very large tanker, and placing a greater proportionate risk on the small tanker. I wonder how that objection might be met, either with logic or with some other arrangement, and whether you agree or disagree with it. Mr. CHECKET. Well, it is possible, I suppose, on the very smaller vessels, that there could be a disproportionate cost. I don't think that this, the total context, is really that disparaging or is really that meaningful as between the larger ship and the smaller ship, within the limits that we have been considering. Senator BAKER. If I can interrupt you just a second, is it not also likely that the larger ship, by and large, would be owned by the larger company, and that therefore the risk of total economic destruction as a result of a loss would be less in the case of a larger ship than it would in the smaller one, from a relative standpoint? Mr. CHECKET. Actually, in the larger category of ships being built today, I say that more are probably being built by independents in total than they are by, let us say, major oil companies. Senator BAKER. Do you expect that this will continue to be the case? Mr. CHECKET. I would say that yes, I would expect that to continue. I would not think that the ratio of ownership to charters that we included, or 35 percent, which has been pretty traditional, is going to vary that much. It might be slightly higher, with certain individual companies, but on an average I think that is the way it will finally turn out. And certainly, the smaller companies, as well, there is enough money involved in these ships that an independent owner is going to get into that business as well, in spreading their risk of obsolescence in ship size, that they would still build those vessels, and expect to charter them to other small or medium or large-sized oil companies. Senator BAKER. Mr. Chairman, I have one more question, if I may. World tanker fleet review report Mr. CHECKET. I might mention that this was just given to me. It is a report that is made annually by John I. Jacobs & Co., of London, and entitled "World Tanker Fleet Review," and is as of December 31, 1968, and this would show of new buildings on order, that of the total, 522 million deadweight tons, that 63 percent are for the account private owners, and 37 percent for company. Senator BAKER. Thank you, sir. DIFFERENCE IN PREMIUM COST On May 23, Mr. Miller testified before the subcommittee, and the chairman asked this question, or put this point: That the cost-I am speaking now of insurance cost-the cost for negligent liability under your plan, to your association, is 8 cents per registered ton or $100 per gross ton, and $10 million limit, and that according to Mr. Miller's testimony and his previous letter, that the cost for that coverage, the same coverage, to the owners would be 20 cents per gross ton. If you want to clarify those figures, it is fine, but the point I am reaching for is: Does this reflect a difference in premium cost related to the $1.4 million deductible as distinguished from full coverage from zero dollars to $10 million? Mr. CHECKET. No, sir. TOVALOP I think I can explain the difference. One, the reference to the 8 cents, and I think at times that number, I know was used as the actual cost, whereas the 8 cents was, is what will be the first call upon the participating owners in the TÓVALOP scheme. They expect, based on the cost, that it would approximate 16 cents in the policy that has been taken. The 20 cents, which is for the same coverage, that Mr. Miller spoke to, was based upon legislation passed by the United States only, so it would only apply to the United States. In discussing this, if there were a convention, or many countries adopted the same legislation, and these became worldwide, the same as TOVALOP, it would probably go, then, to the 16 cents. Now, he was talking to all kinds of ships. Senator BAKER. Was he also saying that if we pass the statute generally along the lines we have discussed, that TOVALOP's premium rate would go up to 20 cents? Mr. CHECKET. No, sir; because it is on a worldwide basis, and that insurance has been placed at 16 cents. Senator BAKER. At 16 cents; so in effect TOVALOP is saving 4 cents? Mr. CHECKET. That would be correct, sir, versus, if the United States passed it, and they had to go in the market and cover for anybody who was not in TOVALOP, or for other kinds of cargo ships, they would pay a different premium. Senator BAKER. It would be another powerful incentive for people to join TOVALOP. Mr. CHECKET. It most certainly would, sir. Senator BAKER. I wonder if the witness receives a commission on membership. Mr. CHECKET. One thing we might suggest, Senator, again for consideration, as one way to make TOVALOP mandatory, we have not thought this one through, have only started discussing and thinking about this, coming over here, as to how they could be woven together, and one might be a provision that any U.S. company or individual chartering a vessel would have to assure himself as to the financial responsibility of the vessel being chartered. Senator BAKER. That is, the shipper would