Financial Responsibility Requirements for Licensed Launch Activities

SUMMARY: Under its licensing authority, the Associate Administrator for

Commercial Space Transportation (AST) of the Federal Aviation

Administration (FAA) determines financial responsibility requirements

for licensees authorized to conduct commercial space launch activities.

This rulemaking establishes procedures for demonstrating compliance

with those requirements and for implementing risk allocation provisions

of 49 U.S.C. Subtitle IX, chapter 701, formerly the Commercial Space

Launch Act of 1984, as amended.

DATES: This final rule is effective on October 26, 1998.

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

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

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

9320.

SUPPLEMENTARY INFORMATION:

Availability of Final Rules

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modem and suitable communications software, from the FAA regulations

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703-321-3339), the Federal Register's electronic bulletin board service

(telephone: 202-512-1661), or the FAA's Aviation Rulemaking Advisory

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5948).

Internet users may reach the FAA's web page at http://www.faa.gov/

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www.access.gpo.gov/su__docs/aces/aces140.html for access to recently

published rulemaking documents.

Any person may obtain a copy of this final rule by submitting a

request to the Federal Aviation Administration, Office of Rulemaking,

ARM-1, 800 Independence Avenue, SW., Washington, DC 20591, or by

calling (202) 267-9680. Communications must identify the amendment

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procedure.

Small Entity Inquiries

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) requires the FAA to report inquiries from small entities

concerning information on, and advice about, compliance with statutes

and regulations within the FAA's jurisdiction, including interpretation

and application of the law to specific sets of facts supplied by a

small entity.

If you are a small entity and have a question, contact your local

FAA official. If you do not know how to contact your local FAA

official, you may contact Charlene Brown, Program Analyst Staff, Office

of Rulemaking, ARM-27, Federal Aviation Administration, 800

Independence Avenue, SW, Washington, DC 20591, 1-888-551-1594. Internet

users can find additional information on SBREFA in the Quick Jump

section of the FAA's web page at http://www.faa.gov and may send

electronic inquiries to the following Internet address: 9-AWA-

[email protected]

Background

49 U.S.C. Subtitle IX, chapter 701--Commercial Space Launch

Activities, formerly the Commercial Space Launch Act of 1984, as

amended (CSLA), directs the Secretary of Transportation to establish

insurance (or other financial responsibility) requirements in amounts

sufficient to address certain risks associated with the conduct of

licensed launch activities. In addition, the CSLA provides detailed

requirements for allocating risk among the various launch participants,

including U.S. Government agencies involved in launch services. Enacted

in 1988, this comprehensive scheme was intended to facilitate

development of the U.S. commercial launch industry by allowing it to

compete effectively in the international marketplace and by providing

to launch participants certain protections against the risk of

catastrophic losses that could result from hazardous launch activities.

The U.S. Government benefits from these provisions by limiting its own

liability exposure including obligations that arise under international

treaties. Additionally, a viable commercial launch industry contributes

to the national interest of the United States.

The Secretary implements statutory-based financial responsibility

and risk allocation requirements through the licensing and regulatory

program carried out by the Federal Aviation Administration's Associate

Administrator for Commercial Space Transportation (referred to herein

as the FAA or agency). Under delegated authority, the agency licenses

commercial space launches and the commercial operation of launch sites

carried out within the United States or by U.S. citizens abroad. As

directed by the CSLA, the agency exercises its licensing authority in a

manner consistent with public health and safety, the safety of

property, and U.S. national security and foreign policy interests. The

CSLA is also intended to encourage and facilitate private sector launch

activities through simplified licensing procedures and use of

Government-developed space technology, and to enhance U.S. space

transportation infrastructure with public and private involvement.

This rulemaking is vital to the agency's goal of creating a stable

regulatory environment, with predictable costs and benefits, for the

commercial launch industry. Through a clear enunciation of regulatory

requirements for insurance and allocation of risk, the commercial

launch industry will have the information and certainty it requires to

make informed risk management decisions that affect relationships with

customers and suppliers.

Notice of Proposed Rulemaking

The agency issued a notice of proposed rulemaking (NPRM) on July

25, 1996 (61 FR 38992), soliciting public comments on its proposal for

implementing financial responsibility and allocation of risk

requirements. The NPRM provided a 60-day comment period that closed on

September 23, 1996. A technical corrections document was published on

August 23, 1996 (61 FR 43814). In response to requests for an extension

of time in which to submit comments, the agency reopened the comment

period for an additional 60 days. The comment period closed again on

December 2, 1996. (See Notice published October 2, 1996 (61 FR 51395).)

In the NPRM, the agency proposed to codify existing practices,

except where otherwise indicated, and to standardize its approach to

implementing the CSLA financial responsibility and allocation of risk

regime in rules of general applicability.

