Financial Responsibility Requirements for Licensed Launch Activities

SUMMARY: The Associate Administrator for Commercial Space

Transportation of the Federal Aviation Administration (FAA) currently

prescribes financial responsibility requirements for licensees

authorized to conduct commercial space launch activities on a case-by-

case basis, after analyzing the risks associated with licensed

activities. This proposed rulemaking would codify the Associate

Administrator's approach to implementing these requirements in rules of

general applicability. Specifically, the proposed regulations would

establish how certain risks are allocated among the various launch

participants and addressed through financial responsibility

requirements, including statutorily-based reciprocal waivers of claims.

The proposed regulations would also address eligibility for payment by

the United States Government of certain third-party claims and this

Notice requests comments on appropriate means of implementing this

obligation. The FAA is undertaking this rulemaking initiative to

implement financial responsibility requirements under the Commercial

Space Launch Act of 1984, as amended, codified at 49 U.S.C. Subtitle

IX, ch. 701, Commercial Space Launch Activities.

DATES: Comments must be received by September 23, 1996.

ADDRESSES: Comments should reference the docket number of this notice.

Commenters should mail four copies of any comments to the FAA Rules

Docket, Room 915G, Federal Aviation Administration, U.S. Department of

Transportation, 800 Independence Avenue, SW., Washington, DC 20591.

Persons wishing to receive acknowledgment of receipt of their comments

should include a self-addressed, stamped postcard. Copies of materials

relevant to this rulemaking, including copies of all public comments,

are kept by the Rules Docket Technician, Room 915G, at the above

address. The docket is available for inspection between 8:30 a.m. and 5

p.m., Monday through Friday, excluding Federal holidays.

FOR FURTHER INFORMATION CONTACT: Ms. Esta M. Rosenberg, Attorney-

Advior, Regulations Division, Office of the Chief Counsel, Federal

Aviation Administration, U.S. Department of Transportation, (202) 366-

9305.

SUPPLEMENTARY INFORMATION:

Background

The Commercial Space Launch Act of 1984, as amended (the Act), 49

U.S.C. App. 2601-2623, codified, at 49 U.S.C. Subtitle IX, Commercial

Space Transportation, ch. 701, Commercial Space Launch Activities, 49

U.S.C. 70101-70119, authorizes the Secretary of Transportation to

license and regulate commercial space launches and the commercial

operation of launch sites carried out within the United States or by

its citizens. Among the stated purposes of the Act are protection of

public health and safety, safety of property, and United States

national security and foreign policy interests, as well as ensuring

compliance with international treaty obligations of the United States.

In carrying out the Act, the Secretary is required to encourage,

promote, and facilitate private sector launch activities. Another

objective is to facilitate development of a commercial space

transportation sector that is capable of competing in the international

market. The Secretary's responsibilities under the Act are carried out

by the Associate Administrator for Commercial Space Transportation of

the Federal Aviation Administration (Office). Prior to Fiscal Year

1996, the Secretary's responsibilies were carried out by the Office of

Commercial Space Transportation, located within the Office of the

Secretary of the Department of Transportation (DOT or Department). The

Commercial Space Transportation Licensing Regulations set forth in 14

CFR Ch. III remain applicable to regulatory activities administered by

the Office.

Current Industry Status

The commercial space industry is expanding and experiencing

reinvigorated growth with the creation of new technologies and markets.

U.S. commercial space revenues are estimated at $6.5 billion for 1994

and prospects are positive for continued growth. As a July 15, 1996, 63

DOT-licensed launches that have taken place since the first license was

issued in 1998. Up to three big low earth orbit (LEO)

telecommunications systems and two little LEO systems are projected for

launch this decade, resulting in as many as 40 launches and 275 small

satellites. Many other systems requiring additional launches are being

planned and may increase projected launch rates.

The U.S. commercial launch industry is responding to increasing

demands and heightened international competition with new launch

concepts and innovative partnerships. In addition to conventional

suborbital and orbital launches of expendable launch vehicles (ELVs)

from earth to space, the Office has licensed launches involving a

variety of innovative space transportation technologies including air-

launched rockets and a reentry vehicle system. The Office has also

begun discussions with industry on approaches to evaluating new

reusable launch vehicle and sea-launch technologies. Currently, the

private sector is conducting launch activities at four Federal launch

ranges throughout the United States. Five States--Alaska, California,

Florida, New Mexico, and Virginia--have plans under way for developing

state-sponsored spaceports.

Evolution of U.S. Commercial Space Transportation Policy.

The first ten years of the U.S. commercial launch industry have

been a period of transformation, informed by national policy and world

events.

After passage of the Commercial Space Launch Act of 1984, the

Government instituted policy and legislative initiatives encouraging

commercial launches. Nevertheless, during this time, in the face of

competing federal policies favoring maximum use of NASA's Space

Transportation System and relatively low launch prices for services

offered by the European launch operator, Arianespace, the U.S. private

sector appeared reluctant to commit the resources necessary to compete

for the relatively few launches of commercial satellites then available

in the international market.

The commercial launch services market was altered dramatically in

1986 with the loss of the Space Shuttle Challenger. This event caused

the United States Government to reverse its policy of reducing reliance

on ELVs in favor of the Shuttle. On August 15, 1986, President Reagan

announced a new United States Space Launch Strategy stating that NASA

would ``no longer be in the business of launching private satellites,''

and that the government would be looking to the private sector to

``become a highly competitive method of launching

[[Page 38993]]

commercial satellites'' and ``clear[ing] away the backlog that has

built up during this time when our shuttles are being modified.''

This decision removed the United States Government from direct

competition with private launch services providers and, because the

Challenger accident resulted in a backlog of payloads to be launched

provided a potential market for U.S. launch firms. Shortly thereafter,

the President initiated a comprehensive review of existing space policy

for the purpose of providing a clear, unified statement of policy goals

and directives.

On February 11, 1988, President Reagan issued a directive on

National Space Policy that consolidated and updated previous

Presidential guidance on space activities. The National Space Policy

recognized for the first time a distinct commercial space sector,

alongside the military and civilian government sectors, as an integral

part of an overall national effort to maintain United States space

leadership. Concurrent with release of the National Space Policy, the

Administration announced a fifteen-point Commercial Space Initiative

that reinforced one of the principal objectives of the Act: The

promotion of a robust commercial launch industry. This objective was to

be accomplished by, among other things, instituting a more equitable

allocation of risk between the Government and private sector for

commercial launch activities at Government ranges. This provision of

the initiative consisted of two elements: A United States Government

waiver of claims of property damage to Government property in excess of

DOT-required insurance; and a United States Government waiver of claims

covered on DOT-required insurance when loss of injury results from

Government willful misconduct or recklessness.

Taken together, these policy initiatives created an environment

that became more conductive to private investment in and business

commitments to commercial space launch activities, and Federal agencies

responded accordingly. Agencies operating United States Government

launch facilities developed range support agreements to provide for

commercial use of Government launch property and services in accordance

with the Act. On April 4, 1988, the Office published DOT's Commercial

Space Transportation Licensing Regulations, 14 CFR Ch. III, and on June

22, 1988, issued the first of 33 licenses issued to date.

Policy guidance supplementing the National Space Policy has been

formulated to encourage further growth of private sector space

activities. Most recently, on August 4, 1994, President Clinton

announced a new National Space Transportation Policy reaffirming the

Government's commitment to the commercial space transportation industry

and the Department's critical role in licensing, facilitating and

promoting commercial launch operations. Under this Policy, the

Department, along with the Department of Commerce and other agencies as

appropriate, is charged with developing an implementation plan focusing

on measures to foster an internationally competitive U.S. launch

capability. The Department also ensures that U.S. Government space

technology plans address commercial space launch sector needs.

The 1988 Amendments

General

The Commercial Space Launch Act Amendments of 1988, Public Law 100-

657 (1988 Amendments), replaced very general insurance requirements

with a detailed, comprehensive financial responsibility and allocation

of risk regime for commercial launch activities, including a more

explicit exposition of the United States Government's risk-related

rights and obligations. Reaffirmed, as part of the 1988 Amendments, is

the Department's responsibility to protect United States interests when

Government property or personnel is involved in supporting licensed

activities.

The principal features of the regime include risk-based insurance

requirements, limited Government payment of certain third-party claims,

and reciprocal waivers of liability among launch participants.

Participants in licensed launch activities are protected from

potentially unlimited liability by: (1) requiring the licensee to

provide insurance (or otherwise demonstrate financial responsibility)

based on maximum probable loss determinations that: (a) protects launch

participants, including the United States Government, from third-party

liability (in an amount not exceeding the lesser of $500 million or the

maximum available on the world market at reasonable cost) (49 U.S.C.

70112(a)), and (b) compensates for damage or loss to United States

Government property (in an amount not exceeding $100 million) (49

U.S.C. 70112(a)); and (2) providing for payment by the United States

Government of successful third-party claims up to $1.5 billion in

excess of the required amount of third-party liability insurance,

subject to enactment by Congress of an appropriations law or other

legislative authority (49 U.S.C. 70113(a)(1)). In addition, the goal of

allocating risks and costs associated with licensed activities is met

by requiring participants to enter into reciprocal waivers of claims in

which each party absorbs certain losses it may sustain as a result of

licensed activities. 49 U.S.C. 70112(b). Taken together, these

provisions are intended to achieve a fair allocation among the various

parties, including the United States Government, of the risks attendant

to their involvement in commercial launch activities.

The Office has been implementing the financial responsibility and

allocation of risk provisions of the 1988 Amendments on a case-by-case

basis, consistent with the adjudicatory process established by the

Office in the Commercial Space Transportation Licensing Regulations, 14

CFR Ch. III. Since early 1989, when the first license was issued after

the 1988 Amendments became effective, licenses have included a license

order devoted entirely to insurance and other financial responsibility

requirements that must be satisfied as conditions of each license. As

of July 15, 1996, 63 launches have been conducted pursuant to these

requirements. As a result of this experience, the Office believes that

many provisions included in license orders may be standardized in rules

of general applicability. The specific amounts of required insurance

would be set forth in a license order.

Although requirements would be standardized, licensees may ask for

relief from a particular regulatory requirement by petitioning the

Associate Administrator for Commercial Space Transportation using the

procedures set forth in Sec. 404.3 of the Commercial Space

Transportation Licensing Regulations (14 CFR Sec. 404.3).

Allocation of Risk and Payment of Excess Claims Provisions

The 1988 Amendments focus on two areas of risk allocation: (1)

Protecting the commercial launch industry against catastrophic losses

from third-party liability claims; and (2) limiting possible claims

among launch participants. At the same time, the 1988 Amendments are

directed at minimizing the potential liability of the United States as

a launching state under international law; and protecting the United

States Government, including its agencies, personnel and contractors,

from liability, loss of injury resulting from the Government's

participation in commercial launch activities by providing launch

support to commercial launch services providers.

[[Page 38994]]

This effort to insulate the United States Government and its

agencies, personnel and contractors involved in DOT-licensed launch

activities from a significant measure of exposure to liability, loss or

injury resulting from licensed activities is important because of the

Government's liability exposure. This exposure derives from two

sources. Under international treaty, especially the Treaty on

Principles Governing the Activities of States in the Exploration and

Use of Outer Space, including the Moon and Other Celestial Bodies

(Outer Space Treaty) (entered into force October 1967), and the

Convention on International Liability for Damage Caused by Space

Objects (Liability Convention) (entered into force September 1972), the

United States Government has accepted certain obligations to compensate

parties outside the United States for damage, including personal injury

and loss of life, caused by space objects launched from the United

States or by persons or entities whose activities are supervised or

overseen by the United States Government. In addition, when the

Government is involved in private sector launch activities through use

of its property, facilities, equipment or personnel to support and

facilitate those activities, the United States Government risks damage

or injury to its own property and personnel and legal liability for

other losses. It is the Office's view that, under the 1988 Amendments,

risk for these losses should be allocated primarily to the

nongovernmental launch participants, subject to three important

exceptions, and the statutory requirements for insurance and waivers of

claims must be construed and implemented to effect this allocation of

risk. (The term ``nongovernmental'' is used throughout this discussion

to mean launch participants other than U.S. Government, its agencies,

contractors and subcontractors, and the employees of each.)

The three important exceptions are those risks that the U.S.

Government affirmatively accepts under the Act. They are: (1) The risk

otherwise borne by the U.S. commercial launch industry of catastrophic

losses and unlimited liability associated with commercial launch

activities, up to the statutory limit of $1.5 billion above required

third-party liability insurance, subject to enactment of legislation,

49 U.S.C. 70113(a); (2) the risk of property damage or loss to United

States Government launch property or facilities in excess of required

insurance, 49 U.S.C. 70112(b)(2); and (3) acceptance of liability for

death, bodily injury or property damage or loss that results from the

willful misconduct of the United States Government or its agents, 49

U.S.C. 70112(e).

The Office believes that acceptance of these risks by the United

States Government is necessary in order to accomplish the goals

underlying the 1988 Amendments; that is for the U.S. commercial launch

industry to compete effectively against foreign launch services

providers that offer certain financial assurances from their

governments,\1\ and to limit the amount of liability insurance that

must be obtained to protect launch participants without, in industry's

words, their ``betting the company'' on each launch.

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\1\ At the time the 1988 Amendments were enacted, entrants to

the commercial launch industry expressed deep concern over

potentially open-ended exposure to liability for damages associated

with launch activities that could undermine the position of United

States firms vis-a-vis their foreign competitors. For example, while

customers of Arianespace benefited from full indemnification by the

French Government for all third-party liability that exceeded

required insurance levels of 400 million French francs

(approximately $65 million in 1988), corresponding protection was

not available to customers of emerging commercial launch services

providers in the United States. Consequently, from a commercial

perspective, foreign launch services providers possessed a

significant competitive advantage over U.S. firms.

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Not surprisingly, the linchpin of the allocation of risk regime in

industry's view has been the United States Government's agreement to

protect launch participants against the risk of catastrophic losses and

unlimited liability associated with commercial launch activities.

Pursuant to the 1988 Amendments, the Department seeks to provide this

protection, or so-called ``indemnification,'' by preparing a

compensation plan that the President submits to Congress for review and

approval, and, if necessary, enactment of additional legislative

authority providing for the payment of claims.