have to? Mr. CHECKET. Yes, sir. Whoever charters in, has to assure himself, whether it is Mobil Oil Corp. who is chartering, or who, or New England Petroleum, who all charter ships. That then would put the responsibility, you might say, on the charterer to assure this. This would give him the legal basis to then put into his charter paper form the requirement in the case of tankers that they be a member of, let us say, TOVALOP's scheme. Senator BAKER. Or describe the protection and services offered by TOVALOP as a condition precedent to their qualifications. Mr. CHECKET. That is correct, sir. Senator BAKER. Thank you, Mr. Chairman. Thank you, sir. QUESTIONS BY SENATOR BOGGS Senator MUSKIE. I have this statement of questions by Senator Boggs that I shall put to you, Mr. Checket. It explains that he is unavoidably absent today due to a death in his family, and he continues as follows: I had the opportunity last night to read prepared statements submitted by today's witnesses, and I should like to ask a couple of questions on that basis. First, I must express my disappointment that the Institute in particular has offered no substantial testimony on the matter of liability for spills from offshore facilities, as requested in Senator Muskie's telegram. I would like to ask some questions along that line, however, and if the witness is unable to answer them, I hope he will be able to supply answers soon. There are three questions, and I will ask them in the order in which he puts them. First, "Interior Secretary Hickel has established an absolute liability that is unlimited beyond the 3-mile limit. What has been the effect on the insurance market and rates?" Mr. CHECKET. I would not be in a position to answer that, but in any of the questions that Senator Boggs has, I can assure the committee that I will see that answers are prepared and submitted promptly. Senator MUSKIE. All right. The second question: According to figures from the American Petroleum Institute, which obviously did not include Santa Barbara, there have been 827 oil spills by offshore drilling rigs, costing $81,218 for cleanup, or approximately $3,000 per spill. On this record, why should spill insurance not prove to be an inexpensive, low risk? Mr. CHECKET. I think that question is the one that the chairman has alluded to, or more than alluded to, referred to before, in this whole area of good experience in oil spill recovery, and again, I have really no explanation for this, other than to rely upon what the insurance representatives have stated is what they require, or what the underwriters require in the way of premium. Senator MUSKIE. Well, the third question then: Would a selfinsurance fund work among the offshore drillers? Response to questions Mr. CHECKET. I think, since this is beyond my area of responsibility, I would prefer to include that in the written response to the question. Senator MUSKIE. All right. (The information furnished follows:) AMERICAN PETROLEUM INSTITUTE, Hon. J. CALEB BOGGS, New Senate Office Building, DEAR SENATOR BOGGS: During the hearing on June 4, 1969, by the Subcommittee on Air and Water Pollution of the Senate Committee on Public Works, the Chairman of the Subcommittee, Senator Edmund S. Muskie, asked the witness appearing on the behalf of the American Petroleum Institute, Mr. Everett S. Checket, three questions proposed by you. It is my understanding that you were unavoidably absent from the hearing due to a death in your family. Herein, I will restate the questions by you, exactly as they appear in the record of the hearing, and the answer by the American Petroleum Institute to each question will follow. Question No. 1: First, Interior Secretary Hickel has established an absolute liability that is unlimited beyond the three-mile limit. What has been the effect on the insurance market and rates? Answer to Question No. 1: Liability contracts are presently written on an accident or occurrence basis where negligence is established for damaged properties. If absolute liability prevails, in our opinion, little of our liability insurance will be available on this basis because of prohibitive costs or specific exclusions. Cleanup expenses for oil slicks offshore historically have not been covered. Although in our opinion it cannot be associated with the Department of Interior action, since the Santa Barbara incident, some oil companies in recent months at time of renewal of their excess loss legal liability contracts, have had to accept offshore exclusion endorsement for damages arising out of seepage and pollution. For example, London has issued seepage and pollution exclusion endorsements as aforementioned, but we believe that liability coverage can be repurchased resulting from an accident based on negligence basis. This, of course, involves substantial additional costs. In addition, one large U.S. insurance company issued an endorsement effective June 1, 1969 which in respect to offshore facilities has excluded pollution damage, regardless of cause for all insureds involved in petroleum production. While it is hoped that other domestic