B-116912, APR. 19, 1961

B-116912, APR. 19, 1961

TO HONORABLE THOMAS E. STAKEM, ADMINISTRATOR, MARITIME ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 24, 1961, CONCERNING YOUR POLICY OF ATTACHING MARITIME ADMINISTRATION WAR RISK BINDERS "BACK-TO BACK" WITH COVERAGE PROVIDED UNDER COMMERCIAL WAR RISK POLICIES. YOU ADVISE THAT YOU HAVE MADE A STATUTORY FINDING AS TO INADEQUACY OF COMMERCIAL WAR RISK INSURANCE FROM THE TERMINATION OF COMMERCIAL WAR RISK COVERAGE AND HAVE AUTHORIZED THE AMENDMENT OF MARITIME ADMINISTRATION WAR RISK INSURANCE BINDERS EFFECTIVE AS OF MAY 8, 1961, TO PROVIDE FOR THE ATTACHMENT OF SUCH COVERAGE UPON THE TERMINATION OF COMMERCIAL WAR RISK INSURANCE. A COPY OF THE ABOVE-MENTIONED FINDING WAS ATTACHED TO YOUR SUBMISSION, AND YOU REQUEST OUR CONCURRENCE BEFORE PUBLISHING A REVISION OF THE REFERRED-TO BINDERS.

AS POINTED OUT IN YOUR LETTER, SECTION 1202 (A) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, PROVIDES, IN PERTINENT PART, THAT THE SECRETARY OF COMMERCE MAY PROVIDE INSURANCE AND REINSURANCE AGAINST LOSS OR DAMAGE BY WAR RISKS IN THE MANNER AND TO THE EXTENT PROVIDED IN SUCH TITLE WHENEVER IT APPEARS TO THE SECRETARY THAT SUCH INSURANCE ADEQUATE FOR THE NEEDS OF THE WATERBORNE COMMERCE OF THE UNITED STATES CANNOT BE OBTAINED ON REASONABLE TERMS AND CONDITIONS FROM COMPANIES AUTHORIZED TO DO AN INSURANCE BUSINESS IN A STATE OF THE UNITED STATES. THE AUTHORITY TO MAKE SUCH A FINDING WAS DELEGATED TO THE MARITIME ADMINISTRATOR ON AUGUST 26, 1958. IN KEEPING WITH SUCH AUTHORITY, YOU STATE THAT IT IS THE POLICY OF YOUR ADMINISTRATION TO PROVIDE FOR THE ATTACHMENT OF ITS WAR RISK BINDERS "BACK-TO-BACK" WITH THE TERMINATION OF COMMERCIAL WAR RISK INSURANCE UNDER THE SO-CALLED "AUTOMATIC TERMINATION CLAUSES" OF SUCH INSURANCE POLICIES. THE PROVISIONS OF SUCH COMMERCIAL TERMINATION CLAUSES HAVE BEEN AMENDED FROM TIME TO TIME. IN 1950, COMMERCIAL WAR RISK INSURANCE TERMINATED 48 HOURS AFTER THE OUTBREAK OF WAR BETWEEN ANY OF THE FOUR GREAT POWERS. 1959 BOTH THE AMERICAN AND BRITISH INSURANCE MARKETS AMENDED THEIR AUTOMATIC TERMINATION CLAUSES TO PROVIDE FOR TERMINATION UPON THE OUTBREAK OF WAR OR INCEPTION OF THE FIRST HOSTILE ACT RESULTING IN WAR (WHICHEVER MAY FIRST OCCUR AND WHETHER THERE BE A DECLARATION OF WAR OR NOT) BETWEEN MEMBERS OF NATO AND MEMBERS OF THE WARSAW PACT OR RED CHINA. YOU STATE THAT WHILE THESE CLAUSES WERE OBJECTIONABLE BECAUSE OF INDEFINITENESS AND POSSIBLE RETROACTIVE EFFECT, THE ADMINISTRATOR MADE THE REQUIRED STATUTORY FINDING, AND AUTHORIZED THE AMENDMENT OF THE MARITIME ADMINISTRATION BINDERS TO ATTACH SIMULTANEOUSLY WITH THE AFORESAID TERMINATION OF COMMERCIAL COVERAGE IN ORDER TO PROVIDE CONTINUOUS COVERAGE TO SHIP OWNERS, AND TO PROVIDE AN OPPORTUNITY TO CONSIDER WHETHER THE OBJECTIONABLE FEATURES COULD BE ELIMINATED OR WHETHER A FULL GOVERNMENT WAR RISK INSURANCE PROGRAM SHOULD BE UNDERTAKEN. SUCH BINDERS, AS AMENDED, WERE EXTENDED ON AN INTERIM BASIS TO MAY 7, 1961. MEANWHILE, THE SHIPOWNERS WERE URGED BY YOUR ADMINISTRATION TO ESTABLISH A SO-CALLED MUTUAL INSURANCE ASSOCIATION WITH GOVERNMENT REINSURANCE TO ATTACH UPON THE OUTBREAK OF WAR INVOLVING THE UNITED STATES; HOWEVER, WE ARE INFORMED THAT THIS SUGGESTION HAS NOT BEEN IMPLEMENTED.