Significantly, the 1988 Amendments do not expressly mandate

indemnification of launch participants and, unlike the 1988 Price-

Anderson Amendments. Pub. L. 100-408, the notion of a ``contract of

indemnification'' does not appear. Rather the 1988 Amendments lay out a

mechanism by which Congress may enact legislation to appropriate the

requested funds. Accordingly, it would be inappropriate to refer to the

payment of excess claims provisions without recognizing the role

Congress must play in enacting appropriations. Nevertheless, it is the

Office's view that the 1988 Amendments represent an undertaking by

Congress to allocate to the United States Government the risk of

certain losses, including damage to Government property in excess of

required Government property insurance, and excess third-party claims.

In this manner, commercial launch operators, their customers, and the

contractors and subcontractors of each may be relieved from some of the

risk associated with commercial launch activities. In return, the

United States Government is protected from liability and loss by

required insurance at no cost to the Government

Risk-Based Insurance Requirements

One of the principal features of the 1988 Amendments is the

Department's mandate to establish risk-based insurance requirements.

Under the Act, the amount of required insurance is prescribed based on

the Department's determination of the ``maximum probable loss'' that

would result from licensed activities.

Before enactment of the 1988 Amendments, section 16 of the Act

prescribed general liability insurance requirements. It specified that

any person launching a launch vehicle or operating a launch site under

a license issued by the Department have in effect liability insurance,

at least in the amount that the Department considered necessary for the

licensed launch or operation, considering the international obligations

of the United States.\2\ These obligations include, in particular, any

United States obligations as a signatory to the Liability Convention.

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\2\ Each person who launches a launch vehicle or operates a

launch site under a license issued or transferred under this Act

shall have in effect liability insurance at least in such amount as

is considered by the Secretary to be necessary for such launch or

operation, considering the international obligations of the United

States. The Secretary shall prescribe such amount after consultation

with the Attorney General and other appropriate agencies.'' 49

U.S.C. App. 2615.

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On May 7, 1985, the Office published an Advance Notice of Proposed

Rulemaking on third-party liability insurance requirements for

commercial space launch activities (the ANPRM), 50 FR 19280, focusing

exclusively on implementation issues relating to section 16 of the Act.

The ANPRM reflected the Office's conclusion that liability

insurance should be adequate to compensate parties not participating in

licensed launch activities for losses or damages resulting from those

activities. The Office sought to identify considerations other than

international obligations of the United States to be taken into

account. Other general issues highlighted in the ANPRM were: (1)

Whether evidence of insurance (including significant levels of risk

retention) should be the exclusive

[[Page 38995]]

means of demonstrating financial responsibility; and (2) whether the

Office should require launch services providers to obtain the maximum

amount of liability insurance commercially available at reasonable

rates (the standard employed by NASA in requiring insurance for

commercial payloads launched on the Space Shuttle), or, alternatively,

whether the Office should conduct an analysis of the risks arising from

a launch and set appropriate financial responsibility requirements

based upon that analysis. The ANPRM also sought comments on whether the

Office should vary liability insurance requirements by vehicle class

and the duration of licensed activities, and what factors the United

States Government should consider in deciding whether to seek

compensation from responsible parties for damages for which the United

States may be held liable under United States or international law.

Ten private parties submitted comments in response to the ANPRM.

They included one commercial operator of a privatized United States

expendable launch vehicle (ELV) launch system, three entrepreneurial

launch firms, two space insurance brokers, two government aerospace

contractors, and two law students.

Most of the comments addressed the amount of liability insurance

the Office should require and the appropriate standard for making that

determination. Only three of the commenters, the insurance brokers and

an entrepreneurial launch services provider, supported utilization of

NASA's approach of requiring that launch services providers obtain the

maximum amount of insurance commercially available at reasonable rates.

One insurance broker favored applying this standard to the actual

launch phase only, arguing that risk analysis should be employed in

setting requirements for on-orbit liability coverage. All of the other

launch and aerospace firms that commented favored the risk analysis

approach.

Commenters differed on the issue of duration of required insurance

coverage. One commenter favored requiring coverage only for the launch

phase, another preferred the useful life of a payload, and a third

recommended insurance be maintained as long as a physical object

remains in space. Only two commenters addressed the question of whether

the Office should distinguish among the different ELV launch systems in

setting third-party liability insurance requirements, both favoring

making such distinctions if justified by risk analysis. In addition to

the issues on which the ANPRM requested comment, five commenters argued

that the United States Government should indemnify private launch firms

and their contractors for damages that exceed the amount of required

coverage. One commenter urged that the United States either re-

interpret its responsibilities under, or withdraw from, the Liability

Convention.

Following publication of the ANPRM, and in light of most

commenters' endorsement of insurance requirements based on an analysis

of risk, the Office developed a risk analysis approach to determining

acceptable levels of public exposure to hazards associated with

commercial launches, and it began applying risk analysis techniques on

an application-specific basis. The Office's risk analysis approach was

based upon extensive studies it had conducted on the risks associated

with commercial launches and launch operations, and on the utility of

various analytical techniques for quantifying them. These studies

include a three-volume report, dated May 1988, entitled ``Hazard

Analysis of Commercial Space Transportation'' and an ``Assessment of

Third Party Liability Insurance Associated with Commercial Expendable

Launch Vehicles,'' each of which is available from the Office.

At the time the 1988 Amendments were enacted, the Office was

preparing a rulemaking action to establish risk analysis as the

preferred method for determining appropriate levels of insurance for

licensed activities. The need to propose adoption of this approach

became moot. In requiring maximum probable loss determinations,

Congress effectively codified the Office's approach by mandating risk

analysis as the basis on which the Department establishes required

levels of financial responsibility under the Act.

This rulemaking is intended to provide definition to the statutory

term, ``maximum probable loss,'' in terms of the Office's approach to

prescribing insurance requirements for each launch license issued.

``Maximum probable loss'' does not mean maximum possible loss, that is,

a ``worst case'' scenario regardless of likelihood. The Office

determines maximum probable loss for licensed launch activities by

analyzing the known hazards, and the probability of loss, associated

with specific launch activities. A detailed explanation of maximum

probable loss methodology is presented in the section-by-section

analysis below.

Implementation Issues Following the 1988 Amendments

In early 1989, the Risk Management Working Group of the Commercial

Space Transportation Advisory Committee (COMSTAC) \3\ developed

implementation positions on the 1988 Amendments, including a

recommendation that the scope of required liability insurance coverage

be commensurate with the scope of potential liability of those persons

involved in providing launch services--the licensee, its customer, the

U.S. Government, and the contractors and subcontractors of each--

resulting from activities carried out under the license. In its view,

potential liability arose with the licensee's entry upon the launch

complex. Additionally, the waiver of claims provisions and the so-

called ``indemnification'' provisions of the Act were viewed as being

equally broad in scope. The COMSTAC further recommended that post-

launch protection under the Act remain in place for at least three

years following ignition of the launch vehicle for flight.

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\3\ The COMSTAC, a duly chartered federal advisory committee

consisting of public and private sector representatives appointed by

the Secretary to advise on matters affecting the commercial space

transportation industry, has taken a very active role in reviewing

and commenting on the Office's implementation of the 1988

Amendments. Based on its reviews, the COMSTAC submitted formal

recommendations to the Secretary. These recommendations are

available in the docket for this proposed rulemaking.

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In carrying out its licensing responsibilities, the Office began

issuing licenses in 1989, authorizing a specific launch and preparatory

launch site operations associated with the conduct of that launch. This

approach was intended to satisfy industry's expectations, including

those voiced by COMSTAC, and be consistent with the Department's

understanding of the 1988 Amendments. Within two years, the Office

issued the first of several operator licenses issued to date. Under

this approach, the Office licensed and established financial

responsibility requirements for site operations associated with the

conduct of a program of commercial launches for a two-year period.

This approach to licensing reflected an understanding between the

Office and the U.S. Air Force, as the Department of Defense (DOD)

element responsible for management of the Eastern Range, encompassing

Cape Canaveral Air Station, and the Western Range, encompassing

Vandenberg Air Force Base, to avoid conflicting insurance and liability

requirements when commercial launch operators

[[Page 38996]]

conduct operations on Air Force ranges in support of commercial launch

activities under a range use agreement. Despite this understanding with

the Air Force, certain questions remain between the Office and the Air

Force as well as other Federal agencies that operate and manage Federal

range facilities.

A September 1992 COMSTAC resolution reaffirmed COMSTAC's view that

the financial responsibility regime should be construed broadly so as

to cover all activities conducted by a licensee on a Federal range.

Under this view, referred to as ``gate-to-gate'' licensing, all of a

licensee's activities conducted on a Federal range in support of its

commercial launch operations would be subject to DOT-determined

financial responsibility requirements and eligibility for so-called

indemnification. To address this and other uncertainties associated

with the intended scope of the 1988 Amendments, the resolution

recommended that the Department seek clarification by legislative

means.

October 27-28, 1994 Public Meeting

The Office convened a two-day public meeting on October 27-28,

1994, to elicit industry views on, among other things, a range of

issues associated with implementation of the 1988 Amendments. The

meeting concentrated on licensing issues associated with commercial

launch operations and the commercial operation of launch sites. One of

the focal points of the meeting was a discussion of the appropriate

scope of a license authorizing commercial launch activities and its

relationship to financial responsibility and allocation of risk

requirements.

At the public meeting and in written comments submitted to the

docket, industry remained fairly consistent in its view that the

Office's licensing authority should be broadly construed to address

risks associated with the flight of a launch vehicle and pre-flight

hazardous operations in order to protect public health and safety. One

commenter suggested that, as a starting point, it would be useful to

look at those unusually hazardous activities for which the Government

agrees to offer indemnification under other authority, such as Public

Law 85-804, in attempting to determine the range of activities properly

encompassed by the Department's licensing authority.

Two launch services providers and one DOD element commented that

all pre-launch processing on a Federal range should be licensed for

purposes of the Act's financial responsibility requirements and setting

the levels of required insurance. Other commenters observed that it is

no longer sufficient to limit DOT licensing to activities done on a

Federal range because, increasingly, launch operators are engaging in

hazardous pre-launch processing activities off the range, either to

reduce their costs or because they are not permitted to use Government

facilities where comparable, off-range commercial services exist. A

number of commenters, including a DOD element, an insurance broker, a

prospective commercial spaceport operator and two launch services

providers, suggested that DOT-licensed activities should include

hazardous, as distinct from ultra-hazardous, operations defined in

terms of risk, not geography, because the Office's mandate is

protection of public safety. The prospective spaceport operator also

suggested using the license as a kind of safety net to avoid gaps in

regulatory oversight. In contrast, another Government agency

representative offered a different approach, noting that other

regulatory regimes would apply to hazardous operations when conducted

somewhere other than at a Federal range.

As an example of hazardous operations requiring licensing, a number

of commenters, including a payload processing facility, stated that

payload processing, whether conducted on a Federal range or at a

privately operated facility located off the Federal range, should be

covered by a DOT license. One launch company noted that manufacturing

is not sufficiently hazardous as to warrant DOT licensing, but certain

testing is. However, a prospective spaceport operator noted that

manufacturing may be hazardous and, if so, should be covered by a DOT

license. Another prospective spaceport operator stated that licensing

matters should be separated from the issue of indemnification

altogether, and noted that one could conceive of licensed activity

without indemnification if the purpose of licensing is protection of

public safety. The commenter suggested a narrower approach than that of

licensing all activities conducted by a launch licensee on a Federal

range, noting that material may be stored at the range for a long time

in advance of a scheduled launch.

Two DOD elements advocated that the Office establish maximum

probable loss requirements for all commercial activities conducted on a

Federal range facility. One of the agencies also indicated that the

Office should set maximum probable loss requirements any time

Government property would be placed at risk for commercial purposes,

including coverage for commercial development and demonstration

activities conducted on a Federal range.

One launch services provider noted the benefits to the public of

requiring statutory financial responsibility and allocation of risk

requirements, along with so-called indemnification, in that third-party

recovery for losses need not depend upon the financial health of a

launch company. For example, without Government regulation, small

start-up companies with limited financial means might buy less

insurance than the Office would otherwise prescribe in insurance

requirements.

Another launch services provider noted that the financial

responsibility requirements should be coextensive with a license. That

is, the Government should provide indemnification to the extent

activities are covered by a license. Likewise, according to the launch

services provider, if there is no indemnification offered by the

Government for an activity then it can be inferred that the Office has

not licensed that activity. The commenter noted that this is not clear

today.

In a related rulemaking, the Office is planning to address, more

specifically, such issues as the appropriate scope of a license to

conduct commercial launches and the activities subject to the

Department's licensing authority. As part of that rulemaking, the

Office intends to address comprehensively those comments received at

the public meeting concerning the appropriate scope of a license and

licensable activities. The instant rulemaking focuses on implementation

of financial responsibility requirements and the allocation of risks

that attend licensed launch activities, as those activities are defined

in a license issued by the Office.

The Proposed Regulations

Scope and Objectives

The proposed regulations are intended to implement the full range

of statutorily-imposed financial responsibility requirements and carry

out the Department's responsibility under the Act to protect U.S.

interests when Government property or personnel is involved in

supporting licensed launch activities. The proposed regulations also

clarify the means by which the commercial launch industry and its

customers are provided with the assurances and protections that have

been considered critical to their survival.

This rulemaking does not address financial responsibility

requirements for the operation of a launch site. To date, all U.S.

commercial launches have taken place from U.S. Government facilities.

[[Page 38997]]

The Office believes that this fact will change in the not too distant

future. Plans for developing state-sponsored spaceports in five states

are under way and the Office is currently developing regulations that

would apply to prospective applicants for licenses to operate launch

sites or spaceports. The Office is also in the process of developing

policies applicable to the appropriate implementation of financial

responsibility requirements for launch site operators, including

spaceports, consistent with the Act. As part of this effort, the Office

requests comments on the full range of financial responsibility and

risk allocation issues associated with licensing the operation of a

launch site.

More specifically, under the Act, a licensee is required to obtain

two forms of insurance (or otherwise demonstrate financial

responsibility) to compensate for certain claims ``resulting from an

activity carried out under the license''--liability insurance that

protects participants in launch services from third-party liability and

property insurance that protects Government property. 49 U.S.C.

70112(a). No distinction is made in the Act between the holder of a

license to launch a launch vehicle and the holder of a license to

operate a launch site. As one commenter pointed out at the October 1994

public meeting, the legislative history accompanying the 1988

Amendments provides no guidance as to whether, or how, financial

responsibility and allocation of risk requirements would apply to a

licensed operator of a launch site.

One view under consideration by the Office is that the insurance

that is required under a license to conduct licensed launch activities

would be sufficient to protect United States interests as well as those

of a licensed launch site operator. This view presumes that the

potentially catastrophic risks that the 1988 Amendments intended to

address are those associated with hazardous launch operations, and that

the risks attendant to the industrial activity of managing a launch

site can be managed effectively through available industrial risk

insurance as a cost of doing business, and through contractual

agreements between the site operator and its customers and contractors.

