Would you raise your right hand?

Do you solemnly swear that the testimony you are about to give in. this hearing shall be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. BARNARD. I do.

Senator MONRONEY. Thank you very much. You may proceed.

TESTIMONY OF KENNETH BARNARD, CHAIRMAN, COMMITTEE ON INSTALLMENT CONTRACTS, ASSOCIATION OF BETTER BUSINESS BUREAUS, INC.

Mr. BARNARD. Mr. Chairman, members of the Subcommittee on Automobile Marketing Practices, the attention of the Subcommittee on Automobile Marketing Practices of the Committee on Interstate and Foreign Commerce, United States Senate, is respectfully directed to a scheme for muleting individual collision-insurance policyholders on a scale well-nigh incredible. Examiner Whitesides of the Texas Board of Insurance Commissioners has estimated the take will equal $25 million. Some other authorities concede that "guesstimate" may prove much too small.

When one's collison-insurnace policy on his automobile expires, or is first taken out, it is usual to inquire if he has anyone in his family under 25 years of age who will drive the car. Experience has proved that those under that age have higher accident records and, hence, involve greater risk. A simple questionnaire is attached to the policy application.

One has merely to check that class in which he belongs. If he has drivers in his family under 25 years of age he belongs properly in class II. If he has not, he is entitled to be cataloged in class I. Class II carries a substantially higher premium of a penalty nature. In collecting that penalty premium willy-nilly from thousands of car purchasers, wholly without justification, lies the basis of this plan. Thus another important segment of automobile time financing has devised an even more fruitful plan for fleecing the automobile buyer than was the finance "pack," as previously exposed.

Not more than 20 percent of all collision risks properly belong in class II. Nevertheless, in this scheme up to 80 percent were arbitrarily put there, according to the transcript of the Texas hearing, and the higher premium regularly collected from them. Overcharges ran as high as $125 on a 3-year policy, according to Thomas J. Kelleher, Jr., principal insurance examiner of the Insurance Department of the State of Massachusetts.

How was all this done? No rating information from the finance agency or the dealer, for the finance agency's insurance affiliate, was had or requested. Hence, at least six known insurance concerns took unto themselves overcharges to which they had no claim, either moral or legal. These six companies, all affiliates of national finance companies, are:

Calvert Fire Insurance Co. and Cavalier Insurance Co., both affiliates of Commercial Credit Co.

Emmco Insurance Co., affiliate of Associates Discount Corp.

Industrial Insurance Co. affiliate of American Installment Credit Corp.

Marathon Insurance Co., affiliate of Pacific Finance Corp. Service Fire Insurance Co., affiliate of Universal CIT Credit Corp. Reports from Connecticut, Massachusetts, New York, and some other States, indicate that additional but unnamed companies may likewise be involved in these misclassifications. However, this involvement could be on a much smaller scale and, in some instances, possibly unintentional.

It should here be stated that the total number of insurance companies, which profited from such secret windfall profits, nonetheless seems comparatively small. From the outset, too, one of the Nation's largest national finance companies scrupulously refrained from becoming embroiled in this clever money-grabbing device. The Nation's better business bureaus lack so much as a scintilla of evidence to connect this company and its insurance affiliates with this unparalleled plan.

This committee believes the whole scheme was made possible of consummation from connivance among certain automobile dealers, certain finance companies, and their insurance affiliates, as named herein. The plan exposes the finance pack in its most devastating form.

According to Best's Insurance Reports, the Service Fire Insurance Co., insurance affiliate of the large and powerful CIT interests, paid them $4,750,000 in dividends in 1955 on a capital stock figure increased in 1940 to $2 million. Hence, on this 1940 capitalization, before possible surplus adjustments, dividends were at the rate of 237.5 percent per annum.

Apparently first challenged and exposed in Texas by the Texas Board of Insurance Commissioners, the response of the general counsel for Universal CIT, who also represented its affiliate, Service Fire Insurance Co., at the outset was both uncooperative and callously indifferent to the public interest. He argued before the Texas Board of Insurance Commissioners [see transcript of those proceedings, held in the fall of 1955] that if any overcharges had occurred they were refundable only to the finance company, which had ordered the insurance from its own insurance affiliate for the policyholder.

