Senator THURMOND. Any company of integrity would want to do that, wouldn't it?

Mr. OMSBERG. I think I would say "Yes, that is so." If an error has been made, I would say

Senator THURMOND. If they would want to repay a payment to a policyholder, certainly, who is a customer of theirs.

Mr. OMSBERG. Yes, sir; I think a company would act very quickly to correct an error. I am sure that companies-I would not want to say, without exception-I think that is the policy of most all of the companies, practically every company that I know anything about, that I have any close relationship with or to, that they would act very quickly to correct errors.

Senator MONRONEY. Thank you very much, Mr. Omsberg, for the helpful information that you have consistently given this committee. Mr. OMSBERG. It has been our pleasure, sir.

Senator MONRONEY. The next witness is Mr. W. F. Gaunitz, president of the Emmco Insurance Co., South Bend, Ind.

Would you come forward, sir?

I believe you are accompanied by Senator Scott Lucas, one of our former colleagues. Would you identify your other aids for the

record.

STATEMENT OF SCOTT LUCAS, WASHINGTON COUNSEL FOR THE EMMCO INSURANCE CO., SOUTH BEND, IND.

Mr. LUCAS. May I make a short statement in connection with this?

Senator MONRONEY. Yes. Let's identify the witness first.

Mr. LUCAS. I am Scott W. Lucas, Mr. Chairman and gentlemen of the committee. I am the Washington counsel for the Emmco Insurance Co., of South Bend, Ind. Present on behalf of the company are W. F. Gaunitz, its president, and George W. Omacht, the company's general counsel. Mr. Miller, of my office, is also here.

I should like to make just a short statement before Mr. Gaunitz testifies, if I may.

Senator MONRONEY. That is all right.

Mr. LUCAS. Mr. Chairman, in March last year we presented a short statement which the chairman was good enough to insert into the record. Even though it is repetition I should like to read it at this particular point. It is very short.

Scott W. Lucas, Washington counsel for the Emmco Insurance Co., South Bend, Ind., said today that when he received notice of the current hearings being held by the subcommittee investigating automobile marketing practices he conferred with Senator Monroney, chairman of the subcommittee and advised him that because of previous commitments it would be impossible for him or the company's representatives to appear on March 21 to testify on the subject under investigation, and that Senator Monroney agreed it would be acceptable for the representatives of Emmco Insurance Co. to appear at a later date.

Attorney Lucas added that, in an effort to cooperate fully with the subcommittee, he had filed with the counsel for and with all the members of the subcommittee an exhaustive brochure, supplemented by nine exhibits which set forth in great detail what the company has done in complying with the recommendations made by the National Automobile Underwriters Association with respect to the various classifications of commission rates.

Mr. Lucas has said further that the brochure submitted to the subcommittee discloses, among other things, the significant fact that the Emmco Insurance

Co. was examined by a conference examination of the National Association of Insurance Commissioners and that the examination found that for the 12month period ending September 30, 1955, the company used the forms and rates prescribed and filed for it for classifying risks and that sufficient information was available to make it possible for the examiners to state that Emmco's risks were properly classified and rated.

Mr. Chairman, about the only thing we haven't been able to cooperate with you on is the question of our attendance before this committee. The chairman was good enough last year to have, I think, two continuances for us.

Mr. LUCAS. Anyway, I have also returned. I left here last week hoping that this thing had been concluded and I just got into Wisconsin, my summer home, and I got a letter from Mr. Omacht requesting my return, so here I am.

Before turning over these company officials for questioning by the committee and the staff, I would like to say we have been particularly cooperative with the committee in response to questionnaires and requests of the staff for information.

In addition to written responses Mr. Omacht and I had an extensive conference with Mr. Busby, special counsel of this subcommittee, and we have always been treated with courtesy and great respect in the presence of Mr. Busby. In this connection I should like to identify the written communications which we have submitted to the committee and which we should like to have placed in the record. If it has not been done up to this time we would like to have it done now in continuity fashion.

These consist of a 15-page memorandum and 9 exhibits bound in brochure form and submitted on February 26, 1957. I would like to have that marked "Emmco's Exhibit No. 1," if I may.

Senator MONRONEY. Does that include the entire brochure?

Mr. LUCAS. It does. I would like to put it in the record, if I may. If you think it is too much

Senator MONRONEY. No. I want it adequately presented. There are some statistical and financial tables. I didn't know if you wanted those included or not.

Mr. LUCAS. We attempted to give the committee complete information on it.

Senator MONRONEY. We have similar information from almost all the other companies in the record.

Mr. LUCAS. If it is in the record, then that part can be deleted. Mr. BUSBY. We do not have Emmco's report of association examination. We have all the rest. So I submit, Mr. Chairman, it would be a good thing to get in.

(Emmco's exhibit No. 1 follows:)

EXHIBIT No. 1

EMMCO INSURANCE CO., SOUTH BEND, IND.