Risks to the launch site operator change when licensed launch

activities are conducted at the site, and the launch site operator

should be protected as an additional insured under the launch

licensee's liability policy because of the launch site operator's

involvement in launch services. With respect to risks associated with

other activities, a launch site operator can protect itself by

requiring adherence to its own safety procedures and requirements and

through business decisions regarding the need to obtain insurance.

At the public meeting, one commenter representing a prospective

spaceport licensee suggested an approach consistent with this view. The

commenter noted that site operations not related to a particular launch

may not be covered by the Act, and that the launch operator and launch

site operator, rather than the Office, can allocate responsibilities

between themselves. Launch-specific activities carried out at the site

would be covered under the Act, in the commenter's view. However,

another commenter at the public meeting noted that a state-sponsored

spaceport could serve a consortium of commercial users, and the

relationship between them may not be one of prime contractor and

subcontractor. Another prospective state-sponsored spaceport

representative commented that there is no need for the Office to

license a spaceport operator if it is under the supervision and

oversight of another Federal agency, such as the Air Force, and

conducting operations as a subcontractor to the launch company.

Similarly, a DOD element commented that the Office should review safety

operations of a state-sponsored spaceport located on a Federal range

facility only for purposes of determining maximum probable loss.

Additional comments are solicited on the appropriate implementation

of the financial responsibility and allocation of risk regime with

respect to licensed launch site operators, including state-sponsored

spaceports. Comments should address the requirements that would apply

to an operator of a commercial launch site located on private property

and that located on or adjacent to a Federal range facility.

Implementation by the Office of the financial responsibility and

allocation of risk requirements through license orders has resulted in

some uncertainty and controversy over the scope of required insurance

as well as the Government's obligation to cover excess third-party

claims. Some issues result directly from the terminology used in the

Act and have been voiced by both the Office and industry in a variety

of fora, such as the October 1994 public meeting and COMSTAC meetings.

Others have been aired by industry, from time to time, expressing

disagreement with or concern over the Office's implementation of the

requirements. In come instances, industry has offered a view contrary

to that held by the Office, as reflected in license orders. In others,

industry has complained that lack of clarity leaves both industry and

the U.S. Government vulnerable to unintended disputes over the

appropriate mechanism for compensating claims.

The proposed regulations, as well as the Act, acknowledge that the

commercial space industry must bear certain risks and costs associated

with launch activities. However, the Office believes these risks and

costs to be reasonable in light of the potential benefits industry

receives.\4\ Moreover, the Office believes that issuing regulations

will result in an additional benefit to the commercial space industry.

That is, the increased certainty and clarity that will result from

issuance of final regulations should prove beneficial to industry by

allowing it to manage risks appropriately, through insurance and other

business decisions and compete effectively in an increasingly

competitive world market. At the same time, the Office remains mindful

of the Government's unique interests and concerns.

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\4\ An economic impact assessment has been prepared and is

available in the public docket for this proposed rulemaking for

review and comment.

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In addition to protecting the United States Government from certain

liability risks, this rulemaking proposal also recognizes the

importance of valuable national range assets to the continued growth,

vitality, viability and competitiveness of the U.S. commercial launch

industry. One of the principal objectives of the statutory requirements

is to ensure that these assets are protected, and that in the event of

damage or loss, funds are available to restore the affected launch

property to its present condition and use. Thus, when Government

facilities or personnel are involved in licensed launch activities, the

Department is authorized to establish requirements for proof of

financial responsibility and other assurances necessary to protect the

Government and its executive agencies and personnel from liability,

death, bodily injury, or property damage or loss as a result of

licensed activities. However, the Government is not relieved of

liability that results from willful misconduct of the Government or its

agents.

In protecting the interests of Government personnel, the statutory

financial responsibility and allocation of risk requirements also

recognize the role Government contractors and subcontractors, and their

respective employees, perform in supporting commercial launch-related

operations on Federal range facilities on behalf of

[[Page 38998]]

the Government. For this reason, in establishing financial

responsibility and allocation of risk requirements, the Department also

ensures that their interests are protected. The Office solicits views

on whether its approach to protecting Government contractors' and

subcontractors' interests should be adopted in a final rule.

To facilitate the reader's review of this proposal, the Office's

rationale for allocating and addressing certain risks is presented

below under appropriate topic headings, preceding the section-by-

section analysis. This approach should prove useful to the reader in

understanding how certain risks would be addressed through both the

required demonstration of financial responsibility and waivers of

claims among the launch participants. The section-by-section analysis

that follows describes and discusses specific provisions of the

proposed implementing regulations which, taken together, effectuate the

intent of the Act.

Protection of Government Personnel

In providing direct support for commercial launch operations,

either through its agencies or contractors, the U.S. Government

necessarily exposes itself and certain Government personnel to

potential losses and liabilities. Accordingly, under the approach the

Office has adopted in the proposed regulations, certain Government

personnel need to be afforded a variety of protections through the

financial responsibility and allocation of risk regime. These

protections are necessary to ensure that the U.S. Government does not

bear any greater risk than it affirmatively accepts under the statute.

Through the proposed regulations, risks to Government personnel,

including employees of Government contractors and subcontractors, posed

by their involvement in licensed launch activities are addressed as

follows:

1. Government personnel, including employees of the Government, its

agencies, and its contractors and subcontractors, involved in licensed

launch activities, would be included within the definition of third

parties.

2. Government personnel, including employees of the Government, its

agencies, and its contractors and subcontractors, involved in licensed

launch activities, would be named as additional insured under the

required third-party liability policy.

3. Claims for damage or loss to property belonging to the

Government, its agencies, contractors and subcontractors, involved in

licensed launch activities, would be covered under the required

Government property policy, even if the damage or loss is caused by

Government personnel, including employees of the Government, its

agencies, and its contractors and subcontractors, involved in licensed

launch activities, absent their willful misconduct.

These three forms of protection from risk are explained below, in

order.

1. The proposed regulations would clarify that Government employees

are included within the definition of third parties. This is

significant because it means that Government employees' claims for

property damage or bodily injury would be compensated under the third-

party liability insurance policy (or other demonstration of financial

responsibility) required of the licensee up to the limit the Office

establishes, within the statutory ceiling, based upon the Office's

determination of maximum probable loss. (An explanation of the Office's

risk-basing methodology for setting insurance requirements is set forth

in the section-by-section analysis, below.)

The definition of third parties would also include employees of

U.S. Government contractors and subcontractors involved in licensed

launch activities to ensure that their claims would also be covered by

the required third-party liability insurance policy, in accordance with

the statue.

This approach is in accord with the definition of ``third party''

contained in the statute, 49 U.S.C. 70102(11), and the legislative

history which expressly states that ``Government personnel directly

associated with the commercial launch operations are still classified

as third parties.'' S. Rep. No. 100-593, 100 Cong., 2d Sess. 8 (1988).

This protection is necessary to minimize the risk the U.S. Government

would otherwise bear if it were to accept responsibility for these

claims under the Act.

Currently, through a reciprocal waiver of claims agreement executed

by the Office on behalf of the U.S. Government, the United States

waives and releases claims it may have against the licensee and

customer and their respective contractors and subcontractors, and

agrees to be responsible, for property damage it sustains in excess of

required insurance, and for bodily injury or property damage sustained

by its employees in excess of required insurance. \5\ The Government is

required to extend this waiver of claims and assumption of

responsibility to its contractors and subcontractors. This practice

would be altered under the proposed regulations in the following way.

Because claims of Government employees and employees of Government

contractors and subcontractors against the other launch participants

would be covered as third-party claims under the liability insurance

policy that the licensee obtains, the U.S. Government would not be

required to assume responsibility for them as part of the reciprocal

waiver of claims required in 49 U.S.C. 70112(b)(2). This approach

deviates from the current practice of the Office but, we believe, more

precisely reflects the intent of the statute.

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\5\ The reciprocal waiver of claims agreement is used by the

Office to implement the Government's statutory responsibility to

waive claims. 49 U.S.C. 70112(b)(2) requires a Government waiver

only to the extent claims exceed the amount of insurance that is

required to protect Government property. However, under current

practice, the agreement provides that claims for injury or losses

suffered by employees of the Government are waived only to the

extent those claims exceed the required amount of third-party

liability insurance. One reason the Office has taken this approach

is that if Government employee claims for bodily injury or property

damage were compensated under the property policy rather than the

liability policy, the Government's waiver of claims for property

damage could be triggered too soon leaving Government claims for

property damage or loss uncompensated.

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Given that Government personnel are deemed third parties, their

claims against the other launch participants would be presented as part

of the successful third-party claims for which industry would seek

payment from the Government under the payment of excess claims

provision of the statute (so-called ``indemnification''). In essence,

the Government's agreement to protect launch participants from third-

party claims in excess of required insurance would extend to cover the

outstanding claims of its employees, and Government contractor and

subcontractor employees, after the limits of the insurance policy

obtained by the licensee have been reached.

An alternative view--that Government personnel should not be

considered third parties--has been suggested by representatives of the

commercial space launch industry. This view suggests that the 1988

Amendments assigned to the United States Government an assumption of

responsibility and risk for losses sustained by Government personnel,

including Government employees and employees of Government contractors

and subcontractors, who are involved in licensed activities. This

assumption of risk would be in addition to the three areas of risk the

Government has agreed to accept under the Act, as delineated above. The

Office does not agree.

Considering Government personnel as third parties enables their

claims to be covered by required third-party liability insurance under

49 U.S.C.

[[Page 38999]]

70112(a)(3)(A)(i). Absent this protection for Government employees, the

Government would be assuming an unfunded contingent liability for the

successful claims of Government employees against other launch

participants, without explicit statutory authority for doing so. This

is contrary to appropriations laws. The Office does not believe that

explicit statutory authority is provided by the Government waiver of

claims provision of the Act, which limits the Government's waiver to

excess property damage claims. 49 U.S.C. 70112(b)(2). Absent this

protection for employees of Government contractors and subcontractors,

additional costs to protect Government contractors and subcontractors

from these risks would likely be passed to the Government, defeating

the statutory directive to protect the Government from certain

liability risks, at no cost to the Government.

In the Office's view, this approach is beneficial to both the U.S.

Government and nongovernmental launch participants. Nongovernmental

launch participants are protected from claims by Government personnel,

including employees of the Government's contractors and subcontractors,

for loss of injury, by means of required liability insurance and

procedures for U.S. Government payment of excess third-party claims, up

to $1.5 billion above the required amount of liability insurance. The

U.S. Government is protected in the event its personnel, as well as

those operating on behalf of the Government, are exposed to risk of

property damage or bodily injury because their claims will be

compensated under the liability policy the licensee obtains at no cost

to the Government. Considering Government personnel as third parties is

not intended to supplant the individual rights of Government employees

to file claims under the Federal Employees' Compensation Act (FECA), or

the rights of Government contractor employees under workers

compensation laws.

2. Government personnel would be protected from third-party

liability, absent their willful misconduct. The statute explicitly

requires that the Government, ``executive agencies and personnel,

contractors, and subcontractors of the Government'' be protected under

an insurance policy required under section 70112(a), ``to the extent of

their potential liability for involvement in launch services, at no

cost of the Government.'' 49 U.S.C. 70112(a)(4). Therefore, under the

liability policy, Government personnel are both protected parties, or

additional insureds, and potential claimants.

3. Under the property policy required under 49 U.S.C.

70112(a)(1)(B), United States Government property is protected from

damage from any source as a result of licensed activities, that is,

even if the damage is caused by Government personnel, absent their

willful misconduct.

Property Protection for Government Launch Participants

In addition to protection from third-party liability, as explained

above, Government launch participants are protected from the risk of

their own property losses where their property, facilities, equipment

or personnel, are used to support commercial launch operations. In the

Office's view, this risk is allocated primarily to the licensee, who is

required under 49 U.S.C. 70112(a)(1)(B) to obtain liability insurance

(or otherwise demonstrate financial responsibility), up to the $100

million statutory ceiling, to compensate for the maximum probable loss

from claims by the U.S. Government against a person for damage or loss

to Government property resulting from an activity carried out under the

license. The Government waives claims for property damage to the extent

those claims exceed the required amount of insurance or result from

willful misconduct of the government or its agents.

This requirement to protect Government property addresses an

important objective--to assure that facilities used by commercial

launch operators can be restored promptly to current launch-ready

status. These facilities are considered critical to U.S. national

security interests and funds must be readily available to repair them

in the event they are damaged as a result of commercial launch

activities.

Two recurring issues are the scope of Governmental property that

must be protected by property insurance and the extent to which

Government property that is either on a Federal range but not used to

support a licensee's launch, or off the Federal range entirely, is

required to be covered by insurance. Government property on a Federal

range that is not used for commercial launch support purposes may

include anything from a U.S. Post Office to launch vehicles or

components that are intended for use exclusively in Government launch

operations.

The Office's view is that any U.S. Government property that is on a

Federal range facility is exposed to damage or loss as a result of

licensed launch activities conducted on that facility. Accordingly,

coverage for all such property must be provided to ensure the U.S.

Government is fully compensated. The only exception would be for a

Government payload where the Government is the customer for the

licensed launch activity. (A discussion of how different types of

Government property on a Federal range facility are considered in

establishing insurance requirements for Government property is

presented in the section-by-section analysis accompanying proposed

Sec. 440.7, Determination of Maximum Probable Loss.)

It is also the Office's view that Government range facility assets

that are not on the launch facility from which the launch takes place,

but are identified as being exposed to damage or loss as a result of

licensed launch activities, should also be covered by the required

property insurance. For example, a licensed launch at Cape Canaveral

Air Station, Florida, could expose Government assets on neighboring

Kennedy Space Center (KSC) to damage or loss. Under the proposed

regulations, the Office would include these assets in determining

appropriate insurance levels for Government property and prescribe that

property at KSC be covered. The Office believes that this approach is

necessary and reasonable to carry out the statutory mandate of

protecting Government range assets exposed to risk from commercial

launch activities. Similarly, a licensed launch conducted at a

commercially operated launch site or spaceport situated on, or adjacent

to, a Federal range facility, would expose the Federal range facility

to risk of damage or loss. Accordingly, insurance to protect the

Federal range facility placed at risk would be required even if there

were no Government involvement in supporting licensed launch activities

conducted at the commercial launch site.

