requires a considerable number of years to go from a builder of single family homes to a contractor capable of handling a veterans' hospital construction program or anything substantial in between.

What makes the picture complex is the fact that our society, through government, has determined that it would be desirable to accelerate the progress of small contractors, especially where they come from minority groups in the urban areas. Accordingly, many Federal programs urge or even require indigenous contractors be used for substantial parts of majority building programs.

We are all for it, however, Government projects have traditionally required that contractors be bonded in order to protect the public from failure of performance. When this traditional requirement is maintained while attempting to circumvent tradition in the employment of contractors, we develop an impasse.

It ought to be rather obvious that the incidence of failure to perform will necessarily be much greater than normal where contractors are utilized who do not have experience on jobs of substantial magnitude. As we see it, the insurance companies have not in any way changed their bonding requirements. The change has been in the situation of the contractors who are to be bonded. The fact that the small contractor is unable to get a bond today is no different than it would have been 20 or 40 years ago. We suggest that the appropriate answer to this problem is to devise means of handling these jobs without requiring bonds.

If we recognize that there must inevitably be some costs involved in a social program, then a means can be developed for encouraging a small contractor without seriously endangering the projects under construction and without getting involved in a complex subsidized insurance bonding program.

One way of approaching this matter would be to designate certain jobs or parts of large projects as jobs to be handled by small indigenous contractors. The Federal Government should assign a supervising architect to each of these jobs and contract for the work on a time and material plus profit basis. The supervising architect could provide the expertise necessary to see that the contractor approached the job properly and the supervision necessary to assure that the job is not done in a wasteful manner.

Advance payment of part of the contract price would enable the small contractor to meet his payroll and his early expenses, thereby avoiding the working capital dilemma. In all probability, these jobs would cost a little more handled in this manner than might be possible under a traditional low bid approach.

However, this additional cost would be attributable to the cost of achieving a desirable, social result-and accelerated growth of small minority businessmen. Our position on this subject is substantially in accord with the conclusions published by the FIA in July of this

year.

Availability, I think, is a matter that we of the department of insurance can be helpful in. We do not make insurance available, we are not the agent or broker obviously, but we can be helpful.

I have for the committee's information our address, so that you can be aware of where we can be located in matters of this type. Ånd I also have addresses and phone numbers of the other involuntary

market resources that we have here in Illinois-the FAIR plan facility of the Illinois insurance plan for assigned risks under all the assigned risks for workmen's compensation.

I will submit them to add to the record. They will be useful to you. (The statement follows:)

STATEMENT OF HON. JAMES BAYLOR, DIRECTOR OF INSURANCE, STATE OF ILLINOIS

INSURANCE AND THE SMALL BUSINESSMAN

The small businessman in Illinois, like his counterparts across the country, requires a considerable variety of insurance coverages in order to protect himself and his business from financial calamity. Depending on the size and nature of his business, he will be involved in insurance transactions ranging from group life and accident and health insurance to fire insurance, general liability insurance, workmens compensation insurance and fidelity or surety bonds. In recent years the availability of some of these coverages has diminished in many of the older, deteriorating areas of our cities. Insurance against loss from fire and related perils, crime insurance, auto insurance and even workmens compensation insurance have sometimes been difficult to purchase. These circumstances have arisen generally because of changes in our communities and in our society. It must be quite obvious to all that insurance companies do not decline to do business if they feel the business has the potential for profit. The principal factors which have caused insurance companies to tighten their markets are deterioration of physical condition of large sections of the community, a change in the attitude of the public toward law enforcement authorities, and a drastic increase in the crime rates of our inner cities.

In recognition of the importance of the small businessman to the present and future stability of the community, programs have been established to encourage the small businessman by making some essential insurance coverages available at rates which he can reasonably afford.

Both auto insurance and workmens compensation insurance have long been available through assigned risk plans where the voluntary market fails. In the past two years FAIR plans offering basic property insurance have been established. In Illinois, our FAIR Plan has issued over 40,000 policies and offers vandalism and malicious michief coverage in addition to the basic fire and extended coverage policies.

Two areas of insurance availability which are currently undergoing considerable study are burglary and theft coverage and surety bonds for small contractors. These are two kinds of insurance that are substantially unrelated to each other. I will attempt to outline the situation as we see it in Illinois on each of these lines of insurance.

Crime insurance

Burglary and theft insurance was never a widely purchased coverage. It usually had to be sold by the agent rather than requested by the policyholder. Burglary and theft has been included in various package policies such as the homeowners, commercial multi-peril, special multi-peril and some inland marine forms. In recent years, as the incidence of burglary and theft has drastically increased in the urban areas, there has been increasing demand for burglary and theft coverage. However, the insurance industry has been unable to fill the need for many small businessmen because of the readily apparent difficulty in establishing rates high enough to provide the coverage at a reasonable profit or break-even level.

