Will you solemnly swear the testimony you are about to give in this hearing will be the truth, the whole truth, and nothing but the truth? Mr. BACKMAN. I do.

Senator MONRONEY. Thank you, Mr. Backman. I appreciate the time and effort that you have expended in bringing this complaint and matter before our committee, and we are delighted to have your

statement.

TESTIMONY OF ALLAN E. BACKMAN, EXECUTIVE VICE PRESIDENT, NATIONAL BETTER BUSINESS BUREAU, INC.

Mr. BACKMAN. Senator Monroney, Senator Payne, the National Better Business Bureau is a nonprofit organization which business established in 1912 to protect itself and the public from business practices which are fraudulent, misleading, or unfair, where such practices exist on a national or regional scale. Expressing the will of legitimate business to deal fairly with its customers, the bureau thereby seeks to build and maintain public confidence in business.

It is impossible to achieve this objective without removing those things which cause public distrust of business. The chief objectives of the National Better Business Bureau have therefore been: (a) To discourage and eliminate from the buyer-seller relationship practices which cause legitimate consumer complaints; (b) to strive for better consumer satisfaction by encouraging accurate representation of products, securities, and services. In these endeavors, it cooperates with the 108 local better business bureaus in the United States and Canada, and serves them on national problems affecting their communities. Each bureau is autonomous, independently financed and governed, but all cooperate in the public interest.

The national bureau is a member of the Association of Better Business Bureaus and serves on a number of association committees which are concerned with problems of both national and local significance. For example, Mr. Kenneth B. Willson, our president, or his predecessor, have been members of the association's committee on installment contracts since its inception.

The collection, from American motorists, of millions of dollars in overcharges resulting from misclassification of collision insurance on financed automobiles was a business practice which it was within the objectives of the National Better Business Bureau to investigate and expose. It existed nationwide, was contrary to the public interest, and vigorous bureau action to combat the practice and help to repair the damage already done was clearly demanded for the protection of both legitimate business and the public.

As. Mr. Barnard has already explained, these overcharges have been based on misclassification of the risks insured and these misclassifications have resulted from failure to obtain elementary rating information from the car purchaser. When purchasing an automobile it is, of course, no more than prudent and a sound business practice to insure the vehicle against financial loss. If the car is purchased on time the dealer, finance company, or bank which finances the unpaid balance, will usually require that, as a minimum, fire, theft, and collision insurance be taken out as protection to itself as well as to the automobile purchaser. The rates which the insur

ance company can legally charge are made or approved by the various State insurance commissions.

In most States, buyers of automobile collision insurance are classified by the insurance departments so that those who enjoy a less hazardous status may buy their insurance cheaper than those who are poorer risks. For example, young people, under the age of 25 years, have more accidents than older drivers. The insurance company is required to pay losses more frequently on insured cars operated by these youthful drivers. In recognition of this fact, most States have established a class I rate for collision insurance where there are no drivers in the insured household under the age of 25 years. Where there are drivers under the age of 25, a class II rate applies. Many States have additional classifications. The premium charge for a class II policy may be as much as 45 percent more than for a class I policy. The overcharge to the car owner who is rightfully entitled to a class I rating but is erroneously placed in class II can be as much as $125.

I do not believe that anyone knows exactly how much money the American public has paid in overcharges resulting from such misclassifications. Testifying before a group of insurance commissioners of Southwestern States at Austin, Tex., on September 20, 1955, Texas Insurance Examiner Washington Whitesides said that he and other examiners had estimated that the total might exceed $25 million. On September 25, 1956, Insurance Commissioner Cad P. Thurman of Kentucky estimated that motorists in that State alone had been overcharged more than $2 million. On January 29, 1957, New York State Superintendent of Insurance Leffert Holz was quoted in the New York Times as estimating that installment purchasers of cars in the Empire State had paid between 5 and 8 million dollars in excess charges.

These figures might appear to suggest that the estimate of $25 million nationally was conservative. However, it should be noted that changes in the laws and regulations permitting insurance companies to charge a higher rate for the more hazardous risks began about 1950, as in New York and Pennsylvania, and have become effective in most States at various times since that date, some of them quite recently. Thus the opportunities to misclassify have been much greater in some States than in others, so that no exact comparisons are feasible. To obtain even an informed estimate of the amount of overcharges nationally it would be necessary to obtain figures from every State insurance commission. The better business bureaus sought this information but did not receive it, save in a few cases.