I. INTRODUCTION

The current private passenger automobile classification for collision rates was adopted by the insurance departments of the several States at varying times, beginning with Texas in 1953, and continuing through 1954, 1955, and 1956. A list of States in which Emmco Insurance Co., operates and the dates when such States approved these classifications is attached hereto and marked “Exhibit I.” The classifications were devised on August 21, 1953, by the National Automobile Underwriters Association on the theory that the risk of collision differed between the several classes, so that each class should have a different premium.

Strictly speaking, each collision risk differs from every other collision risk. No two are exactly alike; however, it is recognized that in practice a different rate or premium cannot be set for each risk. It is also recognized that practical operating difficulties increased with the addition of every new class. Thus, when the current classifications were established in an industry as large as the automobile insurance business, a period of mistakes and confusion should have been, and was, anticipated while the industry was adjusting to the new operation.

Generally, the current classifications consist of 3 main classes, 1 of which has 6 subdivisions. A reading of the description of these classes and subdivisions should convince anyone of the difficulties of immediately making the insurance companies, their employees and agents, and all persons in other industries having to do with insurance rates understand and properly apply such classifications. It is no wonder that the training has taken time.

In retrospect, it appears that the form first adopted by the National Automobile Underwriters Association for obtaining classification information was unfortunate and did not result in accurate classification as early as could otherwise have been expected, but considering that the association, the companies and the commissioners were pioneering in an unexplored field, some errors were to be expected.

Form E-1105 (exhibit II), devised by the National Automobile Underwriters Association, was put into use by all companies, whether they were affiliated or unaffiliated with any financial institution. Each insurance agent and each automobile dealer was furnished with a supply of these forms for use in making classification. The plan devised by the National Automobile Underwriters Association was that this form would only be signed by the insured and used if the insured was entitled to class I or class III rate classification. If the insured was in class II rate classification, he signed no form since none was provided. The plan of the entire industry, therefore, was that if this form E-1105 did not accompany the order for the policy, the insured was classified as a class II risk. This plan must have appeared to have had reasonable probability of resulting in proper classification of risks to those who devised and examined it, for no objections to it were expressed in any quarter. When the classification plan became effective in a State, our company, as all others, purchased a supply of forms E-1105 and placed them in the hands of its agents and automobile dealers where the statements could best be taken.

However, in June of 1954, our management observed that the plan of assuming a risk was class II unless a NAUA form E-1105 was furnished, was resulting in some misclassification, and our company devised and put into effect its own form which left room for no assumptions, but required an insured to answer "Yes" or "No" to a group of questions, so that facts would affirmatively appear for his classification in any class. It was not until February 1956, that the NAUA adopted some such form. The form has gone through four revisions. Photostats of these forms are attached as exhibit III.

By the use of these forms, we believe that our business is classified as accurately as it can be under this complicated plan of classification. Because of the large number of persons involved in making our classifications, it certainly contains some errors, but it is our opinion that the number of insured misclassified in class II is no greater than those misclassified in class I and class III. Of course, this is little comfort to the person who is paying too large a premium because he is misclassified in class II, but we believe that the experience of the people involved in collecting and furnishing classification data to us, together with the awareness of the classification problem brought to insureds by the publicity given to this and other hearings and investigations, has reduced such misclassifications in class II to a very minimum in our own company.

So concerned was Emmco that there be proper classifications that on August 3, 1954, it sent a memorandum to practically all branch managers on this point. Although this memorandum is set out in full (exhibit IX), attention is invited to the company's concern against issuance of policies with wrong classifications. Note that the memorandum reminds the branch managers that all insurance questions must be signed by the customer, that when investigation reveals misclassification, the "deal must be corrected to the proper insurance classification before it is approved," and that everyone “is to understand it is our interest, regardless of whether or not the transaction has been written at the top rate, that we satisfy ourselves to the best of our ability every

policy issued by Emmco or paid for by associates bears the rating classification that particular individual is entitled to."

We know that our company has some class II risks in class I and class III, because we find them while we are investigating collision claims made by such insured. This fact refutes the loose charges made by some that the classifications are a giant racket for defrauding the insuring public, and discloses that misclassification is a result of human error arising in the struggle of a large industry to adapt itself to a difficult process.

For the period prior to 1955, a summary of the classification of risks of our company was made in an examination of our company conducted under the National Association of Insurance Commissioners (exhibit IV).

With this introductory statement, we shall now adress ourselves to the committee's interrogatories.

II. INTERROGATORY

1. Please state the total number of collision insurance policies which your company issued in each year 1950 to 1955, inclusive, by State. 2. Please state the number of collision insurance policies which your company issued in classes 1, 2 and 3 in each year, 1950 to 1955, inclusive, by State.

