee will give very thoughtful consideration to the suggestions you have made, I would observe that the study would not contemplate in any way the foreclosure of this field for possible legislative action upon an ap- propriate showing of need for that action, PAGENO="0080" 76 While the study, itself, has, under the general guidelines stated by the Secretary yesterday, been indicated as a 2-year study, the commit- tee will be following very closely, if the study is finally authorized and that is the avenue the committee determines upon when they meet in executive session to consider the resolution, and the interest and the continuing followup will be maintained very carefully, as it was by the Commerce Committee during the course of the study which I think was most productive a few years ago of the operations of the securities market of this Nation and a study which you may recall resulted in the most far-reaching amendments to the act since its original adoption back in the early 1980's. So that the Commerce Committee has had the experience of charg- ing an agency with a study while continuing an oversight function and legislating within the area concurrently with the progress of the study. Mr. CAHILL. Mr. Chairman, I have had in mind, personally, some positive approach to this problem-such as the introduction of specific legislation. I have hesitated to do it until the road was outlined that we should follow. I did not want to encumber this subject matter but I do have in mind some specific approaches. As I say, I have hesitated. Would it be your thought, that if specific legislation was introduced at this time, that if it were assigned to your committee, you would feel that hearings could then be held pending the study by the Transportation Department? Mr. Moss. It has always been my policy, upon the introduction of legislation, to try to give the author a hearing and permit him to pre- sent the case he has. If it is a persuasive case, one well founded on fact, then I think the committee has a responsibility to act on it. I do not believe in shelving legislation, in acting as a barrier to the consideration of legislation. Mr. CAHILL. I appreciate that very much. I say to the chairman that I mention it because Senator Hart commented the other day that he, at least to me, evidenced concern that if this matter were assigned to the Transportation Department that it then might be argued that we should not consider any specificlegislative approaches until that study was' completed, which would be in effect to shelve all positive legisla- tion for a minimal period, it seems to me, of 8 years. I am delighted to observe that you share my thinking that if there is some creditable and productive and progressive and constructive approach, that at least the author of the legislation would be given his day in court. Mr. Moss. I think the gentleman recognizes that for some 14 years I have chaired investigating committees with rather broad authority in certain fields and that notwithstanding the in-depth investigations underway by those committees, I have attempted to continue to con- structively contribute to legislation affecting or touching upon the subjects under the most penetrating study by the committee. I feel that is an appropriate policy, there is no conflict at all in such a policy. I feel that I would reflect the views of a number of the members of the committee. I welcome the comments of the gentleman from Penn- sylvania. `~` PAGENO="0081" 77 Mr. WATKINS. Thank you, Mr. Chairman. I want to apologize for being late. I am happy to see my distin- guished colleague from New Jersey whom I think all of us on both sides of the aisle respect his views and respect him as a Congressman for the hard work he does on Capitol Hill. Frankly, the reason I was late this morning, Mr. Chairman, is that my automobile was stolen last night. Mr. CAHILL. I hope you recover it. Mr. WATKINS. I hope they don't find it. I apologize for not being able to hear your testimony. I shall read the record. I am sut~e it will be constructive and helpful what you have said here, not knowing what you did say. You understand this legislation here is for a study only? Mr. CAHILL. Yes. Mr. WATKINS. I notice in talking with the chairman you feel as though the time is ripe for some positive legislation? Mr. CAHILL. Yes. Mr. WATKINS. May I ask the distinguished gentleman how does your insurance department of the State of New Jersey feel about this? Are you in about the same trouble as we are in Pennsylvania? Mr. CAHILL. I will say, really, that I think we have a good insur- ance department in the State of New Jersey. I think the commissioner is doing his very, very best. I think he is qualified and capable. It is interesting to note that since the efforts have been made, I think, nationally in this entire problem, that for the first time our Governor, through the attorney general, appointed a public defender to represent the public in opposing a rate increase that was requested by the companies. Heretofore, it has been almost a one-way street, where they collected the data from the ratemaking bureaus, presented it, justified an in- crease, and it was given. The public was very ably represented and an application for an in- crease of some $30 million was denied. For the first time our commis- sioner held that the investment income of an insurance company had to be considered in an overall evaluation whether or not that company was making a fair profit. So, I, would say to Mr. Watkins that I think that New Jersey has now taken a very progressive and helpful view in this overall problem. I think that they now recogtii~e, unless the courts upset it, that in any future application by any company in the State of New Jersey for a rate increase that the overall income or loss of the company, includ- ing in the investment portfolio, will be considered. Mr. WATKINS. In other words, ~ou feel as tl~iough the State of New Jersey is interested in the Federal Government getting into this business? Mr. CAHILL. I cannot speak for the State of New Jersey but I will say this, I think-whether the representatives of the compar~y will say it publicly or not, I don't know-but I think today the knowledgeable officials of the better companies recognize that some Federal interven- tiôn absolutely has to take place. I think, Mr. Watkins, that ~0 commissioners, some qualified, some not qualified, some arbitrary, some objective, no company today can really, I think, efficiently operate under that system. 92-100-68-----6 PAGENO="0082" 78 Mr. Moss. Would the gentleman yield? Mr. WATIcIN5. Yes. Mr. Moss. I would like to state that the National Association of In- surance Commissioners has endorsed the study. As you may recall, at the opening ~f this session, I made a reser- vation in the record to receive a letter from the Governor of California on behalf of the National Conference of Governors, also supporting the study resoluti~n. Mr. WATKINS. I think that is the answer to it. I know that in Pennsylvania we are, in other words, experiencing quite a little difficulty and complaints on rates and we have not been as fortunate as you have been in New Jersey. Every consumer of insurance, every recipient of it, everybody is dissatisfied today. I happen to know a little bit about it. I pay a fair premium in the business I am associated with and it is up, up, up every time you turn around. I wonder sometimes what happens to your cost if you miss your insurance. Another thing we find is that there are many complaints by people who have been refused insurance due to the fact of where they live. That makes it pretty dangerous. That is a pretty broad statement to ask, where you live, but that is true. I don't want to go into the type of people being denied but some the minority groups can go out and hit your automobile and kill your own family, with no insurance or anything else. In Pennsylvania, too, we have the Compulsory Insurance Act. Once you have an accident, regardless of whether. you are responsible or not and you don't have insurance, as soon as the department gets hold of it you are without a driver's license. I shall review everything you have said. I am sure it is going to be helpful here. But I think we are going to have to give very serious consideration to this legislation, myself. Mr. CAHILL. I recognize in the 10 years I have been here the con- tributions that the chairman has made to a great many of the social problems of this country and thecontributions that this committee has made. I was delighted to have him say that even though the study is authorized, as it is being conducted he will not bar any hearings on any legislation which he feels is appropriate. I thank you very much. Mr. Moss. I thank you for your statement. Mr. WATKINS. I would like to join you in your statement. I appre- ciate my chairman very much, myself. Once in a while we tangle up. It is not too often. We just don't "gas" each other on this committee. It is a real pleasure to work with him. Mr. CAHILL. I concur wholeheartedly. Thank you very much. Mr. Moss. Thank you. We appreciate your testimony this morning. Ii will certainly he considered. Mr. CAHILL. Thank you. Mr. Moss. Our next witness is Prof. Alfred Conard, professor at the Law School of the University of Michigan. PAGENO="0083" 79 STATEMENT OP ALFRED CONARD, PROFESSOR, LAW SCHOOL, UNIVERSITY OP MICHIGAN Mr. CONARD. Mr. Chairman, and members of the committee, I would like to congratulate this committee for taking an interest in the prob- lem of automobile injury reparation as a Federal problem. For 5 years I made a study of facts about automobile injuries and the payment received by victims, and at the end of that time I gave some of my conclusions in 1964. I think this was a good deal before there had been much talk of Federal interest in it. I wrote at that time in the Michigan Law Review: Any program that seeks to eliminate these evils on a state-wide basis is boxing with shadows. - . . Any program for the aid of automobile injury victims will be more effective if it is built on a Federal base. (63 Mich. L. Rev. 325). I am happy to gather from remarks already made here that this is not in issue at this time, that you are not really debating whether it is a Federal responsibility; but debating how the Federal Govern- ment should approach it. I gather also from what I have already heard that I do not need to tell you about the disastrous problem of people who are uncom- pensated or inadequately compensated, nor about the soaring insur- ance premiums. I think that in order to try to concentrate on the approach to this problem which might add most to what you have heard from other sources, I would like to say that it is a mistake to view this problem primarily as one of negligence law and negligence liability insurance. There are, in fact, many programs which tend to the relief of the injury victim which operate better, faster, and more efficiently than negligence liability insurance does. I will mention them primarily in the order in which they arrive to the aid of the victim. The first thing he gets the benefit of is health insurance-when he goes to the hospital for medical care with assur- ance of payment. The next thing that he gets the benefits of is sick leave from his employer, or temporary disability insurance, which pays some part of his wages while he cannot work. The next thing in order which is likely to benefit him is not his ]iability insurance, but his loss insurance-for collision and property loss. Sometime within a couple of weeks or a month he is likely to get some payment for his property loss and the damage to his car. If he is in one of the more seriously injured groups, the fatality or total dis- ability, he will get, not later than 6 months later, the benefits of social security. These will last for the rest of his life, for the rest of the lives of his survivors if they need them. Then 2 or 3 years later, he may get a chunk of money from a negli- gence liability settlement, generally too late to have given him the health care that he needed, too late to have paid his grocery bills dur- ing the time when he was out of work, and too little to support him during the period of his disability or the dependency of the people whom he leaves without a source of support. PAGENO="0084" 80 Now not only are there many different programs in effect here but they have very different costs. To start with the beginning, group health in this country generally operates- Mr. WATKINS. Excuse me. Mr. Chairman, is the gentleman going to talk off-the-cuff on this thing or is he going to follow his statement ~ Mr. Moss. The gentleman is summarizing the statement. Mr. CowAlin. I am dealing with things that are in the stattement. I am not following it page by page. Mr. WATKINS. I don't want to be searching through here. Mr. Moss. Mr. Keith and I suggested that in the interest of conserv- ing time we have summary statements from the witnessses and we will file the full body of the statement in the record immediately following the oral presentation. Mr. WATKINS. I certainly concur in that, Mr. Chairman. Mr. CONARD. Thank you very much, Congressman. I am sorry to have puzzled you. With regard to the costs of operation, most group health operates at an administrative cost level of under 10 percent, in some States under 5 percent. I do not have figures on sick leave and temporary total di~abi1ity. We can say that sick leave payments are made with almost negligible costs of administration, possibly under 10 percent. Social security operates at an administrative cost commonly esti- mated at around 3 percent. In the negligence system, the cost of operation is about 56 percent of the social input. If we turn that around the other way it means that for every dollar of benefit to an accid~ntvictim, received through neg- ligence liability, that premium payers and taxpayers have contributed $2.25. That is the cost of delivering $1 of benefit through that system. Now, I am not an advocate~ of abolishing the tort liability system, but 1 saythat in approaching this problem we should view all of these regimes which are contributing to the relief of the injury victim, and we should adjust the roles of those regimes, and adjust them to each other. We should link them so that they do not fall on top of each other like a tumbled-down building, but so that they support each other. Specifically in this regard, I would like to refer to the notorious col- lateral benefits rule. When a claimant goes into court he proves his wage loss, he proves his doctor bills, he proves his property loss, and he does not mention and is not required to mention, and the defense cannot show that in fact all of those have been paid long since. Now this not only results to some extent in double payment but re- sults in something which has first been paid under an extremely effi- cient low-cost system, being paid over again in the most expensive of systems that we have. Now, how should we approach that ~ As we approach this problem, we have to ask what are the ways in which ~ can most economically contribute to th~ welfare of injury victims. One of the most economical ways is health insurance. My suggestion as to what should be studied first is making health insurance compul- PAGENO="0085" 81 ~ory for everyone who owns a car, covering him and the occupants and eventually, possibly the pedestrians whom h~ might hit. Second, I think a study ought to be made on extending the cover- age of social security for survivorship and disability benefits for those who are not already covered by social security. Fortunately, Congress has, in the past 15 years, so expanded disability insurance that most of our laboring work force is covered by it. Nevertheless, there are key groups which are not covered by it. These are young people in the work force who have not yet acquired the necessary quarters of cover- age, and young people in the student group who have not yet joined the work force; and these, as we know, are particularly accident prone. So, I would suggest that this study should certainly concentrate on the ways of expanding our best and most efficient and direct programs. Now, second, what to do about negligence liability: That is a sys- tem of rules which grew up a hundred years ago and was very appro- priate to the reign of Andrew Johnson but which does not have very much to do with the Presidency of Lyndon Johnson. It grew up at a period when there was no liability insurance, there was no collision insurance, there was no health insurance, there was no social security, there was no temporary disability, and there was very little sick leave. As a result, we have a group of rules which work very badly today. I think that the study of negligence liability must give attention to some of the weak spots in the negligence system. There are a great many of these but I will simply point out a few which I think call for immediate attention. No. 1 I have mentioned, the collateral source rule. That rule simply does not make any sense in a day when we have all these other programs. A second problem to which I would like to call your attention is the compensation of pain and suffering, or damages for pain and suffering. If you imagine a guilty driver paying money out of his own pocket to an injured person for his pain and suffering, it probably is enough if the jury finds it is the fault of the driver. But today those damages are paid by insurance companies out of premiums contributed by every one of us. Now, if you were to put compensation on a legislative basis like social security, and you had to tax every citizen for the money that comes out, would you tax citizens to pay for pain and suffering? I will observe that no government, to the best of my knowledge, ever has; and no individual has ever voluntarily bought insurance against pain and suffering. Yet, what we have today through liability insurance is the fact that you and I, and every other automobilist~ is being taxed to con- tribute to this fund which pays out large amounts for pain and suffering. Now there are two other problems about pain and suffering in practice. One of them is that the people who try to live with their sorrows don't collect very much here. The people who collect are those who dramatize them-those who are willing to brood over them until *the jury awards the damages. PAGENO="0086" 82 In the second place, pain and suffering is the way to blow up a hundred dollar claim into a $500 claim. I think this is so commonplace that everybody knows about it. Now one reason why we have pain and suffering damages and why the lawyers will fight, and I say justifiably fight, to save them, is be- cause it is only through pain and suffering damages that you are even able to collect your money damage. If you have a thousand dollar property damage, specific damage, and you have a third of that going to collection expense, you do not end up with a thousand dollars; you end up with $667, unless you are allowed to add on top of that the pain and suffering. So the real function that the pain and suffering damages do is to pay the lawyers' fees. Fi~ankly, I think the pain and suffering of the plaintiff is a very odd way to measure lawyers' fees. I would suggest that when we decide what we want people to be paid, we should provide for the payment of the collection expense. The insurance company which refuses to pay a perfectly clear liability case should be liable for the collection expense as well. I know very well some of the insurance people who will testify be~ fore you will say, "Our company does not do that. We tell our people to pay just claims off the bat," but there is no one with any experience who doesn't know that somehow the adjusters don't get the message. And because they are overworked or because they are trying to make a good record-they are trying to save over the reserve value of the claims-the fact of the matter is that they refuse to pay, or neglect to pay, small claims unless they are blown up with a pain and suffering addition to them. Consequently, I say that as we eliminate pain and suffering we ought also to add a reasonable collection expense and that should have an- other side to it, too. Where the claimant refuses to take a reasonable offer from the insur- ance company, they should be allowed to deduct from their eventual payment the cost of the defense which they have been put to by a man who litigates needlessly. Now another element which urgently needs attention is the cutting out of small claims. Simply eliminate the payment of small claims and let people take care of them themselves, say, under a hundred dollars. I grant this is a shocking sugestion, but I will say that to a large extent this is exactly what happens to most of us. Unless we want to tell the defendant that we have a bad back or we have excruciating headaches, the fact of the matter is that we bear our small claims. Now because of the fact that it costs two dollars and a quarter per dollar of benefit to pay any claim through the negligence system, but it costs more proportionately for the small claims, frankly, we would all be better off if we paid our own small claims. This is one of the places where we could get a very considerable sav- ing in the administration of negligence liability. *1 know your time is short. I think I will leave you with that brief highlighting of what seem to me to be some of the key problems which you face. PAGENO="0087" 83 I am very happy that you propose to appropriate what seems to me to be a modest sum of money to study a problem which is having a tremendous effect on the welfare of our people and on their freedom to operate automobiles. Thank you very much. (Professor Conard's prepared statement follows:) STATEMENT OF ALFRED COWARD, PROFESsOR, LAW SCHOOL, UNIvERsrrY OF MICHIGAN I. THE NEED FOR CONGRESSIONAL ACTION The Committee on Interstate and Foreign Commerce deserves applause for its decision to examine the problem of reparation for automobile injuries. The fail- ure of our society to provide for adequate reparation of automobile injuries is causing needless suffering, losses of productivity, and feelings of injustice. At the same time, the soaring costs of liability insurance are making automobile ownership impossible for many poor Americans. If they cannot own automobiles, they cannot emerge from the congested cities where public transportation is available, and cannot hold jobs at outlying factories. The present system of rep- aration produces two kinds of victims-those who are inadequately compen- sated for their injuries, and those who are charged the high insurance premiums required by a wasteful system. Congress is properly concerned because poverty, productivity, interstate commerce, and justice are involved. Congress has itself contributed to the stream of traffic by supporting highway building, and the automobile itself is a product of interstate commerce. The problems are too vast to be solved by private individuals or by state governments alone. The federal government holds several of the keys to the puzzle. II. IMPOTENCE OF THE STATES The law of automobile Injuries has fallen into obsolescence partly be- cause it has been left to the states, and the states are powerless to make fundamental changes in the system. The stream of traffic is interstate. If my state of Michigan were to pass a uniquely rigorous insurance law, it would do nothing to protect our citizens against vacationing motorists from Illinois and Ohio. If we were to attempt to put heavy burdens on visiting motorists, it would probably have no effect evcept to scare a few tourists away from our vacation industry. Other states have similar problems. A serious attempt to design a one-state reform is involved in the "basic pro- tection plan" of Professors Keeton and O'Connell. In the opinion of many ob- servers, it creates problems of conflict of laws which are insuperable. We long ago learned that railroad and airline transportation are federal concerns. We have already recognized that highways are federal concerns. It is time to recognize that automobile injury reparation is a federal concern too. III. FALLACY OF SUPPORTING TIlE PRESENT INSURED TORT LIABILITY SYSTEM It would be a mistake for the federal government to come to the rescue of the insured tort liability system as it now operates. This is only one of several reparation systems operating to supply injury reparation, and it is by far the most expensive, ineffective and wasteful of all three systems. The system is expensive in that It makes the public pay $2.25 for every dollar of net benefit delivered to injury victims under the insured tort liability system. Comparing other systems, we find that workmen's compensation costs about $1.45 for every dollar of net benefit; individual life insurance about $1.40; group health about $1.10; social security about $1.03. The system is not effective to provide medical restoration and rehabilitation to the disabled because the victim doesn't know whether be will be compensated, until months or years after the treatment would have to be administered. It is not effective to relieve short term distress for the same reason-the delay and uncertainty of payments. It is not effective to relieve long term destitution and poverty because the damages are paid in a lump sum which is easily dissipated, and is inadequate to PAGENO="0088" 84 provide lifetime support for a permanently and totally disabled victim, or a dead victim's dependents. The system is wasteful because It pays the most generously to the least needy, and most inadequately to the most needy. An injury victim with a total dollar loss under a hundred dollars is likely to be repaid more than three times his dollar loss; but a victim with a $25,000 loss is most likely to be repaid less than a quarter of his dollar loss. The system is not effective to punish or deter negligence. Because of the umbrella of liability insurance, motorists are largely insulated from the fi- nancial effects of their accidents. A survey showed that among defendants who were actually sued, 33 percent did not even know how the case was settled. If the federal government is to come to the rescue of automobilists and auto- mobile injury victims, it must first set up a rational system of protection. This would be consistent with what the goverhment did In the 1930's whe~i It came to the rescpe of banks, home mortgageS, and savings and loan asso4~lat1on5. It rescued them, but it also reformed them. The trouble with negligence la~v is that it is a pack of rules appropriate a century ago when the president was Andrew Johnson. There was no liability in- surance, no collision' insurance, no health insurance, no, sick leave pay, no tem- porary disability insurance, and no social security system. It does not fit the facts in the era of Lyndon Johnson, when all these othOr programs have been added. p7. ELEMENTS OF A $uP1'oRTABLn SYsTE~[ or 1rnPARA~rTON Fortunately, the tort system is by no means the only system presently con- tributing to the reparation of automObile injuries. Victims' Of automobile injuries receive reparation from group `and individual health Insurance, from sick leave and temporary disability programs of their employers, from collision insurance on their automobiles, in fatal cases from Individual and group life insurance and from the survivorship insurance of the social security administration, and in permanent total disability cases from the disability insurance provisions of the social security administration; and finally from tort liability insurance. These programs have been named in the approximate order in which they come to the rescue of the victim. The tort liability system is usually the last in time to arrive, and very commonly the least operative in restoring or maintaining the welfare of the injury victim. It is therefore foolish to focus our attention, as suggested by tb~ Keeton-O'Con- nell plan, on a comprehensive system whiéh would replace negligenc~ liability law. That is only part of the problem. We should look at each of the different programs of reparation, and see how we can expand the role of those which are most useful, and interrelate the roles of the different systems for maximum effi- ciency and economy. Taking this approach, we will find that negligence liability does not need to be abolished, and that there are definite values in retaining it. Rather, the job is one of enlarging the roles of some of the other programs, and of adjusting the tort law to take full advantage of the contributions of the other systems. The principal directions in which we shohld move may be indicated as follows: 1. Health insurance should be broadened and deepened to assure the optimum restoration and rehabilitation of every accident victim. 2. Subsistence for the totally disabled and for the dependent survivors of the dead under the ~oclal security system should be extended to those victims of automobile accidents who are not already covered~ 3. Programs of sick leave and temporary disability benefits for employed persons should be broadened, and should be recognized as a factor in the reparation of automobile injuries, 4. Negligence liability and liability insurance must be modified so as to reduce the waste and misapplication of resources which now characterize them, particularly in the following ways a. reduce underwriting expense; b. reduce duplicative pay-outs by crediting against negligence liability the benefits to which victims are entitled under other programs; c. eliminate damages for pain and suffering and with them the ex- cessive litigation and overpayment of small `claims which they occasion; d. make fair claims collectable by assessing the costs of collection against defendants who turn down a reasonable demand; e. eliminate small claims from negligence liability in automobile cases. PAGENO="0089" 85 V. REHABILITATION INSURANCE The first objective of any reparation system should be to rehabilitate injury victims, using "rehabilitation" in a broad sense to embrace comprehensive care from first aid through occupational retraining (if needed). Rehabilitation not only relieves the individual's own misery, but enables him to carry his weight in society. The tort liability system is a failure in this connection, because its pay- ments come too uncertainly and too late; even when the victim is certain of payment, he has to make an agonizing choice between money and treatment. The way to handle this problem is not a matter for speculation or dispute. Decades of experience under workmen's compensation laws have demonstrated an effective way of handling it. This is to provide for unlimited restorative and rehabilitative treatment which is not subject to a policy limit, and which is wholly disconnected from cash paynients. Insurance companies have success- fully written this kind of coverage for years under workmen's compensation laws. There is already a foundation for this kind of insurance in the customary auto- mobile insurance package. This is the mn~dical payments coverage, sometimes called "family protection." This should be made compulsory in every state; it is much more beneficial than the tort liability coverage which most states directly or indirectly require. However, the low policy limits which are now prevalent sho~lcl be raised. Eventually the insurance can probably be written without limits, as are medical benefits under workmen's compensation. This increase could be made in stages, so as to acquire actuarial experience as we go. The insurance should cover the occupants of the insured automobile, and any other person injured by operation of the car which is not otherwise covered. Congress could appropriately require this kind of insurance for every auto- mobile that is driven across a state line, or on a federal highway. In practice, states would probably fall into line very quickly and require this kind of policy to get an automobile license. They might have done it long ago, except for the complication of one state's requiring anything which isn't required by the state next door. The probable costs of a program of restoration and rehabilitation for auto- mobile Injury victims Is not presently known, but experience proves that this type of risk is not uninsurable, and that the cost is bearable. The social costs of rehabjlitation will be more than repaid by the social gain of returning injury victims to productive roles in society. The costs of such a program to motorists should be minimized in every practicable way. First, the writing of such insurance should be opened to alT types of insurers; it should not be an inseparable part of the tort liability package; it might be more economically attached to group health insurance, most of which is written at a fraction of the overhead cost which characterizes tort liability insurance. Second, the cost of rehabilitation insurance must not be simply added to the existing cost of liability insurance~ When it pays for expenses which would otherwise be charged to liability insurance, the latter liability should be re- duced. This can be achieved by a law providing that a victim's rights to rehabili.