YOU ADVISE THAT EFFECTIVE ON MARCH 7, 1961, THE "WAR RISK AND STRIKES AND AUTOMATIC TERMINATION AND CANCELLATION CLAUSES" IN COMMERCIAL WAR RISK INSURANCE POLICIES WERE FURTHER MODIFIED TO PROVIDE, INSOFAR AS HERE RELEVANT, FOR THE TERMINATION OF SUCH COVERAGE ON THE FOLLOWING BASIS:

"A. THIS INSURANCE AND ANY EXTENSION THEREOF, UNLESS SOONER TERMINATED UNDER THE PROVISIONS OF SECTION B OR C, SHALL TERMINATE AUTOMATICALLY UPON AND SIMULTANEOUSLY WITH THE OUTBREAK OF WAR (WHETHER THERE BE A DECLARATION OF WAR OR NOT) BETWEEN ANY OF THE FOLLOWING COUNTRIES; UNITED STATES OF AMERICA, UNITED KINGDOM (OR ANY OTHER MEMBER OF THE BRITISH COMMONWEALTH), FRANCE, THE UNION OF SOVIET SOCIALIST REPUBLICS, THE PEOPLE'S REPUBLIC OF CHINA, * * *.'

THE MODIFIED CLAUSES ALSO CONTAIN AN ADDITIONAL EXCLUSION AS TO CLAIMS FOR LOSS, DAMAGE OR EXPENSE ARISING OUT OF "ANY PRIOR HOSTILE ACT OR ACTS BY ANY OF THE SAID COUNTRIES RESULTING IN SUCH OUTBREAK OF WAR AND OCCURRING WITHIN A PERIOD OF 90 DAYS PRECEDING SUCH OUTBREAK OF WAR.' YOU STATE THAT WHILE THE SAME OBJECTIONABLE ELEMENTS OF INDEFINITENESS AND RETROACTIVITY ARE STILL PRESENT IN THE 1961 REVISION OF THE COMMERCIAL WAR RISK TERMINATION CLAUSES, THEY ARE CONSIDERED MORE ACCEPTABLE BECAUSE THE FIELD OF COMBATANTS IS NARROWED TO FIVE NAMED COUNTRIES, AND THE RETROACTIVE EXCLUSION IS LIMITED TO 90 DAYS. IN VIEW THEREOF, YOU NOW HAVE MADE A STATUTORY FINDING AS TO INADEQUACY OF COMMERCIAL WAR RISK INSURANCE FROM THE TERMINATION OF COMMERCIAL WAR RISK COVERAGE UNDER THE COMMERCIAL POLICIES, AND HAVE AUTHORIZED THE AMENDMENT OF MARITIME ADMINISTRATION WAR RISK INSURANCE BINDERS, EFFECTIVE AS OF MAY 8, 1961, TO PROVIDE FOR GOVERNMENT INSURANCE "BACK TO BACK" WITH COVERAGE PROVIDED UNDER COMMERCIAL POLICIES. THIS HAS BEEN ACCOMPLISHED BY PROVIDING FOR THE ATTACHMENT OF MARITIME ADMINISTRATION BINDERS IN THE ALTERNATIVE AS FOLLOWS:

"TO ATTACH AUTOMATICALLY UPON AND SIMULTANEOUSLY WITH THE OUTBREAK OF WAR (WHETHER THERE BE A DECLARATION OF WAR OR NOT) BETWEEN ANY OF THE FOLLOWING COUNTRIES: UNITED STATES OF AMERICA, UNITED KINGDOM (OR ANY OTHER MEMBER OF THE BRITISH COMMONWEALTH), FRANCE, THE UNION OF SOVIET SOCIALIST REPUBLICS, THE PEOPLE'S REPUBLIC OF CHINA; UPON THE OCCURRENCE OF ANY PRIOR HOSTILE ACT OR ACTS BY ANY OF THE SAID COUNTRIES RESULTING IN SUCH OUTBREAK OF WAR AND OCCURRING WITHIN A PERIOD OF 90 DAYS PRECEDING SUCH OUTBREAK OF WAR.'