[[Page 45593]]

Eight comments were submitted to the docket. Three comments were

submitted by launch services providers currently licensed by the FAA to

conduct commercial space launch activities. They are Lockheed Martin

Corporation (Lockheed Martin), Orbital Sciences Corporation (Orbital

Sciences) and McDonnell Douglas Corporation (McDonnell Douglas). Boeing

Commercial Space Company commented on behalf of Sea Launch Limited

Partnership (Sea Launch), an international joint venture not yet

licensed by the FAA, and The Boeing Company (Boeing) commented

separately. Since the close of the comment period in December 1996, The

Boeing Company merged with McDonnell Douglas Corporation; however,

McDonnell Douglas Corporation, operating as a wholly-owned subsidiary

of The Boeing Company, remains responsible for providing commercial

launch services for the Delta family of launch vehicles. In this

document, comments submitted by McDonnell Douglas before the merger are

identified as McDonnell Douglas comments for ease of reference and to

distinguish them from Boeing's comments. Spaceport Florida Authority

(Spaceport Florida) was a prospective commercial launch site operator

at the time it submitted comments and has since obtained an FAA

license. Hughes Electronics, a communications satellite manufacturer,

and Intelsat, a public international organization that owns and

operates a global telecommunications network for members and users,

also submitted comments. The agency sought clarification of certain

comments it received and the clarifications are reflected either in the

discussion below or in the docket maintained by the FAA Rules Docket

Clerk and available for public inspection.

Second Reopening of Comment Period and Request for Comments

Several events following the close of the comment period on

December 2, 1996, resulted in an agency decision to reopen the

rulemaking docket a second time in order to allow industry an

additional opportunity to offer views on the content of the NPRM.

A Delta launch vehicle failure at Cape Canaveral Air Station (CCAS)

during a Government launch on January 17, 1997, damaged real and

personal property located at the facility. Although it was not an FAA-

licensed launch, and therefore not subject to CSLA financial

responsibility requirements, the failure led to heightened scrutiny of

insurance certificates provided by launch licensees in demonstrating

satisfaction of FAA license orders.

The ensuing dialogue between agency officials and industry

representatives revealed a fundamental lack of understanding within the

commercial launch services industry of agency requirements with respect

to coverage for claims of Government employees and employees of

Government contractors and subcontractors. Since 1989, the agency has

intended for launch licensees to provide coverage for these claims as

part of the liability coverage required under a license, and has

determined the necessary amount of insurance accordingly. However, this

requirement was not evident to launch licensees until the agency

provided clarifying information, in writing, in late April and early

May, 1997.

Shortly thereafter, the Commercial Space Transportation Advisory

Committee (COMSTAC) adopted a resolution recommending that the FAA

publish a supplemental notice of proposed rulemaking for additional

industry comment before adopting a final rule. In lieu of accepting the

COMSTAC recommendation, the agency deemed it appropriate to reopen the

comment period on the outstanding NPRM in order to afford industry an

additional opportunity to formally express views on the agency's

approach to financial responsibility and risk allocation for licensed

launch activities. Reopening the docket also provided to industry the

first opportunity to comment on these matters with the benefit of the

agency's proposed definition of the term, ``licensed launch

activities,'' which appears in a Notice of Proposed Rulemaking on

Commercial Space Transportation Licensing Regulations (Licensing

Regulations), published March 19, 1997 (62 FR 13216). A Notice

reopening the comment period for an additional 30 days was published in

the Federal Register on July 3, 1997 (62 FR 36028). The Notice posed a

number of questions regarding the appropriate scope of CSLA-based

liability insurance requirements and requested specific comments on

costs and benefits associated with the rulemaking; however, commenters

were not limited to responding to those questions. Four additional

comments were submitted to the docket. Lockheed Martin and Orbital

Sciences supplemented their initial responses and Kistler Aerospace

Corporation (Kistler) and Marsh & McLennan, an insurance brokerage,

commented for the first time. (Both the initial and supplemental

comments of Lockheed Martin and Orbital Sciences are referenced in this

Supplementary Information and distinguished as appropriate.)

Upon consideration of all of the comments received, the agency has

determined that issuance of a final rule is appropriate at this time in

order to ensure that Government, as well as commercial, interests are

adequately protected. Absent a clear understanding of how the risks

that attend licensed launch activities are to be allocated and managed

under the CSLA, all launch participants, including the U.S. Government,

may unwittingly remain exposed to uncovered liabilities.

Costs and benefits of this final rule have been assessed by the

agency and appear in the final Regulatory Evaluation available for

public review in the docket.

General Comments

The three commenters currently licensed by the FAA to conduct

launch activities, Lockheed Martin, Orbital Sciences and McDonnell

Douglas, have been subject to the agency's case-by-case implementation

of financial responsibility requirements since commencing commercial

launch activities. Accordingly, they are each well-situated to assess

the significance of the NPRM to their current business practices. Their

comments indicate that in a number of instances the agency's existing

practices, as explained in the NPRM, were not apparent to the

commercial launch industry or their insurers, and in their view the

NPRM reflects fundamental changes in the agency's approach.

