# Financial Responsibility Requirements for Licensed Launch Activities

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-18532

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 25, 1996
- **Citation:** 61 FR 38992

## Text

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 resultin

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-18532. Public record. Not legal advice.