In the Office's view, Government property that is involved in

licensed launch activities but is located at a site that is remote from

the launch site would be covered by the third-party liability insurance

protection required of the licensee because risk to that property

should be no greater than the risk posed to other third-party property.

Government property meeting this description would include, for

example, remote Government tracking stations and other support

facilities located downrange from the Federal range facility at which

the launch takes place.

Accordingly, Government property that is not located on the Federal

range facility from which the launch takes place or not located at a

neighboring

[[Page 39000]]

Federal range facility would be included under the third-party

liability insurance protection required of the licensee. This would

include any unrelated Government property located outside of a Federal

range facility, such as a U.S. Post Office building.

It has been suggested that the additional cost of covering all

Government property, wherever located, would be prohibitive. However,

the Office views the U.S. Government as situated similarly to any other

third party for purposes of calculating maximum probable loss for

property damage claims off the range, subject to the limited exception

noted above for nearly Federal range facility assets located in close

proximity to, or adjacent to, a Federal range. This is because the

probability of damaging unrelated government property away from the

launch site is no different from that of damaging private property off

the launch site. The Office does not believe that this coverage should

increase the cost of liability insurance or expand the risks covered by

the policy.

In summary, all Government property on a Federal range facility,

whether or not involved in licensed launch activities, must be covered

by the required Government property insurance policy (or other

demonstration of financial responsibility). Federal range facility

assets adjacent to or in close proximity to the launch site where

licensed launch activities take place would also be covered by required

property insurance. Government property located away from the Federal

range facility that is used to support licensed launch activities, such

as downrange tracking stations, are not covered by the required

Government property insurance policy, nor is Government property that

is located off the Federal range facility and totally unrelated to

licensed launch activities. Instead, with respect to these Government

assets, the Government is a third party and its claims for loss or

damage would be covered under the required third-party liability

insurance policy (of other demonstration of financial responsibility),

up to the limits required by the Office.

Some of the confusion surrounding the required coverage of

Government property results from the manner in which licensees have

satisfied the financial responsibility requirements for protecting

Government property. Some licensees have obtained two types of policies

to address Government property. One policy typically provides coverage

for United States Government property, including property of United

States Government contractors and subcontractors, that the licensee

utilizes or otherwise has in its care, custody or control at the site

where licensed launch activities take place. The second policy provides

third-party liability coverage for all other property, including

Government property located elsewhere on the Federal range facility. In

the first policy, the United States and its contractors and

subcontractors are the named insureds; in the second policy, the

additional insureds are the same parties as those protected in

satisfying the third-party liability insurance requirement. This

approach accommodates certain customary insurance practices in covering

property losses but is not required by the Office.

However, where a licensee elects to protect certain Government

property under its third-party liability insurance policy, coverage

cannot be allowed to limit or dilute the availability of insurance

proceeds to cover third-party liability claims. To avoid this

possibility, some licensees have submitted a liability insurance

certificate indicating two levels of coverage, i.e., one amount to

cover claims for damage to Government property that is not in the

licensee's care, custody or control and another amount for ``other'

third-party liability, claims.

The proposed regulations would continue the Office's current

practice, implemented through license orders, of requiring coverage for

property of Government contractors and subcontractors under the

Government property policy. The Office's rationale for doing so

includes the following considerations. Absent certain protections for

Government contractors and subcontractors, the Government would bear

greater risk and incur greater expense than is contemplated under the

statute's risk and incur greater expense than is contemplated under the

statute's risk allocation regime. Section 70112(b)(2) of the Act

requires the Secretary of Transportation to enter into reciprocal

waivers of claims under the licensee, its customer, and the contractors

and subcontractors of each, ``for the Government, executive agencies of

the Government involved in launch services, and contractors and

subcontractors involved in launch services. * * *'' The waiver applies

only to the extent that claims are more than the amount of Government

property insurance or other demonstration of financial responsibility

required under 49 U.S.C. 70112(a)(1)(B). By waiving claims ``for'' its

contractors and subcontractors involved in launch services, the

Government passes certain rights and responsibilities to its

contractors and subcontractors, consistent with those the Government

accepts, including the waiver of claims for property damage above

required insurance. In light of the waiver the Government undertakes on

behalf of its contractors, the Government would necessarily assume

greater risk or costs if the Government's contractors and

subcontractors were not also protected by required Government property

insurance. If there were no insurance protection provided by the

licensee for property of Government contractors and subcontractors

involved in launch services, those parties would be likely to seek

compensation for their losses from the Government. Thus, the Government

would be accepting the risk of property losses in excess of required

insurance, plus, ad a practical matter, responsibility for property

losses incurred by its contractors and subcontractors. Alternatively,

Government contractors and subcontractors could purchase property

insurance protection, as a licensee has suggested; however, the cost

would likely be passed through to the Government as an allowable cost

under a contract with the Government. This is contrary to the statutory

directive that the Government be afforded certain protections at no

cost to the Government.

In determining to adopt this approach in the proposed regulation,

the Office also considered whether coverage for property of Government

contractors and subcontractors could be provided under the third-party

liability insurance protection the licensee is required to obtain. This

approach is contrary to the definition of ``third party'' contained in

the statute at 49 U.S.C. 70102(11) and was not further considered.

There is one important distinction in the requirement to protect

property of Government contractors and subcontractors in the Office's

view, however. That is, with respect to the Government and its

agencies, all Government property on a Federal range facility must be

protected. With respect to Government contractors and subcontractors,

only property on a Federal range facility belonging to those

contractors and subcontractors involved in licensed launch activities

must be covered under the property policy. Government contractors and

subcontractors that do not support licensed launched activities or

whose property is located away from a Federal range facility would be

protected as third parties under the liability policy, and their claims

for injury, damage or loss would be compensated by the required third-

party liability policy. For

[[Page 39001]]

example, a food concessionnaire located on a Federal range facility

would be considered a third party for purposes of insurance and risk

allocation.

One licensee has noted its disagreement with the Office's

requirement. In the licensee's view, requiring this coverage is

contrary to the statute and legislative history. The licensee has

sought clarification of the Office's requirements to avoid the

potential for duplicative, or possibly unnecessary, coverage under the

liability and property policies.

The Office disagrees with the licensee's contention for the reasons

explained above. The U.S. Government utilizes contractors and

subcontractors in carrying out certain activities at Federal range

facilities. Accordingly, for purposes of risk allocation and protection

of the U.S. Government, its contractors and subcontractors stand in the

shoes of the Government and its agencies involved in launch services.

The Office believes that any other view would defeat reasonable

implementation of the Amendments.

The Office believes that a variety of risk management approaches to

protecting Government property may be acceptable as long as the

statutory objectives are achieved; that is, providing for the

compensation of property damage sustained by the United States, its

agencies involved in launch services, and its contractors and

subcontractors, resulting from activities carried out under the license

and ensuring that policy proceeds will be made available to the

Government to effect needed repairs in the event of any damage

resulting from licensed launch activities. These objectives can best be

met through a non-fault, non-subrogation, comprehensive all-risk type

of property policy that would compensate the U.S. Government on behalf

of itself and Government launch participants, as additional insureds,

in the event of any occurrence resulting in property damage, regardless

of fault, absent willful misconduct by the Government or its agents. In

order to satisfy statutory objectives, the policy must respond to

damage caused by Government launch participants, as well as Government

personnel, i.e., employees of the Government and its contractors and

subcontractors. An exception may be allowed where insurance is not

available because of a policy exclusion that is determined by the

Secretary of Transportation to be usual for the type of insurance

involved. In those instances, the Secretary, following consultation

with other interested Federal agencies, may waive claims for property

damage from the first dollar of loss. In all other circumstances,

coverage must be provided to protect U.S. Government property from any

damage incurred during or as a result of licensed launch activities,

regardless of fault, absent willful misconduct by the Government or its

agents.

Government Customer

When the licensee's customer is a United States Government agency,

the agency is treated the same as any nongovernmental customer for

purposes of determining the appropriate amount of property insurance

required of the licensee and in terms of the U.S. Government's waiver

of claims or property damage or less above the required amount of

property insurance under 49 U.S.C. 70112(b)(2). That is, a Government

payload is not covered by the required Government property insurance

and the United States Government agency-customer accepts responsibility

for property damage to the payload. For other purposes, the government

agency customer is an agency of the United States involved in licensed

activities. This is an important distinction because employees of a

U.S. Government agency are third parties and their claims against other

launch participants for bodily injury or property damage are covered by

the third-party liability policy required under 49 U.S.C.

70112(a)(1)(A), even when the agency that employs them is involved in

the launch as the customer. The basis for the Office's distinction is

grounded in appropriations law. An agreement on the part of the United

States Government to be responsible for claims of its employees for

injury or damage from the first dollar of loss, other than employee

claims compensated under FECA, would be an unfunded contingent

liability which, in the Office's view, is not statutorily sanctioned.

Rather, through statutorily-mandated insurance insurance protections,

waiver of claims requirements and payment of excess claims provisions,

Congress has limited the unfunded contingent liability the U.S.

Government may accept. The Office believes its approach to protecting

the U.S. Government when it is a customer of commercial launch services

providers is consistent with the limit of risk the Government has

agreed to accept under the statute.

To summarize the Office's view of the statutory allocation of risk

regime, whereas nongovernmental parties involved in licensed launch

activities accept responsibility for property damage or loss they

sustain and for injury or loss sustained by their employees, the United

States Government is covered on both accounts by insurance secured by

the licensee. Should the loss exceed the amount of required insurance

that a licensee has secured to cover such claims, then the Government

assumes responsibility for loss of or damage to its property (and

property of its contractors and subcontractors) in accordance with

required reciprocal waivers of claims under 49 U.S.C. 70112(b)(2).

Should the loss exceed the required insurance a licensee has secured to

cover third-party liability, then the Government, in effect, assumes

limited responsibility for losses above that amount sustained by

Government personnel by agreeing to pay excess third-party claims. At

the same time, nongovernmental parties are effectively protected from

claims for Government property losses by required insurance and the

Government's waiver of claims in excess of insurance; and from third-

party claims, including claims of Government personnel, by required

liability insurance and by procedures for U.S. Government payment of

third-party claims up to $1.5 billion in excess of insurance.

Section-by-Section Analysis

Part 440, Subpart A--Financial Responsibility for Licensed Launch

Activities

Section 440.1--Scope; Basis

Proposed Sec. 440.1 identifies the activities to which the Office's

proposed financial responsibility and allocation of risk requirements

would apply as all commercial space launch activities that are

authorized to be carried out under a launch issued by the Office.

Section 440.3--Definition

Section 440.3 defines terms used in part 440 that are not otherwise

defined in 14 CFR Ch. III. Terms defined in Sec. 401.5 of the

Commercial Space Transportation Licensing Regulations have the same

meaning for purposes of this part unless otherwise indicated. Some of

the terms, as defined in the proposed regulation, are self-explanatory

and required no additional elaboration. Other terms are discussed

below.

The term ``contractors and subcontractors'' is defined in this

section to address parties intended to be covered by the phrase

``contractors and subcontractors involved in launch services'' in 49

U.S.C. 70112 and 70113. This is important because these contractors and

subcontractors have certain responsibilities and enjoy certain benefits

under the statute relating specifically to the requirements

[[Page 39002]]

for insurance (or other form of financial responsibility), reciprocal

waivers of claims and the U.S. Government's payment under certain

circumstances of successful third party claims in excess of required

liability insurance.

As used in the Act, the term ``contractors and subcontractors'' is

generally modified by the phrase, ``involved in launch services.'' The

term ``launch services'' is defined by the Act to include ``(A)

activities involved in the preparation of a launch vehicle and payload

for launch; and (B) the conduct of a launch.'' 49 U.S.C. 70102(5). When

this term is coupled with ``contractors and subcontractors'' for

purposes of sections 70112 and 70113 of the statute, a literal reading

could narrowly limit the group of covered contractors and

subcontractors to service providers involved strictly in on-site launch

preparatory and support activities. The Office does not believe that

this interpretation is consistent with the overall objective of the

financial responsibility and payment of excess claims provisions of the

statute, which is to ensure financial protection and an equitable

sharing of risks among the parties exposed to potentially catastrophic

losses from a launch accident. The group of covered parties should not

be limited only to the most obvious and visible launch participants

that are engaged in preparing the launch vehicle and payload for launch

and conducting the launch at the launch range. This group should also

encompass, for example, the manufacturer that produces a component part

for installation in the launch vehicle or payload, or the supplier that

delivers a piece of equipment or other physical object used to prepare

for or conduct a launch, as well as the contractor that constructs or

refurbishes a launch pad specifically for licensed launch activities.

In other words, to the extent a third-party loss is attributable to the

direct or direct involvement of contractors or subcontractors who have

provided goods or services in connection with licensed launch

activities, the required insurance should cover their resulting

liability. It is important to note that the statute addresses claims

that result from an activity carried out under a license. Third-party

claims that do not result from licensed activities are not addressed by

the financial responsibility requirements of the statute. For example,

third-party claims that arise during the manufacture of a component

part would not be covered by required insurance.

Accordingly, the term ``contractors and subcontractors'' as set

forth in proposed Sec. 440.3 would include all contractors and

subcontractors at any tier that participate in or contribute to the

conduct of licensed launch activities, including suppliers of property

and services and component manufactures of a launch vehicle or payload.

The Office requests comments on the practical ability to protect all of

these parties through required insurance.

The definition of the term ``customer'' in proposed Sec. 440.3 is

intended to respond to concerns that the protections afforded ``the

customer'' under the statutory allocation of risk regime be available

not only to the party that actually contracts with the commercial

launch services provider and prospective licensee, but also to the

intended beneficiary or recipient of launch services when the latter

party is different from the former. For example, this situation

typically arises in the context of ``turnkey'' contracts for on-orbit

delivery of a satellite. Under this type of arrangement, the ultimate

owner/operator of the satellite contracts with a satellite manufacturer

to produce the satellite and secure launch services to deliver the

satellite to a prescribed orbit. The satellite manufacturer purchases

launch services directly from a commercial launch services provider,

and transfers title to the satellite only after successful completion

of the launch and on-orbit tests to confirm that the satellite is

functioning properly. For this reason, the term ``customers'' also

includes a person to whom the procurer of launch services conditionally

sells, leases, assigns, or otherwise transfers its rights in the

payload or a part thereof. Another example is the purchaser of an

interest in the satellite, e.g., transponders, from the party that owns

the satellite whether that party has purchased launch services directly

or has contracted for on-orbit delivery on a ``turnkey'' basis. Another

example is the customer who has placed its property on board the

payload in order to receive an on-orbit service, such as microgravity

experiments. The Office believes that these parties should be viewed as

``customers'' in order to enable U.S. commercial launch services

providers to compete with foreign operators, consistent with one of the

objectives of the 1988 Amendments. The proposed definition of

``customer'' therefore includes the person who enters into a launch

services agreement with the licensee, as well as any person to whom the

customer has, conditionally or otherwise, sold, leased, assigned or

otherwise transferred any of its rights in the payload to be launched.