~ tation benefits must be credited against any claims under tort liability. As be- tween the two kinds of insurance, the rehabilitation insurance should do the paying, because it will not incur the delay, expense and controversy which is inevitable in tort liability. Third, motorists should be permitted to buy their rehabilitation insurance With deductibles of one or two hundred dollars, just as they generally buy their collision insurance. Most people can pay small medical bills out of their own pockets, and should be permitted to do so if they wish. VT. SURVIVO1tSHIP AND DISABILITY INSURANCE A man or woman should not be a pauper because of an automobile accident which disables him or her, or kills or disables his or her sole source of support. Luckily, this is an infrequent phenomenon, because the survivorship and disa- bility provisions of the Social Security Act protect most of our population. But there is a significant group which they do not protect, and which is peculiarly prone to automobile injuries. This group comprises the young men and women who have not yet begun to work, or who have not yet worked for the ten years which give full social security coverage. PAGENO="0090" 86 The only economical way to close this gap is to amend the Social Security Act to cover disability and survivorship cases occasioned by automobile accidents, and not otherwise covered. This would involve a rather trifling extension of the social security system, with immense benefit to the individuals involved. Like the rest of the social security program, it should be paid for by taxes; but it should not be paid for by payroll taxes since the affected individuals may not be on a payroll. It should be paid for by an automobile registration tax. Thjs should be calculated at an amount which would pay for the estimated additional disability and survivorship benefits occasioned by this extension of coverage. Obviously this is an appropriate program for federal action, and one which would be out of the power of the states. The federal tax could be collected along with state annual automobile license fees. To balance off the addition to their registration taxes, motorists should get some reduction in their liability insurance premiums. This would be accom- plished by providing that all social security benefits for disability and survivor- ship are to be credited against tort liability. This will not only avoid duplicate payments; it will also save a great deal of administrative expense, since social security operates at an administrative expense rate of about 3 percent, compared with about 56 percent for insured tort liability. vu. RATIONALIZING NEGLIGENCE LIABILITY AND LIABILITY INSURANCE The rise of insurance companies specializing in high risk, the troublesome growth of assigned risk systems, and the prohibitive costs of liability insurance in special areas illustrate the impasse into which negligence liability and liability insurance have led us. Liability insurance premiums have risen beyond the capacity of many automobiles to pay, but still fall short of liability costs in many companies. The failure of a few liability insurance companies organized to ac- commodate special risks emphasizes the crisis. It is essential that the costs of liability insurance be controlled. In part, this must be accomplished by changing the rules of liability, and in part by adapting the insurance instrument. Reducing underwriting e~vpenses.-Forty percent of liability insurance premi- ums today go to the costs of the insurance process-selling policies, rating custo- mers, and adjusting and defending claims. These costs are considerably higher than those experienced in many other areas of insurance, and can be reduced by applying the lessons learned elsewhere. The most important reform is to admit group underwriting. Since nearly 20 percent of the insurance premium goes to agency commissions, it is probable that at least 15 percent could be eliminated by group underwriting. This has proved immensely successful and beneficial in health and life insurance. Not only does it reduce the costs of insurance acquisition, but it eliminates much of the neces- sity for risk rating. Thus it would presumably alleviate the assigned risk problem. At least one insurance commissioner has recently announced the permissibility of group underwriting. This possibility must be made more widely available. Crediting collateral beneflts.-Another needless cost of liability insurance Is paying for things that have already been paid for, or will be paid for, by other, less expensive programs. Under the present law, a claimant sues for and collects damages for medical and hospital expense even if it has already been paid for by his health insurance; for loss of pay, even if it is already made up by sick leave; for disability even if it is going to be compensated by Workmen's Com- pensation and Social Security. It is easy to see how this got started a hundred years ago, when collateral benefits, if any, were chiefly gifts from friends or charities. Today, with group health insurance, social security, workmen's coni- pensation, sick leave, disability benefits, survivorship benefits, and private pen- sion funds, disregard of collateral benefits Is indefensible. It leads to overpay- ment of claims, over-utilization of congested health facilities and lets aggressive claimants make profits out of minor injuries. The old rule of disregarding collateral benefits must give way to a new rule of crediting collateral benefits against damages for negligence. Damages for pain and suffering.-Damages for pain and suffering must be eliminated from ordinary automobile negligence cases. Damages for pain and suffering immensely increase litigation. Survey evidence shows that they are second only to negligence questions as a source of contro- versy. Damages for pain and suffering also lead to the wasteful overpayment of small claims, where the amount of pain and suffering is very little. Damages for PAGENO="0091" 87 pain and suffering are unfair, because they do not benefit people who minimize their misery, but only those who brood on it and dramatize it. If one could meas- ure pain and suffering, one would probably find that injury victims .j~orease their pain and suffering by recalling it, reviewing it with their lawyer, and retelling it for the purpose of collecting money. Three principal arguments are made for pain and suffering damages. First, It is said that people who have suffered extreme shock may need special psychiatric care, or removal from a noisy location, or time off from work. But these are eco- nomic losses, which can be proved as such. Second, it is said that the wrongdoer should suffer the extra deterrence of the extra damages. However, most pain and suffering damages, like other damages, are not paid by wrongdoers; they are paid by innocent premium payers, through insurance. To punish the wrongdoer, the proper remedy is "punitive damages," not damages for pain and suffering. Third, it is said that damages for pain and suffering are necessary to make other damages collectable; the lawyers' fees are often paid out of the extra award for pain and suffering. There is some truth in this argument, but damages for pain and suffering are a preposterous way to value lawyers' services. A better way is to provide for payment of reasonable collection expenses-my next topic. Gollection eccpenses.-In order to encourage both claimants and insurance companies to settle claims fairly and economically, both sides should. be given an incentive to make and to accept fair offers. This can be done by providing that the insurer should pay reasonable collection expenses when he has refused an offer to accept the amount eventually found due; similarly, the insurer should be able to deduct his costs of defense, when the claimant has refused an offer of as much as is eventually found to be due. This type of provision would greatly speed up settlements, and would eliminate one of the principal justifications of damages for pain and suffering. A further advantage of adding collection expenses is to eliminate the sense of injustice which arises today when insurance companies refuse to pay property damage claims In spite of clear liability. They count on the claimant's giving up the chase. Some claimants give up, but others learn to pad their claims, chiefly by alleging pain and suffering. Awarding collection expense would enable them to collect just claims by just methods. ~mafl cl~irns.-One of the greatest wastes in present-day liability insurance is the investigation, evaluation, and payment of small losses. It is a waste because the costs of investigation and evaluation, plus the insurance overhead, are likely to be two or three times the original loss. Since most of the beneficiaries are the same as premium payers, the effect of payment is to multiply their own costs. Since minor losses are within the capacity of automobilists to pay from their own pockets, they would be collectively benefited by paying them directly, rather than through liability insurance. The sensible solution is to eliminate liability below a deductible limit, which might be set initially at $100. In the light of subsequent experience, it could be raised or lowered. For many non-litigious automobilists, this rule would merely formalize what already happens, when they bear their own small losses because it is easier than trying to collect damages. For the litigious, it would remove the impulse to spend more time and expense trying to collect a small claim than it is worth. The big gain would be to premium payers, because their insurance companies would be relieved of a substantial fraction of their case load. viii. A STAGED REFORM The reforms proposed here can be done in easy stages. It is not necessary to introduce a new, untried system, nor to make the entire transformation at a sin- gle leap. Although these reforms lead toward a fundamental restructuring of the whole system of reparation for automobile injuries, it is to be done by little steps, which can be separately adopted, and separately modified in the light of sub- sequent experience. ~eparabiUty.-RehabIlitation insurance for motoriSts could be required with- out broadening social security and without changing negligence liability law PAGENO="0092" 88 be made with or without any of the others. Group underwriting can stand on its own feet, and so can the crediting of collateral benefits. However, there are three of the proposed changes in negligence liability which must be parts of a single package. Damages for pain and suffering should not be eliminated unless at the same time collection costs are added. Otherwise, it would be Impossible for a claimant ever to recover the full value of his money loss, no matter bow clear hi~ right. When colle~tion costs are added, it will become im- mediately necessary to cut out liability on small claims. Otherwise, tremendous numbers of very small claims which are now dropped, to everyone's advantage, would overwhelm Insurance companies. Graduation.~-~Each of the reforms proposed can be introduced with a certain dollar limit which can be raised or lowered as later experience indicates. Rehabilitation insurance, for example, would start with the familiar limits which now govern the medical payments insurance which many automobilists now carry. Subsequently, in the light of experience, the limits could be raised. Eventually this insurance might be written, as In the case of medical benefits under the workmen's compensation laws, with no limit except the amount of treatment which could iisefull3~ be given to the injury victim. The extension of social security could also be made gradually. It might start with registered automobile owners and licensed drivers, thus providing a list of the perstms covered. At a further stage, It would include members of the families of owners and drivers, who could also be listed at the time of license renewal. The remaining step of including other passengers or pedestrians would be minimal. The crediting of collateral benefits should also begin with the most obvious subjects for credit, and be extended in steps to Include others. Crediting should begin with health insurance. At a time when the costs of health insurance are in a state of crisis and medical care facilities overtaxed, it is essential to di- minish every channel of overpayment and every incentive to over-utilization of facilities. Double health insurance should be recognized as containing the same perils as double fire Insurance. The proposed requirement of health in- surance for all autoists would make the crediting of benefits all the more urgent. The crediting of social security benefits should come next. The value of sur- vivorship and total disability benefits over a lifetime may amount to tens of thousands of dollars; it is preposterous to ignore these in awarding damages. It is sometimes argued that they should be paid from automobile insurance rather than from payroll taxes. But it is the public which pays them in either event. The big difference is that when the public pays through liability insur- ance, it pays an operating expense rate which is 40 times the rate under social security. Where an economical, almost universal regime like social security is doing a job, the automobile premium payer should have the full advantage of it. After providing for the crediting of health insurance and social security bene- fits, legislation could move on to crediting proceeds of sick leave, temporary disability, and property loss. These areas involve progressively more difficult problems. iv. THE FEDERAL ROLE The vital role for Congress and the federal government is develop a nation- wide plan for autontobile injury reparation. The plan should include federal legislation, state legislation, and voluntary action by automobilists and insur~ ance companies. Private individuals and insurance companies cannot do it by themselves, because archaic rules of negligence law stand in the way of funda- mental reform. The states cannot do it by themselves, because some of the essential links require federal law. The states cannot impose requirements op out-of-state drivers without installing. European-type border controls, and they cannot gov- em the effects of lawsuits which take place in other states. The federal government alone can develop a plan, in cooperation with rep- resentatives of state governments, private insurance companies, and private automobilists. Congress can then require the necessary kinds of insurance for driving outside the residence of the driver or automobile owner. Congress can also enact rules of liability which will apply to accidents involving drivers and passengers outside their own state. These are matters of Interstate commerce. Congress can also extend social security, and can provide for the effects of social security benefits in lawsuits by the persons entitled to these benefits. PAGENO="0093" 89 Finally, Congress should make efforts to bring all state laws up to a minimum standard. This can be done by differentiating in grants of highway aid, giving more to those states which meet minimum standards. But Congress should not eliminate all state Individuality. States should be allowed to impose greater standards on their own citizens, iti accidents with other citizens of the same state. But citizens who comply witlt the rules of their own state, and with the national standards, should be free to drive through- out the nation without being subjected to unforeseen liabilities. Mr. Moss. Thank you, Mr. Conard. Mr. Watkins. Mr. WATKINS. I wish to thank the gentleman for coming in and testifying. You speak about the pain and suffering. Of course, where a person really has pain and suffering that entail doctors' bills and trying to find out just what is wrong with him and trying to cure it. You mention about eliminating claims of a hundred dollars or less. Where are there any claims of a hundred dollars or less in any accident today? In fact, to give you an illustration, the Interstate Commerce Com- mission sets a set amount you report to them in the transportation business. I found out through experience that we tried to estimate our claims, what they would be through our men picking up the dawages, investigators on the road. They said, "Well, this damage will only be $150." You would wind up with the person you were involved in the accident with submitting a bill for $750 or $800. In fact I remember at one time at the Interstate Commerce Commis- sion because we didn't report it, we thought the damage was under the amount mentioned that was not reportable, that we wanted to assess a fine of something like $50,000, or $60,000 for not reporting accidents. When you talk about a hundred dollars today, that is out of the ques- tion. There are no claims under a hundred dollars that I know of. You can knock a headlight out and damage a fellow's bumper and you have a bill for $250. I don't see how you can eliminate the claims under a hundred dollars. There would be so few of them. Mr. CONAFD. Congressman, your experience very much coincides with my own there. Nevertheless, on studies of this matter which have been made we do find that the number of small claims is tremendous. In fact, if we take what I think is the most thorough study of this kind made, and this was the Illinois Highway Department study, the broadest base survey I think that has ever been published on this, showing the cost of claims of different amounts, we have this striking fact. There at~e more auto loses between $10 and $100 than there are between $100 and $1,000. There are more between $100 and $1,000 than between $1,000 and $10,000, This strikes you as odd. In other words, this is what makes a logarithmic function. When you think about this, it is not surprising that this should be true. Sup~. posing I ask you this: For every person you know that was ever killed in an accident, don't you know of a hundred who had lesser injuries? For every person who was hospitalized, don't you know 10 others who were shaken up and not hospitalized? For every case where a car was creamed, there were 10 cases where a fender was smashed. PAGENO="0094" 90 For every case where a fender was smashed, there were 10 cases where just the light was knocked out. I think, Congressman, that you may be referring in part to a very interesting phenomenon, and that is that the claims that have money loss under $100 get paid off much more than that. The University of Pennsylvania did a study on this in which they showed that on claims under $100, if the people collected they were very likely to collect more than five times the dollar loss. They had a $75 cost on knocking out a headlight. They collected $500 if they collected at all. Mr. WATKINS. I would have to agree with that. I would have to agree that the claims are exorbitant and not fair. If I may interrupt you, personally, that is my opinion, I don't see how you can say you will eliminate claims under $100 because there would be so few. Mr. CONARD. Excuse me, it is the monetary loss. Mr. WATKINS. I don't know of any claim; in fact, my answer to you is due to the fact that the Interstate Commerce Commission demand we report all claims; we don't take any chance on them even though they have a limit. I forget what the limit is. I think they increased it to $350 or some- thing like that now. But there is a limit. We report all claims to eliminate fines. I am ju~ wondering how your study worked out on public liability. I think this has turned out to be one of the biggest rackets in America, the payment of public liability claims. The biggest majority of them wind up in the courts where there is any chance to collect any money, where there is any chance at all to make money. In the decisions that are being made both in local and Federal courts the sums are exorbitant. Would you entertain an idea, and this is only for the record, and I do not want to consume too much time, Mr. Chairman, but would you think that perhaps in this study there should be some consideration that public liability claims be paid on the basis of compensation? Mr. CONARD. Congressman, absolutely. Mr. WATKINS. In other words, a set rule that could be set up that these claims could be settled on a fairer basis. I think some of the decisions are just terrible, are exorbitatit, and very hazardous to people in business. For instance, suppose your car hit a school bus and you injured some children. What would be the result? You have $25,000 to $50,000 liability. You might lose everything you had before this claim was settled. For the amount of money to be collected under public liability it seems to me there has to be some set form whether you agree with this or not. I would like to know how you feel, if there has to be a pattern set for the payment of damages under public liability. Mr. CONARD. I certainly agree with your basic approach here. I would like to correct myself. You said there is no such thing as a small claim and you are right. There is such a thing as a small mone- tary loss. It becomes a big claim in practice. PAGENO="0095" 91 Mr. WATKINS. That is right. Mr. CONARD. So, the thing I am recommending that the people ab- sorb themselves are the small losses. Mr. WATKINS. You have made no study on a preventive cure for these exorbitant claims then, have you? Mr. CONARD. We have indeed shown that in the small losses the payments are very much in excess of the moneta ry loss. I mentioned Pennsylvania because they went down to a smaller level. We took a group under a thousand and we found that losses under a thou- sand were likely to be paid, if paid at all, more than one and a half times the loss. On the other hand, large losses, over $25,000, were rarely paid more than a quarter of the loss. This means that we are overpaying little losses and underpaying the big ones. The cause of that is very clear, Congressman. It is the pain and suffering damages. I could not go along with calling it a racket be- cause the law now says that the individual is entitled to payment for pain and suffering. Mr. WATKINS. I think it is a racket. Go ahead, I am sorry. Mr. CONARD. I think we know what the cause of this inflation of the small losses is. It is pain and suffering, that is very clear. Mr. WATKINS. But you have made no study on a formula on public liability payments. Mr. CONARD. I did not answer your question on that. No, sir; we did not study any particular proposal. I think this is well worth studying but, sir; I think when you elimi- nate pain and suffering and pay economic losses you are down to hard figures. I think that is what you want to do. I think you can d~ that with or without a schedule. I think a schedule is certainly worth a study. Mr. WATKINS. You take claims today that are made and are taken into court. There is a habit of some insurance companies of taking cases to court anyway because they feel that they will die a natural death before they hear them. I know of cases in Pennsylvania that have been hanging for 6 years. People are either dead or gone and maybe they don't know whom to talk to, the heirs have even left. That is why I think there should be some method. I thank the gentleman very much. Mr. Moss. Mr. Guthrie. Mr. GurmuE. Professor Conard, could you state for the record over which the Illinois study was done that you referred to? Could you `supply that information for the record? It might have some bearing on the am'oun't'that you ~tated. Mr. CONARD. Yes, sir. The base date for the Illinois study was 1958. It is possible that the absolute amounts have gone up. On the other hand, it is impossible to know, and one of the reasons I ~m very happy to have the `suggestion of a further `study is `that the 1958 studies, our Michigan one, and `the Illinois one, undoubtedly need `to be updated. On the other hand, it seems to me that we probably have a phe- nomenon in nature here. That is that regardless of `anything that hap- PAGENO="0096" 92 pens to the price level, there are going to be more cases of small damage than large damage. Cars go through `tl~e `street, they `scrape, they touch, they bang. It is simply in `the nature of the physical facts `that there are alwe~ys going to be immensely more of the small oases than the large oases. So I am sure the absolute amounts will go up and although I don't have up-to-date figures, I believe `this `is what you might call sort of rn `the nature `of `the statistics, just like you have illnesses, people lose 1 day. You will find 10 times as many people l'osrng 1 day of work `as lose 5 days. You will find 10 times as many people losing 5 days as 50 days. Mr. GUTHRIE. When y'ou first began your statement you evidenced some satisfaction that there wa's no question being raised as to whether ~hi's w'as going to be `approached `at~th~ Federal level or not. Do you think that the problem that exists in `the auto insurance industry `today can be approached `at the Federal level and resolved effectively `there `or must it `also `be `approached at the State level? Mr. CONARD. I understand, you `are `asking `about the regulation of the insurance industry `as distinguished from the regulation `of negli- gence liability. I's that correct? Mr. GtTTHRIE. Yes, sir. Mr. CONARD. I do not feel myself qualified to talk about the regula- tion of `the insurance industry and its `adeqnacy or `in'adequacy `at the Federal level. I `am generally, I would s'ay, favorably disposed to it. It `seems to me a reasonable step but I `do not claim any expertise on this subject. Mr. GUTuRIE. Thank you. Mr. Moss. Before concluding the discussion of your presentation, I would like to `observe that you have ~timul'ated the types of questions which I `think illustrate the need for the `study proposed. Your presentation is `an excellent one and it raises `as many questions `as it `answers. I `think that was `typical of the presentations yesterday. I `hope that it continues to be the thread `of the presentations today becau'se in careful consideration given the `subject by me, `and 1 know by Senator Magnuson, we reached the conclusion `that we had far too few `answers `to proceed to s'oli~e the problems. Th'at i's why the `study was recommended. I have no questions at this point, I w'an't to express `the `appreciation of the subcommittee fOi~ your `appearance and for your cooperation. Thank you. Mr. CONARD. Thank you very much, Mr. Chairman and Mr. Guthrie. Mr. Moss. Mr. Vestal Lemmon, president of the National Associa- tion of Independent Insurers. Mr. Lemmon, do you desire to summarize your statement? Mr. LEMMON. I am going to sketch through it. I have marked out part of it. Mr. Moss. Would you like to have the entire text inserted immedi- ately following your oral presentation? Mr. LEMMON. Yes, sir. Mr. Moss. Is there objection? Hearing none, that will be the order. PAGENO="0097" 93 STATEMENT OP VEST~ LEMMON, PBBs~ENZ N4TIo~AL ASSOCI- ATION OP INDEpEN~N~ I~SUBE~ AcCOj~p~E~ BY ft0GEB DOVE, VIO~j 1~1i. AND ~ ~ ~ Mr. LEM~o~. I have on my right Mr~ ~Toh~ Nw~gie, our Washing~ ton counsel, who Was in the insurance bu~4n~ss in `St~ Lo~i5 for many years; en my left, Roger Dove, vice president of our association My name is Vestal Lemmon, and I am pre~ici~nt of the N~tionaJ Association of htde~pen'dent Insur~rs. We are a trade association of ~O casualty and Property lilsurers of all types inc~u'ding stocks, mu- tuals, reciprocals, and Lloyds. We estimajte that companies affiliated with us `write ~uore than half the private passenger `automobile insurance in the United States. We appreciate the in~itatjon to' present our views to this conimj~e and in this nation~,l `fo~~uiu, The NAIl beli'eve~ that an objecti~e and fl~pk~ehensjve study into the automobile in~uranoe system aS sugg~s~e~' in the Presid~t"s con- sumer message arid in House Joint Resolut~0~ 9~8 is a proper approach. We feel that `the call for a careful study reoogni~es the oomp1~ nature of the legal system under which the insurance `business is required to operate and the demands plated on us by a rapidly grow- ing motor vehicle Population. In conferring with our member companies in preparati~ for t~his appearan~ here iod;ay, they asked that I ernpha'~jze what they feel is a critical point in the present automobile ~insurance coritrovers~. For more than 20 y~ars,~as the needs `and conditions in our motoriz~-j society have undergone ~ drastic metamorphosis the' independent insurance companies of the United States htave met change with chaflge. This is Our stock in trade; this ha~ been our formula for Succe~. The challenge of ~volution has not fa~ed us. We have' been in the fore- front of innovation We `have demonstrated the flexibility to meet new needs with new teelmiques, n~w products, flew service; a new outlook. We have never fought-and We do not fight today-~for the status quo. The situation being considOred by your `committee did not d~velop overnight. It started to build up' early in the' 1~60"s `as a ~reSult of a;' variety rif social and `eeou'ornic' factors. We were not unmindful of this tr~nd; it had our cl'o~est attention nncl deepest eOncer~. As long as several years ago, the top executives of our companies were Personally exploring these matters in depth. Two years ago, their efforts resulted in the NAIl recommending that our membèr~ VOluntarily mak~ available additional coverages and services for motorists in the assigned risk plans, it brought relief to an area troubling some of the `public. A year ago, this program was further expanded. Meanwhile, vohintary restrictions on cancellation were pioneered within NAIl, and most of our companies, and the industry gen~rally, soon inserted such provisions in their policies. In addition, our association developed and supported~and con- tinues to develop and support_~model laws regulating cancellation PAGENO="0098" 94 practices and procedures in every State where legislators and State insurance ~ommissloners feel there is a problem. To prote~t tiie~ responsible citizen~ we originated and have taken the lead in extending to all 50 States measures requiring that uninsured motorist-UM-coverage with, insolvency protection be offered with every automobile liability policy. Forty-two States now have TJM laws, and 26 States have the in- solvency protection. TIM and insolvency bills are pending in five other States as we seek to blanket the country wiih this protection by law. We want to emphasize that all these steps were initiated long be- fore there was any substantial national criticism or talk of Federal studies. Last November, as a direct result of these several years of in-depth studies and consultations, our association announced here in Wash- ington a statement of policy which is unmatched in the history of the property and casualty business-and maybe of any other business. We enunciated a set of guiding principles in which we pledged that every applicant for automobile insurance-every policyholder-would be considered for insurance and provided insurance on his individual merits. We declared that this principle would apply regardless of race, creed, color, occupation, whether previously rejected or canceled, whether divorced, or whether a senior citizen. Now there is a distinction in this wording and this policy that I would not want to be lost on this committee or on the Americaii public. When we say provide insurance, that is exactly what we mean. Once the initial underwriting period is over-the same kind of in- vestigatory period that a bank has' in making a loan, or a store has before opening a charge accountr-once this period is over and a policy has been issued, the policyholder will not be canceled or refused re- newal because of any of the reasons outlined in the guiding principles. Thus you have a sweeping pledge from our con~panies that they are committed to a policy of providing-consistent with financial sound- ne~s and fairness to all policyholders-r-continuous cover~ge for the American motoring public. Part and parcel of the underwriting discussion, of course, is the furnishing of an adequate markei~. .M the number of motor vehicles on our streets and highways centiiiues to increase, our business must expand its capacity so it can safely insure this mushroçming armada- Our companies have been dç4ng just this. We have been stepping up to the plate and providing the greatest share of the overall mar- ket as well as the greatest share of the new market. In 1961, our companies wrote $2.6 billion ~n private passenger auto premiums or 41 percent of the market. In 1966, it was $45 billion or over 50 percent of the market. When final 1967 figures are compiled, we expect that this total will exceed the $5 billion mark. Since 1959, the number of private passenger cars voluntarily in- sured by our members and subscribers has been increasing at 21/2 times the rate of increase in the total number of private passenger vehicles registered in this country. Furthermore,~ un our statement of policy, we propose a mechanism for furnishing automobile insurance to every person who holds a valid driver's license. PAGENO="0099" 95 `We feel this can be achieved by a combination of vQluntary action and liberalizing eligibility rules under the assigned risk plans now operating in every State, provided there are adequate rates and a uni- form, all-out Government effort throughout the country to remove unfit drivers from the road. This has to be an equal partnership be~ tween Government and industry. We can't do it alone. There was nothing fainthearted in our espousal of these principles. We left no room for hedging; no room for doubt. We stood right in the harsh spotlight of national publicity and took an unequivocal posi- tion. Almost every newspaper of any consequence in the United States carried a story on the program. There was e~tensive coverage in maga~ zines, radio, and television. A copy was sent to every insurance com- missioner in the country, which meant that the regulators could look right down the barrel at our companies. Several Congressmen and Senators were kind enough to commend our statement of policy efforts. Our member companies found strength and encouragement in this response. We have had equally rewarding reaction from insurance commis- sioners, editorial writers, commentators, the public. Commendation has come from other groups such as the million-member American Association of Retired Persons, which publicly praised our efforts to 1iovide a market for senior citizens. I would like to report to you today-3½ months after our an- nouncement-that we have had only an insignificant handful of corn- 1)laillts. Each complaint was promptly investigated, and where war- ranted prompt remedial action was taken. To further implement this program, the NAIl is holding regional underwriting seminars with our member companies throughout the country. In a continuing process, we are finding our companies improving and updating their underwriting rules and practices to meet the spirit and intent of these underwriting principles. Through voluntary action, we have made dramatic strides in elimi- nating some of the sources of public dissatisfaction mentioned in statements by Members of Congress and President Johnson.