THUS, YOU ADVISE THAT IF A HOSTILE ACT OCCURS WITHIN THE 90 DAY PERIOD PRECEDING THE OUTBREAK OF WAR (WHICH ACT IS DETERMINED TO RESULT IN SUCH OUTBREAK OF WAR) THE MARITIME ADMINISTRATION BINDERS WILL BE ACTIVATED AS OF THAT TIME FOR THE PURPOSE OF COVERING THE WAR RISK LOSSES EXCLUDED FROM COMMERCIAL POLICIES UNDER THE 1961 REVISION. FURTHERMORE, BY WAY OF SUPPLEMENTING THE ABOVE ATTACHMENT CLAUSES, THE MARITIME ADMINISTRATION BINDERS ALSO INCLUDE THE FOLLOWING NEW WARRANTIES OR EXCLUSIONS TO PREVENT ANY OVERLAP WITH RISKS COVERED BY THE COMMERCIAL POLICIES IN EFFECT DURING THE 90 DAY PERIOD:

"WARRANTED FREE FROM ANY CLAIM FOR LOSS, DAMAGE OR EXPENSE COVERED UNDER ANY COMMERCIAL POLICY IN EFFECT FOR THE BENEFIT OF THE ASSURED.'

"WARRANTED FREE FROM ANY CLAIM FOR LOSS, DAMAGE OR EXPENSE WHICH IS OR COULD BE COVERED BY A COMMERCIAL WAR RISK POLICY CONTAINING THE AMERICAN INSTITUTE WAR RISK AND STRIKES AND AUTOMATIC TERMINATION AND CANCELLATION CLAUSES (TIME) - HULLS - (MARCH 7, 1961).'

YOU ADVISE THAT THE ATTACHMENT OF THE MARITIME ADMINISTRATION BINDERS IN THE ALTERNATIVE APPEARS TO PROVIDE FULL AND COMPLETE PROTECTION TO SHIPOWNERS WITHOUT A GAP BETWEEN COMMERCIAL AND GOVERNMENT INSURANCE.

AS STATED ABOVE, SECTION 1202 (A) AUTHORIZES THE SECRETARY TO PROVIDE INSURANCE AND REINSURANCE WHENEVER IT APPEARS TO THE SECRETARY THAT SUCH INSURANCE ADEQUATE FOR THE NEEDS OF WATERBORNE COMMERCE OF THE UNITED STATES CANNOT BE OBTAINED ON REASONABLE TERMS AND CONDITIONS FROM COMPANIES AUTHORIZED TO DO AN INSURANCE BUSINESS IN A STATE OF THE UNITED STATES. PURSUANT TO AN APPROVAL OF THE PRESIDENT ON OCTOBER 9, 1950, AND A DELEGATION OF AUTHORITY FROM THE SECRETARY OF COMMERCE TO THE MARITIME ADMINISTRATION ON AUGUST 26, 1958, THE MARITIME ADMINISTRATOR IS AUTHORIZED TO MAKE THE FINDINGS REQUIRED BY SECTION 1202 (A). WHILE THE SECTION CLEARLY PROVIDES FOR THE ISSUANCE OF GOVERNMENT INSURANCE AND REINSURANCE AGAINST LOSS OR DAMAGE BY WAR RISKS IN THE CIRCUMSTANCES SET FORTH THEREIN, IT CONTAINS NO STANDARDS FOR THE DETERMINATION OF WHAT MIGHT BE CONSIDERED "REASONABLE TERMS AND CONDITIONS.' HENCE, IN THE ABSENCE OF SUCH CRITERIA, IT WOULD APPEAR LOGICAL TO ASSUME THAT THE LEGISLATIVE INTENT IN THIS AREA WAS TO PLACE WITHIN THE DISCRETION OF THE SECRETARY OF COMMERCE (AS DELEGATED TO THE MARITIME ADMINISTRATOR) THE RESPONSIBILITY OF SUCH A FINDING.