The term ``customer'' does not include the ultimate beneficiary of

the payload services, as opposed to launch services, because doing so

could theoretically include any person who uses a television or makes a

long-distance telephone call, and goes beyond the intended scope of the

Act.

When the licensee's customer is a U.S. Government agency, it is not

intended that the agency be treated any differently from a

nongovernmental customer with respect to the payload. Thus, as

discussed in greater detail in the accompanying supplementary

information under the heading, ``Government Customer,'' and in the

analysis of Sec. 440.17 of the proposed regulations, the Government

payload is not covered by required Government property insurance and

the U.S. Government agency involved accepts responsibility for property

damage to the payload. For other purposes, the Government customer is

an agency of the United States involved in licensed launch activities

and, as such, it is a named insured in required insurance and its

employees are deemed third parties.

A definition of the term ``Government personnel'' has been included

in proposed Sec. 440.3 for purposes of identifying those employees of

the Government and its contractors and subcontractors entitled to

protection and coverage by required insurance.

A definition of the term ``hazardous operations'' is included to

add clarity to the list of information required by the Office to

perform a determination of maximum probable loss. The definition

proposed is consistent with the Office's study, ``Hazard Analysis of

Commercial Space Transportation,'' prepared in May 1988, and is

intended to capture activities that create a potential for an accident

that would result in damage or injury.

The term ``liability'' refers to any legal obligation, whether

arising under United States, international or foreign law, to pay

claims for bodily injury or property damage resulting from licensed

launch activities.

The term ``licensed launch activities'' is intended to reflect the

activities subject to the Department's authority under the Act to

license the launch of a launch vehicle. For purposes of applying the

proposed regulations, it focuses specifically on activities authorized

to be conducted under a particular license issued by the Office.

The term ``maximum probable loss'' (or MPL) refers to the Office's

determination, in the form of a dollar amount, of the greatest

potential losses for bodily injury and property damage

[[Page 39003]]

that can reasonably be expected to occur as a result of licensed launch

activities. The Office determines the value of the maximum probable

loss attributable to licensed launch activities by analyzing the known

hazards, the consequences (amount of loss), and probability of loss

associated with such activities. It does not mean maximum possible

loss, that is, a ``worst case'' scenario regardless of likelihood.

Rather, assessing maximum probable loss employs risk analysis

methodology. The analysis takes into account the characteristics of one

or more launches in similar circumstances, the proximity of persons and

property on and around the launch site and the likelihood of injury and

damage within an established probability threshold. (A more elaborate

explanation of the Office's methodology for determining the value of

maximum probable loss is provided in the section-by-section analysis

accompanying Sec. 440.7.)

Through risk analysis, the Office determines two results: the

probability an undesirable event will occur and the consequences

(measured as the amount of loss) of that event. The Office then

compares these results to a threshold probability of occurrence

selected by the Office in order to determine whether the results are

reasonable to expect, or probable, and therefore warrant financial

protection against their occurrence. Typically, the larger, or more

catastrophic, the potential loss or damage, the less likely it is to

occur. The threshold probability is the probability value selected by

the Office at and below which loss or damage that can be reasonably

expected to occur is measured. Loss or damage that has a likelihood of

occurring that is equal to or greater than the threshold probability is

considered probable. Accordingly, insurance to protect against that

amount of damage or loss is required. Loss or damage that has a

likelihood of occurring that is less than the threshold probability is

not reasonably likely to occur and is therefore considered improbable.

Accordingly, insurance to protect against such loss or damage is not

required. In summary, maximum probable loss is the dollar value

determined by the Office as the upper bound of loss that can reasonably

be expected to result from licensed launch activities. Loss or damage

exceeding the upper bound would result from events that are so very

unlikely as to be unreasonable to expect. That is, they are not

sufficiently probable.

Currently, the Office utilizes two different threshold

probabilities in determining third-party and Government property

maximum probable loss. The threshold probability used for determining

third-party MPL, exclusive of Government personnel, is on the order of

one in ten million. The threshold probability for determining

Government property MPL and third-party MPL for Government personnel is

on the order of one in one hundred thousand. The thresholds are defined

to accommodate the difficulty of setting precise bounds on risks that,

by definition, are somewhat remote.

The Office's selection of on the order of one in ten million as the

threshold probability (the probability of occurrence) for determining

third-party MPL is based upon the Government's experience in supporting

launch activities at Federal ranges. Because of the stringent safety

requirements used at Federal range facilities, the general public in

the vicinity of the range has little chance of being adversely affected

by a launch event. As a result, the likelihood of a third-party

casualty resulting from a launch from a Federal range should be no

greater than on the order of one in one million. If the Office used one

in one million as the threshold probability for determining third-party

MPL, no third-party loss would reasonably be expected to occur, the MPL

would be zero, and no third-party liability insurance would be

required. The Office does not believe that this was the result Congress

intended in adopting maximum probable loss as the basis for setting

financial responsibility requirements. Accordingly, the Office's view

is that the Act requires a reasonable and measurable amount of

financial responsibility by licensees and has selected the very low

threshold of on the order of one in ten million probability of

occurrence as the threshold probability that achieves this result. The

MPL determination using this threshold signifies that there is less

than on the order of a one in ten million chance that claims for third-

party losses would exceed the required amount of insurance. Stated

another way, the insurance requirement set by the Office is the maximum

magnitude of loss such that there is less than on the order of one in

ten million chance of exceeding this amount.

The Office utilizes on the order of one in one hundred thousand as

the threshold probability for determining Government property insurance

requirements because Federal range facilities, by their very nature and

intended purpose, will be exposed to hazardous activities and may

suffer some damage. Thus, the Government appropriately accepts greater

risk than third parties and the MPL is determined using the higher

threshold probability. This assumption of some amount of risk may, in

part, account for the lower statutory ceiling on insurance requirements

and the Government's waiver of claims for damage above the amount of

required insurance. Similarly, Government personnel, including

employees of Government contractors and subcontractors, accept greater

risk than the general public or other third parties through their

exposure to or involvement in hazardous operations. For this reason,

the third-party MPL determination includes risks to Government

personnel measured at the probability threshold of on the order of one

in one hundred thousand, rather than on the order of one in ten

million.

In the Office's experience, this approach results in insurance

requirements that are reasonable, within the statutory ceiling for

required insurance, and adequate to protect U.S. Government interests.

The proposed definition of the term ``third party'' reflects the

definition contained in 49 U.S.C. 70102(11). However, the Office's

definition of ``third party'' clarifies the statutory definition by

expressly including as third parties United States Government

personnel, including employees of Government contractors and

subcontractors, to the extent that they are directly involved in

providing launch support or launch services for licensed launch

activities. The purpose of the definition is to ensure that liability

insurance, or other form of acceptable financial responsibility,

required under Sec. 440.5(b) of the proposed regulations is available

to cover the claims of Government personnel, as well as persons not

involved in licensed launch activities, who are injured or otherwise

sustain a loss as a consequence of those activities. Government

personnel who contract personally and directly with a licensee or other

nongovernmental launch participant to provide a service are not

considered Government personnel for purposes of these regulations when

performing that service. In addition, the proposed definition would

expressly exclude employees of other launch participants because their

claims for injury or loss are not intended to be included in the

Office's determination of required third-party liability insurance.

Responsibility for employee losses is assumed by each employer under

the reciprocal waiver of claims required under Sec. 440.17 of the

proposed regulations, and those employee claims are not eligible for

payment by the U.S. Government in the event of excess third-party

claims.

[[Page 39004]]

The term ``United States'' is intended to refer to the United

States Government in its entirety and as the collective sum of its

various parts.

Section 440.5--General

Although issuance of a license constitutes legal authorization to

carry out the activities specified therein, certain conditions must be

satisfied for the licensee to proceed with authorized activities.

Section 440.5(a), as proposed, would establish the fundamental

requirement that authorization to conduct licensed launch activities

pursuant to a license issued by the Office is contingent upon the

licensee's demonstration of financial responsibility and compliance

with risk allocation requirements as set forth in proposed regulations.

In addition to insurance required by this part, a licensee may be

required by other agencies of the United States Government to obtain

other types of liability or property insurance covering activities

involving United States launch property, launch services or personnel.

Other insurance requirements may include workers compensation,

unemployment insurance, employer's liability, comprehensive automobile

liability, environmental liability, or insurance required by Federal,

State or local environmental protection laws and regulations. These

other insurance requirements are not set forth in license orders issued

by the Office; however, licensees are not relieved of the requirement

to comply with them.

In addition, as further explained in the section-by-section

analysis accompanying Sec. 440.15(b), the financial responsibility

requirements prescribed under the proposed regulations would preempt

those provisions in agreements between the licensee and the United

States, or any agency thereof, involving United States launch property

or launch services that address financial responsibility, allocation of

risk, and related matters covered by 49 U.S.C. 70112 and 70113. The

objective of this preemption is to avoid duplicative requirements, but

not to relieve the licensee of contractual or legal obligations

intended to address interests other than those served by the statute.

Section 440.5(b) would codify the Office's existing practice of

setting the required amount of financial responsibility in license

orders. As a procedural matter, the Office has relied on the issuance

of license orders to supplement the license and prescribe specific

terms, conditions and limitations, including financial responsibility

requirements, on a case-by-case basis. Many of these terms and

conditions would now be set forth in rules of general applicability.

The amount of financial responsibility that must be obtained would

continue to be set forth in a license order. The license order would

generally be issued concurrently with the license, although there may

be circumstances when it would follow issuance of the license. The

Office may also revise financial responsibility requirements in a

subsequent license order in the event of a change in exposed property

or risks affecting the required amount of coverage. In any event, to

the extent the license order reflects the Office's determination of

maximum probable loss, the timing of its issuance would be subject to

the provisions of proposed Sec. 440.7.

Propose Sec. 440.5(c) states the fundamental principle that

evidence of financial responsibility provided by the licensee is no

substitute for actual financial responsibility of the licensee. In the

event the licensee fails to obtain or maintain insurance or financial

responsibility in amounts and according to the terms and conditions

prescribed, the licensee would bear the risk and be liable for claims

resulting from licensed launch activities that would otherwise have

been covered. In addition, in the event of a defense raised, or

exclusion, to coverage under the policy that relieves the insurer from

compensating claims, the licensee would remain responsible for

satisfying the claim. The only exception to this fundamental principle

provided under the statue is where the Secretary of Transportation

specifically determines that an exclusion is usual for the type of

insurance involved, and the United States Government agrees to provide

for paying claims from the first dollar of loss. As explained in the

section-by-section analysis accompanying Sec. 440.19, a policy

exclusion would be considered ``usual'' only if insurance covering the

excluded risk is not commercially available at reasonable rates. The

licensee is required to submit a certification to that effect when

demonstrating compliance with financial responsibility requirements. No

final determination is made by the Department unless and until an

occasion arises when the Department is called upon to prepare a

compensation plan covering excluded claims. If it then becomes evident

that insurance was, in fact, available at commercially reasonable

rates, the Government need not pay claims from the first dollar of loss

and the licensee remains responsible for the liability.

Failure by the licensee to comply with these requirements may

result in suspension or revocaton of the license and also subjects the

licensee to other penalties as provided in section 405.7 of this

chapter.

Section 440.7--Determination of Maximum Probable Loss

Section 440.7, as proposed, describes the Office's procedures for

assessing and issuing a determination of maximum probable loss (MPL) on

which financial responsibility requirements are based. Section 440.7(a)

would provide that a determination of maximum probable loss resulting

from licensed launch activities forms the basis of the financial

responsibility order issued by the Office.

Section 440.7(b) would provide the timing for the Office's issuance

of the MPL determination, consistent with the Act. The Act provides

that MPL determinations must be made no later than 90 days after a

licensee or transferee requires it and has submitted all of the

information needed to make a determination. In practice, the Office

begins the risk analysis required for the MPL determination during the

180-day license application review period. Doing so enables the Office

to issue financial responsibility requirements concurrently with a

license so as not to delay commencement of licensed launch activities.

On a very few occasions, the Office has been unable to issue the

MPL determination concurrently with the license. This result may occur

for several reasons. In order to conduct the analyses, the Office

requires from the applicant information described in Appendix I to the

proposed regulations and may also request information from Federal

range facilities involved in proposed launch activities or exposed to

risk of damage or loss as a result of proposed activities. Incomplete

information, either from the applicant or from the Federal range

facility, can extend the amount of time necessary for the Office to

complete and issue the MPL determination. Typically, a delayed

determination results from submission by the applicant of incomplete

information on which to perform the necessary risk analyses. Until the

Office has complete and sufficient information the 90-day period does

not begin. A delayed determination as a result of incomplete

information is not untimely. In addition, the Act requires that the

Office consult with heads of other appropriate Federal agencies in

issuing financial responsibility requirements. The Office's practice

has been to share its

[[Page 39005]]

MPL analyses with affected Federal agencies and request comments within

three weeks. The Office's experience has shown that three weeks may not

be sufficient for other Federal agencies to complete their reviews and

issuance of the MPL determination may necessarily be delayed.

Accordingly, proposed Sec. 440.7(b) would provide that the Office

notify a licensee or transferee of any delays in issuing the MPL

determination beyond the statutory 90-day period. The Office intends

that this provision would be invoked only in circumstances beyond the

Office's control, such as protracted consultation with other Federal

agencies.

Proposed Sec. 440.7(c) refers to Appendix I to the proposed

regulations which prescribes information requirements for issuing a

maximum probable loss determination. Appendix I is intended to be a

comprehensive list of information requirements, some of which could be

waived by the Office if, as a result of consultation with the

applicant, the Office finds that the information is not necessary in

light of the particular launch proposal. Once information is provided,

the person requesting the MPL determination is responsible for

reporting any changes that could affect the outcome of the risk

analyses.

As provided in proposed Sec. 440.7(d), the Office may amend or

adjust its maximum probable loss determination to reflect any new

information relevant to an accurate assessment of risk. In lieu of

submitting duplicative information, a person requesting a MPL

determination who has previously been issued one may certify that there

has been no change from information previously submitted. This

provision is intended to reduce the regulatory burden on licensees who

conduct similar launch activities under separate licenses.