~ We sincerely believe that in the areas covered by our statement of policy-and as, f~r as our member companies are concerned-there is not a national problem of underwriting abuses or arbitrary and dis- criminatory practices. I am convinced that this part of our house is fast being put in order. One of tl~e surest ways to provide an adequate market and con- tinuing coverage, of course, is to foster competition. This is the cornerstone of the independent philosophy. Ei~er since we were organized 23 years ago, the NAIl has cham~ pioned competitive rate laws as best meeting the needs of the insuring public. Fourteen States and jurisdictions now have laws which place major emphasis on competition as a regulator; we favor extending this concept to all 50 States. In the 1967 legislathre year, three States-Florida, Georgia, and Indiana-enacted such legislation. Already the commissioners in Flor- ida and Georgia, where there had been problems in obtaining insur- PAGENO="0100" 96 ance, report that their merkets `are opening up. The Georgia comniis- sioner announced recently that there have been more rate decreases than increases under the neW law. The oldest competitive rate law in the coinitry-and the type that has been followed by other States and is endorsed by the NAIl-is that which was adopted in Oaiifornia 20 years ago and has been eminently successful. Because of `its explosive growth, trementhms motor vehicle flow and widespread traffic safety problems; `California might be expected to have the most critical automobile insurance situation in the country. Instead, it has far fewer insurance headaches than most States. We believe that competition, as exemplified by' the American free enterprise system, is the fime~t, surest regulator in' the public interest yet devised. S With competition in the marketplace-~w'ith hundreds of companies vying with each other for the available business-the pnblic is assured of the lowest price, best service, latest innovations in product, and an available market. S Competition is the hallmark of the independent cç~mpanies. `It is the secret behind their success; it is the spur to much of the experimenta- tion and progress in our business. It has spawned such innov~tion~ as uninsured motorist coverage, insolvency protection, noncancellation clauses, advance payments, re- habilitation programs, medical payments `coverage4 safe-driver dis- count, special risk coverage, drive-in, claims' service, good student dis- count, 6-month policies and installment paying of premiums, deducti- ble policies, and even the assigned risk plan. The one company in the `cocunt~y today that has any credible experi- ence with a form of an automobile insurance compensation plan-a 10~ year experiment which produced solid facts and figures-is one of our competitive-minded members. Other of our competitive-conscious companies have met a major need by providing a substantial market for military personnel. As a result, NAIl members are. eurrently insuring upward of 1~5OO,0OO servicemen, of all ages and ranging from the lowest enlisted grades to general rank. This willingness to experiment, to innovate, to `compete has made the NAIl workshops and meetings focal points for the industry. `These forums have been in the forefront of developing and intro- ducing new claims practices ~nd tec1n~iqu~~, underwriting changes, new coverages, new services, operational improvements; even a ques- tion of philosophies., We have pitted plaintiff bar against defense bar and lieard argu- ments on Federal versus State regulation. At our annual meeting in 1964, we provided what was probably one. of the first national plat- forms for II~arVard T~rof. Robert E. Keeton, coauthor of the, Keeton- O'Connell plan. , ` S ` We have debated the Morris plan, the Saskatchewan' plan, the Ehrenzweig plan. ` 5 We have furnished' a forum for State commissioners, academicians, TT.S. Senators and Coxigressmen, space sc1enti~ts, economists, traffic ex- perts, and automobile manufacturers~, S PAGENO="0101" 97 We have heard Federal offlcials, foreign insuranceleaders, Gover- nors, big city mayors, non-member-company ex eutives~ newsmen, and spokesmen for independent agents' groupa. Little wonder that at the close of our annual meeting last fall, Robert F. Jones, associate editor of Time magazine observed: The scope of your interests, as reflected in the sp~aker's rostnr, was genuinely eflgaged; you neither seek comforting, pat answers to the Nation's problems, nor do you turn deaf ears to harsh ones. The problem areas that I have ca~s1iied today, Mr. Chairman, repre- sent the most urgent matters that have been confronting our industry. They covCr most of the grievances and irritants that have concerned you and this committee. They required action. We aOted. Now we must loek at the system under which we are operating. This problem does not lend itself to quick decisions. it is too complicated; it is too ~eeped in the law and the rights of the individual. It requires exhaustive study and deliberation such as is contained in the Depart- merit of Transportation p~oposa1. ~Uasty action could catTse irreparable damage. We are hard at work in this aDea, too, and will have some tangible contributions to make. Expert committees of our association are weiP advanced on investi- gatory* studies~ We are participating in experiments which should produce meaningful data. Within the past m~nth, we entered upon a research project with the TJnii~ersity of Texas whiéh we hope will be of widespread benefit to every one who is critically examining the present system. The fund we ~stablished at the University of Texas will enable inde- .penden~ researchers there to expedite a project on which they are al- ready embarked pertaining to the prnblems surrounding the compen- sation of auto accident claimants. We want to en~our~ge independent, objective research and thinking in this whole area which is of such vital concern to the American consumer and to our birsiness. Iii addition, a study committee o~ our association has approved in principle plans to experiment with a progr~rni addressed directly to major criticism of `the automobile a~cident reparations system. While final details of this experiment have not been worked out, a tremendous amount of research and deliheratiou has already gone into the preparations for the project, and valuable data has been assembled. - The major benefit of this work and these studies is that hard facts and experience on which to base future decisions will be available. I am thinking especially of public acceptance and reaction, cost factors, and similar test objectives. We believe the results of such experimentation will be extremely helpful to this committee, to the Federal agencies which would imple- ment Senate Joint Resolution 129, and to our business. In conclusion, Mr. Chairman, could I respectfully call the attention of the committee `to just a few of the factors that combined to put this business in its present position. I am speaking of the socioecmomic forces with which we have had to contend. At the end of World War II, the motor vehicle registrations in this country totaled an estimated ~4 million. Today, that figure is estimated PAGENO="0102" `98 at 9T millio~t In the short span of two decades, we have been trans- formed into a nation on wheels. The stream of vehicles on our streets and highways is increasing at an astronomical rate of 3 million a year. Traffic accident dë;aths and injuries are increasing 58-percent faster than motor vehicle registrations. It costs almost 50-percent more to repair a popular-priced car today than it did 10 years ago. In the last 10 years, hospital daily: service charges have risen 92 percent and physicians' fees 39 percent. And if you want to look back 20 years, hospital daily service charges have skyrocketed 354 percent. We have no control over these inflationary costs and soaring sta- tistics. Yet these are the dollar signs of the times as far' as the insurers are concerned when it comes to paying clairn~ and settling millions and millions of cases. These are the cost figures we are saddled with when we are called upon to honor our contract with the American public-a contract that calls for us to defend, indemnify and provide a service. These factors- and the law as it now exists-are `the standards against wh'idh our performance shouldbemeasured.. In a short period of incredible growth and change and inflation, we have' compiled a record `of accomplishment, of service, of meeting an unparalleled need. It is a record of vigor and action, of imagination `and optimism. We are proud of this record. We stand ready to Work with this committee and with any agencies you designate in our continuing effort to achieve optimum performance in serving the needs of `the American motoring public. Thank you,Mr: Chairman. Mr. Moss. Thank you. Mr. Watkins. Mr. WATKINS. Thank you, Mr. Chairman. I have no questions~ Your testimony is very helpfttl and very clear. In the National Association of Independent Insurers, how many various insurance companies do you represent? Mr. LEMMON. About 850. Mr. WATKINS. Do you have any members in Pennsylvania? Mr. LEMMON. We have some, yes. sir. The ~Harleysvi1le Mutual, Keystone, Erie Insurance Exchange. I would be delighted to furnish a complete list. Mr. WATKINS. That is not necessary. I would like to ask one question. Have you had any mutual insurance companies that have gone out of business? Mr. LEMMON. I suppose every organization in its history has had member companies that become insolvent. We have had a few, un- fortunately. Mr. WATKINS. How many Would you say? You have had a few in Pennsylvania. Mr. LEMMON. I don't believe any of those were our members, Con- gressman. That is one reason we innovated and suggested this unin- sured motorist protection and insolvency protection. PAGENO="0103" 99 If I am insured in an insolvent company a~'id `I hit you~ `you are protected regardless of my company's insolvency. Mr. WATKINS. Would be prote~ted? Mr. LEMMON. Ye~, sir. We are trying to pass it in Pennsylvania now. It is in 26 States and we have it in five legislatures at the moment. Mr. WATKINS. In other words, I take your testimony here that you join in this stdu~ that is to be made? Mr. LEMMON. Yes, sir. We did not come down and beat the drums for it, of course, to be honest with you. But we think this is a neces- sary step at this juncture. Mr. WATKINS. A study can never hurt, I don't think. Do you? Mr. LEMMON. I don't think so. I think it will do the business good. We will have a better understanding by theAmerican public. Mr. WATKINS. You feel like I do, you like to keep the Federal Goyernment out of everything they can. Mr. LEMM0N. I feel that.w~y. Mr. WA~rKINS. I feel personally that this in~ur~nce business is in bad shape. At least, it is in my State. It has been pretty costly to some people in these mutual companies, the `enormous bills they have received. ` `Mr. LEMMON. Congressman, it is `not anew term. around here but it is difficult to legislate honesty and integrity in people. We have had thos'~ on'bccasion but they are sporadic.'We had them in Illinois. But that situation is being cleared up ih Illinois and I think it is being cleared up in Penns~ylvania. Mr. WATKINS. Not entirely, I notice `you don't mention it in here at all hut would you be In favor of some ~et form of settlements on public liability claims, the ~vay we settl~ workmen's compensation claims? ~You know, the courts are olutter~d with cases of public liability. ` 9 ` ` , `` " Mr. LEMMON. That is said, Congressman, but I think you will only find that clutterh~g of the'courts in certain big cities like Philadelphia, New York, San Francisco, Chicago, Actually, countrywide only 5 percent of the personal injury claims or thereabouts go to suit or are taken to suit. Only 2 percent are' ever litigated'. So this is a pretty go6d number. Mr. WATKINS. Two perc~nt? Mr. LEMMON. Two percent, I believe, are litigated. Mr. WATKINS. What State i~ this? Mr. L~MMON. This is countrywide. These are published figures. Each year the insurance companies have to report them in their annual statements and they are consolidated by the national publications. It is a very low amount. We had a check made recently. The first year on personal injury claims I believe it was about; it might vary a point or two, but 78 or 79 percent of the claims are settled in the first 12 months. Mr. WATKINS. That is quite a record. Mr. LEivrMoN. I think that is generally true in the industry. Now there are exceptions, of course. Mr. WATKINS. Thank you, gentlemen. Thank you, Mr. Chairman. PAGENO="0104" 100 Mr. Moss. Mr. Blanton? Mr. BLANTON. Mr. Chairman, I have no questions. Mr. Moss. I have no questions, Mr. Lemmon. I do want to ex1press the apprethation o~ the subcommittee for your statement. I have no doubt if the study resolution is authorized that the Department will give very careful consideration to the views ~xpri~ssed by you~ Mr LEMM0N We will be very glad to cooperate in furnishing any informatioiiwè are.aibietio. Mr. Moss. Phenk:you. Our next witness will be Mr. Melvin L. Stark~ mana1g~r of the Wasb~ ington office of the Atheric~n~ Insurance Association. Mr. STARK. Is it yom~ desir~ to now ha~e iticorpbrated in the record the entire text: of your statement so that ~ou can. stimmarize it in conson'tnce with the notice made at the stert of the hearing ~ STATE1VIL1~T OP MELVThI L. STA1'~K, IA~A~E1t, WASBINGTO1~ OP~'IO~1; ANEBJOAM INS~1RAI~1CL AS~O~IATION Mr. S~aui. Yes, sir. I have a brief statement to introduce into the record five statements that were submitted to the Senate committee irhen Senator Magnuson held hearings last week, with the permission of your committee, ~ir. Mr Moss Is there ob1ection to having the five statements inserted at this point in the record ~ Mr. WATKINs. No objection, Mr. Chairman!~ Mr. Mess. Hearing no objection, it is so ordered. Mr STARK Our organization, the American Ineurance Association, is grateful for the opportunity to present its vieW$ regarding House Joint Resolution ~58 Our organization is a trade group comprised of 169 property and liability insurance companies doing business through- out the United'Stote~. The large majOrity of these companies write automobile insurance, and the policies are sold through independent insurance agents and brokers. We favor the proposed legislation sponsored by Qhairman Moss, and the member companies of our organization will lend support and assistance to the study proposed by this resolution., With your permission, WC are submitting for the record, statements presented by five of our executives before the Consumer Subcommittee of the Senate Commerce Commit1~ee on March 14, 1968, when hearings on the companion bill before the Senate (S.J. Res. 129) were held by Senator Magnuson. These informative statem~nts were delivered by the following executives: T. Lawrence Jones, president, American Insurance Association. Fred H. Merrill, chairman of the board, Fireman's Fund Insurance Companies. H. Clay Johnson, president, Royal-Globe Insurance Companies. William 0. Bailey, vice president, Aetna Life and Casualty. PAGENO="0105" i1~i Harold Scott Baile, Senior Deputy General Manager and General Counsel, Ge~e~1 A~ccide~t Fire and Life A~sura~ee Corp, Ltd. (The statements referred to follow:) STATEMENT OF P. LAWRENCE JONES, Pnusjjm~, AMERICAN INSURANCE ASSOCIATION, NEW Yonit, N.Y. My name is T. Lawrence Jo~j~s an4 I am President ot the American Inst~rance Association a trade organization of 169 stock th~urance companies writing property and liability insurance. Practically all of our member comMnlcs selj automobile ins1jra~e Policies tbroughou~ the nation. The sales `~eprësentatlvés of these companies are indep~dent agents and brokers. SQU1~ of our companies file or promulgate their ilisurance rates lm~epenaent1~. some belong to rating orga~i~tio~5 which, i~je or promulga~~ rates for' them. We welcome the OPpOrtunity to appear bè~ore yoi~ 44ay. American Insur- ance Association and its men~ber companje~ on a ni~tn~ber ~f Oc~asjon~ have strongly and pttbjiely suppQ~ted state an4 fe~eral stu~es of au~omobj1e in- surance and the UndE~lylng tort liability system, $peeillcally, we Urge passage of Senate Joint Resolution 129, autilorizlng the Departme~ of ~ to Undertake a comprehensive and detailed study. As an industry we are very much aware of criticism about the present sy~~e~ or systej~ of compensation of automobile aeeidor~t victims and of 4iut~u1obi1Ø insurance as to its role an~ Performance in that system, We have ~iLdeavore~ to analyze and understand these criticisms and to respond to them. In doing so we have had to come to the conclusiQu t1~m~1 t~e criticisms were not directed to basic problems but to symptoms of basic problems. The criticisms hjave been directed to the rising cost of auto~~~j~ insurance, the ailegc~j Slowness in the Paying of claims, the unevenness, of recovery by aeci~ dent vietim~, the Utfileulty of some car `owners :~fl `ohtai'nlng insurance, and the fact that some victims do not r000verat alL The imfusliry ha's not failed to `respond to any of these complaints. H~wever, the efforts to treat them have revealed `to us `that tIme real problem was not tl~q `Specifl,e objectives of criticism but the nature of the present system of compensation and a question as to whether it measures up to the expOctatlous and desires Of society today. As far as automobile insurance is concerned, we are convinced that much of the criticism results from a misunderstanding of the role that insurance plays in the present `system. Th'~ `rising co'~ts and number of accidents have created `a price `squeeze for the industry. The prevailing rate levels are not ade- quate to cOver the risk of some drivers and thus their policies `are very difficult to place on a voluntary basis. We want `to make several comments about ~ criticisms and present the industry's analysis `and `respon,se to them. We would `obterv-e here that `the num~ her, `scope and complexity of `the prothiem's argue well for the paRsage of S.J.R. 129, and the need for the comprehensive `study it `authorizes MAJOR NATIONAL PR0nLEM The operation of 96 million motor vehicles by 102 million licensed operators in the United States illustrates the scope of the subject we are considering Though insurance is a mechanism for economic security subsidiary to the auto itself, its widespread need `and recogniz~~ worth has mad~ auto i'ns~1rance a service `of major `significa~~0 `to the generaj public. When rela,te~ to `accidents, injuries, death, economic loss, and th'e method `of compensating `the `auto `accident victim, it is not surprising that the operations and functions of insurance companies have `attracted `so much public a,tten,tion The isu,es involved `are truly national in `scope; they `differ `only in degree from `state to `state. Therefore, a 0)mnprehensjve survey is `appropriate In our estimate, the Department of Transpo,rtaitiou is eminently equipped to supervise that study, particularly in view of its Previously assignee responsibility in the field of traffic safety. PAGENO="0106" 102 The posithion o~ the in'sura~ic~ ~m~1ne~s ip. the eral frame of reference is fre- quientlythisflnderstoOd. We ~e;long pas1~ the polut `of re~ognizing that the `auto- mohile ~ * neces~itv of lif& It has become such an integral part of our economy and society that no man and no businesseatL escepe concern and responsibility for the vitality of the traffic system. COST OF INSURANcE The co~t of autonioiçile in an~e is ~ne o~ the rnajQr causes of complaint in regent ~ea~s. 3~$ the cost is.a pr~xInct of our The bu~iness of insuru~g aut~inobiles is a highly copipet~t~ve one with more t1~a~ ~OO companies actively writii~g tki*i~se policies in tue ~J~iited States with premi~ns of ~ 6 blflloli w~itte~i in 1~66 Agams~ a 196~ l?4c~drop of 53 OO~ traffic ~ata1zties and 3 ~LO~OOO tra1~lc i~uries resulting fron~ i~6OQ OOo accidents it is evident that an enothiious humaup~$~le~xL is basic to ~ totalsuhject. With accidents and thejr eccuonue co~zisecfuences ~onsta~it1y on the increase, prjva~e $ssenger autonlobile insu ice preminine countr~wIde rose 23 per cent from J nu~ry, 1, 196Q~ to December ~1, 1966. Fro~ti 1$5~ to 1~)66, average claims costs for onto proport~ ~lam~ge rose 46 per cent ~nd avei~age claims costs for bodi'y in~jury rose 31 p~r cent The economic cost qf auto accidents to the Amen ~an public is cUrrently Ostithat~d toI* $13 ~iiiQn a rear. .~t ~the heart of these statlsl4cs ~5 ac~udeiit prevebtion which is ftndamoi~taI to the reduetio~ of automobile ins4rance co~t5 The frejliency of accidents and tb~ snrging ~os1t of claim s~ttlèthnb4~s must be eontroll~d a~id made manageable as ~ pr~iude to reversafig the upWard trend of auto inshrance rates T1i~4~'FXC SAFE~T The American Insurance Association companies have a long record in the traffic safety field. It ic frequcutly overlooked, particularlytoday with the stress on car safety design; that the lnaiirance industry was in the fOrefrOnt of driver eduea~ tion and literally financed and nurtured the traffic engineering profession. We are proud of these~aeeompllsbments and of many othera in the field of highWay safety~ We support the actt~lties of ~the NationalHiglmwa~ Safety Bureau afid strongly endorse those federal ittid'~tate programs directed to raising the stand~ ards of ~traffic safet~r and conipliahce so vital to effective programs. In addition, we are one of three auto insurance trade associations supporting the Insurance Institute for Highway Safety based lnWashington~ D.Q~ REGULATION The insurance business Ls subject to state regulation and supervision. Our organization has long been committed to the system of state reg~lation, and we are dedicated to making It a viable and rcspo~sii~le governmental concept with full regard for the primary public interest. With particular i~eference to rating laws and regulations, we believe in a itezibiity of pricing our product so that the business can respond to the needs of the market place and make insurance available to the public at all times aUd under conditions which allow insurers to make a reasonable profit. MARKET SUPPLY~ PROBLEMS In the decade from 1956 to 1966w th~ automobile insuranca industry has su~ere~ a series of annual underwriting losses from automobile liability insurance. If it were not for income from investments', the consequences would of course be much worse. These unsatisfactory operating results have been the root cause of many complaints about automobile insurance. In the prese~ce qf continued annual auto insurance losses, there has occurred a constriction in the market availability o1~ automobile liability insurance. This could be predicted for any business enter- prise whose operations were not producing a reasonable return. This constric- tion has bad undesirable consequences in the field of pndeniyriting practices and with regard to cancellations and ~non-renewals of policies. Although company underwriting practices from time to time have been criticized, we believe that overall the insurance industry is doing a responsible job in making liability in- surance available to motorists. Automobile liability insurance is in quite a different position from other prod- ucts and services. With regard to other products and services, the seller's concern is usually with the buyer's desire to pay at the prevailing prIce. The motorist regards liability insurance as essential. In fact, it is a "must" for most prudent PAGENO="0107" ;1o~3 car owners. For the driver who has been involved in accidents, the essentiality of insurance is even greater. Thns. in many c~es, the person who is most in need of insurance so that he ~an ~ontinue to operate his car is, in fact, not infrequently an undesirable risk at proyalling insurance rates because of his, poor clrivin~ record. Oaneellation and non-re~iewaj practices in recent years l~av~ come under critical obsei~atiçrn. "Cancejlatiou" refers to policy terminatton by the, insured or tl~e company during the policy, term. `~Non-renewal" refers to the decision not t~ continue an existing policy at the expiration of its stated term., * Since 1961 our eomp~nies have voluntarily restricted their rights to cancel after the initial 64) ~1ays of the policy period, which period is needed to Investi- gate and review risk information. In December 1~67, the voluntary n~n~ancei- Jation plan was very `substantially revised. Poda~V, there are only two reasons for cancellation: (1) failure to pay premiums and (2) suspension or revocation of a driver's license or registration. While these are voluntary steps, American Insurance Association, with other groups, is `sponsoring in all `states legisintton designed to confine cancellation by. the insurer after the first 60 days to non~ payment ~nd suspension or revocation of license or registration. Our member companies are certainly sensitive to the insurance requirements of motorists, As a Supplement to the volunt~'ry market, it should be noted that autcxm~bile assigned risk plans are a~ailable to provide liability insurance in all states. PRODUCT DEVRLOPMENT it is sometimes overlooked, and certainly rarely fully understood, that the auton~obile liability policy has bene expanded over the years to afford broader protection and to provide sn~plementa'l benefits to meet new public demands. It has been greatly broadened and supplemented through- (1) extensIon of drive4other-car coverage, (2) automatic substitute automobile coverage, (3) medical payments coverage, * (4) uninsured wotorist prOtection, and (5) vulmitary limitation o'u the right of companies to canceL These new feature's add to the coSt of the poliey)b'ut we think they are fully warranted in terms of the added protection afforded by them. COURT INTERPRETATION We are all aware of the tread in the courts to. interpret policy provisions adversely to the insurer and to construe existjng laws to assure a `monetary recovery for traffic `accident victims. These trends have added' ~ub'stantial'ly . to the cost o~ automobile liability insurance and clearly raise the question as to whether the `courts are actually seeking an `accident reparation system rather than a tort liability system `based on t'he conceptof fault. CLAIM HANDLING The handling of claims is `a mo~t important function of any liability insurance company. All' meritorious `claims should `be pro'm~ptly and fairly paid; o~i the other hand, it is the obligation of an insurer to resist claims when there is no liability. It is the latter responsibility which frequently places insurer's at crOss purposes with other social alma Insurance com,panins, for example, are under constant pressure from the courts to settle cases, including cases of very doubt- ful liability, `the purpose being (1) to avoid an overwhelming backlog of s'uits on the court's calendar and (2') to compensate traffic accident victims. While the figures may differ In urban as compared to rural arOas, it has been estimated that in New York City (a highly litigious `area) 60% of all personal injury claims, not just automobile, are concluded without the institution of a lawsuit. Of the approximately 40% that result in suit's, less `than 4% of `the total number of claims reach trial and less than 2% `are actually tried to verdict. Thus, it is clear that `the processing of this mass of personal injury litigation is vitally dependent upon settlement's by insurers. As an illustration of the .ini- portarice of the settlement procesS to our courts, liability insureris were told by a distinguished lawyer and former judge that, if liability insurance cOmpanies in New York City reduced the number of claim settlements by a's little as 5%, the impact on the courts would be catastrophic `and the whule system would collapse in a matter of months. Insurance companies are acutely aware of their settlement responsibility `and their part in making the system work. PAGENO="0108" 104 IMPOSING JUDICIAL PEOCF~DURES Our member companies have always sought to cooperate with the judiciary in exploring and experimenting with different technicJ~*es to handle litigation ex- peditiously. American Insurance Association companies t~ok the initiative in helping institute amasters' plon in a pri.ncip~l court in New york City, pursuant to which per~oual injury and property damage claims are heard by two mastets- one from the plaintiffs' bar and one from the insurdnee company ranks-all serv~ lug as volunteers with no compensation. This masters' plan has been highly successful. NEW SET~LEM5NT r1~ooupvans All principal companies today are neing settlement procedures which were un- heard of a few years ago. first, they began withrettling property damage liabcilit~ claims without taking a release. In that way the clalmaknt could obtain immediate reparation for his damaged ear without waiting to determine the extent of his personal injuries. This idea has& been greatly expanded. Today, companies are paying medical and hospital costs and loss of wages as incurred without taking ally release; leaving ho the future the final determination of the total claim. Re- sults so far have been most gratifying from the standpotht ot the Injured person, who receives reimbursement for otit-of~pocket losses when he needs it most. NATURE OF LIABILITY POLICY We believe there is a general misunderstanding of the purpose of an automo- bile liability insurance policy. It was developed many years~ago as an aecommoda- tion to the tort li~bility system. Its purpose was, and in theory still is, to protect the assets of the negligent driver. It is a policy sold to a potential wrongdour. It was not designed nor intended to pro~ride benefits to traffic accident victims. True, the automobile liability insurance policy is a retiree of compensation to traffic accident victims, but in most states it is onLy supposed ho provide those payments when the victim is free of fault and the insured ia negligent, And then these payments are just an incidental beueflt arising from the indeminiffeation of the insured for his liability under law. DEVELOPING REPARATION SYSTEM The public attitude has been changing over the years. Today, the emphasis has shifted to compensating the traffic accident victim rather than protecting the assets of the wrofigdeer. This suggests that the public now wants to see every injured person properly and fairly compensated for his losses rather than elfgoege In protracted proceedings to determine ~ho ~aused the accident. The industry has responded to this growing trend by adding~coverages to the automobile policy based on the reparation approach. Medical ~ayments and disability or lose of earnings coverages come under this category. Collision or physical damage coverages always have been on the reparation basis. However, the present system cannot be evialuated on the assumption that it is a mechanism for providing adequate benefits to all traffic victims. If it were to be judged on that basis, admittedly, the present t~rf liability systerp is not an efficiefit system of making reparations to all traffic accident victims because it was not designed or intended for that purpose. INDUSTRY STTTDIu5 American Insurance Association has been well aware of what appears to be a growing dissatisfaction with the present system. We have been engaged in our own studies, reviewing and analysing the present system and all alternatives, including the baste protection plan proposed by Professors Robert E. Keeton and Jeffrey O'Connell. We realize that cost is not the only significant factor in determining the kind of system which should provide benefits to accident victims. Nonetheless, we all know that cost is highly important. For this reason, we ate ROW ill the process of colicting data which will enable us to determine the prices of a variety of plans. including the Keeton-O'ionnell basic protection plan. The raw data is beiiig compiled by twelve participating member companies on the basis of claims currently settled in a stated period. It will cover all claims closed in the stated period by the twelve participating