WE HAVE REVIEWED THE ADMINISTRATION'S STUDY OF THE CIRCUMSTANCES LEADING TO THE ATTACHMENT PROCEDURE SET FORTH IN YOUR SUBMISSION AND WHILE, AS STATED BY YOU, THE MODIFIED CLAUSES IN THE COMMERCIAL POLICIES STILL CONTAIN CERTAIN OBJECTIONABLE ELEMENTS, WE AGREE THAT THEY ARE MORE ACCEPTABLE THAN THOSE PREVIOUSLY ISSUED BY THE COMMERCIAL COMPANIES. FURTHERMORE, IN VIEW OF THE TERMS OF SUCH CLAUSES, WE MUST ALSO AGREE WITH YOUR DETERMINATION THAT COMMERCIAL INSURANCE PROTECTION WILL BECOME UNAVAILABLE UPON THE OUTBREAK OF WAR, OR UPON THE OCCURRENCE OF THE SO- CALLED "PRIOR HOSTILE ACT.' HENCE, IT WOULD APPEAR THAT THE ACTION TAKEN BY YOUR ADMINISTRATION IS IN CONSONANCE WITH THE LEGISLATIVE INTENT THAT GOVERNMENT PROTECTION BE PROVIDED IN THE SPECIFIC SITUATIONS THUS PREVAILING. IN THIS CONNECTION, ATTENTION IS INVITED TO SENATE REPORT NO. 1828, 81ST CONGRESS, 2D SESSION, ACCOMPANYING S. 2484, WHICH AS SUBSEQUENTLY ENACTED (P.L. 763) CONTAINED SECTION 1202 (A), AND WHICH, IN EXPLAINING THE PURPOSE OF THE BILL, CONTAINED THE FOLLOWING PERTINENT REMARKS:

"THE WAR RISK INSURANCE MARKET IS HIGHLY RESTRICTED. POLICIES ARE ISSUED SUBJECT TO AN AUTOMATIC TERMINATION CLAUSE IN THE EVENT OF THE OUTBREAK OF WAR BETWEEN ANY OF THE FOUR POWERS--- UNITED STATES, FRANCE, GREAT BRITAIN, AND THE UNION OF SOVIET SOCIALIST REPUBLICS--- WITH PROTECTION FOR VESSELS AND CARGO AT SEA ONLY UNTIL THEY ARRIVE AT THE NEXT PORT AND 24 HOURS THEREAFTER. A SIMILAR CLAUSE IS INCLUDED IN HULL WAR RISK POLICIES WRITTEN IN THE BRITISH INSURANCE MARKET. IN THE BEST JUDGMENT OF PERSONS COGNIZANT OF WORLD CONDITIONS AND THEIR EFFECT ON SHIPPING, WAR RISK INSURANCE WILL NOT BE AVAILABLE IN THE PRIVATE MARKET, PARTICULARLY THE AMERICAN MARKET, AT THE FIRST SIGN OF AN IMPENDING CONFLICT AND OUTSTANDING POLICIES WILL BE TERMINATED UNDER THE EXISTING CANCELLATION CLAUSES. THIS IS TRUE EVEN THOUGH OUR COUNTRY MAY NOT BE IMMEDIATELY INVOLVED. IF SUCH A SITUATION DEVELOPS AMERICAN SHIPPERS, SHIPOWNERS, CREW MEMBERS AND PASSENGERS WILL BE WITHOUT ANY PROTECTION AGAINST LOSS BY RISKS OF WAR. WE CANNOT EXPECT CARGOES AND SHIPS TO MOVE WITHOUT ADEQUATE INSURANCE COVERAGE. IT IS REASONABLE TO BELIEVE THAT IF WAR RISK INSURANCE IS NOT AVAILABLE OUR OVERSEAS COMMERCE WILL BE SHARPLY CURTAILED AND WE WELL MAY HAVE A BREAKDOWN OF OUR OCEAN WATER-BORNE TRANSPORTATION SYSTEM. TO PROTECT AGAINST THESE CONTINGENCIES IT APPEARS HIGHLY DESIRABLE TO PROVIDE THAT IF WAR RISK INSURANCE CANNOT BE OBTAINED ON REASONABLE TERMS AND CONDITIONS IN THE AMERICAN MARKET, THEN THE INSURANCE SHOULD BE PROVIDED BY THE GOVERNMENT, WHETHER OR NOT AT THE TIME WE MAY BE TECHNICALLY AT PEACE. * * *"

ACCORDINGLY, FOR THE REASONS SET FORTH ABOVE, WE PERCEIVE NO LEGAL BASIS FOR DISAGREEING WITH THE CONCLUSIONS SET FORTH IN YOUR FINDING.