An MPL determination must accompany every license authorizing

launch activities and is therefore typically performed in conjunction

with the Office's review of a license application. Section 440.7(e)

would address the situation in which the Office is requested to issue a

determination of maximum probable loss resulting from activities that

are not the subject of a specific license application. A determination

made under this section would not be governed by the 90-day requirement

set forth in Sec. 440.7(b).

Methodology for Determining Maximum Probable Loss

The Office derives the value of the maximum probable loss that may

result to third parties and Government property from licensed launch

activities through case-by-case risk analyses. The Office considers

factors ranging from the kinds of hazardous operations, as defined in

proposed Sec. 440.9, to be conducted under a license, to the number of

third parties that may be exposed to risk in the event of a launch

accident. Failure modeling techniques, the Office's experience in

preparing numerous MPL determinations, and engineering judgment all

play roles in the final determination. A more complete description of

the Office's approach to hazard analysis and risk analysis techniques

appears in a study, entitled ``Hazard Analysis of Commercial Space

Transportation,'' released by the Office in May 1988. A copy may be

obtained from the Office upon request. In addition, the Office is

preparing a comprehensive description of its procedural methodology for

determining maximum probable loss in a separate report to be made

available to the public. A brief summary of the Office's approach to

determining MPL is presented below to explain the underlying rationale

for the information requirements referenced in proposed Sec. 440.7(c)

and listed in appendix I to part 440.

In addition to information required from the applicant, the office

obtains certain information from the Federal range facility in order to

assess properly the value of Government property exposed to risk. This

information is not reflected in regulatory requirements. Typically,

this information consists of identification of facilities the Federal

range facility has authorized for use by the licensee and the value of

those facilities, other range facilities that the Federal range

facility identifies as exposed to risk as a result of the licensee's

proposed launch activities due to their proximity to the licensee's

hazardous operations, the number of Government personnel that the

Federal range facility believes would be exposed to risk, and range-

required risk mitigation measures.

Much of the information required to complete the MPL determination

is provided as part of the application to conduct a launch. However,

because any person can request a maximum probable loss determination at

any time, information requirements for obtaining a determination are

included as part of this proposed regulation. The proposed information

requirements are not intended to place an additional or duplicative

burden on prospective licensees and can be satisfied by specific

reference to the license application.

Appendix I describes the full range of information required from an

applicant to complete the MPL determination. In certain circumstances,

not all of the information would be required and the Office will advise

the applicant accordingly during pre-application consultation. For

example, where a launch from an isolated location would not expose any

identifiable Government property to risk, the Office would waive those

information requirements directed at assessing risk to Federal range

facility assets. A launch proposal may involve vehicles and risks

similar to those previously considered by the Office and the Office may

waive information requirements it believes would be unnecessary or

duplicative in light of existing analyses. Where the Office can

determine, on the basis of the launch proposal, that certain risks need

not be considered in order to calculate MPL, the Office will waive the

requirements that pertain to those risks.

The complexity of the MPL analysis will depend upon the risks that

attend a specific launch proposal. At its most complicated, a complex

launch vehicle involving hazardous operations and flight paths that

expose people and property on and off-range to risk, the Office is able

to employ a variety of risk analysis tools, such as computer models

that estimate impact probabilities, potential property damage and

casualty expectations. For all proposals, government property and

third-part losses are considered in separate MPL analyses.

The Office's objective is to determine the value of the maximum

magnitude of loss that is sufficiently probable to warrant financial

responsibility protection. That is, within the stated probability

thresholds, as defined in proposed Sec. 440.3, the Office must

establish a maximum value of loss. By corollary, the maximum magnitude

of loss within the probability threshold drives the MPL value. This

means that the Office need not consider every single accident scenario

that falls within the threshold probability. Those having relatively

minimal damage consequences need not be individually considered.

Rather, the office's focus is on finding the maximum value of loss that

would result from an accident that is within the specified threshold

probability of occurrence. The Office does so by identifying

specifically the hazardous activities to be conducted under a license,

Government and third-party property placed at risk by those activities,

and the number of third parties placed at risk. Then, the Office

identifies a range of accident or failure scenarios and estimates the

probability

[[Page 39006]]

of occurrence for each scenario. The Office then estimates the value of

loss for various accident scenarios.

The Office utilizes several methodologies, in order of preference,

to estimate the probability of occurrence of the different scenarios.

The order of preference begins with actual experience or existing

models, and descends to expert probability analysis as the second best

alternative, followed by professional engineering judgment.

Estimating the value of loss for each accident scenario is done

similarly, using different methodologies in an order of preference.

Actual experience is most reliable and is used wherever it exists and

is directly applicable to a launch proposal. For pre-flight licensed

launch activities, the Office uses estimates that are informed by

facility damage tables developed for the Federal range facilities,

building design specifications, and engineering judgment. Computer

models, such as the Facility Damage and Personnel Injury (DAMP)

programs, may be used to estimate damage during and immediately

following vehicle life-off. For third-party casualties, the Office

develops an Expectation of Casualty figure for off-range population and

Government personnel at risk.

As noted above, low loss scenarios need not be considered unless a

possible accident scenario involves losses that, when combined, may be

significant in determining the value of the maximum probable loss.

However, in many instances, accident scenarios are mutually exclusive.

For example, a pre-flight accident that destroys the launch vehicle

means there will be no launch, and there is no need to aggregate the

damage from a pre-flight accident of this nature and a post-launch

accident in determining the maximum value of loss.

In summary, the Office performs a detailed estimate of property

damage and casualties for the different accident scenarios that fall

within the threshold probability of occurrence in order to determine

the maximum value of loss. The MPL value becomes the amount associated

with the most costly accident scenario falling within the threshold

probability of occurrence.

Government Property

The Office's maximum probable loss determination for Government

property damage takes into account U.S. Government property situated on

a Federal range facility, wherever located. As noted above in the

Supplementary Information, the Office includes as part of its

determination Government range assets on adjacent Federal range

facilities that are exposed to risk of damage or loss as a result of

licensed launch activities.

The Office historically has not considered temporarily placed or

``transient'' Government property, including launch vehicles and

payloads, in calculating the maximum probable loss determination. The

Office bases its approach on several considerations. First, the Federal

range facility is responsible for maintaining a schedule of launch

activities. The Government is therefore aware of upcoming commercial

launch activities and, by exposing its transient or movable property to

the possibility of damage or loss due to commercial launch activities,

accepts certain risks. Second, readily movable property may no longer

be present at the time the licensee ultimately conducts licensed launch

activities. If that property were included in the MPL determination,

the licensee may be unfairly burdened with too great an insurance

requirement. One alternative would be to adjust, either upward or

downward, the amount of property insurance that would be required just

prior to commencing licensed activities. This approach is arguably

contemplated by the statue, which provides for the Secretary to amend

the maximum probable loss determination when new information so

warrants. However, last minute adjustments to the MPL determination due

to the Government's action of placing its property at risk, could prove

administratively burdensome for both the Office and the licensee, whose

launch could be delayed by having to demonstrate additional financial

responsibility due to last minute changes in requirements. Third,

including transient or Government property temporarily located on the

Federal range, such as launch vehicles and payloads, could readily

drive the MPL value above the $100 million statutory ceiling for

required insurance. Although the Act contains provisions whereby the

Department is directed to review annually the statutory ceilings on

required insurance and report to Congress proposed adjustments to

conform with changed liability expectations and the insurance market,

the Office views the $100 million statutory ceiling on the Government

property insurance requirement as a clear indication that Congress did

not intend for these Government assets, which typically cost in excess

of $100 million each, to be included as part of the range assets on

which the MPL determination is based.

The Office makes an important distinction between transient,

movable property that is not included in the MPL determination and

property that has been placed in a storage facility on the Federal

range. The latter is included in the MPL determination. The rationale

for the Office's distinction is that certain facilities are intended,

by design, to house Government property on a temporary or long-term

basis. However, where Government property has been stored in a facility

not designed or intended for storage, thereby exposing the property to

additional risk, the Office believes it would be unreasonable to impose

the cost of this additional risk on the licensee. The Office therefore

excludes the stored property from its MPL determination. In addition,

to the extent this stored property, such as rocket motors or

explosives, may contribute to the possible extent of damage to

Government facilities, the Office does not factor the additional losses

that may be attributed to that property in determining the MPL value.

In taking the approach of excluding certain transient, movable

Government property, the Office is aware that failure to include it

could expose the Government to greater risk of loss. However, the

Office believes that its approach reflects the intent underlying the

comparatively low statutory ceiling on the Government property

insurance requirement, and is reasonable in light of the Government's

assumption of risk in placing property on the Federal range facility in

a manner that exposes it to damage or loss from commercial launch

activities. For these reasons, the Office believes that its approach is

the better one. Nevertheless, it is important to bear in mind that,

whether or not the value of certain property is included in making the

MPL determination, damage or loss to any Government property, whether

fixed or movable, located on the Federal range facility must be covered

by the insurance policy the licensee obtains under 49 U.S.C.

70112(a)(1)(B). Comments are requested on the Office's approach to

considering non-fixed Government property in determining Government

property insurance requirements.

Current Replacement Value

In determining maximum probable lose for Government property, the

Office bases its findings on the current replacement value of the

property. The notion of current replacement value takes into account

the current use and function of a Government facility, not its

originally intended use. For example, the current replacement value for

a facility that was originally built to support engineering operations

but is no longer needed for that purpose and is

[[Page 39007]]

now used as an excess storage facility would most likely be lower than

its original construction cost, even if a launch accident meant its

total loss. The Office's rationale is that the cost of restoring

property to its original use when the Government itself has chosen not

to maintain the property in its original condition imposes an unfair

cost on the licensee. The reverse situation may also occur, whereby

restoring property to its current use may cost more than restoring it

to its original use. This could occur where property has been up-graded

or modified to support another purpose than originally intended. In

that event, the Office believes that it is fair and appropriate to

require insurance that covers the maximum probable loss to the

property's current value, up to the statutory ceiling. In all

circumstances, the Office consults with Federal range authorities in

valuing Government property.

Third-Party Property Damage

Under the proposed regulations, third-party property includes all

property owned by persons or entities other than the licensee and its

customer, and the contractors, subcontractors, and employees of each,

involved in licensed launch activities, the Government's contractors

and subcontractors involved in licensed launch activities, and the

Government (except for property located on a Federal range facility).

It includes the personal property belonging to Government personnel

involved in licensed launch activities, and all off-range private and

public property other than property on nearby or adjacent Federal range

facilities for which Government property insurance coverage is

required.

The risk analysis performed to determine the value of third-party

property maximum probable loss utilizes three approaches to estimating

property values: (1) Specific determinations, (2) averaging, and (3)

setting an upper bound or ceiling. The Office selects the appropriate

methodology to use on a case-by-case basis, taking into account such

factors as the availability of information, the launch site, and the

range of risks to third parties presented by a particular launch

proposal. The Office may use all three methods of estimating third-

party property losses in one MPL determining, depending upon the type

and amount of property exposed to loss or damage as a result of

licensed launch activities. In all instances, the Office utilizes a

conservative approach to ensure the adequacy and sufficiency of its MPL

determination and third-party liability financial responsibility

requirement.

The first estimation methodology, specific determinations, entails

obtaining actual property values and determining the likelihood and

consequences of an accident affecting that property. This method is

typically used for very high-value property in the area that would be

most exposed to risk. The second method, averaging, can be accomplished

in several ways. One way is to average estimated property values in a

homogeneous area through such means as county or city tax assessment

records. Another is to assume that an accident will occur in the high-

value part of the risk area and determine the average of the high-value

property exposed to risk. This conservative approach assures that the

MPL determination will be sufficient to cover losses to this high-value

property. The third method, setting an upper bound, also yields a

conservative result. This approach utilizes the Office's experience by

considering the nature and size of the area exposed to risk, e.g.,

urban, suburban, rural, industrial, farm, or some combination, and

comparing it to third-party property considered at risk in past MPL

analyses and to know values of Government property placed at risk.

Setting an upper bound involves a qualitative assessment of the value

of third-party property at risk and is based on the Office's extensive

experience in assessing risk.

Third-Party Casualties

The Office must also consider third-party casualties in determining

maximum probable loss to third parties. Doing so requires an analysis

of the number of persons exposed to risk and assigning a value of life.

Department guidance issued in 1993 for preparing economic evaluations

suggests using $2.5 million as the value of life in estimating one's

willingness to pay for safety measures in order to reduce one's

probability of death. However, the Office is mindful of the distinction

between the value of life used for purposes of estimating the cost of

safety requirements in regulations and for seeking damages in civil

litigation. Accordingly, the Office utilizes the somewhat higher figure

of three million dollars as the value of a life to assure a

conservative, but reasonable, result.

The Office requests comments on the appropriate means of assessing

the value of third-party property and the value of life for purposes of

determining maximum probable loss to third parties. In their comments,

commenters are requested to consider the impact on insurance

requirements that could result from a change in methodology.

Section 440.9--Insurance Requirements for Licensed Launch Activities

This section would establish in a regulation financial

responsibility requirements in the form of insurance as a condition of

every license issued by the Office authorizing commercial space launch

activities. A licensee would also be allowed to demonstrate an

equivalent amount of financial responsibility through means other than

insurance.

Proposed Sec. 440.9(b) would establish the requirement that a

licensee obtain a policy of liability insurance to pay claims of third

parties for bodily injury or property damage resulting from licensed

launch activities. In accordance with 49 U.S.C. 70112(a)(4), the

parties protected under the insurance policy as insureds, or additional

insureds, are the United States, its agencies, and its contractors and

subcontractors, and their respective personnel, involved in licensed

launch activities; and the licensee, the customer, and their respective

contractors and subcontractors involved in licensed launch activities.

Because Government personnel, as defined in proposed Sec. 440.3, are

included within the proposed definition of ``third party,'' Government

personnel may be both third-party claimants whose claims are

compensable by required liability insurance, as well as additional

insureds.

Under proposed Sec. 440.9(c), the amount of required insurance is

based on the Office's determination of maximum probable loss from

third-party claims resulting from licensed launch activities. As

provided by statute, the amount of coverage required by the Office may

not exceed $500 million, or the maximum liability insurance available

on the world market at reasonable cost. It should be noted that the

maximum limit on insurance applies to the aggregate of claims for any

particular launch, as provided by 49 U.S.C. 70112(a)(3). A policy may

cover more than one launch. However, the amount of insurance prescribed

by the Office in a license order must be available to cover the total

of third-party claims resulting from each launch event. For example, if

a licensee intends to conduct a series of launches under an operator

license and third-party claims resulting from the first launch are

compensated by the liability policy, the amount of coverage for each

succeeding launch must be the amount required by the license order.