companies in seven states-California, Con- necticut, Illinois, Massachusetts, New York, Rhode Island and Wisconsin. PAGENO="0109" 105 Involved in the project are underwriters, claim executives, actuaries, lawyers, systems analysts, researchers knowledgeable In sampling techniques and data processing programmers. When completed we will be able to present realistic cost estimates on the Keeton-O'Connell plan. We also expect that We will be able to provide cost figures on a var~cty of plans, Indluding those which would go beyond the Keeton-O'Connell plan and other plans o~f~ a more limited nature. In addition, by modifying or adjusting specific aspects of a given plan, we will be able to measure the cost impact of such changes. TNDVSPRY BE5PONSIBILFrY The insurance industry in large measure is the administrator of the current compensation system, such on it is, and in this role must adhere to the legal r~quirements of the law of torts. Many of the criticisms of the industry are traceable to this law and not insurance procedures. Further, as a responsible member of the nation's economic structure we recognize a duty to provide a broad Insurance market in a manner that will sustain our ability to continue this function in an expanding economy. Responding to this duty has become increas- ingly difficult during the past decade for the factors most directly affecting insurance rates, such as hospital and medical care and automobile damage repair costs, have increased at a rate greater than most other elements in the consumer price index, while at the same time the industry has had serious difficulty in securing adequate rate levein. We are confident that a fair and objective study of the current system and the attendant administration ~e the system by the insurance industry will place in proper perspective the many aspects of this matter. In addition, we sincerely hope this study will emphasize the urgency of action programs to manage effec- tively the broader problem of the safe transportation of our citizens with çlra- inatic reduction in accidents and injuries. The Department of Transportation should he able to coordinate these ap~ proaehes to a sound and efficient system of compensating victims of automobile accidentS. STATEMENT OF FRED Ii. MERRILL, CIIAIRMAN OF THE BOARD, FIREMAN's FUND INSURANCE Co., SAN FRANCISCo, CALIF. My name Is Fred R. Merrill. I am Chairman of the Board of Directors and Chief Executt~e Officer of the Fireman's Fund Insurance Company and its sub- sidlaries. During 1967, our cOmpanies wrote nearly $600 million of premiums, of which approximately $205 million was in automobile lnsnrance. This is our largest classification of business, accounting for 35 per cent of our annual pre- mium income. Let's begin our discussion of automobile insurance costs with a simple defini- tion of the "product" itself. A~tomobi1e insurance prorid~s the means by which the risk of financial loss arising out of the use nf a car is transferred from an individual to a company. For this service, the company charges a premium. In the ierformance of this function, the automobile inshrance company can be likened to a conduit. In one end goes the p~rem1um dOllars of policyholders, and out the other comes some portion of these same dollars to pay claims. It would be reasonable to hope, of courSe, that su~ffici~nt money would remain in the con- duit to reward the compnn~V' for the vital services it is providirig~ Unfortunately, such has not been the case. The driving record of thO motoring public has required that more and more money be put into the conduit to pay for the claim costs that flow, from its end. In the process, the capital stock companies `have sustained losses and expenSes that exceeded premiums by the Staggering amount of $1.1 billion during the j~ast ten years. Exhibit "A" shows the record of this $1.1 billion underwriting loSs, and While 1967 figures are not yet available, I strongly doubt that they will do very much to change the picture. My point is a Simple one. The cost of having the insurance company assume our `liabilities is* directly related to the cost of the automobile accidents we cause, or are involved in, and because this' is so, we-the nation's automobile drirors-4argely determine our own `rates. Now let's go directly to this matter of rates or anto insurance co$ts. At one outset, it is important that we all hare an appreciation for the ti~mendous growth and size of the automobile insur&flee market and the highly competitive atmos~ phere that exists. PAGENO="0110" 1O6 ~ ~ ~ In 194~3, a~ t~i~çiidof World W~ II, U~i~ ~were1~ ~nhi11iqn re~is~ered pri~tte passenger ve1~1e~ jn th~ ~ini~e4 ~ At the ~n4, ot 49t~, there were 78 million -almost * three ti~n~4 more-~-ai~d neaj~Iy ~ ~nil1lQii e~ir~ are ad~jed to our high- w~ys each y~r. To~ tbe1~è ar~~o~it ~QO ~utpi~ob~ile i~isurers in the, Unfled states. These . corr~pa~4e~ eo~l~ç~ appo~im~it~y $~/~ ~il1ion arniu~Uy from the sale of auton~QW~le insur~ñc~e coverage. It is important to understand thast aüto~nobj~e, ips~u~a~ce largely determines the property-liability insurance compan~s operating performance. Because the market is so large, it freque~tly m~J~es up the n~i,ajor share of most companies' business. For that reason, the automobile classification to a very large extent determines over-all company proflinbility, It is also true that automobiin Insurance in the key~ to the marketing of other lines of insurance. c~ company mfi5t. aggressively ~seek new automobile insured~ if it is to operate suecossffilly in theproperty4iability industry. These two eonthtjons, then, create a highly competitive environment in which a company simply, cannot~ afford to price itself out of the mnr1~et. The result is a check mate or~obntrol agtiinst ruhaway prendum cbarges~ We see ample evidence of this situation in the co~1tiuuing refinement in clas- sification ~ystems that has occurred since W~rld. War II. The industry has progressed from a very rudimentary rating classification system to a highly refined one which proctaces different rates not only on the basis of insureds' lo~ cation, but also on the basis of age of o~erator, use of automobile, and record of previous accidents. This greatly refined classification system is used corn- petitivety as a means' to attract' the better insureds by way of a lower premium. Not only does .èompetitlon act as a~barrier to unreasonable~ insurance eosts,but the actual mechanies~ of revising `rates. also tend~tO hold premium costs downs Generally speaking; premium levels many state are not changed more than once a year; in fact, there are many states in' `whlch~ premium levels have not been revised for two' or more years. ~Furthei~, the rate~inak}ng procedure involves an actuarial analysis of pa1st statistical experience. ~Simply stated, companies are always using past experience to forecast future costs. This means that our "product" is priced and delivered before its actual cost is known. Obviously, when claim costs' are rising faster than they were at the time the past statistical experi- ence was accumulated, the stañda$ rat~-m'ak1ng `fOrrnuias are almost certain to produce inadequate rates. My point, quite frankly, is that our rating formulas are not entirely responsiv~ tc~ current inflationary ~onditions. Tl~e result, fre- quently is an inadequate pr~~mium charge rather than a pi~oper one. With respect to ris~ng costs, attached Exhibit ~`E" indicates that during 1967, automobile insurance rates were mncrease4 in 3~ s,tate~ for the liability coverages and in 31. states f~r the physiqal damage coverages. Rate rt~ductions were effec- tive during 1967 in 2 states for liability coverage, in 10 states for collision cover- age, and in 29 states for comprehensive coverage. The effect of rate incre~ses durIng 1967 ii~ th~ states where action~ was ta/pen was to increase the level of liability, premiums 5~3 per cent and the physical daniage premiums 0.1, per cent'; combined~ the effect of 1967 rate action was an over-all increase in existing premium levels of 3.7 per cent in the affected stgtes. If yoj take into `aqeount that there was no rate aetiv~ty in some states during i967, the over-all increase of 3,7 per cent becomes only 2.5 per cent., , Premiums have risen and unquestionahly will ~ontiuue to rise, simply because those benefits that automobile insurance provides involve aspects of the econon~y on which the current inflationary spiral will continue to have the greatest ha- pact This fact is clearly demonstrated b~r attached exhil?it "~`O", which compares the increase' in All' Items of the Oonsnmer Price Index to those selected items which' have a~direet bearing., on alitomobil~ insurance costs. Please note, that d~irlug the past 14Tyea~5, `these items have risen ata much higher average annual rate than has thEi~encral leveL nfl prices reflected in 4he iU1, Items category~of the Consumer Price Index. Further,, the rate of inflation has accelerated in the last year throughout the entire economy. For example, while Ijospital Daily Serv- ice charges increased at an annual rate of 8.6 percent during the sts year period 1960-1966, durIng `1907 the' actual increase in coSts was 11.5 percent, nearly double the ann'ualrate of increase for the previous `six years~ Exhibit "D", also attached, indicates how inflation has caused higher claim costs. During the three `year period ending June 30,1967, the average cost of paid ela'im~' for~Bodiiy Injury `Liability,' `Property Damage Liability and Medical `Payments coverage have increased $t22~.0O; $42~00 and $33~00;'respectively. During the most recent of these years, Bodily Injury Paid Olaims rose $59.00, Property Damage Liability claims rose $16.00 and Medical Payments' claims increased PAGENO="0111" 1:07 $15.00 on the average. When available, later statistics will unquestionably show an even more dramatic increase in costs. I should add here that the phenomen of higher benefits necessitating higher premiums for the automobile insurance industry has been paralleled by the actions of other programs, such as Blue Oross, Blue Shield and Medicare, all of which are involved in the payiue~t of similar benefits. Yes, gentlemen, the cost of automobile insurance has gone up, as has virtually the price we pay for any service or product. We recognize also that in the cur- rent economic climate, continuation of the present system of providing automobll~t insurance benefits will almqst inevitably result in still higher premiums. fo~- the motoring public. ~ks an industry, we do not feel that an ever increasing cost is the solution to the current problem. It is Important, however, that we realize that the insurance industry, did not create our present at-fault tort liability sys- tem. Rather, it responded to its existence and has succeeded well in creating a "product" that fills a basic need within the system. At the moment, industry groups are carefully analyzixig aI~d weighing possible alternative autOmobile insurance systems of reimbursement. It is our hOpe that an alternative to the current system can be devised which will result in a system of reparations which produce lower insurance preniiums for the motoring public. EXHIBIT A TJn~derwriti~g eaperience-Al1 stock companies All automobile eoverages combined, 1957-66 -, -.-.,.,-,--.,,. Statutory underwriting profit or loss Year Premiums earned Amount As percent Of premiums earned ,,,, 1957 $3,295Q93,404 -$301 031 523 -9 1 1958 3,534;.509,906 -142;265,516 -40 1959 3,818,521,979 -18 601 443 -.5 1960 4,065,952,774 54,329 811 1.3 1961 4,145,216,923. 41,516,064 1 0 1962._... 4,309,472,668 -60 365 147 1963 4,584,192,772 -109,912,854 -2.4 1964 4, 896, 030, 351 -280, 836, 201 -5.7 1965 5,409,444,137 -251 863 740 -4.7 1966 6, 085, 838, 638 -32, 180, 447 -. 5 ~ ~,. -,.._,_ -- .,._ .__ ._.._ ,_. ~ ~ ~ .~ ~ .-- Total 44,144,273,552 -1,101,210,996 -2.5 , AUTOMOBILE LIABIL1TY-BODILY INJURY AND PROPERTY DAMAGE COMBINED ~ 1957 $2,024,188,622 -$263,383,645 1958 2,218,185,138 -196,754,126 . -8.9 1959 2,441,155,916 -105,135,125 -4.3' 1960 2,627,490,170 -38,910,636 -1.5 1961 2,705, 120,637 -58, 523,856 -2. 2 1962 2,828,230,353 -86,683,263 -3.1 1963. 2,989,462,029 -122,121,730 -4.1 1964 3,184,329,856 -233,466,560 -7.3 1965 3,504,350,618 -234,671,247 -6.7 1966 3,895,036,968 -183,164,283 -4.7 Total 28,417, 550,307 -1, 522,814,471 - -5. 4 AUTOMOBILE PHYSICAL DAMAGE 1957 $1, 270, 904,782 -$37, 647,878 ._5. 3 1958 1,316,324,768 54,488,610 4.1 1959 1, 377,366,063 86, 533,682 6. 3 1960 1, 438,462,604 93, 240,447 6. 5 1961 1,440,096,286 100,039,920 6.9 1962 1,481,242,315 26,318,116 1.8 1963 1,594,730,743 12,208,876 0.8 1964 1, 711, 700,495 -47, 369,641 -2. 8 1965 1905,093,519 -17,192,493 -0.9 1966 2,190,801,670 150,983,836 6.9 Total 15, 726, 723,245 421,603,475 2. 7 PAGENO="0112" (`3 2 ~ ~ - - -~ ~ 0 ~ 0 <~ ~ DC DC DC c ~ ~ ~ ~ ; ~ 22- ~ ~ ~8; ~ CD s ~- a, CD : `~;~` : DC ,,,,,,,,`~C'$'''''' H :~HHH O-C ~D) ````````````````` H, == ~ -l H `H'''''''''''' ``` >~ C~ -` C) -` C) ~ C~ ~ ,~ < C) ~ h C - j;~; ~ ~ ~ ~ C~C~3 C~ N)N3())OC -~CC)d~C~ -J~ C)(D0~~ 4(J)C CO H C,, 0 Ji PAGENO="0113" 109 EXHIBIT C CONSUMER PRICE INDEX (19S7-59~1.000J Hospital daily Physicians' Weekly Automobile Date All items service fees earnings 1 insurance charges rates December 1953 0. 936 0.770 0. 860 0. 833 0. 888 December 1955 .935 .843 .912 .921 827 December1960 1.039 1.154 1.074 1.050 1.122 December1965 1.110 1.571 1.23~ 1.317 1.364 December1966 1.147 1.830 1.329 1.361 1,424 March 1967 1.150 1.942 1.355 1 361 1.431 June 1967 1. 160 2. 001 1. 373 1. 339 1. 434 September1967 1.171 2.041 1 394 1.371 1.445 December1967 1.182 2.114 1.410 1.403 1.451 AVERAGE ANNUAL RATE OF CHANGE (PERCENT) December 1953-December 1967 ±1. 7 +7. 5 +3. 6 +3. 8 +3. 7 December 1960-December 1966 +1.7 +8. 0 +3.6 +4.4 +4. 1 1967 +2. 1 +15. 5 +6. 1 +2. 3 +1. 9 I Weekly earnings of factory production workers. Source: Bureau of Labor Statistics. EXBIBIT D COIJNTRYW10-E AVERAGE PAID CLAIM COST TREND (EXCLUDING MASSACHUSETTS), PRIVATE PASSENGER CARS Year ending- Bodily injury Pro~perty damage Medica pay ments liability liability Jane 30, 1964 $803 $158 $209 Sept. `30, 1964 803 1~8 210 Dec. 31, 1964 809 161 213 Mar. 311965 810 165 218 June 30, 1965 816 158 218 Sept. 30, 1965 828 171 219 Dec. 31, 1965 835 175 221 Mar. 31, 1966 857 180 224 June 30, 1966 866 184 227 Sept. 30, 1966 - 881 188 232 Dec. Si, 1966 896 192 235 Mar. 31, 1967 906 196 239 June 30, 1967 925 200 242 Chahges: June 30, 1964, to June 30, 1967 122 42 33 June 30, 1966, to June 30, 1967 59 16 15 Source: Insurance rating board. 92-100-&8------8 PAGENO="0114" 110 STATEMENT OP H. CLAY JOhNSON, PRESIDENT, ROYAL-GLOBE INSURANCE COMPANIES, NEW'YORTt~ N.Y. My name `is H. Clay Johnson and I am Pres'iden:t of the Royal-Globe Insurance Companies. These companies are members of the American Insurance Associa- tion. They `are licensed and ~oing busiine~s in the 50 States and the District of Columbia. The Royal-Globe Companies' 1967 premiums were a little more than $409 mil- lie; of whichau'tomobile insurance comprised $142 million of premiums, We strongly endorse the comprehensive stu4y by the Department of T~ans~Yór-~ tation `as contemplated `by S.J. Res. 129. I say this with full realization tkat be~ cause the automobile inailra'nce business is va~t, `highly complex and ~e~e~1dent upon personal on~the-spot decisions by many people, there will inevltabl~'~sult from the study critici,sm~' of the administration of the insurance function `Is! `spe- cifl~ eases. As Mr. Jones has already indicated,' however, much of th'e crit~cisrn stems from a misconception `of `the function of the automobile liability' p~li'Cy. Mr. Jones has indicated that those witnesses representing American Insurance Association companies will h'lghuight'sepa'ra'te' aspects of'the problem `and thereby avoid redundancy. My brief remarks will `be confined to state rate-regulatory laws. You will recognize, I am sure, that the `rate~eguiatory la*s under which our business operates `are an important part `of the' automobile insurance system and `that many of the cost `and marketing aspects of which Mr. Merrill just spoke are directly `or indirectly attributable to the character `of `s~th regulation. Most of the state rating laws were enacted in 1946 and 1047 after the~passage of the federal 1\!EcCarran-Ferguson Act in ~t94~. `That Act, as you know, wks designed t'o permit the continuance `of state `regpl'atip~ which had been jeopa'r~i~ed ~y the Supreme Court's decision in the South Eastern Underwriters Association case. The McC'arran Act als~ granted to the insurance industry `a Qualified exemption from the federal antitrust laws, making them applicable only to' the extent that the insurance `business was not `regulated by state law. In approving the 1\~eCarran Act, President Roosevelt mentioned the necessity of "affirmative action" by `the `states. `The emphasis on affirmative `regulation at that `time stemmed `additionally from the industry's understandable preoccupa- tion with antitrust matters follov~ing the SEUA case. It can best be explained by a quotation from the late Senator Kefauver, accompanying his `introduction of a flle~and-use rate regulatory bill (S. 568, 87th Congress, 1st Session) for the Dis- trict of Columbia: "This problem apparently h'ad its gnnesi's in the belief that the McCarran Act's exemption from Federal antitrust `action could be achieved `only by `affirmative regulation.' This, motivated more `by the desire to obtain antitrust immunity than the need for obtaining the best regulatory system, the States seized upon the requirement of advance `approval before `rate's become `ef~e'ctive. flnf0rthnately, certain `of the deliberations of th'e Congress prior to the enactthent `of the Mc- Oarran Act gave weight to this `argument." (Congressional Record, January 23, 1961, page 1045.) The concept of affirmative regulation meant the necessity of requiring rate approval by some spervisory body. The member companies of American Insur- ance Association did not agree with this interpretation of the McCarran Act in 1945, nor do we now. It was and still Is our view that regulation requiring rate approval is unnecessary and undesirable. Our position did not prevail. The model rating laws deevioped by the National Association of Insurance Com- miSSioners, in cooperation with the industry, while intended to be a compromise between "prior approval" and "file and use," has become a prior-approval law in actual state operation. It requires rates to be filed subject to a waiting period before they can be used. But in practice rate filings under this type of law must receive advance approval by the state supervisors before they are used. In support of the prior-approval type of law it can be said that in the late 1940's there was a high degree of rate uniformity since the bulk of the `auto- bile insurance business was written by companies who were members of rat- ing bureaus. Under such conditions, a rigid form of rate regulation may be appropriate. Today, however, vigorous rate competition prevails, particularly in the field of automobile insurance. Nevertheless many states are still trying to Impose rigid rate regulation on a competitive price structure. This is Incon- sistent with the basic principles of free competition. PAGENO="0115" 111 One of the states which did not adhere to the eoncej~t of the model rate regu~ latory law was California and thth was bê~at~~ even back lb 1945 vigorous rate competition prevailed tor àutomObllë ~n~tran~e lii that 1st~t~. Insteà~ of the model bill Califor]ña adopted a n6-11iitL~ la* whik~1i M'~ `öper~ted success- fully to this day. ~` `~ " Now there is a growing awarenés~A of `~ ue~d fb~ change in the rate rogula- tor~v laws of other states in' ~order to'eonfornt tO present ~o~rip~titive market conditions and state rating la~ws' a~e `b~ibg ~rée~aminod àbd i~e~ap~d to this end. In the past few years, Louisiana has ad6~t6d a fOfm Of fiie-and-use law; so has Indiana. Florida and Georgia last `~a~ en&~ted' new rathi~ legislation closely modeled after the CalifOrnia law' which, as I have already indicated, does not require rates to be filed but still `~iVOs the insurance commissioner, th~ gen- eral authority to prevent rates from' being inade~jtate, excessF~e or unfairly discriminatory.' Director of Insurabee l3olt'oñ Of' Xllthç~is ~ seekiig to have the Illinois prior~appro~tal `law `rep1a~Od by `~ no~-fi~ing, 6~en competition laW. It appears therefore that many state commi~smOnE~rs are fo11o~ing the lead of Commissioners Bentley of' Georgia (clrrelitly'the ~tAIO Presid~nt) and Wil- liams of Florida who came to the conclusior~ tha,t a rigid pri9r-approval l~w is not iii the best Interest of th'e'pub'lic, W~ are not alone in Q,iiT view, that the ratin~ laws should be un~láted `to con- form to present market cohdI~iOns. Other m4jou~ segments of the industty sup- port this view. In ddditlOn, the SObahu Jiid~ciary Subcommittee on Antitru~t and Monopoly endorsed a change in the `prior approval laws (Repç~rt No. 831, August 29, 1961, p. 119). SimilOr support was forthcoming f~roth the Department of Justice in connection ,with rating legislation for the District of Colum- bia (testimony of Lee IJoevinger, ~Assi5tarit ttot'ney general, Antitrust Di- vision, Department of ~1ustice, before `~ubcommittee o~t Business and Com- merce, Senate Copimittee `on `the fllstrçt °F Columbia, June 21, 1962). If S.J. Res. 129 is passed we bope'that It will result in a review and analy~i~ of state rating laws `by the Department of Transportation since such laws continue to have an important impact on the nuarket capacity of insurance companies to serve tile public. STATEMENT OF WII~IAM 0. `BA~LnY, Vion PunsInuNT, AETNA `LTTE & C'AStTAtTZ HAnTTOi~D; CONN. I am William 0. 1~ailey, Vice President, of Aetna Life & Casualty. I appear here today to share with you my Companies' earnest concern over the problems which have beset the~writing of automobile' insurance, to urge the adoption of Senate Joint Resointion 129 and to pledge you and th~ DepartmOnt of Trans- portation our full cooperation in the study, contempted by that resolutlon~ Automobile insurance is not the e~ciusi~e~ concern of `the twe1ve~hundred companies which write it. Nor is it solely the concern of theone-hundred million licensed drivers who `seek to be, protected by insurance. It is equally the concern of every man, woman and child in the United States~who is a potential victim of the financial injury which often follows ,wlienltyars ~o11ide.' Other representatives frQm. the insurance industry are testifying on the subjects `of accident prevention, insurance costs, claim's practices `and `regulatory patterns. I will direct my remarks to the ~a~aiiahility of autom~o)~ile insurance and the matters of cancellation and nonrenewal which have ca'used:widespread concern. During 1967 Aetna wrote $414,000,000 of automobile insurance' premiums, ranki~ig second ir~ this, line ameng agency stock companies and. fourth among all auto'moblle~ insurers. Over the past five years the numb,er of our insi,lreds has increased by nOarly 70%, a~rate, thr~ times faster than the growth In `automobile registrations. Our goal has been and continues to ~e, to `provide a wider and wider market to the ~ w~herever,conditions exist. which reasonably offer an opportunity for profltabie underwriting, ` In spite of these e~'f0rts and t1~ç~se of other companies, surveys conducted under the auspices of the Insur~lnce In~ormatiou institute indicate that four percent of the public report difficulty in obtaining automo)dle insurance coverage either because of a refusal by'a~çunpany or because eo:v~~age was placed through One of the Assigned Risk `Pluns in existence in all states. An, additional seven percent reported a problem during the last ,t~o yes~çs, of cancellation, refusal to renew or a reduction in coy~rage previously carried. , `, ~` ` ` ` PAGENO="0116" 112 Yet, the selling o~ ~ut~m~biIe in~ura~ncê policies is our iu~iness~ Surely we have reached some sort of mi1esto~ie in eo~nomic history when sellers are reluctant to expand the market i~or their ~prodnet to meet consumer demand. The key to this paradox, in our j~4gment, lies in the lack of opportunity for profit from automobile insurance operations. Measured according to the most unfavorable aecountiug praetiee~ critics would Impose upon ns~ individual com- pany rates of ret~n range from. the +intoierab~Ie ~to the unsatisfactory. My own company has hail ~ve successive years of uudo~writiug losses from automnbile insurance and the :inaustry as a whole has had a decade of unprofitability. In an effort to ii~prove, `and Iti most eases to restore, profitability, companies have tightened their underwriting standards and attempted to select policyholders who they ~elieved were less likely tie become involved in accidents. Tight markets are the inevitable consequence o~ an inability to provide coverage at a premium level wbic~h realistically reflects the cost of insurance protection. At a time when automobile insurance is recognized as a necessity for all those who are permitted to operate a motor v~hicle, it is understandable that market restrictions and unavailability of coverage should. receive the attention of the public and the 4longress. * Senate Joitit Itesollition 129 contemplates a comprehensive study of the system of reparations for the victims of automobile accidents and of the marketing of automobile insUrance which is geared to that `system. The public's need fo.r pro- tection surely justifies this `siucly~ We hope the inquiry will prove both penetrating and searching end will be undertaken in the broadest possible context. From our oxperietice, the overall problems which have been identified are not conducive to piecemeal analysis of symptoms but rather require a searching in-depth in~ qiliry into the underlying and interrelated causes which bring on these symptom's. The scope of the study contemplated by Senate ~1b4nt ~tesohttion 129 recognizes this and offers the opportunity for such thorough analysis. We beIi~ve such an investigation will yield `con,strticttste suggestions for solving the many problems which we now face. As a prelude to this study a review of what 21~ltna and other companies have done in the areas of cancellatiOn and n'onrenewal to increase the availability of `automobile Insurance may be useful. Automobile insurance coverage is generally issued for a term of one year. Both the policyholder and the company may refuse to renew the policy at the end of this period. While historically both the insured and the lnsttrer `also could cancel `coverage upon notice to the other at any time during the policy period, today the imSurance company no longer has `the peitilege of iflirestrieted cancel- lation. A decade `ago, my `Company recognized its Obligation tO the pU'bli~ not to cancel an automobile policy during its term ~xcept in those few tnStances where the insured was `detaonstrably ulicerOper~atire or ptescnted a `previously unknown hanardous expo'surO which creatodth'e probabilltyiof substantial loss. Then in 1962 IEtn'a Life & Casnalty and `other companies voluntarily restricted `their right to cancel a policy exeeptfor the following reason's 1. Nonpayment of premium. 2. Obtaining insurance through ftaudtihtrit misropreserltalion. 3. Violation ofnnyof theteroroonditicns*ofth~policy. 4. Where the named insured ~orany etxsthtn'ary operator of the automobile: (`a) l1~ad his license suspended or*revoke,d. (b) Had epilepsy or `a hea~t condition, `subj'eet'to `a physician's certi- fication with respect to'a'bility `to*opera'te a motOr vehicle. (e) Was convicted or forfeited "bail during the pi~evioUs 36 months for felony, criminal negligence from the operation of *,a motor vehicle, driv- ing `while iflt~~t'l~ated, hit end rUn, theft of a motor vehicle or made false statements In applying for `a driver's license. And now, as of January of this your, my'Conlpany and mfiny dtheri~'htive agreed not to cancel `an `automobile imsura~nee polie3t unlesS the ins'Efled ties failed to pay the prOmlum or `has had his'1'icen'~e or motor vehlcte'registretion suspended or re- voked. This pledge `a~lies to ~ resent ilmnr~&s nell, a~tte~ the first sixty days, to all new insureds. Rettrrning to the subject of nom~e~Owal, my Oorn1i,5rn~r `has `not been willing to guarantee renewal of all `of our present pOl1cie~ because such tn~tion could jeopardize our financial well~belflg end ultimately OUr Solvency. To `agfce to' sell a product Indefinitely into the future in the absence of `control over the price of that product would be foolhardy in'deOd. We did, however, earlier this year PAGENO="0117" 113 voluntarily agree to gh~e noth~e of ottr intention not t~ renew a policy at least twenty days hefo~e the end of its current teriñ so that the `policyholder ~na~ have reasonahie opportunity of fihltng his insurance needs with another carrier While his protek~tion is still In foree~ These procedures adopted by~mei~y in our industry have unquestionably helped to prevent further eonstrietion of this market and Indicate our cfftrts to `date to respond to ptthlic~ concern over inerket availaWlity. While I do not have any industry figures with respect to cancellation and uonreiiewnt our own (J~n- panles' data for 19~ may be belpftll in assessing the magnitude of theseconcerns. Out of over 1,~5O,OøO auto policies, 43',1i64, or 2a%, were cancelled for nionpay- mont ot' premium and 14,589~ or O~l~%, were earicell[ad for ether pei~nittted rea~ sons. W~ are satisfied that the further restrictions on our right to cancel introduced early this year will further rechioet'bis figure. During the same yoar~ we declined to renew autothobile insurance for 19,438 policyholders, ~r 1.2% of the to}1~aL We did not renew the policies ol! an addt~ tional 28~988~ or iiS%, because the agent tbrot~gb Whom the policy had l~een written no longer dilit `business with us. Some of these polie3~ho1'der~ continue to be insured With A13~tn'a through other agents~ AEtna Lifb & Casualty seeks to do an increasingly helter job in `meeting the public~s need for insurance prohection~ If the study antiborized by Senate ~oii1t Resolution 129 can `contribute to the know1e~e, understanding and solution `of the baste `problems of the automobile insurance bOsIne~s, it will imiportantly serve the public interest. STATEMENT OF HAROLD Scorv BAIILE, E~ncurxvu s~pnxv, GE?TEnAL ACCIDENT tIROUr O]~' Il~SUI~Q~CE COMPANIES My name is Harol4 Scott Baile. I am l~xecutive Vi~e l~reside'nit `of the GeI)eI~4 Accident ~*reup of Insurance Companies, with headquarters in Phila~de~phiO, Pennsylvania, Automdbile insurance premiums represent more than ~% of our companies' writings, which approximate ~2t!O,OPO,QQO `pei~ year. We therefore have a v~r~y substantial inlerest in the autoinJohtlc reparation system. I appear `here tedny `to urge your favorable eousidera~ioxi of ~.J. Res. #129. We feel it is timely nnd desirable that there `be an impartial o'bjective re-ex~mina- tion of the iuider1yii~g tort liability principles iipc~. Wbicb~ we rely tQ relieve victimS of the eonsequenc~s of `the autom~oibile aoci~lents, With the advent of the autoipobile `and victims o~ `its oper~stion, the' vai~i0ILS legal juriscii~Uons of this country applied tl~e principle tb~t a person ~vbo is free from fault ntay recover damages only if some third person's `wro~g ut fault caused his injur~y. With this principle estiablls'hed, the insurance me~anism was employed to protect ntoto~ists not for the ios~ they might `sustain it injured, but against the economic loss they might sustain as a result of beiflg held 1ega~y liable to an injury person. Thus, the tort liability principle and the insurance mechanism in e~mbiuatiou constituted an automobile reparation system which allowed only some victims to be redressed, and those victims were placed in an adversary position with the payor of their losses. That system of reparations was conceived shortly after the turn of the cen- tury, when there were fewer automobiles traveling, at slower speeds on the high- ways than there were teams of horses. ~t is, therefore, not untimely to review that system in the light of present-day trallic and economic conclitlona when over 90,000,000 automobiles travel on the highways, with greatly increased horse power and at high speeds, with the result that there are almost 4,000,000 accident victims a year. By the very nature of the system of reparations that was, structured, there are certain incidents which necessarily flow from it, and are inherent in the system itself: 1. There must be a determination of fault. Only if fault exists can anyone be redressed, and this determination requires time. It involves the interrogation and recording of the observations of witnesses, the examination of the scene of an accident for physical facts, the inspection of the vehicles involved, the reviewing of investigations by police authorities, and resort to expert techniques of re~ construction of prior events by the use of photographs and measurements, 11 in- volves the human fallacies of observation, recollection, and recitation of events. PAGENO="0118" There is, ithe~efore, the pr~b1em o~ ~ecor~cj1ing and evaluating, Uie conflicting versior~s ~ o~ a~~ioccurrence. Illiose activities~ are carried on not only by the in- surer, b~it alsa on behalf of tb~ injuredparty, ax~c1~one is arrayed against the other to resolve the question whether reparations should be made.