Space Insurance – Lecture 2

26 January 2010

Neil StevensLegal Counsel – SpaceAtrium Space Insurance Consortium

2

Insurance and Wager Distinguished

3

The Origins of Insurance

Merchants engaged in shipping using the London mutuality concept

Edward Lloyd's coffeehouse around 1688

Merchants sharing in taking risk associated with carriage of goods by sea

Depended on reliable knowledge of shipping, weather and good practice

4

Modern Lloyd’s Market

Lloyd’s today is located in Lime Street

Billion dollar business with sophisticated players

Syndicates offer insurance capacity

Syndicate used to be individual investors until 1992

Reinsurance markets collapsed causing number of syndicates (approx 500 to reduce to about 100)

Now corporate investors

5

The Origins of Insurance at Lloyd’s

Is insurance regulated gambling?

There is an element of fortuity

Losses could be considered bad luck

Some premium rating could be considered a gamble

Greater regulation

Exposures tightly monitored

Solvency requirements are higher

Greater diversity

Smarter reinsurance structures

6

Wagers and Gambling

Consideration is the ‘stake’

Both parties are engaged in taking the risk

In a wager, one party wins and one loses

The stake is returned if the wager is won

One party bets that an event will happen, the other bets against it happening – desired outcomes are different

The parties and the event are seldom connected

Until 2005, gambling contracts were unenforceable in a court of law

7

Wager compared to Insurance

Consideration is the ‘premium’

Insurance involves transferring the risk from the party that would have the risk to one who would not

Insurance nether party should lose– Premium rate should reflect the burn cost + a profit margin

The premium is not returned if the risk runs free of claims

The premium charged is the statistical chance of the event happening [same]

The party transferring the risk MUST have an insurable interest

The contract is enforceable in a court of law

The contract is subject to principle of utmost good faith

8

Wager compared to Insurance

WAGER

GAMBLER GAMBLER

Wager is struck within this range

INSURER INSURED

Cover

Premium + risk

INSURANCE

9

Insurable Interest and Wager at Lloyd’s

10

Insurable Interest

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What is an Insurable Interest?

Historical basis of insurance lies in marine insurance

English law based on statute and precedent

Statute under English law – Life Insurance Act 1774– Marine Insurance Acts of 1746 and 1778– Codification into the Marine Insurance Act 1906

Section 5 of the Marine Insurance Act 1906 defines insurable interest

“(1)Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

(2)In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due

arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

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Insurable Interest

Gain a benefit from preservation of the subject matter or suffer a disadvantage if it is lost

Distinguish between indemnity and non indemnity insurance

Indemnity

Recover the actual amount lost

Liability and Property Insurance

Non- indemnity

Recover a fixed sum

Life personal accident and critical illness

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Insurable Interest - Examples

1. I want to insure my car against theft?

2. I want to insure your car against theft?

3. I want to insure my company’s operations against making a loss?

4. I want to insure my own life against my death?

5. I want to insure your life against death?

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Insurable Interest – Indemnity Insurance

Meaning of ‘indemnity’: – Compensate– make good– guarantee

Before UK Gambling Act 2005, law required that anyone taking out property insurance (contract of indemnity) had to have a legal or equitable interest in the property

Used to be the case that contract unenforceable if link was absent

Section 335 of the 2005 Act inadvertently removed the requirement “the fact that a contract relates to gambling shall not prevent its enforcement”

Indemnity principle still requires policyholder to have suffered a loss otherwise cannot be indemnified

Doctrine of insurable interest is under review

Australia have abolished altogether

15

Characteristics of Satellite InsuranceIN

DE

MN

ITY

NO

N- IN

DE

MN

ITY

HIGH

LOW

HIGH

LOW

Critical IllnessBuildings

Satellite

Car Hire Cover Business Interruption Cover

Mortgage Protection

Life

Contents

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Risks Typically Covered

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Risk Matrix

LAUNCH

L - 3 seconds

(Intentional Ignition)

L - 30 days

L - 2 years

L + 30 minutes

L + 90 days

L + 12 months

Timeline

Asset pre-launchAsset launch and in-orbit (operator)

Third party liability

Loss of Service

Launch phase

Post separation phase Post in-orbit testing phase

Satellite manufactureTransit / integration

Loss of revenueAstronaut / Passenger

personal accidentAstronaut / Passenger

No flight

Asset in-orbit (operator)

Asset launch and completion of IOT (manufacturer)