Two commenters noted that the NPRM reflects a trend towards

significant reallocation of risk from the Government to commercial

launch services providers. Two launch licensees indicated that the NPRM

would require extensive and difficult changes to existing long-term

contractual arrangements between launch services providers, their

customers and their contractors. Rather than facilitating the industry,

the NPRM, if made final, would have damaging and adverse effects on the

U.S. commercial launch industry, according to these commenters.

Although the licensees agreed that rulemaking to clarify financial

responsibility requirements would be useful to the industry, they

believe that additional opportunities for input and submission of

comments should be afforded to the industry before issuance of a final

rule. Two licensees recommended that the FAA utilize the COMSTAC by

tasking it to review and comment on a redrafted document

[[Page 45594]]

reflecting industry comments on the NPRM.

The agency has determined that it is appropriate and timely to

issue a final rule. The FAA's decision follows years of dialogue

between the agency and the commercial launch industry, a public meeting

covering financial responsibility matters, and a total comment period

of 150 days on the NPRM. The agency will not further delay this

rulemaking proceeding on the basis of the comments received. However,

the agency's existing regulations allow any interested person to

petition for amendment or repeal of a regulation and this remedy

remains available to members of the public who seek a change in these

final rules, 14 CFR 404.3.

In its general comments, Lockheed Martin suggested that certain

issues raised in the NPRM be segmented from this rulemaking and the

subject of separate, more focused, rulemaking proceedings. The agency

agrees generally with this comment and, as indicated below, has

identified issues that may require more detailed regulatory treatment

beyond the general requirements contained in this final rule.

McDonnell Douglas has suggested that additional discussions between

the commercial launch industry, the agency and the Air Force would be

useful before issuance of final rules in light of ongoing Air Force

efforts to replace existing commercialization agreements with the

Commercial Space Operations Support Agreement (CSOSA). The CSOSA would

also address insurance requirements and allocation of risk between the

Air Force and range users.

The agency has participated in discussions between the Air Force

and the commercial launch services industry to ensure that financial

responsibility and risk allocation requirements under the CSLA apply to

range users conducting licensed launch activities. Financial

responsibility for unlicensed activities would be addressed by the

CSOSA. The pending rulemaking on Licensing Regulations will determine

in final rules the point at which lines are drawn by the agency between

unlicensed and licensed launch activities. Given that understanding,

the agency does not see the need to tie issuance of these rules to

execution of a CSOSA.

McDonnell Douglas further urged that any changes to current

industry practice that would be effected by proceeding directly to a

final rule should not apply to licensed launch activities conducted in

connection with any launch contracts, including options, executed prior

to issuance of the final rule. In clarifying remarks, McDonnell Douglas

explained its concern that this rulemaking would affect its costs.

Where a fixed price contract has been negotiated with a commercial

customer there would be no opportunity to adjust the price or allocate

those costs differently. Therefore, in fairness to the industry and to

facilitate the smooth implementation of these requirements, contract

negotiations already concluded should not be impacted by this

rulemaking, according to the commenter.

The agency maintains that, for the most part, these final rules

reflect longstanding agency practices and should not impose significant

additional costs on the industry. A Regulatory Evaluation prepared as

part of this rulemaking proceeding assesses its cost implications. As

required, the agency has considered those costs, as well as benefits,

to the public in determining to issue this final rule. A single

effective date for imposition of a final rule is necessary to ensure a

common understanding of CSLA-based financial responsibility and risk

allocation requirements, and staggered effective dates would be

unworkable and confusing to all launch participants. Accordingly, the

FAA rejects the suggestion of deferring the rule's effective date.

Spaceport Florida provided general comments to the docket

maintaining the view that the proposed rules do not apply to a licensed

commercial launch site operator. The agency agrees that the NPRM

proposes requirements applicable to licensed launch activities.

Customers of a launch site operator that hold FAA launch licenses would

be required to comply with the agency's financial responsibility

requirements. In the agency's view, a licensed launch site operator

would obtain the benefits and responsibilities of a contractor to the

launch licensee as a provider of launch property and services. The

recently concluded memorandum of agreement between the Department of

Defense, National Aeronautics and Space Administration (NASA) and the

FAA reflects this approach to risk allocation for licensed commercial

launch site operators.

Spaceport Florida further noted that the import of the NPRM would

be to add to the levels of insurance historically required of launch

licensees. This would make launch activities conducted within the

United States more expensive and would hurt the competitive posture of

the U.S. commercial launch industry vis-a-vis its foreign competitors.

The agency disagrees with Spaceport Florida's supposition that

insurance levels will increase if the proposed rules are made final.

