Third-party liability insurance and space launches

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  • Third-party liability insurance and space launches

    Joel S. Greenberg

    This article discusses a number of issues related to the US commercial expandable launch vehicle (ELV) Indus- try and government's role In ensuring its compatitlvemms, particularly third- party liability insurance for space laun- ches. The author finds that the space insurance industry has become a major constraint on the commercial develop- ment of space. The future impllcetions are considered of US government in- volvement with the launch services Industry, initially through providing third-party Insurance Itself. The author concludes that, for a stable commercial ELV Industry, it will he necessary for the USA either to establlah fair-trade agreements with other space-capable nations, or to maintain a significant government Involvement to support the industry.

    Joel S. Greenberg is President of Prince- ton Synergetics, Inc, 900 State Road, Princeton, NJ 08540, USA.

    1R.W. Stevenson, 'GE-Madetta satellite deal', New York Times, 27 January 1988. aAIAA, 'US commercial space transporta- tion risk allocation and insurance: an AIAA position paper', AIAA, November 1987.

    The US firms Martin Marietta, McDonnell-Douglas, General Dyna- mics, American Rocket Co, and Space Services, Inc have announced their entry into the commercial expendable launch vehicle (ELV) market. They have expressed concern over the potential 'unlimited' third-party liability that could result from an accident, and the competitive advantage gained by Ariane, Proton and other launch vehicles through government indemnification of claims in excess of a limited amount of customer-provided or paid-for insurance. As a result, the US ELV firms have appealed to the US government to provide indemnification against claims above commercially available insurance and/or to place a legislative 'cap', or limit, on maximum liability. The Space Shuttle's $500 million indemnification level and the Price- Anderson Act (relating to the US nuclear power industry) have frequently been cited as precedents in these appeals.

    The debate now rages with respect to what action, if any, the US government should take to encourage the entry of US firms into the commercial ELV market. While ELV firms appeal for assistance to relieve high risk levels and 'unfair' competitive advantages, they have also indicated that, in the absence of indemnification and/or a legislative cap, they would still enter the market. Martin Marietta has already entered into an arrangement with General Electric involving multiple Titan launches.1 However, in the absence of government indemnifica- tion, ELV commercialization decisions are uncertain and US firms might choose not to compete.

    The American Institute of Aeronautics and Astronautics (AIAA) has prepared a position paper entitled 'US commercial space transportation risk allocation and insurance', a The AIAA has sided with the ELV industry in calling for indemnification and/or a legislative cap on liability.

    The following discussion is presented (a) to bring out facts possibly not previously considered, and (b) to broaden the current debate on third-party liability insurance to include the underlying cause of the problem, and likely future problems which might arise if that cause is not directly addressed. The underlying cause is the differences which currently exist among the ELV government/industry infrastructures employed by nations competing for ELV business.

    0265-9646/88/030211-10 $03.00 1988 Butterworth & Co (Publishers) Ltd 211

  • Third-party liability insurance and space launches

    Background The launching of any commercial or government payload into space involves certain risks. These include the loss of the launch vehicle and/or payload, loss and damage to property and injury to people. In addition, there are pre-launch and post-launch risks. 3

    The insurance industry currently makes available a number of insurance products for the space industry, covering many aspects of space launches and space operations. Space insurance falls into three main categories: liability cover, launch cover, and on-orbit operations cover. Different types of insurance are applicable during different periods of time. The risk period has historically been broken down into the time preceeding launch operations (ie, pre-launch), the time period during launch operations, and the time period during on-orbit opera- tions. Pre-launch insurance is concerned primarily with product liability, damage in transit, and other more or less conventional forms of insurance.

    Launch period insurance includes both launch and liability cover. It covers the performance of the launch vehicle, transfer stage, apogee kick motor and, until recently, the deployment and initial operation of the satellite. The magnitude of claims for damage covered by launch insurance can be well defined and controlled. Liability insurance includes cover for the two classes of liability which may arise from a launch accident: 'first and second-party' liability, and 'third-party' liability. The former is liability for injury or damage to employees and property of the government and/or the commercial space transportation provider resulting from the launch process. The latter, currently the area of major concern to the commercial launch industry, is legal liability to those individuals, corporations, or other entities that had no involvement in the launch. The potential magnitude of third-party damage and resulting claims is not known and thus potentially exposes the ELV industry to unbounded claims.

    On-orbit insurance is applicable during on-orbit operations and covers loss of fuel, power or transponders. Satellite owners are indemnified for loss of revenue because of a malfunctioning satellite or for the cost to replace capability with a new satellite. Liability insurance is also provided for the on-orbit time period. This covers damage to other satellites resulting from collisions in-orbit and damage to third parties resulting from satellite return to Earth.

    The commercial launch industry has indicated concern over the possibility of catastrophic third-party damage and resulting claims that may arise from space launches. 4 This concern stems from the fact that there is always a very small chance of a space launch causing very significant damage. To date no third-party claims have been filed for damage resulting from space launches, and it is estimated that there have been in excess of 10 000 space launches. The extent of possible third-party damage and claims that may result from a launch accident is limitless. Thus every time a launch takes place it is conceivable,

    3Sedowick Space Services, 'Commercial although with little likelihood, that third-party claims may result and space risks: the insurance market and its future development', The Sedgwick Cen- that these claims and resulting awards could exceed the resources of any tre, September 1987. commercial launch firm. 4princeton Synergetics, Inc, 'Federal gov- The commercial launch industry has therefore turned to the insurance ernment provision of third-party liability insurance tospacevehicle users', January industry for protection. However, no assurance has been forthcoming 1985. that insurance will be available, when needed, at reasonable rates.