In this connection, I have prepared an exhibit reproducing the answers of those insurance departments which replied to the questionnaire which Mr. Barnard read to your honorable body. Additional pertinent information which has since come into our possession concerning the situation in the various States is also included in the exhibit which I am submitting with this statement.

Similarly, we are unable to identify all of the insurance companies which have collected the overcharges. Mr. Barnard named six large companies, all affiliates of finance companies, which are known to have been involved. We also know that other insurance companies, some apparently not affiliated with finance companies, have overcharged in

some States, but the insurance departments have declined to divulge the names of these companies.

As to the effect of misclassification on the individual motorist, we can be more explicit. In New York City a motorist entitled to class 1 rating who bought a new Ford Mainliner, financed on a 2-year basis, would be overcharged by $71, if he were wrongly placed in class 2. On a 1957 Buick, purchased under the same terms, the overcharge would be $94. In Massachusetts, according to Thomas Kelleher, Jr., principal insurance examiner, misclassification could result in an overcharge of as much as $25 to $30 per car, purchased on a 1-year basis, $60 to $75 per car on a 2-year basis, and $90 to $125 per car on a 3-year basis.

The first clue that costly misclassification might exist on a widespread scale came during the summer of 1954, when the Texas Board of Insurance Commissioners received information that a number of automobile drivers insured by the Service Fire Insurance Co. were so misclassified. Operating nationally, this company annually insures more than 800,000 cars financed through the Universal CIT Credit Corp., with which it is affiliated. A preliminary investigation indicated that approximately 85 percent of the drivers insured by this company in Texas had been placed in class II.

In his testimony at Austin in September 1955, Insurance Examiner Whitesides stated that nationally, according to the National Association of Insurance Commissioners, only 13 percent of all automobile policyholders in all insurance companies are in class II, whereas 80 percent are in the less expensive class I, with 7 percent in all other classes. I understand that some other sources have figures indicating a somewhat higher percentage in class II and a lower percentage in class I. On January 28, 1957, F. Roger Downey, administrative assistant to the New York State superintendent of insurance, stated that, normally, 30 percent of policies of insurance companies specializing in auto finance accounts should be written under class II conditions. All authorities, to my knowledge, agree that the percentage of car owners entitled to class I rating is substantially greater than those who should be placed in class II.

That there was something wrong with the Service Fire classifications in Texas was obvious. Following a conference with the Texas board, the company sent a letter to policyholders which it had placed in class II, telling them that they might have been misclassified, in which case they would be given a cash refund, and requesting information in proof of such possible misclassification. Less than half of these policyholders responded to the questionnaire, but of those replying, 85 percent were determined to have been misclassified. The company thereupon made cash refunds of approximately $89,000 to those individual policyholders.

Meantime, investigations were also conducted to determine whether other insurance companies were complying with Texas requirements concerning classification of automobile risks and, of 16 to 18 companies checked, 5 were found to have made similar misclassifications. An additional $90,000 was refunded to policyholders in these companies as follows: Calvert Insurance Co., $8,845; Cavalier Insurance. Co., $42,628; Consolidated Lloyds, $14,636; Home Service Casualty Co., $1,096: Marathon Insurance Co., $24,700.

Underwriting procedures were corrected to prevent future misclassifications. An investigation conducted by the Texas insurance board a year later (1955) indicated that the companies previously at fault were properly classifying their risks so that policyholders in that State were getting the rating to which they were entitled. However, during an examination of Service Fire Insurance Co. conducted in New York in the early part of 1955 by the National Association of Insurance Commissioners (NAIC) it became evident that practices leading to misclassification were not confined to Texas but existed on a national scale.

A check of the policies written by this company nationally during April 1955 showed that 26.33 percent of its policies were in class I, 46.04 percent in class II and 27.83 percent in all other classes. Here again, the variance from the national averages was so great that the conclusion that many Service Fire class II policies belonged in class I was inescapable. Further investigations were conducted. According to Mr. Whiteside, they went back as far as 1951 on Service Fire and "the further back we went the worse it was. In St. Louis in 1951, I found as high as 90 percent in class II that should have been in class I; in fact, nearly all in class II, once in a while in class I. The majority should have been in class I."