There is hereto attached exhibit V and exhibit VI, giving this information for the years 1955 and 1956, respectively. As was pointed out I above, the report of the conference examination of the National Association of Insurance Commissioners was made for the period ending 1954. On page 14 of this report (exhibit IV) the examiners discuss the classification practices which they found existing during the period covered by their examination, and that report is as follows:

"For a 12-month period ending September 30, 1955, a tabulation of 279,504 policies issued by the company shows 58.5 percent of the risks were given class I rating, 37.7 percent class II rating, and 3.8 percent class III rating. A test check of these percentages proved them to be substantially accurate.

"Since the inception of the classification and rating program, the company used the forms and rates prescribed and filed for it by NAUA for classifying risks. Class I and III rates were granted when information was available. Class II rates were used when information was not available.

"In June 1954, the company's application form was revised to incorporate therein the rating information so as to better produce the information necessary to rate and classify risks. Branch managers and producers were notified that policies would be held up until the classification section of the form was filled out in every detail. As a result, sufficient information has been available and the risks are properly classified and rated."

It is customary for insurance companies, after the completion of a conference examination, to dispose of much of their statistical information to the date of the close of the examination. It should be realized that the statistical information accumulated has no direct effect upon the financial assets or liabilities of the company, and that such information is so voluminous that it cannot be accumulated for a long period of time. Therefore, the company does not have and cannot produce the information requested in the above two interrogatories for the year of 1954 and prior thereto. It is submitted that the conference examination report summarizes these findings of the insurance commissioners in respect to classification for 1954 and prior thereto. It is also pointed out that the current private passenger automobile classifications for collision rates first appeared in the year of 1953 and that information in respect to years prior to 1953 would show nothing concerning the current problem of classifications. Attention is also called to the fact that the company is furnishing the information for the year 1956, even though it is not requested by the above two interrogatories.

3. What action, if any, has your company taken to prevent "misclassification"?

The steps taken by the company to prevent misclassification are fully described in part I of this statement.

4. If form letters were sent to your policyholders to determine whether or not they were "misclassified," please include a copy of such letter and state the number of letters sent and the number of replies received by State.

Two form letters were used in writing to policyholders, each of which is attached. One form was sent to those persons whose policies had already expired (exhibit VII), and the other was sent to policyholders whose policies were still in effect (exhibit VIII).

5. Please state the number of replies, if any, from policyholders requiring refunds, by State.

6. Please state the total amount and number of refunds, if any, sent to policyholders, by State.

Our company has made refunds, after sending out requests for classification information at the direction of the insurance commissioner of various States as follows:

CONNECTICUT

Letters requesting classification information were sent to all policyholders classified as class II on policies written from July 27, 1953, through October 30, 1955; 2,937 questionnaires were mailed; 1,558 replies indicating misclassification were received and an aggregate refund of $32,098.54 was made to these policyholders. It should be noted that a large part of the period covered was prior to June of 1954 when our company was using only NAUA's form E-1105. It should also be pointed out that no questionnaires were directed to be sent to policyholders classified as class I or III; therefore, the number of such policyholders who should have been classified as class II is not known.

KENTUCKY

One thousand six hundred and ninety-seven questionnaries were mailed and 484 replies indicating misclassification were received. The amount refunded to these policyholders amounted to $13,883.58. As directed, the questionnaires were sent only to class II policyholders whose policies were in force between January 1, 1954, through December 31, 1955. Attention is called to the fact that most of the policies written prior to June of 1954 were in force on January 1, 1954, so that a great part of the investigation was made in respect to policies written prior to June 1954, when the company was using NAUA's form E-1105. No questionnaires were sent to class I and II policyholders.

KANSAS

The company sent 71 questionnaires and received 7 replies indicating misclassification. The amount of the refund was $57.44. The direction was to send questionnaires to all class III policyholders whose policies were in force between January 1 and June 30, 1955.

MARYLAND

Two thousand three hundred and forty-two questionnaires were mailed and 653 replies indicating misclassification were received; $19,634.17 was refunded. The instructions were to send questionnaires to class II policyholders whose policies were written from January 1, 1954, through December 31, 1955. Here again, the inquiry covers policies written prior to the use of the June 1954 questionnaire. It is also pointed out that no questionnaires were sent to class I and III risks to determine whether any of such risks were actually class II.

MASSACHUSETTS

Three hundred and thirty-two questionnaires were mailed; 147 replies indicating misclassification were received, and $3,066.83 was refunded. The direction was to send questionnaires only to class II policyholders whose policies were written from August 23, 1954, through December 31, 1955.

MISSOURI

Five hundred and two questionnaires were mailed; 154 replies indicating misclassification were received and $7,303.06 was refunded. The instruction was to send questionnaires to class II policyholders whose policies were in force between January 1 and December 31, 1955. Thus, questionnaires were sent to a number of policyholders whose policies were written prior to the use by the company of the new questionnaire.