The maximum probable loss methodology as well as the agency's general

approach to assessing risks to certain property and personnel, as

described in the NPRM, are utilized currently by the agency in

establishing required levels of insurance. Insurance requirements will

not necessarily increase by virtue of this rulemaking.

Risk Allocation Under the 1988 Amendments

In developing this rulemaking, the agency's goal has been to carry

out congressional intent and facilitate the competitive posture of the

U.S. commercial launch industry through statutory-based risk sharing

arrangements. However, in certain instances, the statutory language has

left more questions unanswered than settled. For this reason, the

agency sought industry views and clarification of the appropriate means

of implementing particular provisions of the statute concerning

liability insurance coverage and allocation of risks, including the

requirement for inter-party waivers of claims.

This final rule represents the agency's position on how best to

reconcile statutory requirements with the divergent views reflected in

industry comments, taking into account the Government's limited

acceptance of risk under the CSLA. In this discussion, the FAA has

articulated its understanding of basic risk allocation principles of

the 1988 Amendments (Pub. L. 100-657) and, in particular, the

reciprocal waiver of claims provisions of 49 U.S.C. 70112(b) which lie

at the heart of this rulemaking effort.

As outlined in the NPRM, two principal purposes of risk allocation

under the 1988 Amendments to the CSLA are to limit the cost of managing

launch risks by restricting litigation among launch participants and

protect the commercial launch industry from the risk of catastrophic

losses from third-party liability claims. The CSLA also insulates the

U. S. Government from a significant measure of liability exposure at

little or no cost to the Government. As explained in the NPRM, the

Government faces liability exposure to third-party claims by virtue of

its involvement in licensed launch activities through use of its

property, personnel, facilities, equipment and services to support

commercial launches and as a result of treaty obligations which impose

strict liability on the United States for certain damage when the

United States is a launching

[[Page 45595]]

state (Convention on International Liability for Damage Caused by Space

Objects (Liability Convention), entered into force September 1972). The

United States also bears international responsibility for national

activities in outer space carried on by non-governmental entities which

require authorization and continuing supervision by the appropriate

State Party, according to Article VI of 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.

In order to ensure the comprehensive intent of the CSLA risk

allocation scheme is fulfilled, the agency sought to identify all

potential sources of claims against the various launch participants for

injury, damage or loss and the financial resources that would be

available to respond to those claims, either through insurance, self-

insurance or congressional appropriations. Sources of claims can be

separated into two broad groups: (1) those entities and individuals who

are involved in licensed launch activities, and (2) those entities and

individuals who are not involved in licensed launch activities. The

agency then sought to identify potential targets of claims to ensure

that their liability exposure would be addressed. These entities can

also be classified into two groups: (1) the licensee, its customer, and

the contractors and subcontractors of each involved in launch services,

referred to collectively in this document as private party launch

participants (PPLPs), and (2) the United States and its agencies, and

their contractors and subcontractors, involved in licensed launch

activities, referred to collectively herein as Government launch

participants (GLPs). These categorizations are important because

implementation of the benefits and responsibilities that flow from the

CSLA risk allocation scheme depends upon how an entity is

characterized. Traditionally, AST has utilized the classification of

PPLPs and GLPs in license orders establishing financial responsibility

requirements.

Absent the CSLA risk allocation scheme, each launch participant is

vulnerable to claims from other launch participants for injury, damage

or loss to property and personnel as well as persons having no

involvement in launch activities. The CSLA alters relationships among

launch participants in several ways.

First, the CSLA directs that each PPLP enter into a mutual or

reciprocal waiver of claims whereby each launch participant agrees to

waive claims it may have against the other launch participants for its

own property damage or loss and further agrees to be responsible for

property damage or loss it sustains as a result of licensed launch

activities. When implemented properly, each of the entities

participating in the launch should be effectively estopped or

foreclosed from asserting claims for property damage or loss against

the other launch participants, and each launch participant is relieved

of the threat and cost of inter-party litigation as well as the need to

obtain liability insurance covering its potential liability to other

launch participants for property damage or loss for which it might

otherwise be legally responsible. However, the waiver of claims

agreement is not intended to replace contractual rights and remedies

negotiated by the parties, such as the right to a replacement launch in

the event of a failed launch attempt.

Example 1: Launch company A's contractor is negligent and damages

satellite customer B's spacecraft. By executing the statutory waiver of

claims agreement, B has waived its right to pursue a claim for damages

against A and A's contractor based on the latter's negligent act.