Coverage may not be reduced by the amount of claims paid

[[Page 39008]]

as a result of previous launch activities conducted under the same

license.

Section 440.9(d) would establish in a regulation the requirement

that a licensee must obtain a policy of insurance to compensate for

damage to or loss of property at a Federal range facility that is

owned, leased or occupied by, or in the care, custody or control of,

the United States, its agencies, and its contractors and subcontractors

involved in licensed launch activities, that results from licensed

launch activities. The maximum probable loss determination to support

this requirement focuses on valuable national assets located at Federal

range facilities that are put at greatest risk by licensed activities;

however, all Government property (and that of its agencies, contractors

and subcontractors involved in licensed launch activities) at a Federal

range facility must be protected. This would include Government range

facilities surrounding or adjacent to the proposed launch site. The

Office's experience in administering financial responsibility

requirements to protect Government property has been previously

described in the supplementary information accompanying this proposal

under the heading, ``Property Protection for Government Launch

Participants.'' The Office does not object to any reasonable approach

on the part of a licensee that is taken to meet this requirement as

long as the ultimate objective is achieved, that is, providing for the

compensation of property damage sustained at Federal range facilities

by the United States, its agencies, contractors and subcontractors

involved in licensed launch activities, resulting from activities

carried out under a license. However, the Office believes that, at a

minimum, naming the U.S. Government and its agencies, contractors and

subcontractors, involved in licensed launch activities, as additional

insureds is necessary to accomplish this objective. Comments are

requested on whether the Government should also be named the loss payee

and be responsible for administering payment of insurance proceeds to

its contractors and subcontractors.

Under proposed Sec. 440.9(e), the amount of required insurance

would be based on the Office's determination of maximum probable loss

attributable to property damage claims of the United States, its

agencies involved in launch services, and its contractors and

subcontractors involved in licensed launch activities; however, the

amount would not exceed $100 million. As noted in the analysis

accompanying proposed Sec. 440.9(c), the maximum limit on insurance

applies to the aggregate of claims for any particular launch. Covered

claims are those against a person, including Government employees, for

damage or loss to Government property, including the property of

Government contractors and subcontractors, resulting from licensed

launch activities. In this respect, the named insureds are different

from those on the liability policy.

Section 440.9(f) would provide that, in lieu of obtaining policies

of insurance, the licensee may demonstrate financial responsibility in

an alternative form--such as insurance purchased from a risk retention

group authorized under the Risk Retention Amendments of 1986, surety

bonds, letters of credit, or some combination--that reflects

substantially the same terms and conditions of the requirements set

forth in these regulations. Whatever the form of financial

responsibility proposed in lieu of insurance, the licensee must

demonstrate that it meets the requirements for financial

responsibility.

Section 6 of the 1988 Amendments to the Commercial Space Launch Act

provides special incentives to certain satellites affected by National

Security Decision Directive 254. This directive, issued by President

Reagan in August 1986, following the Challenger accident, essentially

ended NASA's role in launching commercial and foreign satellites.

Section 6 of the 1988 Amendments provides that if certain eligibility

criteria are met, the requirement that the licensee obtain property

insurance covering loss of or damage to United States Government

property does not apply. The Office believes that there are no

remaining ``eligible satellites'' that have not been launched or

otherwise accounted for and no provision is made in the proposed

rulemaking to cover them. Comments are requested as to whether this

provision may be properly omitted in final regulations.

Section 440.11--Duration of Coverage; Modifications

Proposed Sec. 440.11(a) would specify when financial responsibility

must be in place. Section 440.11(a), as proposed, would provide that

required insurance coverage or other form of financial responsibility

must attach upon commencement of licensed launch activities, and remain

in full force and effect until the later of: (i) The completion of

licensed launch activities, as defined by the Office in a regulation,

or (ii) until risk resulting from licensed launch activities to third

parties and Government property is sufficiently small, as determined by

the Office through the risk analysis conducted to determine maximum

probable loss, that financial responsibility is no longer necessary.

The duration of financial responsibility requirements for a particular

launch is specified by the Office in a license order.

The statutory requirement for a licensee to obtain insurance or

otherwise demonstrate financial responsibility refers to providing

compensation for claims ``resulting from an activity carried out under

the license.'' 49 U.S.C. 70112(a)(1). Based upon this language, the

Office's view is that insurance requirements attach upon commencement

of licensed launch activities but do not necessarily cease upon

completion of a licensed launch, defined for orbital launches as the

point when any remaining fuel is emptied from the upper stage, the

vehicle tank is vented and otherwise ``safed,'' and the upper stage is

no longer subject to the operator's control. Hazard analyses performed

by the Office to determine maximum probable loss have shown that the

greatest exposure for which insurance is typically required exists at

the time of lift-off and flight, and that there is virtually no

quantifiable risk to third parties or to United States Government

property after completion of a nominal launch. The Office has found

that thirty days is an appropriate amount of time in which to determine

whether an orbital launch has been nominal or whether an anomaly has

occurred that could affect risks to third parties or the Government.

For this reason, historically, the Office has provided in license

orders applicable to orbital launches that insurance coverage is

required to attach upon commencement of licensed activities and remain

in force ``for a period of thirty (30) days following payload insertion

into orbit.'' For suborbital launches, insurance has been required to

be maintained at least until motor impact and payload recovery.

However, in the event of a launch anomaly, the Office may amend the

license order to require that the licensee maintain insurance until the

Office determines that risks to third parties and Government property

are sufficiently small that insurance is no longer needed.

When the licensee is no longer required to maintain insurance under

the license, both the Government's waiver of excess property damage

claims under Sec. 440.17(c), and the Government payment of excess

third-party claims provisions under Sec. 440.19, would apply from the

first dollar of loss. However, it is important to note that the

[[Page 39009]]

Act requires that the third-party claim result from the licensed

activity in order for the Government payment of excess third-party

claims provision to apply. When that nexus no longer exists, neither

does the Government's acceptance of the risk of such claims. In every

instance, a factual determination would be required as to whether a

sufficient nexus exists between the licensed activity and the third-

party claim. In terms of business planning, it has been the Office's

experience that for nominal launches, licensees may procure insurance

for periods of time in excess of thirty days in accordance with

individual risk management practices because the premium rate

difference to cover any additional period of time tends to be

negligible.

As noted in the preceding Supplementary Information, questions have

arisen over time with respect to the appropriate scope of a license

authorizing pre- and post-flight ground operations and associated

requirements for insurance coverage. As to pre-flight activities, the

Office intends to address the question of the appropriate scope of a

license authorizing launch activities in a separate rulemaking. With

respect to post-launch ground operations, the Office believes that

damage to Government property or property of Government contractors and

subcontractors, as well as to third parties, could occur during clean-

up and from removal of launch-related equipment and material and that

insurance should remain in place to protect against such claims. In

this regard, it is significant to note that the Act requires financial

responsibility to protect against claims ``resulting from an activity

carried out under license'' (emphasis supplied) (49 U.S.C.

70112(a)(1)). Comments are requested on the proposed duration of

required insurance with respect to ground operations, including clean-

up and removal of launch-related equipment from the launch site.

Comments are also requested on the extent to which insurance should be

required to compensate claims of third-parties and the Government for

short-term environmental damage, or alternatively, whether clean-up or

short-term environmental damage to Government property should be

charged to the licensee as a direct cost.

The Office is also requesting comments on the extent to which

insurance to protect against claims for long-term environmental or

property damage should be required, its availability, and mechanisms

for assuring adequate coverage has been obtained. The Office is aware

that long-term environmental damage risks are typically excluded from

launch insurance coverage because of, among other things, the

difficulties of insuring against claims that may not arise until long

after the risk period (generally launch plus a number of days) is

concluded. Commenters should address whether such claims should be

included in determining maximum probable loss for licensed launch

activities and whether the existing statutory ceilings are adequate if

such claims are included. In considering the issue, commenters are

requested to suggest mechanisms for ensuring that funds are available

to address long-term environmental damage that results from commercial

launch activities. Commenters are also requested to address whether and

the extent to which insurance to protect against property damage that

results from orbital debris long after a launch has been completed

should be required.

Section 440.11(b), as proposed, would provide that the licensee may

not replace, cancel, change or withdraw the insurance or other form of

financial responsibility required, or in any way modify it to reduce

the limits of liability or the extent of coverage, and that any form of

financial responsibility may not be permitted to expire prior to the

time specified by the Office in a license order, unless the Office is

notified in advance and expressly approves of the modification. The

purpose of this requirement is to ensure that the licensee has adequate

coverage in place that meets the requirements of the applicable license

order.

Section 440.13--Standard Conditions of Coverage

Proposed Sec. 440.13(a) identifies the terms and conditions that

must be included in any insurance policy obtained to satisfy the

requirements of proposed Sec. 440.9. With some modification, the

proposed terms and conditions of insurance coverage have been required

by the Office in license orders issued on a case-by-case basis in order

to carry out the office's responsibilities under the statute, and to

the Office's knowledge, have not been difficult to obtain.

Section 440.13(a)(1) would provide in a regulation that any

required policy of insurance must provide that bankruptcy or insolvency

of the insured (licensee) or any additional insured does not relieve

the insurer of any of its obligations under the policy. This

requirement is commonly found in liability insurance policies. Its

presence is desirable because under common law, if an insurance

agreement were construed as only an agreement to indemnify against

loss, under certain circumstances the insurer could avoid payment of

third-party claims altogether where the insured was declared insolvent.

This condition is intended to remove any doubt that the policy insures

against liability to pay damages and is not merely an agreement to

indemnify against loss.

Section 440.13(a)(2), as proposed, would provide that the policy

limits for any required insurance policy apply separately to each

occurrence and in the aggregate with respect to claims resulting from

licensed activities associated with a particular launch. This provision

would further the intent of 49 U.S.C. 70112(a)(3), which prescribes

insurance ceilings applicable to ``the total claims related to one

launch, * * *'' As noted above, where insurance is obtained by a

licensee for a number of launches under an operator license, the limits

of the policy must be available for each licensed launch and may not be

reduced due to claims resulting from a prior occurrence.

Proposed Sec. 440.13(a)(3) would state that any required policy of

insurance must provide for the payment of claims from the first dollar

of loss, without regard to any deductible, to the policy limits, except

in the limited circumstances allowed in the regulation. The Office

discourages the use of a deductible because of the clear statutory

mandate to ensure comprehensive protection for all insureds from

liability for third-party claims and prompt restoration of United

States range assets. If this coverage entails additional cost to the

licensee, it is not unreasonable relative to the policy objectives

underlying the statute. Risk retention arrangements between the

licensee and its insurer may be used as a means of reducing the policy

premium.

Nevertheless, the Office understands that licensees may desire a

small deductible amount from their coverage in order to reduce policy

premiums and the Office has included a provision in the proposal that

would allow the reasonable use of deductible amounts. However, to

ensure that statutory objectives are achieved, a deductible would be

allowed only if the amount of the deductible is placed in a an escrow

account established to cover claims resulting from licensed launch

activities or if the licensee can demonstrate to the office that it has

that amount readily available to it, with no prior liens or obligations

on the funds. The Office believes that use of a deductible is

appropriate only for comparatively small sums and should not be used as

a means of avoiding insurance.

[[Page 39010]]

Comments are requested on whether the proposed approach is reasonable.

Where Government property is concerned, commenters should bear in mind

the objective that proceeds must be made immediately available to

restore Government property to its prior condition and use, and that

any delays (e.g., in the event assets must be liquidated to pay claims)

would be counter to the statute. The Government may also be exposed to

claims by its contractors and subcontractors for their property damage

where insurance proceeds are not immediately available to cover those

loses. Any inability to obtain promptly full payment of such claims

could expose the Government to administrative and legal expenses the

Government seeks to avoid through required insurance.

Section 440.13(a)(4), as proposed, limits the defenses available to

the insurer to avoid paying claims under the policy. It states that a

required policy of insurance must provide that the actions of the

insured or any additional insured shall not result in invalidation of

the policy; however, an insured or additional insured itself may be

denied coverage under a policy for claims against it in the event of

any breach or violation by it of any warranties, declarations, or

conditions contained in the policy. Action by the insured includes

nonpayment of the policy premium. Thus, although the Office views the

licensee as ultimately responsible for paying additional insureds under

the policy as a result of the licensee's nonpayment of the premium.

As a general rule, liability and property insurance policies issued

by insurance underwriters contain certain standard exclusions of

coverage as well as particular exclusion depending on the activities

for which insurance is sought. Proposed Sec. 440.13(a)(5) acknowledges

that the insurance policies required under Sec. 440.9 may contain

certain exclusion from coverage. Those exclusion must be specified.

In the event of a claim for property damage or bodily injury that

is not covered by insurance, the liability for such damage and injury

would ordinarily fall on the licensee or additional insured in the

absence of some form of indemnification. The Secretary of

Transportation is empowered, under 49 U.S.C. 70113(a)(2), to provide

for payment of third-party claims that are the subject of insurance

policy exclusions that ``are usual for the type of insurance involved''

and for which insurance is therefore not available to cover the claim.

49 U.S.C. 70113(a)(2). In addition, under 49 U.S.C. 70112(b)(2), the

Secretary may, following interagency consultation, waive claims for

property damage not covered by required property insurance by reason of

exclusions that are ``usual for the type of insurance involved'' such

that insurance is not available. 49 U.S.C. 70112(b)(2). As a result, a

claim that is not compensated by insurance because it falls within an

insurance exclusion determined by the Office to be usual would

essentially permit first-dollar payment by the United States Government

without regard to the thresholds provided, respectively, in 49 U.S.C.

70113(a)(1) and 70112(b)(2).

However, in determining what may be considered usual exclusions for

the type of insurance involved, the Office is necessarily mindful of

the direction from Congress that first-dollar payments by the United

States for such exclusions should not be an inducement for insurers to

begin restricting the scope of coverage in their insurance contracts

with licensees. Moreover, payments for claims excluded from third-party

liability coverage, like payments generally of third-party claims in

excess of required insurance under 49 U.S.C. 70113, are subject to

certain conditions including Congressional approval of a compensation

plan and appropriation of funds.

There are no identical exclusions found in each and every policy.