Manufacturers performance incentives

Terminated ignition

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Pre Launch Insurance

All risk of physical loss or damage

storage, transit and integration with launcher

Rated between 03% and 0.5%

Underwritten by marine cargo market

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Pre-launch Covers

Placed in the marine cargo markets which means it is subject to the

peculiarities of Marine Insurance Law – Most notably the exclusions– Process Clause excludes cover where loss is due to a process of

manufacture– Date Recognition Exclusions

Cover is for all risks of physical loss or damage– Normal risks associated with property cover– Transit risks – Integration and assembly with launcher– Assembly through to launch or lift off … no gaps

20

Satellite Insurable Typical Interests Covered under Launch Policy

Extra Expenses

Covers the riskiest part of the mission

Cover to reinstate cost of …

Satellite

Launch service costs

Insurance premium

Launch insurance premium calculated on the insured items

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Launch Insurance

Third largest mission cost

Risk of loss rated between 10% and 20% - depends on satellite / launch vehicle combination

Historical ‘burn rate’ 1 in 7

Covers satellite from launch through in orbit testing and up to 365 days after launch

Placed in specialist insurance market

Communications satellites generally covered for between USD200m to USD300m

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In-Orbit Insurance

LAUNCHSeparation

L + 90 days

L + 12 months

Timeline

Asset Life

IOT

In-Orbit InsuranceLaunch Insurance

23

In-Orbit Cover

Placed in specialist space insurance market

Cover for loss damage or failure of the satellite on a fixed value basis

Losses determined by telemetry data or lack of it

Rates are in region of 1.5% for 12 months cover depending on satellite health and type

Insurance Capacity is high which is presently causing rates to fall

24

Third Party Liability Insurance

25

Third Party Liability Insurance

Red-hot piece of space junk crashes through pensioner's roof16th October 2009

Mr Peter Welton of Hull

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Third Party Liability Insurance

Basis of cover is to protect insured parties from liability claims for damage caused by space related activities

Cover is for the consequences of an occurrence, typically “to indemnify the Insured for all sums that it becomes legally obligated to pay due to an occurrence that causes death or personal injury to any third party”

Cost is relatively cheap (0.1%) because there are relatively few accidents

Cover generally provided for the initial 12 months through the launch service provider

Cover for satellite life depends on obligations on the operator and attitude to risk

27

Indemnity and Insurance

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Space Insurance Risks

LAUNCH

Timeline

Asset launch and in-orbit (operator)

Third party liability

Pre-Launch is indemnity based insurance

• Property insurance

• Satellite only

• Cost to rebuild/repair/re-test

Launch and in orbit insurance is non-indemnity based

• Launch Service Cost

• Satellite cannot be repaired (few exceptions)

• Extra expenses Satellite only

• Cost to build new satellite and launch it

• Insurance costs

TPL is indemnity based insurance

• Settling claims

• Paying lawyers fees

• Unquantifiable in advance

Asset pre-launch

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Indemnity Based Space Risks

Pre-launch Scenario– Satellite is damaged at facility– Claim is based on physical

loss or damage to the satellite– Policy may be held be

manufacturer or operator depending on contract terms

– Basis of claim is to put the satellite back into its pre-loss state

– Indemnity in this situation is based on repair or replacement

30

Non – Indemnity Based Space Risks

Titan 4

Long March 3B

Sea Launch

Purpose of the cover is to fully reinstate the insured party

31

Difference between Indemnity and Non Indemnity

Policy language will be different– “to indemnify the Named Insured for Partial Loss”– “to pay the Named Insured for a Partial Loss”

Significant difference between what you may get back as a purchaser of insurance particularly in relation to Constructive Total Loss (CTL)

CTL point in space policies is usually 75%– Available communications capacity is reduced to below 25%– Can a satellite operator provide a meaningful commercial service with

only 25% capacity remaining– Eventually need to replace the impaired satellite – Cannot buy 3 quarters of a satellite

32

Space Risk Constructive Total Loss

CTL points are included to accelerate the loss payment to 100%– Indemnity policy would only pay for what is actually lost– CTL point of 75% comes with a quid pro quo

Insurers acquire salvage rights Could mean impaired satellite is sold to a competitor

Alternative is to have a higher CTL point (90%)– Insurers generally agree to relinquish salvage rights– Operator can continue to offer service and earn revenue– Operator may have regulatory requirements to maintain

33

Satellite Insurance Profile of Risks

Time

LaunchConstruction End of Life

Full Cover

Satellite only

Incentives

Depreciation based on revenues

Depreciation based on

asset value

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