    212 SPACE POLICY August 1988

  • SAIAA, op cit, Ref 2. SAccording to industry spokespersons. 7US Nuclear Regulatory Commission, The Price-Anderson A c t - The Third Decade, Report to Congress, December 1983; and R. Laurie Rockett et al, Financial Protec- tion Against Nuclear Hazards: Thirty Years' Experience Under the Price- Anderson Act, Trustees of Columbia Uni- versity in the City of New York, 19 January 1984.

    Third-party liability insurance and space launches

    Claims and resulting awards could possibly exceed the maximum amount of insurance coverage available at reasonable cost on the world market to the commercial launcher.

    The historical financial performance of the space insurance industry has not been good. 5 As a result, the cost of insurance has risen dramatically in recent years and its availability has been reduced. Launch insurance cost has increased from 10% to more than 25% of launch and payload cost and third-party liability premiums have risen from $100 000 to in excess of $500 000 for $500 million cover. 6 Further, the space insurance industry will not make long-term availability and

    p r i ce commitments to the US ELV industry. Even if the insurance industry were to make commitments of $500 million or more per launch ($500 million was available for individual payloads flying on the Shuttle), the ELV firms would still be liable for claims above the insured amount. In the case of the Space Shuttle payloads the problem of unlimited liability was solved by NASA indemnifying for claims in excess of the $500 million of required insurance.

    A similar problem was encountered earlier by the US civilian nuclear power industry. This was solved by the Price-Anderson Act in 1957 and its subsequent amendments. This act was aimed at overcoming industry reluctance to participate in nuclear power generation due to the fear of catastrophic, uninsured claims from a nuclear accident, and to avoid delay or failure in providing compensation to the public in the event of an accident. The act requires a nuclear power operator to submit proof of financial protection (either through private insurance, private contractual indemnities, self-insurance, or other financial responsibil- ity) to cover liability claims for damages caused by nuclear materials. The government agreed to be liable for $500 million. Each nuclear facility's maximum liability was then limited to $560 million (the cap): the amount available from the private insurance market ($60 million) plus the $500 million the government would indemnify in case of loss exceeding private-sector capacity. A fee was imposed on reactor operators for the extra protection from the government.

    A 1975 amendment to the Price-Anderson Act required that a secondary level of financial protection be created through payments of retrospective premiums (originally $5 million per large operating reactor) if a nuclear catastrophe occurred at one of the plants that exhausted the primary level of financial protection (that available privately). The intention was to phase out government indemnification, and this has actually been the effect of the secondary level. The amount of insurance available from the private insurance market (which grew to $160 million by 1979), together with the amount that is available in the secondary layer, now exceeds $560 million. 7

    Foreign competitors to the US launch industry have followed the NASA indemnification precedent. The risk of third-party liability beyond available levels of insurance is assumed by these competitors through a combination of customer-provided or paid-for insurance, in some cases with guaranteed availability and cost, coupled with indemnification in excess of the available insurance coverage. Ariane customers, for example, are provided with third-party liability insurance coverage of approximately 420 million French francs (according to a 1985 launch agreement). Reinsurers provide this coverage. In addition, the governments of the European Community have agreed to indemnify Arianespace against claims in excess of this amount.

    SPACE POLICY August 1988 213

  • Third-party liability insurance and space launches


    The desire of a commercial ELV firm to have a limit placed on its third-party liability is understandable. A position paper by the A I A A has concluded that

    To foster and encourage a U.S. commercial space transportation industry that can be effectively competitive with European and other non-U.S, launch service providers, it is necessary to develop a commercially-tolerable approach to the allocation of these launch operations liability risks. The solution recommended in this paper would allocate these liability risks on the basis of those that are commercially insurable at reasonable premiums, as determined by Governmen- tal authority, and those that are in excess of such insurance capacity. The level of reasonably-available commercial insurance would be prescribed by the Government taking into account applicable risk factors, would be paid for by the commercial sector with the Government as a cost-free named beneficiary. The excess-of-insurance liability risks would be assumed or contained by the U.S. Government either through indemnity, a cap on liability or, possibly, some combination of Government-provided insurance of last resort and indemnity or cap of liability in excess of the insured risk. s

    Thus the A I A A is asking for indemnification and/or a legislative cap. The determinat ion of the need for indemnification and/or a legislative

    cap for the third-party liability claims should consider many factors, including the following.

    NAS A' s indemnification of Space Shuttle commercial payloads against claims in excess of commercial ly available third-party insurance ($500 million) has often been cited as precedent for government indemnification for commercial E L V launches. It may, however, be argued that all Space Shuttle flights involved government payloads and/or experiments in addition to commercial payloads - and thus it was appropriate that government participate in the liability risk. Commer- cial ELV launches may involve only commercial payloads - a significant difference, making the precedent not totally applicable.

    The Pr ice-Anderson Act has also been discussed as a precedent ." When the nuclear power industry started up (1957), little experience existed in the provision of nuclear power and little or none with respect to accidents and claim statistics. Something was indeed necessary to allay the fears of the power industry if nuclear power was to develop. Commercial ELVs are somewhat different - there have been in excess of 10 000 space launches before US ELV commercialization. Further- more, the US firms have stated publicly ' that, in the absence of government indemnification and/or a legislative cap on third-party claims, they would still intend to offer commercial launch services. (More recent statements, however, indicate a backing away from this position.) In addition, damage from nuclear accidents was excluded from the coverage of home insurance policies, whereas no such exclusion exists for damage caused by space launches.

    Every individual as well as every business entity faces risk of causing damage to third parties. Auto drivers, homeowners , small businesses and large businesses face liability risk, and purchase liability insurance to the maximum amount that is deemed affordable. All parties face the same question relating to the finite amount of affordable insurance and

    aAIAA, op cit, Ref 2. the maximum amount of claims that might occur against them. Nearly...


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