Second, the CSLA further directs the Government to execute a

similar waiver of claims agreement with PPLPs when the Government is

involved in launch services by virtue of its property or personnel;

however, the Government's acceptance of risk under the statutory waiver

of claims agreement is more limited than that undertaken by PPLPs. For

property damage, the Government's waiver is limited to claims in excess

of the required amount of Government property insurance. The CSLA

instructs the Department of Transportation (DOT) to enter into the

agreement for, or on behalf of, the Government, executive agencies of

the Government involved in launch services, and the Government's

contractors and subcontractors involved in launch services,

collectively referred to herein and in agency license orders as

Government launch participants (GLPs). The agency views this provision

as establishing for the Government's contractors and subcontractors

involved in licensed launch activities third-party beneficiary rights

in the waiver agreement between the DOT and PPLPs.

Example 2: Launch company A's vehicle is destroyed seconds after

ignition and lift-off causing extensive damage to the Government-owned

launch pad from which the launch took place. As a condition of A's

license, the agency required that A obtain insurance covering damage to

Government property at the launch site in the amount of $40 million,

based upon the agency's determination of maximum probable loss. If the

amount of damage to the launch pad is assessed at $60 million, the

Government absorbs $20 million of loss to its property because it has

waived claims for property damage in excess of the required amount of

insurance.

Third, the CSLA provides that each signatory to a reciprocal waiver

of claims agreement must also agree to be responsible for personal

injury, property damage or loss sustained by its own employees

resulting from licensed launch activities. Individuals employed by the

various launch participants do not waive claims for their own property

damage or loss or for personal injury suffered on the job under the

CSLA reciprocal waiver of claims requirement. An employee who is

injured or suffers loss in the course of employment as a result of

licensed launch activities may recover workers compensation from his or

her employer. Alternatively, that employee may elect to pursue his or

her legal remedies against another launch participant whose negligence

caused or contributed to the injury or loss. Ascertaining where

financial responsibility lies under the CSLA for covering individual

employee claims has proven to be one of the more controversial issues

in this rulemaking.

The CSLA also alters traditional insurance practices with respect

to third-party liability coverage. Under the CSLA, each launch

participant involved in licensed launch activities is also an

additional insured under the statutorily-mandated liability policy

obtained by the launch licensee and is covered in the event of third-

party claims, up to the required level of insurance. In this manner,

entities participating in the launch are relieved of the need to obtain

separate liability policies covering the shared risk of third-party

liability. This approach of insuring all launch participants against

third-party liability maximizes the capacity of the space launch

insurance market to cover the risk of third-party claims.

Example 3: Launch company A's launch vehicle is destroyed mid-

flight and debris impacts a nearby community. Community residents file

suit naming both launch company A and its customer, satellite company

B, as defendants and joint tortfeasors. Launch company A's liability

policy must respond to cover both A's and B's liability, up to the

limits of the policy established by the agency, unless a policy

exclusion applies.

[[Page 45596]]

Finally, the CSLA provides a mechanism whereby the Government

accepts the risk of third-party claims that exceed the limits of the

liability insurance established by the agency, subject to approval of a

compensation plan prepared by the agency and congressional

appropriation of funds. This catastrophic risk protection is frequently

referred to within the space transportation industry as

``indemnification'' although that term does not appear in the statute.

In the previous example, if successful claims against A and B exceed

the amount of insurance established by the FAA for A's launch, the FAA

would prepare a compensation plan for the President to submit to

Congress for an additional appropriation or other legislative

authority, up to $1.5 billion (as adjusted for inflation occurring

after January 1, 1989) above the amount of insurance established by the

FAA. Above that amount, A and B would remain liable for judgments

against them.

Identified earlier in this discussion, is the troublesome issue of

determining how the CSLA is intended to address financial

responsibility for employee losses and injuries. Defining the class of

``third parties'' whose claims would be covered by the statutorily-

required liability policy has also been one of the more problematic

issues associated with this rulemaking. The two issues are closely

related, as explained below.

In this final rule, the FAA concludes that although all employees

of the various entities involved in licensed launch activities meet the

statutory definition of the term ``third party,'' the statutorily-

mandated liability policy is not intended to respond to PPLP employee

claims. Rather, the CSLA imposes on PPLPs financial responsibility for

covering their employees' claims in a manner that is separate from the

launch liability coverage a licensee must obtain. In essence, the

agreement undertaken by each PPLP to be responsible for its employees'

losses contractually obligates each PPLP to indemnify and hold the

other launch participants harmless in the event of claims by one's own

employees for injury, property damage or loss.

From the comments received and clarifications provided by licensees

concerning their existing risk management programs, the agency

understands that different methods are employed to provide the

financial responsibility that covers this additional obligation. Some

launch liability policies will respond to a contractual obligation

assumed by an insured under the policy, including the obligation

assumed under the reciprocal waiver of claims agreement to be

responsible for one's own employees' losses. Alternatively, launch

participants may rely on separate insurance, such as their

comprehensive general liability policy, to respond to this obligation.