~ ~I~i most instances, these disputes are re~o1vecl by eomprQmise, but when it cannot be, it goes into litig~tlon. Thea again the; litigation procedures necessarily involve delay. Civil procedure today permits protracted discovery proceedings, ~teposItions, inter~ rogatories, physical examinations, pr~ducUon of docnrnents, pro-trial conferences, and eventually, jury trials, perhaps followed by appellate procedures. To the extent that we dependin the main upon the settleme!tit of these disputes through compromise, since the best ~coznpromise is one in which neither party is fully sustained, there is some dissatisfaction on each side; of any result. The fact that there is this adverse relationsb~ip and the con~cquent delay, does not necessarily condemn a fault system of reparations; it Is, however, important to recognize that reasona~ble delay is a necessary incident ~of the system. One may well conclude that in an orderly system of society thereshould b~ ~ome form of retribution accorded against the wrongdoer through our civil courts, and that this is the principle which should guide our autothobile rotaration system ; but if it is, the. unde~i~wble but necessary. tncldence of that form ~of system, must be weighted against the dasira~ility of adhering to a fault concept1 This Is one o1~ the qnestions whichwe think, deserves a careful and thorough objective study. 2. The rules ofdamages which have been adopted under our tort liability system permit the recovery not only of economic losses, that Is, expenses and earnings loss, and other things which can be measured in dollars and cents, but in addition, permits the recovery of a completely non-economic form of damage, an award for dignitary~ bartn~ such as pain and suffering. There is no ~tandard for measuring this form of damages. it is left to the fact-finder to apply a theoretical rule of reasonableness. Thus, in the.~iajp, it reflects t~e conscience of a jury. A necessary consequence of this fact is that one Whç~ seeks the m~xirn~ith recovery must, In sOme way, dramatIze his liijthyy to ith~r~ss the fact-finder ~lth the pain and suffering he has endured. Expert physicla~w, X-ray films, and other demonstrative evidence a~re resorted to, to 1mpr~ss tb~ fact-finder. There i~, therefore, neces- sarily1nvOl~ed, more expense and mo$ time, but this ~s an ~ncl&~nt of the nature of the rule of damages inherent inthetort lia4bility ~ystè~n. ~tprodttce~, by Its very nature, variations in I~ecovér7 by d1ffth~ent claimants wj~1iot~t relation tQ any necessary differencesin thEir Ipjttries or los~e~. But, if we ~re going to undertake to attempt with dollar awards to .öoMpensate for prirely dipitary harms, we must recognize that there are ~oIng to be va~ations in tl~e a~rds recpivecl,, arid tbat the process of determination of th~ amount of an award #111 be delayed. Here, again, it seems appropriate to' deteflniiie whether society doqs demand protection, not only ag~lnst its E~cononhiC lçsses, b~at also ~ome redress for purely dignitary harms, whl~h can never, in fact, be relieved by the ~IOllar award. We are con~ciOus of an apparent chn~ngIng public attitude. There seems to be a public feeling that any person injured ta an automobile ~accI~ient should, in some way, be relieved of the consequences of. his injuries. Working within the frame- Woi~k of our existirig reparation sy~tem, the insurance industry has endeavored to ,resiioi~d to. this apparent public destre. It Introduced iuto its policies medical payments coverage providing immediatep~yment to an insured and occupants of hils car without regard to fault. In addition, companies in their adjustment prac- tices are following the procedure of making prelifrilnary payments for rout-Of- pocket expenses and loss of earnin~s, without making a final determination of fault, and reserving for later determination the finul adjustment of the claim. If these are the courses society wants .to follOw, the question is presented, "Why do we do this, while still preserving the form ~f a different form of a system of reparations ?" In summary, our present system, by its very nature, denies a remedy to many victims, and awards ethers varying `relief which may be viewed as inequitable to some. It is a system which necessarily involvels time, expense, and creates social frictions. It is also a system which attempts `to `replace non-economic losses by hioney awards, thus adding to the cost of the system. We think It is appropriate to determine whether these necessary incidents of our present system, which might be eon'siderM as defects, are ~ut~weighed by the advantage.s of the present system. Costs can `be reduced if digri tary harms are not compensated; time can be saved if reparation Is not dependent upon fault; but do we introduce into our society other evil's, if we abandon these l'ong~established principles? It is the PAGENO="0119" a~iswer to these questious the studies ~nviis~ged by the resolution would supply, and we earnestly urge those answers are sorelyneeded. Mr. `St&i~. In the interest of preserving time, I have not pre- pared any statement that would be duplicati~e. However, I am prepared to respond to questions from the com- mittee that are in any manner related to the subject of this resolution. Such interrogation could supplement the information already avail- able which is contained ii~ the five prepai~ed texth submitted herewith for the hearing record. Mr. Moss, Thank you, sir. Mr. Watkins. Mr. WATT~INS. 1 have no questions. Mr. Moss. Mr. Blanton. Mr. BLANTON. Thank you, Mr. Chairman. ii have no questions. Mr. Moss. We have no questions, apparently. I want to make it very clear thatitis not in any manner refiectiv~ of a Tack o~, interest but, as I stated earlier, we are seeking the study resolutionbecause we want to learn much more. Your support of it is appreciated. Your brevity is appreciate~E. I thank you very much fO~ your appearance here. Mr. STARK. Thank you. Mr. WATKINS. I concur in the chairman's statement. Mr. Moss. Mr. Wallace M. Smith, branch manager of the Ameri- can Mutual Insurance Alliance. STATEMENT OP WALLACE M. SIVIITH, BRA.NCR MANAGER, AMEB!- OAN MUTUAL INSURANCE ALLTANC~; ACCOMPANIED BY P. A. HOLDERMAN~ MANAGER, LEGISLATIVE BRANOB Mr. SMITH. I am Wallace M. Smith, rnana~er of the Mid-Atlantic office of the American Mutual Insurance Alliance. The alliance is a national trade association representing 124 mutual companies writing automobile insurance and other property and casualty coverages, with headquarters in Chicago, Ill. With me, Mr. Chairman, is F. A. Holder- man, who is manager of the Alliance legislative department. Mr. Moss. Do you intend to summarize? Mr. SMITH. Yes, I will summarize. Mr. Moss. Would you like to have the entire statement as presented here inserted at this point in the record? Mr. SMITH. If you please, we would like it that way. Mr. Moss. Is there objection? Mr. WATKINS. No objection. Mr. Moss. That will be the order of the committee. (Mr. Smith's prepared statement follows:) STATEMENT OF WALLACE M. SMITH, MANAGER, MID-ATLANTIC OFFICE, AMERICAN MUTUAL INSURANCE ALLIANCE I am Wallace M. Smith, Manager of the Mid-Atlantic Office of the American Mutual Insurance Alliance. The Alliance is a national trade association represent- ing 124 mutual Companies writing automobile inuurance and other property and casualty coverages, with headquarters in Chicago, Illinois. Our member companies offer their unqualified support for the study authorized by House Joint Resolution 958. We agree with the sponsors of this resolution and with the President that there is a need for a comprehensive, objective, and non- PAGENO="0120" 116 parti~an study of the entire system used for compemsating automc~bi1e accident victims. Our cempanies welcome such a study for two iuajur reasoi~s: First, we share the generally held opinion that a review of our pr~eut metbjods of compensating persons injured in highway accidents will be benefidal for the public, the Congress, and the industry. Alliance companies already are engaged in a major program of e~perimentation, voluntary reforms, anci legislative action. Our efforts are based on research which the All4ance Initiated more than live years ago. We welcome this opportunity to share our ideas anci research informa- tion with other grot~ps striving for the san~e goals. Second, we are confident that an objective study will clear the air of niisunder- standings which are doing harm to the good name and reputation of our industry. We feel that some criticisms of the present system are misdirected or based on unrealistic expectations. An unbiased study can perform a useful ~ul~lIc se~vtce by provldji~g a f~etual basis for sorting out the issues, and for pl~aeimg responsibility where it rightfully belongs. One of the most useful results of such a study might be the realization that many of the practices new beipg eritic1~ed are simply atte~pts t~ ree~aicile con- flicting interests and objectives. Our iñdtistry is constantly dealing with contra- dictory demands~-demands from claimants, from plirchasers of insuraflce, from legislatures and regulatory officials, ftian thq press and ~ieademic comniunib'. The responses we make to these coufifeting duniand~ may not always please every- one, but the responses are not arbitrary. Tb~se represent honest efforts to provide practical and equitable solutions to the dilemmas we have to face. Take, for example, the insurance rating structure. Nearly everyone fancies himself a good driver and feels that he is entitled to low insurance rates. But the fact is that tbe~ driving population covers a wide spectrum of driving abilities. I~ addition, each individual's chances of having an accideqt are in- fluenced by a great many other factors, incLt~dlxig mileage, traffic conditions, weather conditions, and personal habits. The probable insurance loss is further influenced by such impersonal factors as prevailing hospital and medical costs, wage levels, auto repair costs, and the generosity of juries. As a practical matter, it is imposs~bl'e for an ipsurance co~npany to devise an individual rate, for each poliCyholder, based on an investigation of all the factors relevant to his driving abilities and exposure to insutalaee lOsses. The cost of doing so would greatly increase the present cost of providing coverage. On the other hand, it would clearly not be fair to charge the same rate for all drivers, regardless of their individual characteristics and environmental exposure. Insurance companies steer a middle course between these two extremes. The in- surance rate structure fulfills a social riCed by spreading the cost of mOtor vehicle accidents over the entire group of auto pelicyholdere. At the same ttnie, it seel~s to achieve equity by allocating the cost among groi~ps of driyers on tl~e `basis of measurable differences in their loss exposure. What many critics don't under- stand is that this process has to be sophisticated enough to produce substantal equity, and yet simple enough to be administered inexpenslvel~ and fairly for up- wards of 100 million drivers. We also face conflicting demands in the application of insurance underwriting procedures. Most of our policyholders want us to be careful in selecting the people we insure, in order to keep our total losses down and their rates low. This is especially true of the policyholders served by mutual companies. Many companies of the Alliance were started as consumer organizations, with the express purpose of reducing insurance costs through adherence to ptact~ces designed to reduce loss exposure. This continues to be one of our major objectives today. Our dilemma is that this objective is in conflict with society's demand that drivers with high loss ex- posure be provided with insurance, and at a price they can afford to pay. If we charge these drivers a price commensurate with their actual loss potential, we are accused of pricing them Out of the market. If we cancel their policies ip `order to avoid sac~iiing our other policyholders `with the losses they `cause, there is a public clamor for protection to be provided regardless of their driving perform- aace. If we accept these drivers at a `subsidized rate, we run into strOng protests from the average or better drivers who have to pick up part of the price. The only permanent solution to this problem would be to remove from the high- ways the drivers who cause an excessive number of accidents, injuries, and 11- PAGENO="0121" ~117 ~3Janth1I 1~se& Bttt a~~y~t) tim A~teri~an public ha~ sbown little willingness to do ~so. A~ ~t 1~atioiT~ ~ ~o1erate a 1~anta~t~ degree of irr~spons~bi1ity on our highways. Peopk~ are aI1o~w~d t~ k4lI~ maim, and inf1I~t e~onoa~c dam'a~s on othE~r p~op1e With reiJstite ithpunfty, so 1oi~ as~ they do it With an autethobile. In 1966, this uatioh's increhsibgly destructive ~tse of the b4~hways killed ~8,OOO human beings, injured tie~ar1y 2 ihIllloh, atid tlahiaged 22 mi1h~ti vehicles. Very few nf the drivers res~nslb1e for thiS a~~a1litig deStrUctiOn were removed from the roads or required to undergo remedial ltrltltilng. YOU cah go Into any state iS the Union tOdhy and thid Ot~ ~the highways people Who have repeatedly demonstrated their utifitness to drive. Yet they ret~in their drirer's licenses, or drive With6iit them, bedaliSe our aattomobile-orientetl SGèict~r refuses to hold to a reaSOn~ble standard of pe~orma~ce. It is against tbi~ backdr~ that the insuranbe industt~y must ~1ea1 With such politically sensitive issues aS premiuth surcharges, nnderwriting standards~ ~ate eiasthéattotiS, catic~ll5tiOh, atid itoflt*e~reWal of policies. We truSt that these ~ssties will be considered in the light of the coni~icting demands we are trying to satisfy. This does not mean that the Alliance is satl~1ied With the status qwo, or that we would defetid the ~ctiOns Of all companlOs in their struggle to nope With the automobile problOin. On the contrary, ~Mr member nohipanies and other responsl- ble segments Of the Industry tth~e been working on seteral fronts to overcoane the shortComings of Our preseht System and to curb abuses Oh th~ part of a few companies. 1~'ot' example, the 1ndU~try has rnhde available plans In every Sttite to assist mOtorI~t~ who heed auto liability insurance and who have diffi4mlty hi obtaining it. The Alliatice advocateS erpanded use of these plans and stahds ready to cooperate with other segments ~f the inthistry In attaining this objective. Over the years, Our cottqYanles also ht~e parth~tited In etj~ndIng the auto liability policy frOth a rather lithited cotitract into a paCkage of eceerages that provide broad pr6tectlon to tr&~relers upon the hlg~kwayS. This broadening of protection has been brought about ~y extending the Policy to cover drivers other thati the ~policyhOlder, ~ehIcIeS~ other than the ear he owns, and hamrds other than the ones originally insured. On example is the widely sold auto medical payments coverage. Another is the Uninsured Motorist coverage, which protects policyholders and their families if they are injured by an uninsured driver. 1*hls coverage, available in every state, has noW become the source of protection against insolvencies as well. Twenty-six states how require that companies offer insolvency protection to their policyholders under the Uninsured Motorist cover- age. In the remaining twenty-four states, bureau companies and some other insureres have automatically extended insolvency protection to all purchasers of the UninSured Motorist coverage. Iti other WOrds, the policyholder and his fam- ily Cati look to their own company for payment should they beinjured by a motor- ist whose company later becomes insoltetit. The Ihaurance industry also has Supported measures that would provide more adequate staffs for state institance departmetits, and has supported eUactment of laWs to strengthen the hand of regulatory officials in dealing with companies in shaky financial cOndition. Over the years, our industry has sought to alleviate the burden on our made- quate eoutt facilities, which hkve not kept j~ace With the growth in population and the startling increase In legal matters of all kinds-particularly criminal cases. As a result of the industry's efforts, an estimated 97 to 98 per cent of all automobile accident citims are settled wIthout~ the necessity of a trial. Where courts are congested, auto injury cases make up a disproportionate part of the backlog because the courts give precedence to other types of eases and spend relatively little of their available judicial manpower hearing injury cases. How- ever, even in the most congested courts, attorneys with hardship eases can bring them to trial in a reasontbly Short time by requesting that such eases be moved forward on the calendar. All of these facts are well dOcumented in research done at the University of Chicago and elsewhere. On the matter Of cancellations, the principal stack and mutual rating bueaus have had in efi~ect for the past five years a program of voluntary restrictions on the right of their members and subscribers to cancel private passenger automo~ bile liability policies. As of January 1, 5968, the right to cancel Was further restricted to jtist two alloWable reasons: Non-payment of premium or loss of driving privileges. Iti addition, the guarantee against cancellation was extended to other coverages such as collision, fire, and theft. PAGENO="0122" jig The Alliance has publicly declared that it will suj~port state legislation requir- lug all companies writing automobile insurance to meet a similar standard. The Alliance likewise has been responsive to criticisms of the automobile liability system, which sets the ground rules for the settlement and adjudication of claims. While the insurance industry is not, basically responsible for that system, we are nevertheless deeply involved In it. Our co~npan1es felt that they had a responsibility to participate in efforts to make the system more responsive ~o changing public needs and expectations. Accordingly, move than live years ago the Alliance began looking for ways to accomplish that Objective, We discovered that there was very little available in the way of authoritative data on which yaljd jtLdgmente could be baseL In an effort to overcome this information gap, we embarked in 1962 on a research project involving detailed analysis of about 26,000 auto accident claims. While the project was wider way, other researchers were turning pp additional information-on the economics of automobile injury reparations, on the attitudes of claimants, on the effectiveness of the American jury system, and on such related subjects as court congestion. A high-level conanittee of Alliance company executives began working with this new bo4y of information, evaluating the present system and looking for ways to improve It.. One result was a report strongly urgipg tl~e need foi~ change and suggesting a inunher of already' tested measures which could be taken to get more people `paid. ~Since then, we have embarked on a bolder and more j~aginative approach ~ n~uto insurance reform with tb~ developu~nt of a test program called Guar- anteed Benefits. The Alliance plus a number of non-member insurance con~panies, both stock and mutual, already, are ~u~perimei~itipg with this new ~ia'ims~handling program in two Illinois counties: Another major experiment will start in the near future in New York State, There has been widespread. favorable reaction to the Guaranteed Benefits experiment, from legislators, the press, members of the public, and officials in many states, The whole idea of the Guaranteed Benefits experiment is to 1~nd out from auto accident victims themselves what kind of changes they want made in the present automobile insurance system and what effect those changes would have on the cost of insurance. Our objective is to perfect a new way of handling claims that will pay more people, pay them quickly and equitably, and eliminate the Irritants whIch have crehted dissatisfaction with the present system. We also hope to stabilize the cost of automobile insurance for all categories of motorists. We believe that these objectives can be accomplished without sacrificing the `desirable features of the pr~sent system. Just as our system of government has evolved within the basic framework established in 1789, we believe that the practical changes desired in the handling of auto accident claims can be made within the basic framework of our long-established legal system.,, For example, the Guaranteed Benefits plan preserves the right of every claim- ant to have his day in court, if he wants one, Our, experimental plan also preserves those aspects of the present system which bring tp bear the pressures of the marketplace on motorists who cause more than their share of the accidents. injuries, and economic loSses, The Guarunteed Benefits program produces a number of practical changes which are frankly, intended to tip the `scales more in favor of `the injured vjctim. If our experiments indicate that the plan is workable, and the Guaranteed Benefits program or some modification of it is adopted generally, automobile accident victims would be assured of receiving up to $12,500. This include~ up to $5,000 in medical benefits, to be paid without delay or red tape. Injured claimants would not be reciui'red to make `a commitpient of any kind in order to receive these benefits. In addition, they would be offered a new settlement option covering up to $7,500 in other damages such as income losses, physical impair- ment, and extra living expenses made necessary by the accident. Survivor's benefits will be paid in death cases. Claimants who choose to accept this new option would simply be paid the money, ~4'thout delay and without having to prove that the other driver waS at fault. In return, they would agree orally not to pursue a liability claim. We are willing to take their word that they won't sue. This program is compatible with present operating metl'~ods in that payments will be made on a third-party basis in most cases. That is, the other driver's PAGENO="0123" 1 ~9 insurance company will offer the Guaranteed Benefits. This is to avoid the rieces~ity of haying two ~Ufferent iusurance ~ompanles involved in negotiating with the injured person. We are glad to make available details of the Guarantee Benefits pro~~rani to all interested persons, and we plan to r~lease to the public ~ll data flowlr~g from the experiments. We hope this information ~il1 be of assistance in the ~onduet of the study authorized by House Joint Resolution 958. Let me say again that we fully support a comprehensive, objectiye, and non- partisan study. We are ready to assist aM cooperate in any possible manner. Mr. SMITH, Let me say at the outset, Mr. Chairman, that *~ o~er our unqualified support for the study authorized by House Joint Resolution p58. We agree with you and the other sponsors of this resolution and with the President that there is a iiee~l for comprehensive, objective, and nonpar~san study of the entire system~ used for compensating automobile accident victims, We welcome the study, sir. We are confident that an objectiite study will clear the air of misunderstandings which are 4oiiig harm to the good name and reputation of our industry. We feel that some criti- cisins of the present ~ystem are mi~dix~ected or based on unrealistic expectations. An unbiased study ~anperfôrm a us~fu1 public ~ervipe by providiu~ a factual basis for sorting out the issues, and for placing responsibility where it rightfully belongs. I think one of the major points we want to bring out, Mr. Chairman, is that the usefulness of such a~ st~udy will reveal m~wy conflicting demands which the insuraflce industry finds itself subject to today. We in the industry are constantly dç~aling with Oontradictory de- mands. Such demands come from claimants, from purchasers of in- surance, legislators, regulatory officials, from the press, and the academic community. The responses we make to these conflicting demands may nQt always please everyone but the responses are not athitrary. These represent honest efforts to provide practical and equitable solutions to the dilemmas we have to face. I would like to skip over now, if you please, 1\~r. Chairman, to page 4 down at the last paragraph. I would like to bring to the committee's attention one of the dilemmas that the,~iudustry, faces today is the conflict with society's demand that drive~ with high loss exposure be provided with iàsurauce and at a price they can afford to pay. If we charge these drivers a price commensurate with their actual loss potential we are accused of pricing them out of the market. If we cancel their policies in order to avoid saddling our other policyholders with the losses they cause, there is a public clamor for protection to be provided regardless of their driving performance. If we accept these drivers at a subsidized rate, we run into strong protests from the average or better drivers who have to pick up part of the price. We might ask ourselves, What i's then the solution to such a problem in attempting to provide coveragesor the desire of the public generally, the Congress, the legislators, the ~icademicians, everybody generally who desires the insurance industry to provide coverages without any restrictions whatsoever to the public generally? PAGENO="0124" 120 We think that the only permanent solution to the problem would be to remo\re from the highwsys the drivers who cause an excessive num- ber of accidents, injuries, and financial losses. But as yet the American public has shown little willingness to do so. As a nation we tolerate a fantastic degree of irresponsibility on our highways People are allowed to kill, maim and inflect economic dam ages on other people with relative impunity so long as they do it with an autoniobile. I think that the committee knows that in 1966 this Nation's increas in~1y destructive u~e of the highways killed 53,000 human beings, in~jured nearly 2 million, and damaged 22 million vehicles Very few of the drivers responsible for the appalling destiuction were removed from the roads or required to undergo remedial training One can go into any State in the Unibn today and find on the high- ways people who have repeatedly demonstrated their unfitness to drive Yet they retain their driver's licenseS or drive without them be~ause our autofflobile-oriented sbciety refuses to hold to a reasonable standard of performance. It Is against this backdr'op that the insurance industry must deal with such politically sensitive issues as premium surcharges, under- writing standards, rate classifications, cancellations, and nonrenewal of policies. These, as you know, Mr. Chairman and members of the committee, are many of the complaints that are current today in this area We trust that these issues will be consideied in the light of the conflicting dethands we are trying to satisfy. This does not mean that we are satlsfled with the status quo or that we would defend the actions of all companies in our struggle to cope with the automobile problem. On the contrary, our member companies and other ±esponsible seg- ments of the industry have been w~rking oh several fronts to overcome the shortcomings of our system and to clear up abuses on the part of our companies. Now if I may, I will list quickly some the contributions our industry ha~ made in the automobile field Phe industry has made available plans in every State to assist motorists who need automobile liability insurance and who have difficulty in obtaining it. Our organi~atiOn advocates e~pahded use of these plans and stands ready tO cooperate with the Other segment of the industry in attaining this objective. Over the years, our cothpanies also have participated in expanding the auto liability policy from a rather limited contract into a package of coverages that provide broad protection to travelers on the highways. This broadening of protection has been brought about by extending the policy to cover drivers other than the policyholder, vehicles other than the car he owns and hazards other than the ones originally insured. One example is the widely sold auto medical payment coverage. Another is the uninsured motorist coverage which protects policy- holders and their families if they are injured by an uninsured driver. This coverage, available in every State, has now become the source of protection against insolvencies as well. Twenty-six States now PAGENO="0125" 121 require that companies offer insolvency protection to their polidy- holders under the uninsured motorist cOverage. In the remaining 24 States, bureau companies and some other insur- ers have automatically extended insolvency protection to all purchasers of the uninsured motorist covera~e. In other words; the policyholder and his family can look to their own company for payment should they be injured by a motorist whose company later becomes insolvent. The insurance industry also has si~pported measures that would provide more adequate staffs for State insurance departments, and has supported enactment of laws to strengthen the hand of regulatory officials in dealing with companies in shaky financial condition. Over the years, our industry has sought to alleviate the burden on our inadequate court facilities, which have not kept ~ace with the growth in populatiow and the startling increase in legal matters of all kinds-particularly criminal eases. As a result of the industry's efforts, an estinmted 97 to 98 percent of all automobile accident claims are settled without the necessity of a trial. Mr. Watkins, I think thutbirings in the figure of 2 percent that goes to trial which Mr. L~mmon brougkt out a moment ago. Mr. WATKINS. You agree with that? Mr. SMITH. Yes, sir. Those are public figures. Mr. Moss. Will you give a clearer understanding of the magnitude of that 2 percent translated into numbers of cases? Mr. SMITh!. We can get that. I don't know whether Mr. Holderman has that figure at hand or not. If not, we can get the figure for the record. Mr. HOLDERMAN. I can't give you the exact figure, Mr. Chairman. Mr. Moss. Can you give us an approximation now and we will hold the record for the correct figure which may be supplied by you? Mr. HOLDERMAN. The number of automobile liability claims in the course of a year goes well up into thousands. Mr. Moss. Does it go into hundreds of thousands? Mr. HOLDERMAN. I would suspect it might. Mr. Moss. Does it go into millions? Mr. HOLDERMA~. I am not certain. Mr. Moss. Into a million? When we talk about 2 percent of a thousand, we are talking of a very small number of oases. If we talk of 2 percent of 10 million, we are talking of a greatnumberof cases. Mr. SMITH. This is correct. I think it will be a sizable figure. We have a hundred million drivers today. Mr. Moss. About one in four or five will have an accident? Mr. SMITH. I have seen those figures. Mr. HOLDERMAN. They say 1 out of 10 drivers will have an accident, as I recall, it is an estimate sometimes used. In this respect, you might conclude there would be somewhere in the neighborhood of 10 million accidents. So you h~we a sizable total figure. Mr. Moss. I just don't want us to look at percentages and deduce that we are talking of something of no great significance when in fact we may be talking of a massive backlog of court cases. PAGENO="0126" 122 I think, as the gentleman from Pennsylvania pointed out, in his State the period of time is considerable. I think the testimony yesterday was that in the city of Chicago it is at least 6 years. Mr. WATKINS. In Philadelphia, it is same thing. Mr. SMrrn. I think this is something that is very informative for the entire public. I believe the study conducted as a result of your resolution here can brir~g out and perform very valuable assistance in informing the pub- lic, to the Congress, to the industry. Mr. Moss. I think it is a situation where we do need many more statistics. Mr. SMrm. I agree. Mr. Moss. Mr. BlanWa. Mr. BLANTON. On these peree~itages and numbers of accidents you say one in ten in your estimation with a hundred million drivers. Now of these 10 million accidents, how many of them result p~r- centage-wise in an insurance claim? What I am getting at, the 2 percent he was talking about was acci- dents that did result in claims. But there is a difference between the number of accidents and the number of insurance claims, too. I think a vast difference. Mr. SMITH. This is true. What we are talking of here with the 2 percent is the claims which end up incourtigoing to trial. Mr. WATKINS. Right. But you are talking about the number of. accidents? Mr. SMITH. Yes. Mr. WATKINS. The number of accidents is far more than the number of accidents that result in insurance claims. Mr. SMITH. That is true. Mr. HOLDEItMAN. The 2 percent, Congressman, is 2 percent of the 100 percent of claims. How manyof the 10 million, if you want to use that figure as a real rough estimate, accidents would result in claims I would not hazard a guess. Thit of that percentage which did result in claims, 2 percent ultimately wind up in settlements in court. Mr. WATKINS. I think your question on defining 2 percent is very important. I think we would be faced with that if we went to the full committee. Mr. MOss. Are you gentlemen able to supply those figures? If not~ I will instruct thestaff to supply the figures. Mr. SMITH. I am certain we can get you some information on it, Mr. Chairman. Mr. Moss. Promptly? . Mr. SMITH~ Yes, sir. . Mr. Moss. Thank you. You may proceed. (The following supplementary