The Small Business Administration conducted an extensive study which came to the conclusion that this coverage could not be provided under traditional methods of rating and marketing. All who have considered the problem reached the conclusion that if crime coverages are to be offered to the small inner city businessman, it must be under some form of subsidized program. We are in general agreement with the findings and recommendations published by the Federal Insurance Administrator in July of 1970. The Federal Insurance Administrator recommends that each state determine the extent of the problem and the extent of the need for a solution and cope with the problem at the state level. We are currently considering the various alternative approaches to this problem and we expect to recommend legislation to the Illinois Legislature when it convenes in January of 1971.

Construction bonds

The problem facing a small contractor who seeks to be bonded for a particular job is both simple and complex. It is relatively simple in the context of normal bonding procedures. When an insurance company provides a bond for a contractor, the company is guaranteeing a number of things. It guarantees the ability of the contractor to bid, schedule and perform the job in accordance with the contract. It guarantees that the job will be done even if the contractor, either through underbidding or unfortunate subsequent developments, suffers a loss on the job rather than realizing the expected profit. Normally, there is no way for an insurance company to determine that this guarantee should be issued except by reviewing the financial condition of the contractor and his experience in handling earlier tasks. The small minority contractor generally does not have adequate working capital or previous experience to qualify for a bond on a large project.

The way in which a contractor generally grows to the stage where he does qualify is to take on jobs fractionally larger than those he has done before and to accumulate profits. This necessarily requires a considerable number of years to go from a builder of single family homes to a contractor capable of handling a veterans' hospital construction program. What makes the picture complex is the fact that our society, through government, has determined that it would be desirable to accelerate the progress of small contractors, especially where they come from minority groups in the urban areas. Accordingly, many federal programs urge or even require indigenous contractors be used for substantial parts of major building programs. This is a development which we find commendable. However, government projects have traditionally required that contractors be bonded in order to protect the public from failure of performance. When this traditional requirement is maintained while attemping to circumvent tradition in the employment of contractors, we develop an impasse. I ought to be rather obvious that the incidence of failure to perform will necessarily be much greater than normal where contractors are utilized who do not have experience on jobs of substantial magnitude. The insurance companies have not, in any way, changed their bonding requirements. The fact that the small contractor is unable to get a bond today is no different than it would have been 20 or 40 years ago. We suggest that the appropriate answer to this problem is to devise means of handling these jobs without requiring bonds.

If we recognize that there must inevitably be some costs involved in a social program, then a means can be developed for encouraging a small contractor without seriously endangering the projects under construction and without getting involved in a complex subsidized insurance bonding program.

One way of approaching this matter would be to designate certain jobs or parts of large projects as jobs to be handled by small indigenous contractors. The federal government should assign a supervising architect to each of these jobs and contract for the work on a time and material plus profit basis. The supervising architect could provide the expertise necessary to see that the contractor approached the job properly and the supervision necessary to assure that the job is not done in a wasteful manner. Advance payment of part of the contract price would enable the small contractor to meet his payroll and early expenses, thereby avoiding the working capital dilemma. In all probability, these jobs woud cost a little more handled in this manner than might be possible under a traditional low bid approach. However, this additional cost would be attributable to the cost of achieving a desirable, social result-an accelerated growth of small minority business. Our position on this subject is substantially in accord with the conclusions published by the Federal Insurance Administrator in July of 1970.

Mr. KLUCZYNSKI. Thank you very much. Mr. Baylor. Where are you from? Where is vour residence?

Mr. BAYLOR. Í live in the fair town of Wilmette, sir.

Mr. KLUCZYNSKI. You are an impressive witness; you are one of the finest witnesses I have ever heard. I want you to know that.

This is not a campaign speech, I wouldn't campaign in Wilmette. Mr. BAYLOR. I was going to say, I am acquainted with your brother; our children have been in school with his children.

Mr. KLUCZYNSKI. I just want to ask you one question. In your statement, I believe it was page 3, third line from the bottom, it says

that the small minority contractor generally does not have adequate working capital or previous experience to qualify for a bond on a large project.

Well, when will he be eligible to be able to get a bond? If he had no previous experience, how can he qualify for it?

Mr. BAYLOR. Well, it is not

Mr. KLUCZYNSKI. In our experience we find that a small businessman, that we probably helped 10 or 12 years ago, today is a big businessman.