Either way, the agency concludes that financial responsibility for PPLP

employee losses is intended to be addressed, first, through employer-

provided workers compensation coverage, and second, through contractual

obligations undertaken by each PPLP through the reciprocal waiver of

claims agreement in the event one's own employee claims against another

launch participant for loss or injury.

A different approach is utilized for claims of GLP employees,

referred to in the NPRM as Government personnel. Because of limitations

under appropriations laws on the Government's ability to assume an

unfunded contingent financial responsibility and the additional costs

that would otherwise flow to the Government if additional risks were

imposed on Government contractors and subcontractors, the Government

does not accept the additional financial responsibility of indemnifying

other launch participants in the event of GLP employee claims within

the limits of the liability policy. Therefore, GLP employee claims

against other launch participants must be covered by the licensee's

launch liability policy, together with other third-party claims.

By removing from the statutorily-required liability coverage those

claims that have the greatest probability of occurrence, that is, PPLP

claims for property damage or loss and claims of PPLP employees for

injury, property damage or loss, along with the attendant risks and

costs that would accompany inter-party litigation in the event of such

claims, the universe of risks covered by statutory-based insurance is

significantly reduced. In this manner, the launch liability insurance

market is able to cover all launch participants' potential liability to

uninvolved persons and claims of GLP employees. The agency understands

that insurance satisfying CSLA-based requirements is available at

reasonable cost under current market conditions.

Detailed immediately below is a more complete discussion of the

agency's initial proposal on risk allocation, specifically as it

relates to coverage for employee losses, industry comments on the

proposal and the agency's rationale for adopting this final rule.

Comments on other substantive areas of the rulemaking are summarized

and addressed following this discussion in the section-by-section

analysis.

Notice of Proposed Rulemaking

Proposed Approach to Government Risk Allocation

Under the NPRM, financial risks associated with commercial launch

activities would be allocated primarily to the commercial entities

engaged in such activities. The only exceptions are for those financial

risks expressly assigned to the Government by the CSLA. 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 (as

adjusted for inflation occurring after January 1, 1989) 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 U.S.

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 or its agents, 49 U.S.C.

70112(e).

All other financial risks would be allocated under the NPRM to

commercial entities engaged in the commercial launch business. Through

reciprocal waiver of claims agreements, private party launch

participants (PPLPs) would be required to accept responsibility for

their own property damage or loss and for injury or loss sustained by

their employees. Except for insurance required by the CSLA, the NPRM

proposed to leave to the various launch participants the determination

of how best to cover their resultant financial responsibilities.

Financial protection for the Government would be provided through

required insurance and the reciprocal waiver of claims scheme.

Insurance covering the Government's risk would be in the form of: (1)

liability insurance that protects the Government from third-party

liability, including liability imposed on the United States by virtue

of treaty obligations; and (2) property insurance up to a prescribed

amount that covers Government property, range assets and property of

Government launch participants (GLPs), on or near a Federal range

facility, that is exposed to risk of loss or damage as a result of

licensed launch activities.

The CSLA reciprocal waiver of claims scheme would benefit the

Government by freeing GLPs from the risk of claims

[[Page 45597]]

for property damage or loss by PPLPs. The Government would waive claims

for property damage or loss occurring at a Federal range facility, on

behalf of itself and GLPs, to the extent losses exceed the required

amount of Government property insurance. The Government could also

waive property damage claims, consistent with the CSLA, where a policy

exclusion is deemed ``usual'' for the type of insurance involved.

Unlike the additional financial responsibilities accepted by PPLPs for

their employees' losses, the NPRM further explained that the Government

does not accept this responsibility with respect to losses suffered by

Government personnel, defined as employees of GLPs, because they would

be deemed ``third parties'' whose claims must be addressed by the

launch licensee's liability policy.

The NPRM proposed that Government contractors and subcontractors

involved in launch services would be treated no differently than the

United States for purposes of required insurance coverage and risk

allocation. The rationale offered for the agency's approach was three-

fold: (1) that contractors and subcontractors of the United States are

third-party beneficiaries of the Government's waiver of claims

agreement with the licensee, its customer, and their respective

contractors and subcontractors, (2) to relieve the Government of

certain costs and burdens that would otherwise flow to it in the event

of damage to property of Government contractors and subcontractors, and

(3) to avoid violation of the Anti-Deficiency Act which prohibits the

Government from agreeing to assume an unfunded contingent liability

absent specific statutory authority to do so.

The approach proposed to risk allocation for Government contractors

and subcontractors was intended to facilitate commercial use of Federal

range launch property and services. When a commercial user contracts

with a Government agency for use of a Federal range facility, the

commercial user also obtains the benefit of certain services provided

by the Government through its contractors and subcontractors. Services

include base operations support, equipment, maintenance and other

ancillary activities that support Federal range operations. Although

the Government has a means of accounting for contractor services

utilized in support of commercial operations and is able to allocate

direct costs to commercial users, the Government does not contract

differently in terms of risk allocation depending upon whether the

support or services provided are in support of commercial as opposed to

government launches. Therefore, if Government contractors were

confronted with additional risks of liability and financial

responsibilities arising out of their support for commercial launch

operations and had to obtain additional insurance to cover those risks,

either the cost of the additional insurance would be charged to the

Government as an allowable cost but one that is not recoverable from

the commercial user or the contractor could refuse to assume the risk

of additional liability and decline to do business with the Government

or to support commercial operations.