statement was received by the committee:) SUPPLEMENTARY STATEMENT OF AMERICAN MUTUAL JNSU~ANCE ALLIANCE Mr. tThairman; In answer to the ~ijuestions which you ~tnd Congressman Blanton have asked, ~ shordd like to submit the ollowing ~Iat~: The National Safety Council est1n~a1tes that, in 1967, there were 13,500,000 motor vehicle accidents. PAGENO="0127" 123 The Mutual Insurance Rating Bureau, an automobile liability Insurance rating organization, estimates that, in 1967, there were 5,700,000 claims paid or reserved involving property damage. Cases which are closed without payment are not reported to the rating organ1~ations, so there is no known figure as to the countrywide number of caseS closed without payment. Knowledgeable people esti- mate that the number of cases closed without payment, however, is approximately 30% of the total, Therefore, the total number of property damage cases, including those which are closed wthout payment, those on which there is a payment, and those on which there is a reserve held, would be approxImately 8,143,000. Property damage cases are rarely involved in court procedures and consequently are not considered in the balance of the data furnished you herein. In 1967 the Bureau estimates that there were 1,600,000 claims paid or reserved involving bodily injury or death. Using the same 30% estimate in order to arrive at the number of total claims, including those that are closed without payment, results in a figure of 2,285,000 total bodily injury or death claims in 1967 in the U.S. In our preceding testimony, Mr. Smith mentioned that 97 to 98% of all auto~ mobile accident claims are settled withont the necessity of a trial. This referred to bodily injury or death claims. Thus, Mr. Chairman, the 2 to 8% which do go to trial would aniount to 45,000 to 68,550 cases per year, on a countrywide basis. As has been pointed out in our testimony and that of others, the delay which occurs is primarily in a relatively small number of our larger urban areas. Therefore, the number of cases which do go to trial and which are subject to delay is obviously less than the total number of cases which are settled through the trial procedure. We would emphasize that the above figures are our best estimates. Mi. SMITH. On the matter of cancellations, the principal stock and mutual rating bureaus have had in effect for the past five years a pro- grani of voluntary restrictions on the right of their members and sub- scribers to cancel private passenger automobile liability polices. As of January 1, 1968, the right to cancel was further restricted to just two allowable reasons: Nonpayment of premium or loss of driving privileges. In addition, the guarantee against cancellation was extended to other coverages such as collision, fire, and theft. The alliance has publicly declared that it will support State legisla- tion requiring all companies writing automobile insurance to meet a' similar standard. The alliance likewise has been responsive to criticisms of the auto- mobile liability system,, *hich sets the ground rules f~r the settlement and adjudication of clairtis. While the insurance industry is not basically responsible for that system, we ax~e nevertheless deeply involved in it. Our companies felt that they had a `responsibility to participate in efforts to make the system more responsive, to changing public needs and ~xpectations. Mr. Chairman, if I' may interject, I would like to come back to the discussion between Professor Conrad and Mr. Watkins about the pain and suffering., You see, this was brought about'by the legal system. Professor Conard commented about `how weh-and I don't know whether it was meant critically o~ not-are chargiug to take care of the pain and suffering which we would pay out on `behalf of our `pol- icyholders' liability. `But you see; we are caught up in the legal system. We think we are providing a service here. Mr. Moss. I think the proJ~essor made it quite clear that it was his opinion that that portion of the recovery,normally went for counsels' fëès and he did not attempt to assess blame. lEfe merely explained the evolution of the system without assessing blame. PAGENO="0128" 124 Mr. SMITH. I bring this up just to point out how we in the insurance iftdustry, Mr. Chaii~man and ~ntiemen of the committee, are inter- woven in the liability system a~id bow ~ertain ~b~ig~ ~an ~orn~ ebout as .a result of the operations of that system ~which we really ar~ not responsible for but we try to irnpDove the situation, being related to it. Mr. WATKINS. I agree with ~ou ~ you are not re~pdfisible for it. Mr. SMITH. Thank you,, sir. Accordingly, more than 5 years ago the alliance began bolting for ways to accomplish that `objective. W~ discovered that there was very little available in the w~y of authoritative data on which ~valid judg- ments could be based. In an effort `to overcome this information gap, we e~n~barked in 1962 on a research project involving detailed analysis of about 26,000 auto accident claims. While the project was underway, other r~searbhers we~ turning up additional information-on the economics of automobile mjury repa- rations, on the attitudes of clai~mants~ on the effectiveness of the American jury system, and on such related sub ject~ as court congestion. A high-level committee o~ alliance company exeontives began WQrk~ ing with this new body of information, evaluating the present system and looking for ways to improve it. One result was a i~eport strongly urging the need for change and suggesting a number of alreadytested measures which could be taken to get more people paid. Since then, we have embar~ked on a bolder and more imaginative approach to auto insurance reform with the development of a test program called guaranteed benefits. The alliance, plus a number of nonmember insurance companies', both stock and mutual, already `are experi'n~enting with this new claims-handling program in two Jilinois counties. Another major experiment will si?art in the near future in New York State. There has been widespread favorable reaction to the guaranteed `benefits experiment `from legislators, the press, members of the public, and officials in many States. The `whole idea of the guaranteed benefi~ts experiment is to find out from auto accident victims themselves What kind of `changes they want made in the. present, automObile' insurance system and what effect those ch'anges ~ouid have on the cost of insuranpe. Our objective is to perfect a new `way of handling claims that `will pay more people, pay them quickly and equitably, and eliminate the irritants `which have created c~is~atisf action with the present system. We also hope to stabilize the cost o~ automobile insurance for all cate- gories of motorists. We believe that these objectives can, be accomplished without sac- rificing the `desirable featuresof th~.pi~esent system. Ju~t as our sy~tem of government has evolved within the basic frame'work established in 1789, we believe that the practical changes desired in the handling of auto. accident claims can be mad~ within `the basic framework Qf our long-established legal system. , ` `For example, the guaranteed benefits plan preserves the right of every claimant to have his day in c9urt, if he desires one4 Our e~peri- mental plan `also preserves those aspeot~ of the present system `which PAGENO="0129" 125 bring to bear the pressures of the marketplace on motorists who cause more than their share of the accidents, injuries, and economic losses. The guaranteed benefits program produces a number of practical changes which are frankly intended to tip the scales more in favor of the injured victim. If our experiments indicate that the plan is workable, and the guaranteed benefits program or some modification of it is adopted generally, automobile accident victims would be assured of receiving up to $12,500. This includes up to $5,000 in medical benefits, to be paid without delay or redtape. Injured claimants would not be required to make a commitment of any kind in order to receive these benefits. In addition, they would be offered a new settlement option covering up to $7,500 in other damages such as income losses, physical impair- ment, and extra living expenses made necessary by the accident. Sur-~ vivor's benefits will be paid in death cases. Claimants who choose to accept this new option would simply be paid the money, without delay and without having to prorve that th~ other driver was at fault. In return, they would agree orally not to pursue a liability claim~ We are willing to take their word that they will not sue. In other words, we would not ask for a written release from them, Mr. Chairman. This program is compatible with present operating methods in that payments will be made on a third-party basis in most cases. That is the other driver's insurance ompany will offer the guaranteed benefits. This is to avoid the necessity of having two differ~n't insurance com- panies involved in negotiating with `the injured person. We are glad to make available details of the guaranteed benefits program to all interested `persons, and we plan to release to the public all data flowing `from the `experiments. We hop~ this information wilT be of assistance in the conduct of the study authorized by Hotise Joint Resolution 958. ` Let me say again that we fully support a comprehensive, objective,. and nonpartisan study. We are ready to assist and cooperate in any' possible manner. That concludes our statement. Thank you kindly for letting us come here, Mr. Chairman. Mr. Moss. Thank you very much for your appearance. Mr. Watkins'. Mr. WATKINS. Thank you, Mr. Chairman. I think that you have brought Out some very important points. I think you are a good witness. Your testimony certainly will be help- ful to this legislation. I know that you do move into a plan of some settlement without excessive going to courts and having to depend on a jury system under which I am beginning to believe in some of these public liability cases the figures are enormous and require an awful lot of legal hattling to break some of them down. The figures are just out of this world. Mr. SMITH. This program which we described in our comments here, Mr. Watkins, is designed to overcome some of the objections to the present system. 92~-1OO-68-9 PAGENO="0130" 126 Mr. WATKINS. I noted that. I am glad to see some testimony on it. I don't have the answer as to what can be done but I know in this study there should be some real consideration of it. Another thing that you bring out that I think, Mr. Chairman, the committee is going to have to look into, the Transportation Depart- ment, if this bill is successful, is going to have to give real study to this driver whose record is so bad he should not be on the highways. Mr. SMITH. We would certainly say amen to that, Mr. Watkins. Mr. WATKINS. Some of these drivers should not be licensed. I did not mean that when I said people were denied insurance. I meant from another angle. But these bad drivers and I found out something I did not know after all these years, perhaps I should have known it, but I know of drivers that have been in trouble in one State and they go to cruother State and they get a license there and they can drive an auto- mobile and there is no agreement between the States. You can drive a Pennsylvania car, in other words, with a California license. I think something has to be done about examining these drivers and finding out why drivers should not be licensed, give him a certain length of time, to get a license in the State in which he is driving, bring his record out so that we can see what kind of driver we are licensing. That is one of our biggest evils. I am glad you touched on it here. Mr. SMITH. I certainly appreciate your comments. On behalf of our whole industry, I would say thank you very kindly. The reason that this means something to me personally, Mr. Watkins, is that in many appearances before many legislatures, in appearances before the congressional committees here, it is very seldom that the people involved in thOse areas ever comment about who is really causing the basic problem. In my personal observation, Mr. Chairman and members of the committee, you can go into automobile safety, you can go into th~ highway design, the shortcomings of those and so on, but still basically the accidents are caused by people~ I don't think I can give it enough emphasis that we would certainly like to see th~ people responsible for this study and the ones who are going to oversee it, give some deep consideration tothis personal factor involved here. For the record, if I may, Mr. Chairman, we have an article here entitled "Epitaph for a Deadly Driver." It is from our publication, the Journal of American Insurance. It happened in 1956, an accident which is degcribed in this article. It is the worse accident on record in the State of Illinois. This person involved, the cause of this accident, had had his driver's license revoked, if I remember correctly, about three times. Mr. Moss. Would you like to submit the article for the record at this point ~ Mr. SMITH. I would, sir. The net effect of this was that after many revocations, some arrests, some accidents in the record of this man, his last accident was caused by running head-on into another car. Tt killed a husband, wife, five children and the wife's parents. Yet we seem to never get a public awareness of this type of person operating the vehicles on the highways today. PAGENO="0131" 127 Mr. Moss. Would the gentleman yield? Mr. WATKINS. Yes. Mr. Moss. I would like to observe that the Commerce Committee did a number of years ago authorize the establi~shment of a clearing- house to be maintained by the Federal Government for the accumula- tion of records of arrests, suspensions, and actions adverse to the driver so they would be available to any State desiring to participate in an effort to deal with this problem. Mr. SMITH. I remember it well, Mr. Chairman. Mr. Moss. So we have a record in this committee of being concerned and taking the action which appeared appropriate. In the final ana~Iy~is under the present pattern of law, the licensing of drivers is a State responsibility. Mr. SMITH. Correct, sir. Mr. Moss. We hope that it ca,n remain a State responsibility. I think it is one far too frequently taken lightly ~nd this occurs in many instances in courts of lowest jurisdiction and before judges of little or no training. But the fact i.s that it does occur and every one of us when we travej the highways are exposed to the danger of the impatient, incompetent driver, and there are many of them. I think there should be far more rigid requirements imposed than are presently imposed and that the dourt should more realistically approach the problem of meting out punishment when there are flagrant violations before them. Mr. WAT~tIN~. Mr. Chairman, I have no objection to making tha~t a part of the record pertaining to this subject. Mr. Moss. Without objection, the article will be received for the record at this point. Mr. SMIPI~. Thank yOu, Mr. Chairman. (The article referred to follows:) [From Journal of Ameriëan Insurancel EPITAPII roil 4 DEADLY DRiv~i~ TEN PEOPLE PERIShED AS DEATh FINALLY RULED OFF TH~ ROAD A L0NG-Tfl&E OFFENDER Ralph f~usnierz' re~ord of driviug v~olat1ons begat~ on April 4, 1956, when he was arrested for making an Improper turn. The last entry came on September 7, 1967, when his weaving, convertible collided head-on with a station wagon on a highway near Downers Grove, Illincds. Kusnierz was killed in the crash. In~ the twisted, burning wreckage of the sta- tion wagon police found the bodies of Arthur Hoffmeister, his wife and five chil- dren, and his wife's parents. A policeman at the scene speculated that Kpsnierz might have suffered a heart attack. Witnesses said they saw Kusnh~rz' westbound convertible careen crazily, go through a stop light, cross over the highway center line and smash head-on into the eastbound station wagon. One witness said the convertible was going 80 mph at the time of the crash. Authorities called it the worst auto accident in Illinois history: Police, trying to piece together the cause of the accident, immediatel~ requested a copy of Ens- nierz' driving record from the secretary of state's office. They found out what they had suspected: Ralph Kusnierz was a dangerous driver who should have been ruled off the road. Since 1956 he had a record of convictions for seven moving traffic violations- once for drunken driving; once for driving with a revoked license; three times for speeding, and twice for lesser offenses. Other notations included two wrecks, PAGENO="0132" 128 one when he was without insurance, a revocation of his license for drunken driving, and a revocation extended for failure to show financial responsibility. Ills driver's license was last suspended on June 21, 1967, after be was unable to obtain insurance after two wrecks earlier In the year. His license had been re- stored on July 26, 1967, when be was again able to show financial responsibility. Chicago area newapaperbeadlines ~acj tagged I~usnierz with the label, "Death Driver." DuPage County Sheriff Lawrence J. Springborn, whose department in- vestigated the accident said, "A death warrant for the Arthur Hoffmeister family was signed July 26 when the secretary of state's office reissued a driver's license to Ralph J. Kusnierz." Judge Raymond K. Berg, aotiflg chief judge of the Cook County traffic court, called for the establishment of a judicial board that would frequently review those cases where a motorist has demonstrated a reckless dis- regard for the state's traffic laws. "There must be a new state law that says when a man has this many violations his driver's license should be permanently revoked," said Judge Berg. After a report `to a coroner's jury from the Illinois bureau of toxicology showed that Kusnierz was highly intoxicated at the time of the fatal crash, Chicago news- papers also demanded that something be done to `take deadly drivers off the road. Said ~bicago's American: "An entire fanifly has been destroyed through one man's stubborn refusal to learn responsibility; when a driver has demonstrated that he is dangerous as thoroughly as Kusnierz proved It, the state should be em- powered to remove the danger permanently." The Chicago Daily News editorial page commented: "When not 10 but hun- dreds of people are killed on highways of the United States every week, many in crashes as shocking and needless as this one, the legislators should move to catch up with the people and add teeth to the laws intended to screen out the dangerous drivers." In an editorial headlined `Potential Murderers on Wheels," the f~bicago Trib- une asked that a study be made of Judge Berg's judicial board proposal. An incensed coroner's jury returned a verdict of accidental death through reckless homicide in its investigation of the crash and added: "We ask Secretary of state Pai~U Powell tO take note~f this accident and show for what reason the license of Ralph Kusnierz was reinstated after his motor vehicle and insurance record." Powell's office quickly answered: There was nO legal cause to have revoked the license of Kusnierz. Said Joseph Belair, director of the public information divi- sion of the department: "From the time E~$nierZ got ~iis Ucense l?ack, there was no record of any driving violation. Failure to pay insurance does not make a person a bad driver." This tragic case typifies the nationwide problem of dangerous drivers whose' licenses are in force despite long and conclusive records of serious traffic viola- tions. Such drivers constitute u j~enace to the safety of others. And they compound the ever worsening problem of automobile insurance losses. Hundreds of thou- sands of drivers who should not be on the roads ca~ry~icenSeS or evade licensing procedures. They then demand to be insured and cause a disproportionate share of death, destruction and monetary loss `on the natiOn's highways. ("Let's 5to~ Pampering Deadly DriverS," JoURNAL or AMmUOAI INSURANOn, May-June, 1967). Recently, a memorial mass was held in a schoolnear the Hoffmeister home in Woodbridge, Illinois, for Arthur Hoffmeister, 28; his wife, Paula, 27; their five children, Beth Ann, 6; Jane, 5; Amy, 3; Pegg~V, 2; David, 1; and Mrs. Hoff- moister's parents. Neighbors of all faiths came to pay tribute to a family they describe as persona Who loved life and their community and who always did things together. They perished together, too, when death met them head on in an automobile driven' by a deadly driver. Mr. WATKINS. I have just one more question. The mutual insurance companies- I perhaps am not telling you any- thing, a lot of people in my State fear them because of mutual aid. There are so many of them that have blown up, people have found themselves with big bills because they were partners in this mutual. If they became a part of this mutual firm and they get a great, big bill when it comes down to the settlement of the liability. Have you had ni any cases of this typo in your Association here? PAGENO="0133" 129 Mr. SMITH. We have not had any such cases to my knowledge, with the membership of our Association, Mr. Watkins. I am aware of the situation in Pennsylvania. You have many mutuals there. You have some very fine ones and I know that you had some insolvencies up there. I think I would agree with Mr. Lemmon's observation, the prior witness here, that in the banking area, in any business area you go into, you are going to find people with unethical motivations. I don't know how you are going to prevent those people from taking advantage of their position and the public. We certainly do not endorse such operations. I would call attention particularly of you, Mr. Watkins, in your great State of Pennsylvania and in the City of Philadelphia, the oldest known corporation in this country was formed there which is called the Philadelphia Contributionship for the insurance of houses from loss by fire. Mr. WATKINS. I am familiar with it. Mr. SMITH. Mr. Benjamin Franklin was the founder there. That company is a member of our organization. It is still in existence and it is still providing wonderful insurance service to the people of Pennsylvania. Mr. WATKINS. You are speaking of good ones. But there are had ones, you must admit. I wonder if we should not check into it and see if we cannot cure some of the evils that are there. Mr. Moss. I think, Mr. Watkins, this would be one of the facets of the study. Mr. SMITH. The insolvency situation is certainly a problem area, We are working on it ourselves. Mr. WATKINS. It is a problem that should be looked into. Mr. SMITH. Yes, sir. Mr. WATKINS. I have one last question. All th~ witnesses this morning have spoken of insuring auton'~obiles. When you speak of automobiles, you mean all forms of transportation, trucks ~ Mr. SMITH. I think we are speaking primarily here of the family automobile. Mr. WATKINS. In other words, none of your testimony- Mr. SMITH. Not on commercial transportation. I believe most of our comments were directed to this area of the family automobile. Mr. WATKINS. Thank you very much. Mr. Moss. Mr. Blanton. Mr. BLANTON. Thank you, Mr. Chairman. I have no questions. Mr. Moss. Mr. Guthrie. Mr. GIJTHRIE. I have no questions. Mr. Moss. 1 have no questions. I want to thank you for your appearance. Again, I think the need for the Resolution has `been further illustrated. We have apparently, in your association, resources developed from research which have not been correlated or coordinated in a manner to make them generally usable for legislative judgment or for policy guidance. PAGENO="0134" 130 I think this great body of information in addition to the original research that the Department will undertake could contribute so much to the understanding of thu nature of the problem we are attempting to deal with initially here today. Thank you, gentlemen, very much. Mr. SMITH. Thank you, Mr. Chairman. I might say that any of the information that we have at hand or that we have gained we will be happy to put it at the disposal of the committee or the Department of Transportation. We will be happy to cooperate as we have indicated in our state- ment. Mr. Moss. Thank you, sir. At this time I request unanimous consent that a statement on behalf of the National Association of Insurance Commissioners supporting the Resolution be inserted at this point in the record. Mr. WATKINS. No objection. Mr. Moss. Hearing none, it is so ordered. (The statement referred to follows:) STATEMENT OF JAMES L. BENTLEY, PRESIDENT, NATIONAL AsSocIATIoN OF INSURANCE COMMISSIONERS Gentlemen, I appreciate the opportunity to appear before your Committee as President of the National Association of Insurance Commissioners. For the past two years, Congress', as well as the press, has devoted a great deal of time and effort to the deficiencies of the automobile insurance system. Staff studies and reports have been prepared which include so-called "findings"-~mos't of which have been cursory in nature, without proper factual basis and which are, to say the least, misleading. When I first learned of Senator Magnuson's and Congressman Moss' desire for an intenstVe investigation to be conducted by the Department of Transporta- tion, I immediately contacted Secretary Boyd. I would like to quote from that letter: I pledge to you the fullest cooperation and enthusiastic interest of our association as you undertake this review. It would be a pleasure to assist your Department with technicians from various states who are skilled in rat,ing, examinations, liquidations, underwriting and all of the many activi- ties of regulation. These men could be made available for whatever amount of time necessary `to assist you. Meanwhile, we are expanding the technical and research facilities of our National Association an4 continuing to expand the work already underway which has been summarized to you. I will be glad to meet with you at any time to further explore and develop these areas where we might be helpful to you and of course, talk about any new areas of cooperation. Since that time `the National Association has furnished to Secretary Boyd and his assistants a `great deal of material to substantiate certain points which I shall mention in this statement. A this time I would like to again offer the `services of the National Association in this project. BAC'ROROUND The Dodd bill Senator Dodd of Connecticut, in October 1966, introduced a bill, 5. 3919, to establish a Federal Moto'r Vehicle Insurance Guarantee Corporation. This same bill was later reintroduced in January 1~67 by Senator Magnuson as S. 688. The' so-called "Dodd" bill envisioned the establishment of a governmental organiza- tion similar `to FDIC to guarantee the contractual performance of insurers writ- ing motor vehicle policies. In connection with the Dodd bill, `a staff report was prepared. This report was apparently predicated upon the erroneous assumption of high rates of insolvency, large scale cancellations, and high premiums. The Dodd bill, well intentioned as it may be, is not grounded upon any detailed study of the industry and its problems. When stripped of its verbiage PAGENO="0135" 131 the effect of the bill would be higher rates on all auto Insureds, good and bad risks alike, and its ultimate effect would be to shift responsibility and the financial burden to the federal government without helping the consumer. We oppose this because we sincerely believe this to be a state responsibility that can and will be met by the states. .1 believe that a careful and concerned study will find, other solutions at levels of government closer to the people and less expensive to the federal government. Last July your chairman requested Secretary Boyd of the Department o1~ Transportation to prepare a preliminary report setting forth guidelines and techniques necessary for this study of the automobile insurance system. In his letter your chairman indicated four areas to be included in such a study; (1) an analysis of the present United States system of compensation for vehicle induced accident losses; (2) an examination of existing governmental super- vision of auto insurance; (3) a comprehensive review of the existing system as it affects the insured motorist; and (4) an examination of alternatives to the existing system of compensation such as the Keeton-O'Connell plan. Such a study is a sound approach to the complex problems which must be resolved. A dispassionate searching examination would do much to cure the misconceptions which have recently been presented to the public and have gained a certain amount of acceptance by Congress and the press. THE HOUSE JUDICIARY ANTITRUST SUBCOMMITTEE STAFF REPORT ON AUTOMOBILE INSURANCE At the request of Congressmen Peter W. Rodino, Jr. and William T. Cahill of New Jersey, the chairman of the House Judiciary Antitrust Subcommittee directed that the staff report relating to its six-week investigation of the auto- mobile insurance industry be published. The staff report recommended that the House of Representatives pass a resolution authorizing the FTC to conduct an investigation of the automobile insurance system and of state regulation of the industry. As part of the report a large amount of statistical data was included. This data is misleading and founded up improper assumptions. Lest these assumptions be accepted by this Committee and the study group which will be formed, ~ wish to discuss some of these erroneous assumptions that appear in both the Dodd Staff Report and the House Judiciary Staff Report. I. Insurance companies' insolvencies Both staff reports on automobile insurance contain seriously misleading std~ tistics with regard to insurance companies' insolvencies. Speciifically, insurance company insolvency totals used by the Dodd Staff Report and cited by the House Judiciary Staff Report pictured 300 thousand automobile claimants "seeking" an estimated $600 million out of collectable assets of $25 million." It is noteworthy that both of these reports use the $600 million amount within the context of automobile claimants even though each of theW must be fully aware that the total includes the wildest sort of payments for almost any type of business debt. Reliable data obtained from receivers or trustees by state insurance departments shows that figures used in the staff study are wholly unreliable. Moreover, such estimated losses do not necessarily represent the amount which wotild or might have been recovered from the insurers, in the ordinary course of business, if the particular insurers had not become insolvent. Rather the figures used are apparently based upon the damages demanded bti the claimant. The reports received indicate that this figure is inflated by over 500%.1 During the period 1960-4965 actual losses paid by all insurers to automobile policy-holders and claimants aggregated $1 billion. Even on a most liberal basis, the ultimate policy loss to claimants from insolvency with regard to automobile insurance is apj~roximately $6 million annually. Actual losses to automible claimants of insolvent companies have not been great when compared to the total losses paid or to the premium volume of the insurance industry. Both staffs were provided with this information, yet their reports do not reflect these figures. `On the basis of information obtained from receivers and trustees total bodily injury and property damage claims totaled $106,836,636 from automobile accidents, and estimated claimant loss was $16,725,488. These figures are a far cry from the $600 million cited In both staff reports. These figures can be expected to be reduced with the changes in state legislation. PAGENO="0136" 132 Indeed, many states have taken steps in this area to enact some form of insolvency protection statutes. Twenty~seven states provide some form of insolvency protection with the definition of uninsured motorist coverage. Tfhree states have unsatisfied judgment funds which include protection to the motorist insured with an insolvent company. All states and the District of Columbia provided assigned risk plans to which motorists ma~~ apply for liability insurance. No lawfully qualified motorist need turn to high risk specialty companies for automobile liability insurance. II. Cancellations The staff reports also refer to the problem of cancellations. Understandably, individuals who have had their policies cancelled may be vehement in their criticism. And undoubtedly companies have been guilty of unwarranted can- cellation and arbitrary underwriting practices. However, this is not the total picture. At a recent public hearing conducted by a state insurance department, a locally prominent citizen appeared and complained vehemently that his auto insurance policy had been "arbitrarily cancelled" even though he had not had any accidents. It developed that he had negelcted to mention that be had stated in his insurance application, there were no youthful drivers in the family, when in fact he had two teenage sons living at home and using the family car. The Insurer had cancelled his policy when a routine underwriting check revealed the deception. The most recently available statistics disclose that in Wisconsin, for example, only 0.57% of the auto insurance policies in force were cancelled hi mid-term on an annual basis for reasons other than nonpayment of the premium and only 2.06% of the policies that come up for renewal are not renewed. In Maryland, a