Thus even when the plan had been uncovered by the Texas Board of Insurance Commissioners, which cooperated effectively with the Association of Better Business Bureaus, Inc., in revealing its amazing details, counsel for Service Fire Insurance Co. recommended these overcharges merely be transferred from one pocket to another. Taken from the policyholders, he said they would be refunded only to his other client, Universal CIT, itself, not to the policyholders who had suffered the loss.

But, while at the beginning brazenly arguing thus, counsel for Universal CIT and Service Fire Insurance Co. unequivocally yielded, when the Texas Board of Insurance Commissioners ordered refunds to policyholders affected be made forthwith. That body did not agree with his philosophy that the "time price" of an automobile legally could include a flat figure for insurance, regardless of the facts surrounding the individual insureds. The courts, he had said, had made this clear. But he made no attempt to try this issue in any court, in Texas, or so far as is known, anywhere else.

In the next breath, however, counsel for these two corporations denied to the Texas Board of Insurance Commissioners that he was advocating insurance coverage be averaged as to cost-a procedure.

expressly prohibited by law. He likewise denied that his clients were giving insurance free, which the law likewise proscribes and prohibits. Meanwhile, Service Fire was being placed on probation in Oklahoma, and had come under official scrutiny in most all of the 48 States. A vast national scandal at least was being uncovered. The truth was hitting home.

States ordering large and comprehensive refunds of overcharges included Arkansas, Connecticut, Indiana, Kentucky, Massachusetts, Michigan, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, and Texas, merely for example.

"Overcharges" resulting from "misclassifications" were really obtaining money by false pretense-money taken from innocent car buyers who, because the facts had been so cleverly concealed, did not even complain about them, to better business bureaus or to any other agency, official or quasi-official.

Senator MONRONEY. By that you mean that there were refunds ordered in other States by the State insurance commissioners, but these are only examples of where some of the outstanding work was done on getting this money back?

Mr. BARNARD. That is correct.

Senator MONRONEY. I didn't want to interrupt but I thought that should be made clear.

Mr. BARNARD. That is correct.

Senator MONRONEY. There were other States involved?
Mr. BARNARD. Yes.

New Jersey's commissioner of insurance previously had said that, because underwriting information had been retained at the finance company or bank, and not forwarded to the home office of the company for proper classification, by the company's underwriters, the commission had thought the omission of complete data was deliberate.

Obtaining elementary rating information, of course, is essential to the routine business of every legitimate underwriter. Naturally, it is essential, too, to the insurance buying public and to the insurance. buying public's pocketbook.

Massachusetts insurance commissioner has described the scheme of misrating consumer automobile collision insurance risks as―

a combination of slipshod and unconscionable practices, perpetrated jointly by a number of automobile dealers, financing institutions, and their affiliated insurance companies.

Rates which any insurance company may legally charge are imposed or approved by the various State insurance commissioners.

Although Mr. Allan E. Backman will read to your honorable committee a copy of the resolution, passed by the National Association of Insurance Commissioners in December 1955, that action could not be binding on any of its constituent members. Some insurance commissioners frankly so indicated, from the very outset. Nevertheless, Mr. John L. O'Brien, also of this committee, will present further documentation and proof of the widespread existence of this scheme to overcharge.

Calling the offer to refund "fair and reasonable," the resolution of the National Association of Insurance Commissioners covering overcharges which had been discovered, was specific. In effect, most of the insurance commissioners in that resolution said only to the

offenders: "Take your hand out of their pockets and return the money you have obtained under false colors."

This committtee, therefore, considered such a resolution a whitewashing of these practices. According to the resolution, refunds were to be made only on those policies in force on June 30, 1955. In that resolution, too, was mentioned the existence of a "grave question of law," as to who was entitled to the return of "overpayments"-exactly as previously argued by counsel for Service Fire. How about those victims who were overcharged previously? Were they merely to be forgotten or ignored?

Even the implications of the resolution had to be "smoked out" by the better business bureaus. A questionnaire, sent to the insurance commissioners of every State in the Union-and I might add Hawaii and Alaska, too.

Senator MONRONEY. The District of Columbia, too?