Variations exist among U.S., London, continental European and other

overseas insurance markets. Moreover, exclusions may be added by an

insurer depending on the particular market and types of risks involved,

or can often be ``bought out'' by an endorsement or by a separate

policy. Also, exclusions may be added or existing exclusions modified

as a result of judicial interpretations the insurance market neither

intended nor anticipated in setting its premium rates. Based on

insurance market conditions and loss experience, future exclusions may

vary from customary or usual exclusions today. Consequently, the

proposed regulations define a usual exclusion as one for which coverage

is not commercially available at reasonable rates. Licensees must

certify at the time they demonstrate compliance with insurance

requirements that insurance covering the excluded risks is unavailable

at reasonable rates in order for the United States Government to

provide for payment of claims from the first dollar of loss. However,

the licensee's certification does not finally resolve that a particular

exclusion will be deemed to be ``usual.'' That is, in the event the

Office determines that insurance was available at reasonable rates the

Secretary need not provide for payment of claims from the first dollar

of loss. Comments are requested on other appropriate criteria for

determining whether an exclusion may be considered ``usual.''

Proposed Secs. 440.13(a)(6)-416.13(a)(8) would prescribe, in

regulations, additional insurance requirements that have been

customarily imposed by the Office in license orders in carrying out its

statutory mandate.

Comments are requested on any other terms and conditions that would

be appropriate to require in rules of general applicability.

Section 440.15--Demonstration of Compliance

As proposed, Sec. 440.15(a) would require the licensee to

demonstrate that it has complied with the insurance and allocation of

risk requirements under the proposed regulations no later than thirty

days before commencing licensed launch activities. However, a license

order may require a licensee to demonstrate compliance in less than

thirty days where the license or license order is issued less than

thirty days before the licensee intends to commence licensed launch

activities. It is strongly recommended that licensees submit required

documentation demonstrating compliance with these requirements well in

advance of the thirty-day period to ensure that the Office has adequate

opportunity to review the submission and confirm compliance by the time

the licensee wishes to commence licensed activities. It has been the

Office's experience that thirty days is a reasonable length of time to

address any issues that arise as a result of the licensee's submission.

Where a licensee uses a form of financial responsibility other than

insurance to demonstrate compliance, the Office require sixty days to

review the submission and ensure its sufficiency.

Section 440.15(b) would establish in a regulation that once the

licensee has fully demonstrated compliance with part 440 financial

responsibility and allocation of risk requirements, these requirements

preempt any conflicting or inconsistent requirements in any agreements

the licensee may have previously entered into with other agencies of

the United States concerning access to or use of United States launch

property or launch services. This express preemption is necessary

because there has been a significant amount of confusion in the past

concerning the effect of similar or additional insurance requirements

imposed by agreements governing

[[Page 39011]]

access to United States launch facilities. As stated above in the

section-by-section analysis accompanying Sec. 440.5(c), the object of

this preemption is to avoid imposing duplicative and inconsistent

obligations on the licensee, but not to relieve the licensee of

contractual or legal obligations intended to address interests other

than those served by the statute. The Office evidences its

determination that a licensee has fully complied with part 440

requirements in a letter issued to the licensee.

Under the proposal Sec. 440.15(c) would establish requirements for

a licensee to provide the Office with proof of insurance. It is

extremely important for the Office to secure adequate assurance that

the licensee has obtained the insurance required under the regulations.

However, the Office believes that it is unnecessary and impractical to

review each policy constituting part of an insurance submission to

ensure compliance. Accordingly, proposed Sec. 440.15(c) and (d) would

provide for certain certifications and representations from the

licensee and its insurer, respectively. The licensee must certify that

it has obtained insurance in conformance with the part 440 regulations

and the applicable license order. In addition, the licensee must file

with the Office one or more certificates of insurance evidencing

coverage, as prescribed by the Office, under currently effective and

properly endorsed policies applicable to licensed launch activities. A

certificate of insurance must specify any policy exclusions or

limitations in detail, in accordance with proposed Sec. 440.13(a)(5a).

In addition, the licensee would be required to certify that insurance

is not commercially available at reasonable rates in order for the

exclusion to be found usual for the type of insurance and the United

States Government to provide for payment of claims from the first

dollar of loss. The licensee would also be required to submit duly

executed waiver of claims agreements, signed by the licensee and its

customer. The licensee's certifications must be signed by a duly

authorized officer of the licensee and may be submitted in one

document.

Section 440.15(d), as proposed, would specify certain insurance

certificate requirements. Each certificate of insurance must be signed

by the insurer and accompanied by a signed opinion of the insurer

stating that the policy obtained by the licensee complies with the

requirements set forth in part 440.

Section 440.15(e) would further require the licensee to maintain,

and make available for inspection by the Office upon request, all

required policies of insurance and other documents necessary to

demonstrate compliance with part 440 requirements. Although this

section essentially imposes a mandatory recordkeeping requirement upon

the licensee, the Office believes that the maintenance and

administration of these records by the licensee is consistent with the

Office's regulatory authority to monitor compliance with the license.

Moreover, it is considerably less burdensome and time-consuming for

both the Office and the licensee than requiring submittal of all the

policy documents to the Office.

Proposed Sec. 440.15(f) recognizes that the licensee may propose to

satisfy financial responsibility requirements in a form other than

insurance. A licensee may do so, provided it otherwise satisfies

regulatory requirements. In practice, licensees have furnished

insurance in order to meet the financial responsibility requirements

prescribed by the Office pursuant to the statue. Under existing

insurance market conditions, third-party liability insurance is

obtainable to prescribed limits at reasonable cost. A presentation by

the Risk Management Working Group of the COMSTAC at its meeting on May

18, 1995, projected market capacity as sufficient to satisfy launch

insurance demand in 1995. In addition, property insurance, where

required, may be accommodated within the licensee's existing property

and casualty insurance program and is therefore easily obtained.

While the Act does state that a licensee may demonstrate financial

responsibility in a form other than insurance, it does not specify what

other forms of financial responsibility would be acceptable. A number

of alternatives are possible and the Office necessarily will examine

any proposal for demonstrating financial responsibility through

alternative means on a case-by-case basis to determine whether it

otherwise satisfies the requirements for demonstrating financial

responsibility.

Section 440.17--Reciprocal Waiver of Claims Requirements

This section, as proposed, establishes requirements for reciprocal

waivers of claims among launch participants. These requirements are

additional conditions of a license.

Proposed Sec. 440.17(b) would implement 49 U.S.C. 70112(b)(1),

which requires the licensee to implement reciprocal waivers of claims

with its contractors and subcontractors, its customers, and the

contractors and subcontractors of its customer, whereby each party

agrees to be responsible for loss or damage it sustains. Parties to a

waiver of claims agreement waive two types of claims: Claims for their

own property damage, and claims they may have against another launch

participant as a result of losses for property damage or bodily injury

sustained by their employees, resulting from licensed launch

activities.

49 U.S.C. 70112(b)(2) requires the Secretary of Transportation, for

the United States, its agencies involved in licensed launch activities,

and its contractors and subcontractors, to enter into reciprocal

waivers of claims with the licensee, its customer, and their respective

contractors and subcontractors involved in launch services. In the

Office's view, the purpose of this provision is to establish the

Government's waiver of claims against the private sector launch

participants and acceptance of responsibility for property damage that

exceeds the level of Government property insurance obtained by the

licensee under 49 U.S.C. 70112(a)(1)(B).

The approach taken in proposed Sec. 440.17(c), of requiring a

formal three-party agreement among the United States, the licensee and

its customer, deviates from the form suggested by a literal reading of

the Act. However, the Office believes that this approach is the most

desirable and efficient one to effectuate the overall purpose of the

statutory reciprocal waiver of claims requirements: To limit the

universe of potential claims that could arise out of licensed launch

activities, and to eliminate the need for each participant in licensed

launch activities to obtain separate liability insurance protection

against such claims. This approach has also proved manageable for the

launch services industry in executing agreements with customers and the

U.S. Government.

Section 440.17(c), as proposed, would require that the licensee,

its customer and the Department of Transportation on behalf of the U.S.

Government enter into a three-party agreement as set forth in appendix

II to part 440. The form of the Agreement for Waiver of Claims and

Assumption of Responsibility (Agreement) presented in Appendix II

deviates from the current practice of the Office and is intended to

clarify the scope of the waiver that the United States provides when it

is involved in licensed launch activities, and the waiver it requires

in return. Simply put, the Department of Transportation, on behalf of

the United States, its agencies involved in licensed launch activities,

and its contractors and subcontractors, would agree to waive claims

against the

[[Page 39012]]

licensee, its customer and the contractors and subcontractors of the

licensee and its customer, and accept responsibility for losses to

property of the Government launch participants, only to the extent that

such claims exceed the level of insurance the licensee must obtain

under Sec. 440.9(d). As a reciprocal undertaking, the licensee and its

customer each would waive claims against the other party and the United

States and its agencies involved in licensed launch activities, and

against the contractors and subcontractors of each of those parties,

and accept responsibility for damage to its own property and losses

sustained by its own employees, respectively.

Whereas other parties to the three-party reciprocal waiver of

claims agreement would agree to waive and accept responsibility for

claims for property damage or bodily injury sustained by its employees,

the U.S. Government need not do so. Because Government personnel are

third parties, their claims for bodily injury or property damage would

be compensated by the third-party liability insurance the licensee is

required to obtain. Claims in excess of required insurance would become

eligible for payment by the Government under the payment of excess

claims provisions of the statute. 49 U.S.C. 70113. Although the

approach reflected in the proposed form of Agreement is not currently

reflected in existing license orders, the Office believes it more

accurately reflects the allocation of risks intended by the statute and

correctly responds to the Government's inability under appropriations

law to accede to unfunded contingent liability, unless so authorized.

In addition, under the proposed from of the Agreement, the licensee

and its customer would further agree to extend, or flow down, the

waiver obligations to their respective contractors and subcontractors,

and all three principals to the Agreement--including the Department--

would agree to indemnify the other parties from claims by their

contractors and subcontractors arising out of the indemnifying party's

failure properly to implement or extend the waiver.

One launch company has objected to the indemnification provisions

required under the three-party reciprocal waiver of claims agreement

currently employed by the Office and included in this proposal for all

interparty waiver of claims agreements. In the launch company's view,

this provision is not required by statute and adds liability and risk

over and above that imposed by a breach of contract remedy, which the

launch company believes would be the appropriate remedy for failure to

flow down the cross-waiver requirement.

The Office's view is that a contractual undertaking to indemnify

another party for one's own failure to implement properly the

agreements flow-down requirements is preferable. It would provide a

strong incentive for parties to be attentive to the flow-down

requirement. This is significant because of the limitation on the

Office's ability to monitor each licensee's and customer's cross-

waivers with their myriad contractors and subcontractors. It would also

provide a ready remedy for parties who sustain loss because of another

party's failure to flow down the cross-waiver requirement.

In those situations where the licensee's customer is a Government

agency, the provisions applicable to the customer are the same as those

for an agency involved in licensed launch activities for purposes of

the reciprocal waiver of claims requirement. However, because the

Government property insurance requirement does not cover the Government

payload, the Government waives claims for property damage and assumes

responsibility for damage or loss to the payload from the first dollar

of loss.

Some concern has been expressed within the commercial space launch

industry over the assumption of responsibility for employee losses

required of signatories to the waiver of claims agreement. In the

Office's view, this is a risk that can be effectively managed without

imposing unreasonable economic burdens on launch participants.

The assumption of responsibility by nongovernmental launch

participants for their own employees' losses represents a mutual

undertaking by each entity to cover losses of its employees. Although

employees of nongovernmental launch participants would not be ``third

parties'' whose claims are compensated under the liability insurance

required under the proposed regulations, launch participants could

protect themselves by ensuring that their general liability policies

would respond to compensate such claims. The Office believes that a

variety of measures may be utilized by launch participants to manage

the mandatory assumption of responsibility. At the same time, the

objective of the risk allocation scheme--to limit the need for each

launch participant to obtain broad liability coverage to protect itself

from the universe of potential third-party claims--would be realized.

The Office requests comments on its approach to implementing the waiver

of claims and assumption of responsibility requirements of the Act. In

doing so, commenters should bear in mind that there is no indication in

the Act or its legislative history that employees of nongovernmental

launch participant, unlike employees of Government launch participants,

are intended to be included in the definition of ``third parties'' for

purposes of these regulations. Nor is there any indication that the

Government would agree to pay their claims as excess third-party claims

(so-called ``indemnification'') to the extent employees' claims exceed

required insurance. Moreover, considering employees of launch

participants as third parties under the statutory definition would run

counter to the assumption of responsibility for their loses mandated by

the statute. Also, if such employees were included as ``third

parties,'' the amount of third-party liability coverage the licensee

would be required to obtain would likely increase significantly.

It is important to note that not all private participants in

licensed launch activities are necessarily expected to accede to the

reciprocal waiver of claims scheme in order to effect its purpose. Only

those participants who have their personnel or property involved in

licensed launch activities, and who may make claims against other

participants as a result of loss or damage sustained by their personnel

or property in the event of an accident, should be expected to enter

into reciprocal waivers of claims. If all participants having personnel

or property involved in licensed launch activities have acceded to the

reciprocal waiver scheme, they would be foreclosed from making any

claims against each other.

A question has been raised by a payload company as to the Office's

requirements when multiple customers contract with a launch operator

for launch services or there is more than one customer's payload on the

launch manifest for a single launch. In those cases, executing a single

waiver of claims agreement that includes each customer as a party to

the agreement, or executing separate but appropriately modified

agreements, would serve to ensure all parties have been included and

protected as intended.

There has been some question as to the meaning and appropriate

implementation of the provision in 49 U.S.C. 70112(b)(2), which

requires the Secretary to enter into reciprocal waivers of claims

``for'' the Government's contractors and subcontractors involved in

launch services. The Office has interpreted this provision to mean that

contractors and

[[Page 39013]]

subcontractors of the United States are intended to be included as

beneficiaries of the waiver of claims by the licensee, the customer and

their respective contractors and subcontractors; and that the United

States, through its appropriate agencies involved in licensed

activities, is responsible for protecting their interests.

The proposed form of Agreement set forth in Appendix II to the

proposed regulation continues the current practice of excluding from

the waiver and assumption of responsibility claims for bodily injury or

property damage resulting from willful misconduct of the parties. It

also continues the current practice of requiring that parties waive

claims, regardless of fault. Questions have been raised as to whether

claims resulting from gross negligence are also excluded from the

intended scope of the waiver. The Office believes that carving out an

exception for gross negligence from the reciprocal waiver of claims

could result in parties attempting, in effect, to nullify or avoid

required waivers of claims by alleging sufficient evidence of gross

negligence to withstand legal challenge, thereby defeating one of the

purposes of the Agreement. The Office has not elected to do so in the

proposed form of Agreement.

The Office believes its approach is consistent with t

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