survey of the state's 11 leading insurance companies compiled in 1964 disclosed that companies and agents cancelled only 1.4% of the policies in force on an annual basis, and declined to renew only .7%. In the State of Virginia an official survey by the Virginia State Corporation Commission in 1966 showed that only 1.8% of all auto insurance policies enforced were cancelled for reasons other than nonpayment and only 1.4% of the policies filed for renewal were not re- newed. A survey in the State of Washington by Professor Wickman disclosed that only .9% of the total policies in force, covering an average of 1,650,000 drivers during 1959-4903, were cancelled either by companies or agents. In Michigan less than 1% of the policies written were cancelled. Some automobile risks are simply uninsurable-as the federal government has found to he true of crop insurance. The government has "blacked out" or "red thied" areas within which it will not grant crop insurance. For example, six counties of Western Oklahoma were blacked out in mid-season in 1966 due to drought. Any study of automobile underwriting restrictions should recognize that a teenage hot redder with a dozen reckless driving arrests, the drunken driver with a suspen4ed license, the applicant who falsified an application, etc., may not be entitled to automobile insurance-~and in any event are less entitled to in- surance than the sincere farmer in the "black out area" designated by the federal government. Granted there have been instances where insurance coverage has been cancelled or has not been renewed without apparent justification, yet in the total insurance picture these situations are not numerous. Indeed through one means or another, it has been the goal of insurers to extend coverage to every licensed driver. It is interesting to note in this regard the policy of the National Association of Independent Insurers and the various guidelines and legislative enactments which have been adopted in many states. For example, the Texas Insurance Commission has issued guidelines to this effect: (1) family automobile policies should only be cancelled if the named insured ~ails to pay any of his premiums due; (2) if the driver's license or motor vehicle registration of the named insured or of any other operator who resides in the same household or cnstomarily operates an automobile insured under the policy has been under suspension or revocation during the policy period; (3) on policies or coverage written for less than one year, the company should not refuse to renew except as of the expiration of a policy period; (4) insurers should not cancel or decline to renew solely because of the ages of the insured. Again, assigned risk plans are available to those cancelled m'otorists of every state. PAGENO="0137" 133 III. Automobile insurance premiums The study prepared by the staff of the House Judiciary Antitrust Subcommittee to demonstrate the high automobile `insurance premiums included Albany, New York in `a comparison of passenger car liability rates of the 50 state capitals. The defect in the comparison is obvious and arises from specifying one rating territory of a state instead of the average statewide liability rate. Another inherent fallacy in such a comparison which is not so obvious is the particular rating classification specified by the `Committee staff. In this case, about 7% of the nation's cars are in the specified rating classification, While 90% are subject to lower rates and only 3% are subject to higher rates. The Albany, New York comparison `typifies the misleading nature of prior studies and in this particular situation led one columnist `to observe that there had been a 38% increase `in all `of New Y'ork State's liability premium rates. In fact the average liability rates f'or New York State, including Albany, for a seven-year peri'od increased only 11.3% and in New York City rates only increased slightly less than 1% for the same seven-year period. The staff of the House Judiciary Committee and I both obtained `this information from the National Bureau of Oasualty Underwriters, ye't there is this disparity in the figures presented. One `other point which I would `like to make before moving to another topic is the claim tha't insurance rates are too high. Certainly the `above mentioned staff reports would seem to support that claim. But what is the frame of reference for this allegation? For the same seven-year period just mentioned the Consumer P'rice Index rose 13%. For `the seven-year period from 1960-1967 hospital costs have increased about 64%, medical costs have grown `by some 25%, while per capita income itself has moved up some 32%. Insurance costs like other living expenses h'ave `been caught in the cost spiral. In addition `to these comparisons, the following figures should be noted: Automobile thefts have increased 111% in the period from 1956-1966, some 535,225 cars were stolen in 1966 and property loss as `a consequence has increased commensurately. The increased traffic statistics `are staggering. In 1966 there were `approximately 94 million motor ve'hicles registered, a 24% increase over 1961. In 1966, 52,500 people were killed in `automobile accidents and almost 2 million people `injured, `an increase of over 86%. since 1961. This increased loss of property `and injury to life and limb has necessarily mOan't increased costs. Ye't insurance rate increases have been moderate. A recent study conducted by the Texas Insurance Department `concluded after `a nationwide review that the national `average premium paid for private passenger car basic `bodily injury li'aibility insurance at 10/20 limits in 19436 w'as only $3.60 per month.2 The study which has been proposed `by Senator Magnuson and Congressman Moss should look `into these problems, not merely for the purpose of pointing an accusatorial finger at the `auto'moibile insurance system `and state regulation, `but to `ascertain the precise facts. STATE REGULATION It is unfortunate that `reports such a~ the Ho'~se Judiciary Committee Staff Report have `as a general proposition stated th'at s'tate regul'aion of this industry is inadequate. I for one am apalled `at such `a "shotgun" statement and frankly I beliere that this is `one area which should be studied `to clear the air of the innuendo. The implication that State Insurance Commissions are not objective or are overly sympathetic to the industry which `they `are charged with regulating is simply not justified. I suppose this kind `of charge can be leveled at any government `agency, indeed it is frequently raised `against federal agencies. The states are constantly improving themselves in this area of regulation as is demonstrated by changing statu'tes with regard `to unins'ured motorists, insolvency coverage `and the establishment `of guidelines for ~ancellations and n'onrenewals. By its very nature `inSurance deals wi'th local problems-hail in Louisiana, floods in Florida, droughts in Texas, etc-end local people. Accord- ingly, it is better regulated by people wh'o kno'w the local problems. I shonid now like to make a brief reference' to the McC'arran-Ferguson Act, P.L. 15, 79th Congress, 1945. The purpose of this enactment was to preserve the role of the state in the insurance industry and it has effectively done so. The states have responded to the provisions of the McCarran-Ferguson Act, and its 2 It should be noted that clue to variation in basic limits, amounts between the states and rating formulae, most insureds pay less than the $3.60 average. PAGENO="0138" 134 philosophy and purpose has proved effective. It is our overwhelming experience, based upon responses from the public as well as the insurance companies, that insurance companies hare not indicated any appreciable desire to change the system and in our judgment the public is being fully protected. It Is the judgment of the NATO that the intrusion of the federal government into this carefully structured regulatory system is wholly unnecessary. THE HEETON-O'CONNELL PLAN I should like now to turn my attention to a proposal which has received wide- spread publicity for the past year as an alternative to the traditional system of insurance compensation-the Keeton-O'Connell plan. The proponents of this plan summarize it as a way to pay automobile insur- ance claims which is similar to the way health and accident plans are paid- that is, payment without regard to fault. The sponsors of this plan, among other things, assert that it would result in less insuvance cost to both the insurer and the insured. Such a proposal at first blush would appear to be the long sought after panacea. However, before accepting this plan serious consideration must be given to the facts available. Several legal aspects of the plan must be studied before the plan can be properly evaluated. First, how does the plan in its entirety and particulars compare with what we know about workmen's compensation so that the due process provisions of the federal and state constitutions are satisfied? Second, how would such a plan fit into the already existing scheme of the law in all the states? Would such a plan he unconstitutional in any of the states? Third, accepting the interstate character of many many thousands of accidents what conflict of law problems would be created by acceptance of the plan in some but not all states? Fourth, would the adoption of such a plan really cut down court congestion? What are the actual statistics? In addition to these obvious areas of research there are more practical consid- erations-perhaps a more philosophical but certainly a real one is the concept of fault, of liability present in the traditional legal system upon which insurance recovery is founded. The Keeton-O'Connell plan would compromise this factor. If fault is removed what effect does this have on traditional concepts of care and caution. One of the most salient areas for investigation is that of cost. Backers of the Keeton-O'Oonnell plan assert cost savings becauSe of reduced court c'osts, litiga- tion and efficient administration. Yet many vieW the plan as a package which would serve to stimulate litigation because a litigant has everything to gain and nothing to lose. Further, bow many additional claims will be paid if the question of fault is removed? The Conard Automobile Accident Costs and Payment Study,8 had indicated an increase of about 200%, while a similar study conducted by Temple TJniversity of automobile accident claims in New Jersey in 1955 indicates that the increase would be approximately 100%. The chief actuary of the Massachusetts' Depart- ment of Banking and Insurance estimated that if the plan were introduced in his state the cost of coverage required by statute for private passenger car owners would increase from 19% to 35%. This increase would be in a state which already has one of the highest premium rates. Thus, the result may differ from state to state and certainly the study should reflect these figures. It should be noted that in at least one state where the Keeton-O'Connell plan was at first embraced and in fact legislation passed the lower house. When the problems were ventilated and the ramifications realized, the bill was defeated- with full knowledge that if such a measure were to pass the upper house the Governor would veto the bill. I wish to makeS no judgment in the matter at this time. A plan so far reaching as this must be carefully studied from every aspect and every point of view. However, I would like to conclude this discussion of the plan with a quotation taken from a recent speech of Mr. Justice Tom C. Clark, Ret. (now Director of the Federal Judicial Center (as created by Congress, P.L. 90-290, December 20, 1967), whose duties, as defined by the Act inter alia are to study the operations of the courts of the Ilnited States) given at the James Madison Lectures at the As reference material in this statement see: Texas State Board of Insurance, Report on Automobile Insurance Rating Methods, insurance Company Profits or Losses, Investment Income as a Factor in Rates and Related ~ubje~cts, December 30, 1966; Brainard, Automo- bile Insurance, 1961. PAGENO="0139" 135 New York University Law School March 6, 1968 concerning the question of court congestion: Much is said nowadays of court congestior~. But now we have discovered a new congestion-_law office congestion! At Philadelphia in the Federal Eastern District, a computer was put on the court's docket. After some 2,000 cases had been programmed, a surprising discovery was made. Thirty percent of the cases involved longshoremen claims and three law firms represented 95% of the plaintiffs involved; two firms represented 95% of the defendants. The congestion was in the lawyers! Another 25% of the cases were FELA and Jones Act actions with similar results. Of the whole number of plaintiffs involved some 10% were represented by solo firms. Chief Judge Clary got busy and the dispositions there increased 31% last year! The point is: The lawyers must do their part in clearing up this docket congestion problem. I dare say that the remainder of the Philadelphia docket will show up the same way. And I expect the Southern District of New York's 11,000 case back- log will come out in somewhat the same "lawyer congestion" fashion; and in all likelihood the 4,000 case arrearage in the District of Columbia will uncover the same problem, perhaps in different categories of cases; and the 4,000 case load of the Eastern District of Louisiana will probably do like- wise, as will the 2,500 cases in San Francisco and the 1,500 in Brooklyn. And in the state system, where the delay runs as high as 51/a years, the same will probably be true. Yes, the lawyers will have to remodel their dockets. We must also improve the stature of our judges, give them the advantages of continued training in judicial education; and, as to state judges, take their selection and that of their staff out of politics; give them longer tenure, and give them more security retirement-wise. Long summer recesses should be abolished and the judges' time utilized on backlog. Further, Justice Clark made the following statement: Let me say, however, that before I would be willing to compromise even one of our present rights, such as is being suggested by some as to trial by jury, it would have to be shown that action was imperative and that there was no other remedy. Before we tinker with the foundations o~ our legal system let us first get the facts and niake an appraisal of the problem. If automobile personal injury litigation, as many think, is the cause of con- gestion then we must remedy it. But let us first make sure that it is the cause. At the moment the statistics in Philadelphia indicate the contrary. CONCLUSION I have mentioned today but a few of the problems which must be included in a comprehensive study of the automobile insurance system. There are many others. The study group should also consider the factors influencing the number of accidents and claims. Some of these would include: (1) The number of cars driven and miles driven, (2) The driver education and testing programs across the country, (3) The safeguards against the influence of drinking and driving, (3) Automibile equipment safety standards and enforcement of these standards, (5) The adequacy of our state and federal highway systems, and (6) Increased traffic problems in urban areas, along with highway con- struction and maintenance. The study should take into account the current inl~ationary pressures, the need for automobile reserve funds and pooling to meet the increased costs of catastrophes and insolvencies. Such a study must also look into the factors affect- ing the cost of claims. Yet the solving of each of these individual problems will not be the solution. All of the problems and allegations, as delineated in this statement, are closely interrelated and only by viewing them in their total perspective can they be properly appraised, evaluated, and where necessary, corrected. Once again let me say that my offices and those of the National Association of Insurance Commissioners stand ready to be of whatever assistance we can in ob- taining the information and data which this Committee will need in order to evaluate the problem and to develop a comprehensive and meaningful under- standing. I would be happy to designate a committee of select insurance com- missioners who would sit with you and your staff on any problem and I will be happy to meet with you at any time to further explore and develop those areas where we might be helpful to you. PAGENO="0140" 136 E E 0~ H (~ ~ .E .59-~3 == $~. ,.~ ,~- ~ ,~Q >`c~ ~ ~ ~a ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ C 1 ~ ~ ~ ~ ,~(C 1~j j z ~ -~ z >- ~ C,, PAGENO="0141" 137 COMMENTS ON SUMMARY OF UNINSURED MOTORIST LAWS (a) New York (1) Law limits coverage to accidents in New York (extra-territorial coverage available for $1 additional premium). (2) MVAIC pays benefits to qualified persons, and on claims involving policies issued or renewed on or before 6/30/65. (b) Bouth~ Carolina (1) Annual fee assessed against uninsured motorists (prescribed by Insurance Commissioner; not to exceed $50 (off. 11/1/66)). (2) Fund created by fees is used to pay cost of administration of the `Plan", and balance is distributed among insurers to pay for, at least in part, UM coverage (C) Arbitration prohibited (by statnte) The following states have enacted Statutes which prohibit arbitration under tIM coverage: Mandatory TiM states &uth Carolina.-Sectlon 46-750.87 S.C. Code. Virginia.-Section 38.1 381(g) Va. Ins, Laws. West Virginia.-5ection 33-6--31 (g), W. Va. Code. iS~tatutory TiM £`tates Arkansas.-Seetjon 66-3233, Ark. Statutes. qeorga.-~ectlon 56-407 A(F) Ga. Code Annotated. Lonisiana.-Seetion 22:1406, D(5), La. Statutes Annotated. Mississippi.-Section 5, House Bill No. 121 Laws of 1966 (eff. 5-18-66). Tennessee.-Tenn. House Bill 479, Section 6, Paragraph 2. (d) Virginia (1) After 1/1/67 the insured was given right to contract for UM up to lia- bility limits at extra cost. (2) Annual fee of $50 (eff. 6/27/66) assessed against unsinsured motorists. (3) Fund created by fees is used to pay cost of administration of the "Plan", and balance distributed among insurers to reduce the cost of tIM coverage to poUcyholders~ (e) Caiifornia The insolvency provision is not a part of the Statute. Insolvency provisions were provided by a court ruling (9/16/66), (1) Xeintueky (Arbitration) Regulation I G 23 of Insurance Department: prohibits contracts which require arbitration. (g) North CaroUna (1) $5,110/S limits with $100 PD deductible eff. 9-1-65. Premium for this cov- erage $3. (2) $15/30/5 limits available if liability limits of at least that amount. Premium $4. (h) Washington and California Limits $15,130 from 7/1/68. SUPPLEMENTARY INFORMATION ON STATE FINANCIAL ResTRICTIONS AND FUNDS California Impoundment-If an individual is involved in an accident and is found to be financially irresponsible, his vehicle is impounded until financtal responsibility can be proven. PAGENO="0142" 1~8 Maryland Unsatisfied claim and judgment fund-Effective date: 6-1-59~ This fund is financed primarily by an `assessment of insurar~ce companies (maximum is 2% of premirnn). The remainder needed is assessed against uninsured iñcstorisits. Applies to El and PD claims with $100 deçludtihle. Includes 131 in hit-nnl-run and insolvency cases for residents (non-resident if his sta~te has a reciprocal arrangement with Maryland). Michigan Accident claims fund.-EffectiVe date: 1-i-GO. State operated fund financed by n $35 assessment on uninsured motorists and $1 on all others. Applies to El and PD `~itb a $200' deductible on l!~t~. Ilit-an-rith cases are included in BI. New Jersey Unsati~sfied claim and judgment fnnd.-~f~ecUve date; 4-ir--55. This fund Is adminisitered by a board, part of whose methbers are insurance company execu- tives. It Is funded by a maximum $25 per uflinsured metor~s't and an insurance company assessment (maximum is `/2 of 1% of premium). Apphiéable tO both BI and PD With a $100 deductible on PD, the plan covers hit-and-ran for BI with residents (non-residedts if their state has a reciprocal agreement with New Jersey). New York Motor Vehicle Indemnification Corporation.-Effective date: 1-~-j-59. Ip~uranee company operated and supported. Pays to limits of $10/20 on BI if the person is not covered under UM covç~age~ This includes hit-and-run an~ disclaimer cases. If owner does not produce proof of f1uan~i'aI security in a ~.I case wIthin 48 hours the car will be impounded or stored by owner~ North Dakota Unsatisfied judgment fund-Effective date: 7-1-47. Stale operate4 `with a maximum $1 assessment on all motorists. Applies to payment of judgments ob- tained by residents In BT cases. O~rries `a $300 deductible. COMPULSORY LAWS Massachusetts Compulsory for bodily injury liability insurance only. Limits $5/i~. Appli~ to all owners of motor `vehicles registered in the state and to owners o~ motot vehicles operated in state for 30 or more days in the state. Coverage I5~b\y Statute and the rates are ueth `by `the Insurance ConuntssIon~r of l\~[assa~husetts. The law covers only accidents which occur in t1~e. State of Ma's~aqhpnetls- Operation w4~- out required proof is punishable `by a fine ranging frQrn $100 ~o $500 or imprison- ment for one year. " New York Compulsory for bodily injury liability and property damage liability insurance only. Limits $10120/S. The law applies to all owners of registered tehiifies in th~ state. The coverage wa's established by régal'a'tlon ahd eover~ the territory of the United States and Oanada, Rates are established by the insurer, but these rates must have prior approval from the insurance Deiiartlnent. Violation of law is punishable `by `revocation of license and a fine of $100 to $1000 and/or im- prisonment of one year. North Carolina Compulsory for bodily injury liabilbt~ and property damage liability insurance only. Limits $5110/S. Applies to `owners of all registered vehicles and covers the areas `of the United States and Canada. The law is a portion of the' Financial Responsibility Law with rates computed on a merit basis by a company-operated bureau. Operation of a vehicle without financial responsibility is a misdemeanor. PAGENO="0143" ~J1 z x CO z 0 0 0 0 01 01 ~ ~ Jl-~ 0 tO 11 ~ -I to CD CD CD CD CD CD CO - F?i~ ~ a: ~: ~ CD CD CO CO C) C, CO 0:> > C) > -I CO > CO 0 0 I. C) -Q 3 PAGENO="0144" 140 Pnuss RELEASE, TJSXAS SPATE BOARD OF INSURANCE, DECEMBER 28, 1967 The State Board of Insurance today announced the adoption of standards of aceeptatble practice to guide companies cancelling or declining to renew policies. These guidelines are for use by companies writing property-casualty lines of insurance in Texas and are designed to apply to the personal lines which most people buy, namely family automobile policies, homeowners policies and standard fire policies on one-family dwellings and duplexes. Insofar as the Board has been able to determine, there has not been an abuse of the right of cancellation by the insurance industry in this State; nevertheless, the Board feels that a set of guidelines is needed and has called upon the industry to comply. RECORD OF OFFICIAL ACTION OF TIlE SPATE BOARD OF INSURANCE, AUSTIN, TEX., DEC. 20, 1967 Subject Considered: Guidelines for cancellation or non-renewal of property or casualty insurance. GENERAL REMARKS AND OFFICIAL ACTION TAKEN Came on for consideration by the State Board of Insurance the problems sometimes presented to policyholders because of their policies being cancelled by their insurers or by the refusal of insurers to renew policies on their expiration dates. Although the State Board of Insurance has not had a disproportionate number of complaints about cancellations or the refusal to renew expired poli- cies, cancellations by some property and casualty insurance companies impel the Board to adopt Standards of acceptable practice to guide companies can- celling or declining to renew policies, and the State Board of Insurance hereby establishes the following guidelines for all companies writing property and casualty insurance in Texas. 1. The insurance policies most people buy, namely family automobile policies, homeowners policies and standard fire policies on one-family dwellings and duplexes, are presumed to meet the underwriting requirements of the company after a policy has been in effect ninety (90) days. a. Family automobile policies or family automobile coverage should be cancelled only for the following reasons: 1. If tha named insured fails to discharge when due any of his obli- gations in connection with the payment of premium for the policy or any installment' thereof, whether payable directly to the company or its agent or indirectly under any premium finance plan or extension of credit; or ii. If the driver's license or motor vehicle registration of the named insured or of any other operator who either resides in the same house- hold or customarily operates an automobile insured under the policy b~s been under suspension or revocation during the policy period. b. Homeowners polidies and Standard fire policies on one-family dwellings and duplexes should not be cancelled because the company subsequently changes it~ underwriting requirements during the term of the policy. 2. Family automobile policies or family automobile coverage, homeowners polidies and standard fire policies on one-family dwellings and duplexes ~houid be renewed at expiration unless the insurer gives written notice to the named in- sured and to the agent or producer at least thirty (30) days in advance of the expiration date that the policies will not be renewed. With respect to family automobile pOlidies or family automobile coverage, if the policy OF coverage is written for a period of less than one year, the company should not refuse to renew except as of the expiration of a policy period. 3. Insurers should not cancel or decline to renew family automobile policies solely because of ages of the insureds. 4. As to any kind of property or casualty coverage, insurers desiring to discon- tinue the underwriting of certain lines or classes, or to withdraw from a geo- graphical area or a particular agency should not summarily cancel all outstand- ing policies. Instead, insurers should retain until policy expiration date all such policies that met its underwriting requirements at inception date. Thirty (30) days notice of declination to renew should be given to the named insured and to the agent or producer. This guideline is not intended to restrict the ability of an insurer to reinsure such outstanding policies. PAGENO="0145" 141 5. Each company should keep its underwriting information concerning capcel- lation or refusal to renew individual policies readily available to the State Board of Insurance, and the records should be retained in accordance with the com- pany's normal retention practices for the "daily reports" of expired policies~ 6. The Board hereby gives notice that it expects eaclj insurer to exercise its rights of cancellation with discretion and without discrimination, and expects each insurer to be prepared to explain to the Board the principles which control its cancellation practices when called upon to do so. These guidelines shall become effective immediately, WM. HUNTER MCLEAN, Chairman. NED PRICE, Dunwoon MANFORD, Members. Prepared by: PAUL D. CONNOR, Chief Clerk. ADDENDA Statistics have already been offered with regard to the cancellation ratios in Maryland, Virginia, Wisconsin and Michigan. Later information has been de- veloped for the State of Georgia. A recent survey indicates 1.24% cancellation of automobile insurance contracts out of 400,000 contracts sold. Mr. Moss. Our next witness is Mr. Robert Whittlesey, second vice president of the Auto Body Association of America. Gentlemen, we are pleased to welcome you. You may proceed, STATEMENT OP ROBERT WHITTLESEy, SECOND VICE PRESIDENT, AUTO BODY ASSOCIATION OP AMERICA Mr. WHITTLESEY. Thank you,Mr. Chairman. My testimony is very short. ~3efore I go into it I would like to preface my statement. In 1946, I started out as an auto body repairman and then went from there into handling auto damage appraisals. Then I worked for 8 years as an adjuster for the State Farm* In- surance Co., a very happy time in my life, and then opened my own shop. So I have come full circle in the repair and adjusting business. I feel like a small part of your investigation but we feel that it is quite important to the decision whether. or not to have thi.s investigation. Mr. Moss. Thank you, sir. Mr. WrnrrI~EsEy. Mr. Chairman and members of the committee I am Robert Whittlesey of Silver Spring, McI., an independent body shop owner, and vice president of the Auto Body Association of America. We are a national association of independent auto body and repair. shops and closely affiliated industries spread throughout the United States. There are 58,000 auto body shops in the United States including in- dependent and franchised dealer establishments which together em- ploy over 380,000 persons. Our gross volume of business for the last year exceeded $2 billion of which 75 percent, or about $11/2 billion, was controlled by insurance companies. Our members are deeply concerned about some of the inequities that `have grown up in this industry due to certain monopolistic and 92-100-68--.