It developed that Service Fire and the other insurance companies similarly involved had followed the practice of writing class I policies only in those cases where a rating form was attached showing that the policy was entitled to the lower rate. If the dealer or finance company neglected to submit the necessary rating information, the insurance company took no steps to determine the facts, but simply wrote the policy at the higher rate. Obviously, doing business under this theory could be highly profitable to the insurance com

pany.

As the nationwide aspects of the overcharging became known, the National Association of Insurance Commissioners appointed a special committee to study the problem. In December 1955, NAIC adopted the following resolution:

Whereas it has come to the attention of this committee that some insurers engaged in the business of automobile physical damage insurance covering financed cars had, due to possible misclassification of some insureds, charged premiums in excess of the applicable rates; and

Whereas this matter has been receiving the serious consideration of this committee, not only from the standpoint of fashioning measures to prevent any misclassification but also with a view toward effecting the return of the overcharges, if any, and

Whereas there exists a grave question of law in most States as to who may be entitled to the return of any such overpayment, and

Whereas it appears that at least one of the insurers which may have misclassified assureds has, effective as of July 1, 1955, installed new rating procedures on a nationwide basis, which were designed to and in all likelihood will prevent future errors in the classification of insureds, and

Whereas there has now been proposed a settlement pursuant to which the aforesaid insurer will undertake to recheck its rating data in respect of all policies previously written which were in force on June 30, 1955, and on the basis thereof and without resolving the question of law involved, refunds of proven overpayments will be made to the insureds, and

Whereas under the proposed settlement an insured will be entitled to a refund of overpayment by furnishing rating information on a prescribed form properly verified showing that there was an error in his classifications, and

Whereas, the offer of settlement is made without prejudice to the legal rights or contentions of any parties concerned: Now, therefore, be it

Resolved, That it is the sense of this committee that such offer is fair and reasonable; and be it further

Resolved, That this committee recommend favorable consideration of such offer by the several States for which it may be made, unless the laws thereof otherwise provide; and be it further

Resolved, That this committee recommend to the several States that such offer be the pattern for the disposition of all similar situations.

It was quite natural, I think, for better business bureaus to ask why the proposed "settlement" provided for refunds only in the case of policies previously written which were in force on June 30, 1955. What about other policies written some years ago? Should not these policyholders receive refunds, likewise, if they overpaid?

As explained by insurance commissioners, the average policy for the company referred to in the resolution runs for a period of about 18 to 22 months. Hence, checking of persons holding policies as of June 30, 1955, would, in effect, pick up most policies which had been written during the previous 18-month period, that is, back to January 1954, earlier in some cases. Prior to that time, it was stated, rate differentials within the classes involved were not great, and the date limit was also dictated largely because of the unavailability of records going back more than 2 years. I, nevertheless, direct your attention to the fact that this formula provided for no restitution in the case of: 1. Policies written for less than 18 months prior to January 1, 1954, although classification (and the opportunity for misclassification) has existed in the same States since 1950;

2. Policies written for less than 18 months after January 1, 1954, on which payment was completed prior to June 30, 1955; and

3. Policies written for more than 18 months after January 1, 1954, but canceled before June 30, 1955.

The NAIC resolution was not binding or acceptable to all State insurance departments. Some, as in Connecticut, Massachusetts, Kentucky, New Jersey, and Pennsylvania, have stated that they would seek to have all excessive charges returned to policyholders regardless of date of issuance of the policy.

Better business bureaus were also surprised to learn from the insurance departments queried that the grave question of law cited in the resolution appears to have revolved about whether refunds should be made to the finance company or the car purchaser.

This doubt is presumably based upon the legalistic contention that the policy is issued at the request of the finance company, and the money paid the insurance company is the finance company's money. Under this view, any overcharges would be returned to the finance company rather than to the individual. Since the insurance companies known to be getting the overcharges were affiliates of the finance companies, a return of overcharges from insurance companies to finance companies would amount to the parent company taking the overcharges out of one pocket and transferring them to another. Fortunately, for car purchasers, this theory has not prevailed.

The National Better Business Bureau communicated with all six of the insurance companies known to have overcharged, as previously identified, and asked what steps they were taking to make restitution of such overcharges to the insured. In their replies, all of the companies agreed that overcharges had been made and the refunds were

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