To avoid these results, and to limit financial exposure of the

Government, the agency has consistently treated Government contractors

and subcontractors as though they stand in the Government's shoes for

purposes of insurance and risk allocation. Accordingly, the NPRM

proposed to continue the agency's longstanding practice of imposing on

Government contractors and subcontractors only the limited obligation

to waive claims and assume responsibility for employee losses in excess

of required property and liability insurance, respectively, that the

agency currently accepts when entering into a reciprocal waiver of

claims agreement on behalf of the Government and its agencies involved

in licensed launch activities. Thus, under the NPRM, and consistent

with existing license orders, property belonging to Government

contractors and subcontractors involved in launch services at a Federal

range facility would be covered by the insurance provided for damage or

loss to Government property, even if those entities maintain their own

property insurance. Similarly, Government contractor and subcontractor

employees would be accorded ``third party'' status whose claims would

be addressed by the launch licensee's liability policy. In addition,

Government personnel would be named as additional insureds under the

launch licensee's liability policy and their potential liability to

third parties would also be covered.

Proposed Risk Allocation for Employee Losses

(1) Definition of ``Third Party''

In the NPRM, the agency proposed a new definition of the term

``third party'' to facilitate understanding and implementation of the

agency's approach to risk allocation for employee losses. The term

``third party'' is especially significant in this rulemaking because it

is used to determine the universe of potential third-party claimants

under the required liability insurance obtained by the licensee,

determines eligibility for payment by the U.S. Government of excess

third-party claims, and has implications bearing on the proper

implementation of reciprocal waiver of claims agreements whereby launch

participants assume responsibility for losses sustained by their own

employees as a result of licensed launch activities. The definition of

``third party'' must be examined with each of these considerations in

mind to ensure a fair allocation of risk as contemplated by the CSLA.

The statutory definition of ``third party'' is one of exclusion. It

means ``a person except--(A) the United States Government or the

Government's contractors or subcontractors involved in launch services;

(B) a licensee or transferee under (49 U.S.C. Subtitle IX, ch. 701);

(C) a licensee's or transferree's contractors, subcontractors, or

customers involved in launch services; or (D) the customer's

contractors or subcontractors involved in launch services. 49 U.S.C.

70102(11). Conspicuous by its absence from the statutory definition is

any mention of employees of the various launch participant entities

involved in launch services, including the Government. Therefore,

employees of all entities involved in launch services may be considered

``third parties'' under the statutory definition because they are not

excepted from the definition. In essence, the CSLA defines a third

party as any person that is not directed by the statute to sign a

reciprocal waiver of claims agreement.

Nevertheless, the definition of ``third party'' proposed in the

NPRM explicitly included Government personnel, defined to include

Government employees and employees of Government contractors and

subcontractors involved in launch services for licensed launch

activities, and excluded employees of private party launch participants

(PPLPs). The definition, as proposed, differentiates between employees

of PPLPs and those of Government launch participants (GLPs) because

under the NPRM the former's claims are intended to be addressed through

reciprocal waiver of claims agreements and the latter's are intended to

be covered by the required liability policy. This distinction was

justified as necessary (and intended by Congress) because, in the

agency's view, financial responsibility for all claims of Government

employees and employees of Government contractors and

[[Page 45598]]

subcontractors against other launch participants has not been assumed

by the Government. Under the proposed definition, claims for damage or

loss suffered by Government personnel against other launch participants

would be covered up to the limits of the liability insurance required

of a launch licensee. The Government would only be responsible for

covering its employees' claims against other launch participants, as

well as other third-party claims, if the liability policy would not

respond because of a policy exclusion deemed usual for the type of

insurance or if the policy limits were exhausted. Claims of employees

of PPLPs would not be covered by the liability policy and would have to

be addressed through some other means. Accordingly, the NPRM definition

of the term ``third party'' nearly echoes the statutory definition,

with the following proviso: ``Government personnel, as defined in this

section (at 440.3(a)(6)) are third parties. For purposes of these

regulations, employees of other launch participants identified in

paragraphs (a)(15)(i) (B) and (C) of this section are not third

parties.''

In practice, this definition is consistent with the agency's

approach since 1989, to setting risk-based insurance requirements. That

is, for all launch licenses issued to date, the amount of liability

insurance required as a condition of each license takes into

consideration the value of the maximum probable loss from claims by

Government personnel for death, bodily injury, or property damage or

loss. It does not account for potential claims of PPLP employees.