--1O PAGENO="0146" 142. coercive practices whidh encourage the operation of unsafe ve1uc~es and at times result in injustice to the body shop owners and consumers who drive insured automobiles. SAFETY Efforts of some insurance companies through their appraisal prac- tices to repair vehicles at the cheapest possible price in current practice will often prevent expenditures vitally necessary for the proper oper- ation and safety of the repaired vehicle. These practices account for many of the cars that are now operated on the highways in an unsafe condition. The increasing practice of driving severely damaged cars to insurance company operated drive-in claims services often keeps vehicles on the road that should not be driven, and encourages their use for prolonged periods in an unsafe condition with consequent danger not only to the occupants, but to other motorists as well. MONOPOLISTIC PRACTICES It has been common practice in many areas for insurance companies to encourage the use of certain shops which by necessity must do work of marginal quality. These shops tend to overlook such real costs as overhead and depre- ciation and operate below cost at wage levels far below the standards of similar industries. Car owners are coerced into going to these shops rather than to the shops where they customarily go and prefer to have their work done. LOSS OF TIME AND USE Although not provided in the insurance contract, consumers gen- erally must secure on their own time two or more estimates, and are then often forced to go to a shop in some other area than the one where they customarily have their work done. There are often long delays in payment, particularly with regard to shops not favored by the insurance companies, which result in hardship on the body shop owner as well as the consumer, who is denied the use of his car. The current practice of settling insurance claims involves great multiplicity of effort, both on the part of the car owner and the body shop owner, as well as the insurance companies. When one considers that over $2 billion of body repair work is done each year, and the value of the time lost by car owners alone, the loss to the Nation in productive time represents a very sizable eco- nomic loss to the Nation indeed. INEQUITIES Often the insured is afraid to make a claim for damage to his vehicle for fear that his policy will be canceled, or his rate for pre- miums raised. Frequently when an older vehicle is repaired with nfl- depreciable parts, the owner is assessed betterment charges on his vehicle. PAGENO="0147" 143 Our association has d~tailed documentatiQii a~railab1e concernhilg the above and other re1~ted aspects of the ~nd~istry not specifically mentioned, and urgently requests an opportunity to bring these facts to the attention of the appropriate committee at a subsequent hear- ing on this subject. We believe such an in~estiga.tion would reveal abuses, inequities, coercive practices, and unnecessary loss of productive time for. the average citizen now common in this industry that should be corrected, and that the return in increased highway safety, as well `as the reduc- tion in charges, and the saving of time of the consumer would far outweigh the cost of such a hearing. Thank you. Mr. Moss. Thank you, sir. Mr. Watkins. Mr. WATKINS. No questions. I think the gentleman's statement is good for the record. Mr. Moss. Mr. Blanton. Mr. BLANTON. Thank you, Mr. Chairman. I have no questions. Mr. Moss. I want to express the appreciation of the committee for your appearance. The appropriate entity which would consider further the information you have offered would be the study group to be created by the resolution, if the resolution is enacted into law. I would suggest that your agency be prepared to supply that ma- terial to them, once they are authorized and organized. Again, I want to express the appreciation of the subcommittee for your appearance. There being no further questions, you are excused. Mr. WHITTLESEY. Thank you very much. Mr. Moss. The committee will stand adjourned until tomorrow morning at 11 o'clock when it will meet in executive session. (The following material was submitted for the record:) STATEMENT OF BRADFORD SMITH. JR.. CHAIRMAN, INSURANCE COMPANY OF NORTH AMERTCA A comprehensive study and Investigation of the existing compensation sys- tem for motor vehicle accident losses is a necessary and, a timely under1~aking. The automobile, as a practical means of transportation available to the gen- eral public, has been with us for less than sixty years, and yet in that time It, has drastically changed the Ajmerican way of life, as it is now changing the way of life where its introduction has been more recent. It has enabled American business to draw services and personnel from a wide area, and to distribute its goods and services over even wider area; it has brought pollee and fire protection, health and sanitation, and other government i?rvices to many; the industry building and servicing automobiles has become a principal factor in our economy, accounting for 4% of our gross national prodhct and employment of 3,200,000 people. The most dramatic impact has been upon the personal lives and activities of individual Americans. The automobile frees them from the requirement of proximity to their liveli- hood and their necessities. It brings within `their reach education, entertainment, and expands their personal acquaintances, and enhances their right of freedom and self-determination. Thus it has become identified in the public mind as an essential element of life, liberty and the pursuit of happiness. Yet in the course of its use, 53,000 people were kiljed and nearly 2 million disabled last year. The utility and versatility of the automobile were so readily apparent, and so eagerly sought, that its numbers grew at a fantastic' rate-and continue to grow.1 PAGENO="0148" 144 Other facilities incidental to its use have been hard pressed to match the pace; and highway systems, parking facilities, facilities for manufacturing fuel tires, accessories, etc., and for providing services, had to be developed; and whole new systems of marketing these products and services have evolved ta accommodate the almost universal public use of the automobile~ Many of these allied products and services did not develop in an orderly fashion. The pace was hectic, and development was frequently disorderly. Competition de- manded a high degree of innovation and efficiency. Experimentation has been essential; false starts have had to be abandoned; and radical changes have had to be made in systems which became obsolete before they could be completed~ The insurance industry reacted to the automobile as did many other industries. Existing companies broadened and adapted their facilities'; whole new specialty companies emerged; and the insurance industry provided policies for insuring the car, its equipment and accessories, towing and road service, loss of use, acci- dental injury or death, and, most important, policies for insuring legal liability arising out of the ownership and use of the automobile. All of these insurance facilities are part of the existing com.pensation system for motor vehicle accident losses and, therefore, are part of the subject of the proposed study. As in other competitive industries, all of these insurance facilities are con- stantly being changed and improved; that is', all but one-legal liability insurance. By its nature, legal liability insurance protects the assets of the insured against depletion through legal liability and the cost of defending lawsuits. The coverage afforded under this particular insurance system varies, therefore, in accordance with changes in the method by which legal liability is ascertained and measured; in the ease o'f the automobile, tort law. This system is, of course, beyond the power of the industry to change uni- laterally. Maintenance of the orderly rule of law precludes the false star'ts, cx- perimepts, and innovations by which other industries have reacted to the rapid evolution of the automobile, but the tort liability law by which legal liability is a~s~ertained and measured is fundamentally unchanged from that which applied before the automobile became common. The acknowledged public dissatisfaction directed at the automobile liability insurance field is, in fact, a criticism of the tort liability system. The public has come to accept a substantial number of automobile accidents as virtually unavoidable, and is obviously willing to accept the physiological conse- quences as part of the cos't of using automobiles', but it has also come to expect that all victims of these accidents be compensated. To be sure, insurance which will individually provide such compensation is readily available in th~ form of accident and sickness insurance. A great variety of coverages, tailored to suit the individual needs of the purchaser, are available, and ne~v coverages are readily devised as new needs emerge. But the public has come to look to automobile liability insurance, rather than accident and sickness insurance, as the source of compensation for accident vic- tims, perhaps because they are virtually compelled to buy this form of insurance, or perhaps because having accepted the accident toll as "unavoidable," they feel that some absolute liability should attach to the operation of the automobile. In any event, purchase of both accident insurance and automobile liability insurance is too expensive and usually results in a duplication of coverages. One of the facts which should be developed in the course of this study is the reason for the public attitude toward automobile liability insurance and the extent to which the general public demands that it perform as a no fault compensation system. Another major area of discuSsion and criticism of the insurance industry has centered a'bout its ratemaking, underwriting selection, and cancellation practices. In my opinion, most of these criticisms are traceable to a single factor, and that is the public regulation of insurance rates and underwriting practices which has the effect of substituting regulatory authority for the more effective forces of competition. Insurance companies deal in matters involving the economic survival of indi- viduals and family units, as well as businesses and industries, and in these deal- ings they commit themselves' to performance and obligation in the future. Public regulation of such activity is clearly warranted to assure that companies are economically capable of performing and do, in fact, perform as they have con- tracted to do. However, it appears to us that considerably more attefi'tion has been given to ratomaking data and insurance ratemaking `than to regulation for solvency. PAGENO="0149" 145 To a great extent, regulation has taken the form of prior approval of the rates which the company proposes to put into effect. This has the effect of tlirowing this process into the political arena where it does not receive the objective tech- nical consideration necessary to a successful underwriting venture. There is nothing mysterious or sinister, or even particularly complicated, about the process of insurance ratemaking. The insurance industry is a highly competi- tive one and insurance companies determine the price at which they are willing and able to sell their contracts and services just as do businessmen in any other industry. The difficulty is that, before they are permitted to sell their contracts and services at the prices they have determined, they must obtain approval by a government agency. The political pressures brought to bear on regulatory authorities have tended to hinder innovation and development of rate systems and rating techniques which would produce adequate prices for our contracts; in point of fact, they have bad the effect of holding rates at levels which are not compensatory. Faced with such a situation, the underwriter must either resist that segment of the market for which the approved rate is inadequate, or accept that busi- ness at an expected loss. It is anomalous that regulatory agencies who are supposed to see that rates are adequate and whose primary responsibility is to assure that companies will be solvent and capable of performing their obligations require those companies to engage in business at rates which are known to be unprofitable. In their attempt to operate within generally inadequate rate levels, under- writers have become highly selective, employing as underwriting accepta- bility standards, those rating considerations known to identify unprofitable classes of business, but which are not considered in the approved rating systems. They may also employ extensive application procedures and, in some cases, inyes- tigations, for underwriting selection purposes. It must be remembered that, in the case of automobile liability insurance, risks so declined are not deprived of insurance, since the industry maintains assigned risk pools. Experience of the pools, when compared with experience of business accepted directly by the companies, reveals that the selection procedures employed by the underwriter are effective, and that the rates for those risks which do reach the pools are generally inadequate. Au obvious solution to this problem is to remove ratemaking from the pClitical arena, and to permit the many companies offering automobile liability insurance to compete openly with each other. This approach has been advocated by INA for many years and has been the law in California for some time. Similar laws were recently enacted in Florida and Georgia, and the Commissioners in those states report a lessening of the problems of underwriting rejection and cancellation. Several other states have taken the opposite approach and enacted legislation limiting companies' rights to reject or cancel insurance, even though a~signed risk plans are operating in those states. Such regulations and laws present a different problem to company management. Having now been deprived of the right to establish the rate at which the company will sell its contracts and services, and also deprived of the right to decline to sell them at an inadequate rate, management must decide whether to continue in such a market. In this deci- sion companies are ultimately accountable to their owners, who are a1~o memb~rs of the public. The present difficulties of the automobile liability insurance industry stem from the complex evolution of a society which is dependent upon the autonmbile. Heretofore, investigations and studies have attacked piecemeal such subjects as automobile design, highway deaign, traffic law enforcement, driver licensing laws, antitrust law as applied to the insurance industry, and tort law. Moreover, these piecemeal investigations have been undertaken by a variety of agencies of the Federal Government, the fifty State Governments, private research orga- nizations, academicians, members of industries affected, -and others. Many of these investigations have been exploited for their sensational value, and have pro- duced little in the way of usable information. Our ability to respond fully and effectively to such inquiries has been impeded by their multiplicity and diversity. We are faced now with a need for a comprehensive objective study o~ the overall system of which automobile liability insurance is a part. With the facts developed by such a study as a foundation, legislators can develop appropriate remedial legislation, and the automobile insurance industry can develop a variety of contracts and services to satisfy the public demand. PAGENO="0150" 146 INA supports the study described In the Joint Resolutions which are the subject of this hearing. The Department of Transportation, with the special staff and the Interagency Advisory Committee described in the Resolution, is best suited to conduct such a comprehensive study, drawing upon the skills and knowledge of the industry, the bench and the bar, the academic community, and accumulating a breadth `and depth of data not available through any one of these sources alone. The provision for appointment of advisory committees offers a vehicle for identifying and prescribing the nature and detail of data required of the insur- ance industry, enabling us to contribute more fully and effectively than has been possible in previous uncoordinated inquiries. The Resolution calls for a review of the role and effectiveness of insurance in the system of compensation for motor vehicle accident losses. As members of the private enterprise insurance Industry, we are confident that this review will identify our industry as the most effective mechanism for providing compen- sation over a substantial area of the automobile accident field. A review of the present effectiveness of our industry must take into account the present limi- tations under which it operates, including the present tort legal system, and the present regulatory system. An evaluation of the prospective effectiveness of our industry must take into acconnt what it could accomplish under dif- ferent legal and regulatory circumstances, and identify those circumstances which wetild permit maximum effectiveness. In the final analysis, private insurance companies offer a service and are judged by the public on the basis of their performance. They must be given a reasonable opportunity to serve the public requtrement as they are so well equipped to do `by their long experience, their skilled personnel, and facilities dedicated to this pur~ose, and in so doing they should be given an opportunity to earn a reasonable profit as an incentive to performance in the public interest. Competition among these able companies to provide better and more economi- cal service, and to earn public acceptance, is the best possible assurance that the public will have a wide choice of first rhte insurance programs to meet their individual requirements. The study proposed in the Joint Resolution is the logical first step toward achieving this goal, and it will receive our wholehearted support and cooperation. AMERIcAN AUToMoBILE AsSocIATIoN, Washington, D.C., March 20, 1968. Re HJ. Res. 958. Hon. JOHN E. Moss, Chairman, ~ubcoiiunittee on Commerce and Rinainee, Committee on Interstate and Foreign Commerce, house of Representatives, Washington, D.C. Mv DEAR 1\ta. Moss: The American Automobile Association wishes to go on record in support of H.J. Res. 958. We ask that this letter be included in the printed record of your Subcommittee's deliberations on this matter. Recently our Executive Committee unanimously approved the following resolution: "RE50LiJTI0N OF AAA ON CONGRESSIONAL AUTOMOBILE INSURANCE INVESTIGATIONS "The American Automobile Association has a deep and continuing interest in the subject of automobile insurance in `behalf of the motoring public. "AAA recognizes that complaints, while low in frequency in relation to the volume of automobile insurance, have focused attention upon the varied and coin- plex problems of the administration of automobile insurance, as well as under- lying legal principles, statutes and regulations. The extent of attention thus generated, together with changing conditions in the United States, warrant a thorough investigation of the subject. "Pending Congressional resolutions would authorize and direct the Department of Transportation to conduct `comprehensive study and investigation of all rele- PAGENO="0151" 14~ rant aspects of the existing motor vehiele accident compensation system', including all phases of automojdle insurance. "AAA supports such a study in order to determine and document the true facts. AAA urges that Congressional authority to conduct $uch an Investigation should require that the investigation be conducted in two phases-the first phase con- sistiiig of an objective and thorough compilation and analysis of the existing facts and a report to the Congress thereon; the second phase to consist of what- ever recommendatiOns may then appear appropriate. "AAA points out that, until the completition of such an objeetive study and report by the Department of Transportation, It would be premature to assume that new laws or regulatory action are in fact required. "AAA will continue to support constructive efforts to provide fair and reason- able protection to the motorist based upon sound and reliable factual Information. To the end that these objectives be realized, the AAA extends its full cooperation and assistance." You will note we ask for a two phase study of the automobile insurance problem by the Department of Transportation. It is our belief that there should be no comingling of fact, theory and remedy in the study. Too often in a study of this magnitude and complexity, one finds an interweaving of fact, theory and solution. Separation of fact and solution will pre- vent confusion and will make for a better dialogue on the study, we believe. For this reason, we were happy to hear the comments by Secretary of Trans- portation Alan S. Boyd, on March 19, that he plans a four part study, with separate phases for organization, data collection, analysis and recommendations and that he considers it "absolutely essential" to develop an adequate information base so that his "analysis and recommendations can be firmly grounded in the facts rather than conjecture and suspicion." Secretary Boyd further announced his intention of making wide use of advisory groups as permitted by H.J. Res. 958. The AAA, representing 10,700,000 motorists, extends its full cooperation and assistance and stands ready to serve on any such advisory group. With all best wishes, I am Sincerely, Guonon F. KACHLEIN, Jn~, Eo,ecutive Vice President. NATIONAL ASSOCIATION OF INSURANCE AGENTS, INC., New York, N.Y., March 19, 1968. Re H.J. Res. 958. Hon. JOHN B. Moss, Chairman, Subcommittee on Finance and Commerce, Interstate and Foreign Commerce Committee, House of Representatives, Washington, D.C. DEAR Mn. CHAIRMAN: This presentation is made by the National Association of Insurance Agents on behalf of over 36,000 insurance agencies throughout the United States. Insurance agents are close to the public in their function of sell- ing and servicing all lines of insurance, including automobile. The increased accident rates, soaring repair and medical costs, coupled with insurance rate inadequacies in many areas, are causing severe problems for agents in finding a basic market to properly handle needs of their assureds, with consequent in- creased use of assigned risk plans at a surcharge. We are well aware of, and sensitive to, real and fancied complaints of some of the insurance buying public about rates, cancellations, failure to renew, claims settlement practices and insolvencies. We are naturally concerned with all com- plaints since our ability to prosper in the insurance business is directly related to our ability to satisfy the needs of our customers. Agents are, of course, in favor of plans which best serve the needs of the insuring public from the standpoints of cost and compensation. In view of criti- cisms of the present methods of compensating victims of automobile accidents, every effort should be made to find improvements in the system. PAGENO="0152" 148 We agree with H.J. Res. 9~8 in its provision for a comprehensive study of automobile insurance. We also believe it to be in order to appoint an inter-agency advisory committee to work with the Secretary of Transportation in conducting the study. A comprehensive study would also require information from all major segments of the insurance industry and, especially, the State Insurance Departments. Our Association has reviewed with great interest the various proposals that have been advanced as solutions to automobile insurance problems. The plans so far proposed leave many unanswered questions in their ability to fulfill the objectives of improvement in cost and compensation. Impact on the insuring public of major changes in the system should be carefully weighed. In one recent plan, tile authors have claimed advantages in reduction of cost of bodily injury coverage by lowering administrative and legal expenses; by speeding up claim payments and reducing court congestion. This plan, which has received prominence, establishes a compulsory non-fault basic protection in place of liability insurance; abolishes the common law doctrine of tort liability, except where damages for pain and suffering exceeds $5,009 and economic loss exceeds $10,000. Commenting on this plan, a prominent law professor said in an American Bar Association Journal article, "A Plaintiff's lawyer would have everything to gain and nothing to lose by trying for a big verdict in a tort suit, secure in the knowledge that he and his client would be taken care of `by basic protection no matter what happened in the lawsuit." This plan and others should have very careful study because of the contro- versy surrounding them and also because some plans would change the legal concept of fault or negligence, which is centuries old. Statutes and decisions of Federal and State courts have applied the doctrine to all types of accidents involving personal injury or property damage. Changing this legal concept for automobile insurance would involve statutory enactments in every state. It would take years to overcome legal precedents of centuries. The insurance industry has taken great strides in recent years to make en- couraging progress in many areas of automobile insurance, within the framework of the present system of marketing and state insurance regulation. Some of these areas are- 1.' Insolvencies are rapidly being eliminated a(s a prohiem. The growing acceptance of mandatory uninsured motorist coverage with added insol- vency protection, combined with tough regulatory legislation will eliminate even the small fraction of 1% of premiurnsi that have been written in companies which failed. 2. Cancellations, which have never involved more than about 1% of all policies country-wide, have become even niore limited under the industry supported model legislation for cancellation limitations. 3. The traffic safety legislation passed by Congress, and implemented by vehicle and highway safety standards, gives real promise of a major improvement in the area which is caused by the spiraling losses for which the system niust pay. In addition, experiments by ten companiCs with different types of marketing operations are now underway to offer injured motorists a new settlenient option providing guaranteed benefits. Those to whom it is offered and accept will be paid automatically without having to prove which driver was at fault. The agents are awaiting the results of this experiment with great interest, since it offers a possible solution within the framework of ~stablished law and state regulation of insurance. Complete studies are `also underway in several states by direction of the governor or commissioner of insurance, or by legislative enactment. The three major insurance company trade associations are also conducting thorough studies. ll.J. Res. 958 will provide a means to coordinate these and other studies and lead to sharing experience and techniques. On September 1, 1907, this Association directed a letter to the Hon. Alan S. Boyd, Secretary, Department of Transportation, in which we commended plans for na ~n-deptb, long-range study of the automobile insurance problem and offered our complete cooperation in such a study. We renew our commendation and offer our cooperation in any way in \~Thich we can be of assistance in adoption and implementation of H.J. Res. 958. Respectfully submitted. DANrORTII LORING, President. PAGENO="0153" 14~ INDUSTRIAL UNION DEPARTMENT, AFL~CIO, Washington, D.C., March 21, 1968. Hom JOHN E. Moss, Chairman, E~ubco~jnmittee on Commerce and Finance, Interstate and Foreign Commerce Committee, House of Representatjves, WaMington, D.C. DEAR Mn. `CHAIRMAN: The Industrial Union Department, AFL~CIO, urge's the enactment of H.J, Res 958 which authorizes a comprehensive investigation of the autom'obi'Ie insurance industry by the Department of Transportation,. At the recent convention of the Industrial Union Department, our resolution on Consumer Need's urged: "Comprehensive Federal legislation that prohibits geographic, economic, occnpatioual and racial blackoutsi, cancellations, discrimi- natory premium rate's and establishes a Federal Motor Vehicle Ins'ur'au'ce Guar- anty Corporation to protect insurers `against insurance company failures. To lower insurance costs and provide full compensation for injuries, we should es'tab'li~b a national accident compensation system and pay auto insurance claims similar to the way health and accident claims~ are paid.' `The automohile insurance industry has for too long followed policies that damn the p'dblie'. The case has been made over and over again of automobile insurance industry a'b'uses that arbitrarily cancel policies based exclusively on age, race, occupation, and pilace of residence and other unrelated item.s and that refuse to insure applicants for the same reasons,, Insurance rates have risen as much as 30% in the past six years. Rates were raised in 40 sitate's in 1965, 23 `sitateisi in 1966, and the trend continued in 1967. According to the `Consumer Pri'ce Index, ins'urance rates increased in 1967 by 45.1% since the 1957-59 base period. All other items Priced in t'he Index averaged an increase of 18.2% for the same time period. In at least 20 state's, insurance rate's `were in,crease,d without public hearings. The public scandal linked wi'th the automobile Insurance industry affects working people the hardest. Years of neglect have made our pub'lic transit systems o'bsio'lete'. Increasingly, the' only way for an employee to get to `his job is to drive. Refusal to insure means that worker's in many instances are effectively c'ut off from job's `of their choice' and capability. H.J. Res. 958 should be approved speedily so that a full comprehensive inve~- tigation will begin. Such an investigation would `then `lead `to measures' that will give the American public a fair and economical system of automobile in's'urance. I request that thi's letter be inserted in the hearing record. Sincerely yours, JACK BEIDLER, Legislative Director. COMMUNICATIONS WORKERS or AMERICA, Washington, D.C., February 29, 1968. Hon. ARCH A. MOORE, Jr., House of Representatives, Washington, D.C. M~ DE'AR Mn. MOORE: On February 13, 1968, the Executive 13'o'ard'of Corn- municatio'ns Workers of America passed a resolution urging a wide scale inves~ tigatio'n `o'f the practices of the automobile insurance industry, and recommended a possible' alternative to existing industry practices. On beh'alf of the 420,000 people whom we represent, we ask that you give your earnest attention to this problem. Sincerely, JOSEPH A. BIrIRNE, President. COMMUNICATIONS WORKERS or AMERICA ExECUTIVE BOARD, STATEMENT: INSURANCE on ASSURANCE? The advent of t'he automobile has been an important source of s'ocial progress. Iii our lifetime it ha,s become an almost indispensable mode of transportation, enabling millions of American's to' enjoy the benefits `of s'u'burban living `by comrnutin,g to and from. Unfortunately this progress has ex'acted its price. The most noticeable `cost of `course is the `astronomical accidental death and injury rate on the nation's highways. It is estimated that over 50,000 people have die'd on America's high- PAGENO="0154" 150 ways in 1967. We also face tremendous problems in the areas of traffic safety, air pollution, and highway congestion. The solution obviously is not to ban automobiles, but to more closely regulate the industries associated with the manufacture and insurance of automobiles. Recently much attention has been given to the inequities practiced in the automobile insurance in~dustriea The Senate Commerce Committee h~s been conducting a study of automobile insurance since the early part of 1967, due to what Senator Warren G. Magnuson has called a "ground swell of public opinion." One proposal to alleviate many of the problems in the automObile insurance iiidu~try which has received widespread publicity, proposes to pay auto Insur- ance claims the way health and accident claims are `paid-~witbout regard to fault. This scimme of insurance seeks to remedy. the evils of inadequacy, delay, injus- tire, waste, and corruption in the present system of handling claims of traffic victims. Those who have suffered injuries in automobiles know that prompt payment of compensation is rare, and that the gap between loss and compensation is vast. In general, the injured person must seek compensation from the other driver's insurance company and not from his own company. The system of justice, under which our nation has existed from its earliest days, requires that when a man is injured and seeks recovery for his injuries from another, he must prove the other person guilty of negligence, be (the claimant) free from contributory negligence, and the injuries caused by the defendant. Accordingly, if he proves these three essential elements he is entitled to recover for all medical expenses (without any deductions), hiis loss of earning capacity (without any deductions), and for all his pain and suffering (without any deductions). If this theory were faithfully ad- ministered, most traffic victims would go uncompensated. Happily, this is not the case. Insurance companies are ever mindful of the cost of litigation and fearful of the jury verdict that disregards the judge's instructions on fault, and awards something anyway. Thus, the insurance companies settle with a very high per- centage of the traffic victims who make claims-estimated to be as high as 8~ percent. Prompt payment is rare. According to a study published in 1966 the flood of automobile accident trials has produced an average delay of 31.1 months for personal injury trials in metropolitan areas. The longest average delay was 69.5 months in Chicago, followed by periods ranging downward from 51.5 to 46.8 months in Westchester, Kings, Suffolk and Queens Counties in New York State and 50.8 months in Philadelphia. These delays pile up while the parties and their lawyers bicker about who was at fault, and what lump sum damages they suppose a jury would allow if the case were tried. The long delays, characteristic of this system, produce a cruel injustice that strikes harder a~s injuries are more severe. A hard bargaining insurance company can buy the claim of such a person with a penurious settlement offer that capi- talizes on his pressing needs in face of a long wait for trial. A recent study of traffic accidents in Michigan indicates that a man who has a severe injury is likely to settle for it quickly only if he settles for a relatively small amount. This harsh treatment of the disabled breadwinners and their families Is only one phase of a pattern of unfair allocation of the total pool of insurance money available from insurance premiums. The present system, while awarding far too little or sometimes nothing, to some victims makes generous and even unreasonable awards to others. Accordingly the Communications Workers of America urges the Senate Com- merce Committee and the House Judiciary Committee to consider the ramifica- tions of the Keeton-O'Connell plan which postulates; the development of an entirely new form of automobile insurance. This form of insurance would be an extension of the idea of the medical payments coverage-a supplemental coverage one can buy in an automobile policy today. The medical payments coverage should reimburse actual medical expenses up to a stated limit, regardless of who was at fault in the accident. The insurance would do the same for all out-of-pocket loss- wage loss for example as well as medical expense-up to a limit of perhaps $10,000 per person. As in the case of medical payments coverage, one would buy this coverage for himself and his family and guests; and he would make his claim and recover his PAGENO="0155" 151 benefits from his own insurance company. The insurance company would be re- quired to pay month-by-month as doctor bills, hospital bills, and lost wages occurred, rather than delaying as under the present system until the injured per- sons and the company could agree on a lump sum, or have their disagreement resolved in long-delayed trails. This form of insurance should be coupled with a new law to do away with claims based on negligence, unless the damages were higher than $5,000 for pain and suffering or $10,000 for all other items such as medical expense and wage loss. This would mean that all but a very small percentage of the claima for injuries in automobile accidents would be handled entirely under the new system. The wasteful expense of bickering over fault-with all the cost of the time of investi- gation, lawyers, and the courts-would be eliminated, except in the few cases in which injuries were very severe. A result of this system would be to sharply reduce the overhead of the present system. Naturally this greater efficiency would help to reduce insurance costs. Also, eliminating the arguments and multitude of small cases that now occur over fault, lump sum awards, and damages for pain and suffering would remove the chief occasions and upportunities for fraud and exaggeration in the present system. No one should expect that this would eradicate fraud completely, but at least fraud would be substantially reduced and, besides being a good thing in itself, this would tend to reduce the high cost of insurance. (Whereupon, at 12:10 p.m. the subcommittee adjourned.) 0 PAGENO="0156"