Mr. BARNARD. That is right, the District of Columbia, too, by this committee on February 24, 1956, asked nine direct questions. They

were:

1. Did not the overcharges, to which such resolution referred, concern misappropriation of funds collected from policyholders, instead of "possible misclassification" of some insureds, charged premiums in excess of the applicable rates?

2. Does the resolution cover refunds only to insureds having policies in force as of June 30, 1955?

3. If so, how about all policyholders having policies written since the issuance of authority for the "penalty" premium some years ago? Will they receive refunds, likewise?

4. What company, or companies, are involved in your present investigation?

5. What is your estimate of the total amounts collected without legal warrant, as described in the resolution?

6. Why is there a "question of law" in most States, as to who may be entitled to the return of any such overpayment?

7. Why, in your judgment, are only those "insurers engaging in the business of automobile physical damage insurance covering financed cars" involved?

8. Isn't it a fact that "one of those insurers which may now have misclassified assureds" has admitted it, and now claims to be effecting refunds to policyholders affected?

9. Why, in your judgment, should any "settlement" reached excuse, in effect, obvious violations of law and, if it does excuse them, how can such "settlement" be deemed "fair and reasonable"?

Although replies, of course, were not obligatory, these questions, which were asked in the public interest, brought:

1. Forthright replies from less than half of the insurance commissioners addressed.

2. Evasive or unrevealing responses from a few.

3. No answers from the majority.

An unwillingness to disclose all the facts-and a certain reluctance to face them-became evident from a majority of these public officials. Such reluctance and secrecy, in many official quarters, still persists.

Some officials, like the top insurance executives of Connecticut, Massachusetts, Michigan, Oklahoma, and Texas, merely for example,

cooperated zealously with the better business bureaus in their long and arduous investigations.

Most insurance officials, nevertheless, declined to reveal the names of specific offenders. The recent release in New York State is no exception. In some States, refunds aggregating millions of dollars have been-or are being-made. Refunds of "overcharges" discovered in New York total $1,013, 926, according to the recent report.

These refunds, of course, go only to those who claim them, among the thousands of innocent, overcharged policyholders. Those thousands of victims, who could not be located or who did not answer the questionnaire which had been ordered sent them, never received the refunds to which they are entitled. The offending companies merely retained them. They still retain them. The total of such retentions aggregates many thousands of dollars-perhaps millions.

Were these overcharges, these so-called misclassifications, intentional? The facts seem to provide the answer.

It being assumed one intends the legal consequences of his own acts, these facts are persuasive. Perpetrated in thousands of cases, in precisely identical manner, by the same offenders, the scheme shows no other conclusion can be reached, except that these practices were intentional and deliberate. The scheme would appear to be wellnigh universal, throughout the United States.

Senator MONRONEY. By that you mean for the company you have investigated?

Mr. BARNARD. That is right.

Senator MONRONEY. It wasn't universal as to all of the finance companies?

Mr. BARNARD. No, I think I said that.

Senator MONRONEY. You did before, but I wanted to connect that up with that particular paragraph-those practicing these misclassifications.

It was not isolated to any one State among those companies?
Mr. BARNARD. That is correct.

Senator MONRONEY. I just wanted to make that clear.

Mr. BARNARD. That is right, it was practically nationwide among those companies. The better business bureaus know of but one or two States which apparently were not involved.

The State of Illinois, for example, would give no information on the situation to anyone. Its director of insurance, although prodded by the press and by the Chicago Better Business Bureau, elected merely to keep silent. Various excuses were offered-but no reason. Only within the past few weeks has a new director of insurance been appointed. He promises the Chicago Better Business Bureau full cooperation.

And may I interject, Senator, here to say that on Friday, 3 or 4 days ago, I received a personal call from Director of Insurance Gerber of Illinois

Senator MONRONEY. That is the new insurance commissioner?

Mr. BARNARD. That is right, and two members of his staff. He informed me that already in Illinois, although his predecessor had denied that there were any misclassification, so-called, at all-that the following companies have refunded the following amounts:

Calvert Fire, $70,150.10, Emmco, $4,432.35, Service Fire, $72,364.70, or a total of $126,947.15.