Mr. BAYLOR, I think it is a lack of adequate experience rather than the lack of experience, period.

Mr. KLUCZYNSKI. Óh, I agree with you there, but we are trying to find out how we can get this man to become a big man in 10 or 15 or 20 years, if we don't give him a hand now, don't give him the opportunity.

Mr. BAYLOR. I think it is not so much the lack of opportunity as it is simply several factors come to bear together.

One of the reasons he doesn't get enough experience is that he doesn't have the adequacy of capital to move on to other jobs. By the time he finishes one job and the money is held back on that, this is impairing his capital so he really has difficulty in bidding for the next job.

This is the reason we are suggesting on Government jobs there be an advance to him on the project he is undertaking, or a more rapid payment to him on the job he has completed. These minority contractors, as we have been informed frequently, just don't get paid in time to move on to a new job.

Mr. KLUCZYNSKI. I agree with you wholeheartedly. That is the situation as of now. But what can we do to make that small businessman a large businessman in the next 15, 20 years? We have to give him a start somewhere, somehow, and I am very, very much impressed with your testimony this morning.

Mr. ROE. Getting a loan is not going to help him in this particular situation. The problem is that he needs equity capital; he needs the assets, and in order to get a bond he needs equity and not specifically a loan. Isn't this his particular problem in that area?

You are saying that the Federal Government is requiring more and more work for the indigenous contractor and yet he can't get the contract without the bond. The old "catch-22" situation; you can't get the experience without the bond and you can't get the bond without the experience.

Mr. KLUCZYNSKI. Mr. Baylor, I too want to thank you for being here to testify this morning on this problem of the surety bond.

Yesterday we had some testimony from representatives of Harper Court and other people who are in the so-called high risk area and they at least seem to feel that the FAIR plan wasn't working because they said that insurance companies were able to draw red lines. And if you happened to be in the red line area you were a high risk and in many instances weren't able to get it.

Would you explain the Illinois system? I would like to understand whether these insurance companies can arbitrarily exclude certain

areas.

Mr. BAYLOR. People accuse me of playing with words. The answer is yes, they can, but they may not.

Mr. HORTON. I think that is the actual situation.

Mr. BAYLOR. Bill Gibson, who is the assistant director, has been our supervisory relationship to the FAIR plan. He is intimately acquainted with the details of the operation, not only of the FAIR plan itself, but the companies in the voluntary market.

If I may, I will refer the question to him.

Mr. KLUCZYNSKI. I would be glad to have you answer it.

Mr. GIBSON. Yes; I am William Gibson, assistant director of the Department of Insurance, State of Illinois.

Your question is a good one, and I think the answer is, yes, in our State and as far as I can see in any State in the country, we opt insurance under the private enterprise approach and an individual company, like any individual businessman, may decide that they don't want to do business in a particular area. And as a practical matter, there isn't anything currently on the books anywhere that you can do to stop this decision.

Now, if this creates a problem for the people in the area, then the various levels of government have a responsibility to do something about it, and that is what the FAIR plan is. In other words, yes, some companies probably do redline or delineate areas in which they don't want to do business or in which they will look at the business very closely; in other words, being ultraselective so that they might write business in the area but not the average risk, only the much better than the average risk.

In any event, this leaves a lot of people without the ability to get adequate insurance in the voluntary market.

The answer to this is the FAIR plan. The State of Illinois has said the industry must create a FAIR plan to provide adequate fire and extended coverage to people in these areas. So individual companies may not decide to do business there but they must participate in the FAIR plan, which means they are doing business there involuntarily. Mr. HORTON. We have testimony from representatives of a pawnbroker association and also from small businessmen about their problems; how does it happen that they are not able to get insurance in these areas?

Mr. GIBSON. Well, the fact is that they are able to get fire insurance and extended coverage insurance and vandalism and malicious mischief coverage in those areas. It seems tremendously difficult to get the word around. We have passed out thousands of brochures about this program, advertisements, paid ads, have run ads in community newspapers, in the Chicago Defender, extensive efforts have been made to let people know that the FAIR plan is available. But, you know, like they say in the Army, there is always somebody who doesn't get the word and when we hear about it we tell them about it.

And I think to the extent that nobody tells them that there is help, they may feel there isn't any. But the FAIR plan is there and it is working. I believe remarkably well in Illinois, in terms of providing property insurance protection at reasonable rates for virtually everybody who has a problem in the outside market.

Mr. HORTON. You do have some supervisory control over insurance companies in the State of Illinois; do you not?

Mr. GIBSON. We have regulatory control, sir. Jim talked about playing with words, there is a fine line between supervising and regulating, I think.