insurers will not take such action, we are aware they are currently studying this matter and only time will tell. Question No. 2: According to figures from the American Petroleum Institute, which obviously did not include Santa Barbara, there have been 827 oil spills by offshore drilling rigs, costing $81.218 for clean-up, or approximately $3,000 per spill. On this record, why should spill insurance not prove to be an inexpensive, low risk? Answer to Question No. 2: The costs indicated include the cost of actual cleanup operation on the water and shoreline and not the cost of paying any subsequent damage claims. Because a serious event, Santa Barbara, has now occurred and there appears to be significant expenditures involved coupled with the unsettled insurance market conditions of today, the underwriters appear to continue to exercise extreme caution in acceptance of new risks in this area. This appears to be particularly true where we are faced with absolute liability and the underwriters have begun to restrict capacity even on a legal liability basis. Question No. 3: Would a self-insurance fund work among the offshore drillers? Answer to Question No. 3: We assume that the meaning of "offshore drillers" is offshore operators, both drillers and producers. A self insurance fund might have as its source of eligible participants only those operators involved in offshore platforms in certain geographical areas with separate funds for each area, i.e., Gulf of Mexico, possibly divided into offshore Louisiana and offshore Texas, offshore Santa Barbara, and although not in federal waters, Cooks Inlet. The largest number of participants would be offshore Louisiana and relatively few on a spread of risk basis elsewhere. Although statistics are not available at this time, there is the strongest likelihood that even Louisiana does not offer sufficient spread of risk. Of paramount importance, however, is the negative feeling that often develops within an industry for such joint risk assumption ventures that one company designs, bills, and operates much better than another and thus creates serious risks inequities. By each oil company transferring this risk to the insurance industry, the insurers should recognize these differences through their underwriting and the amount of premium to the individual insured should reflect their opinion of the difference in risk. It would be difficult to satisfactorily recognize these risk inequities in a self insurance program within a highly competitive industry. If absolute liability continues and the insurance market does not respond, it may be necessary to study a risk assumption approach which cannot be done overnight but will involve time requirements similar to TOVALOP. It is a pleasure to have furnished you with our answer to your interrogatory. If the American Petroleum Institute can be of further service to you or the Committee in any way, please do not hesitate to call upon us. With best wishes. Sincerely yours, PERRY W. WOOFTER, Senator MUSKIE. Thank you very much, Mr. Checket. Counsel. Senator MUSKIE. The final witness this morning, Mr. James J. Reynolds, American Institute of Merchant Shipping. STATEMENT OF JAMES J. REYNOLDS, AMERICAN INSTITUTE OF MERCHANT SHIPPING; ACCOMPANIED BY RALPH E. CASEY, EXECUTIVE VICE PRESIDENT, AMERICAN INSTITUTE OF MERCHANT SHIPPING Mr. REYNOLDS. Thank you, Mr. Chairman. I will be as brief as possible. I deeply appreciate your courtesy and patience in inviting us back here. I am accompanied by the executive vice president of the American Institute of Merchant Shipping, Mr. Ralph E. Casey, who sits at my left. To reorient the committee to who I am and what AIMS is, very briefly, AIMS stands for the American Institute of Merchant Shipping. We have some 40 members, who are major operators of U.S.flag vessels. They operate some 539 of the 961 U.S.-flag ships in service today, representing a considerable majority of the deadweight tonnage of vessels flying the U.S. flag. I have a statement which is really fairly brief, Mr. Chairman. If I can read it, rather quickly, and skip through it, I think it would possibly set the stage for whatever questions might be appropriate. Senator MUSKIE. Well, we really did not think this session was going to take this long this morning, but don't feel inhibited by it. Mr. REYNOLDS. Thank you very much. You and your colleagues have been most patient with us. Senator MUSKIE. Cover your views. VIEWS OF AIMS Mr. REYNOLDS. We are all anxious to permit of no further delay in the enactment of sound and equitable legislation in this field of oil pollution. I join Mr. Checket in saying that we support the legislation in this field. At the same time, recognizing as we must the serious impact which the imposition of new cost obligations and new penalties will have upon American-flag shipping, I urge strongly that the subcommittee proceed with utmost caution in order that in a completely understandable zealous attempt to correct one situation, it does not place an impossible burden upon an American merchant marine already fighting for its very survival. |