(2) Assumption of Responsibility for Employee Losses

The NPRM explained the assumption of responsibility for losses

sustained by one's own employees as a mutual undertaking by each entity

to ``cover'' losses of its own employees, and leaves to each launch

participant the determination of how best to manage their resultant

risk. As one possible approach, the agency offered that launch

participants could maintain other liability insurance to cover the

financial risk that arises out of this contractual obligation.

The Government is not able to assume an unfunded contractual

liability under appropriations laws absent explicit statutory authority

to do so, and the agency does not view the statute as providing the

necessary authority except to the extent third-party claims may be the

subject of an additional appropriation under the statutory payment of

excess claims procedures presented in 49 U.S.C. 70113. Therefore,

according Government employees the status of a ``third party'' ensures

that financial resources will be available, through the licensee's

liability policy, to cover Government employee claims against other

launch participants and avoids the need for each launch participant to

maintain insurance covering their potential liability for such claims.

It also reconciles the statutory assumption of responsibility

obligation with limitations on the Government's ability to assume an

unfunded contingent liability except where Congress has clearly

provided a mechanism for doing so and allowed the Government to accept

this risk. For example, Public Law 85-804 authorizes certain agency

heads to enter into contracts for national defense purposes which

expressly provide that the United States will hold harmless and

indemnify its contractors for third-party claims, loss or damage to

contractor property and loss or damage to Government property, without

regard to appropriations laws applicable to Government contracting.

This authority is limited to claims or losses arising out of or

resulting from unusually hazardous or nuclear risks.

To avoid passing additional costs to the Government, third-party

status is also accorded to employees of Government contractors and

subcontractors involved in launch services under current practice and

this is the approach reflected in the NPRM.

In 1993, the agency revised the form of Agreement for Waiver of

Claims and Assumption of Responsibility (Agreement) that accompanies

each launch license to clarify that the Government waives claims and

assumes responsibility for property damage it sustains and for any

bodily injury or property damage sustained by its own employees only to

the extent that those claims exceed the amount of property and

liability insurance required under the CSLA. Under current practice, it

is this limited waiver, release of claims and assumption of

responsibility that the Government obligates itself to extend to its

contractors and subcontractors under paragraph 4(c) of the Agreement

now in use. In this regard, the FAA maintains that the approach to risk

allocation set forth in the NPRM is, in practical effect, consistent

with current practice. However, because Government employee claims

would be regarded as third-party claims the agency proposed to remove

reference to responsibility for losses sustained by Government

employees from the proposed form of agreement presented in Appendix II

of the NPRM. Additionally, because employees of Government contractors

and subcontractors would also be deemed third parties, the Government

would not be required to obligate its contractors and subcontractors to

accept responsibility for their employees' losses and reference to this

obligation was also omitted from the proposed form of agreement

presented in Appendix II.

In summary, whereas PPLPs would waive claims against the other

launch participants and agree to be responsible for their own property

damage or loss and for losses sustained by their employees, the

Government's waiver would be limited to property damage suffered by

GLPs at the launch site, in excess of required property insurance.

Claims of Government personnel would be covered by the required

liability insurance up to the limits specified by the agency. Uncovered

claims of Government personnel would be included in a compensation plan

submitted to Congress as part of a request for appropriations to cover

excess third-party claims.

Comments on the NPRM

The agency requested comments on the approach to risk allocation

proposed in the NPRM in light of the following considerations: (1)

absence of any indication in the CSLA or legislative history that

employees of nongovernmental launch participants are intended to be

included in the definition of ``third parties,'' whereas the

legislative history explicitly indicates that Government employees are

to be considered ``third parties,'' S. Rep. No. 100-593, 100th Cong.,

2d Sess. 8 (1988); (2) absence of any indication that the Government

would compensate the claims of employees of PPLPs as excess third-party

claims; (3) considering employees of launch participants as third

parties would run counter to the assumption of responsibility for their

losses required by the statute; and (4) third-party liability insurance

requirements would likely increase if employees of all launch

participants are considered third parties.

Industry reaction to the NPRM and the agency's clarification of

insurance requirements in the spring of 1997, following a Delta launch

vehicle failure earlier in the year, led the agency to reopen the

docket for an additional 30-day comment period. In doing so, the agency

queried whether employee claims are intended to be addressed by the

liability policy a launch licensee obtains to cover all launch

participants' third-party liability. Alternatively, we

[[Page 45599]]

asked whether the reciprocal waiver of claims agreement in which launch

participants agree to assume responsibility for losses sustained by

their employees imposes additional financial responsibilities on the

parties to cover these claims. More specifically, the Notice announcing

the reopened docket requested answers to the following questions: ``Are

employees of the Federal Government and its contractors and

subcontractors (defined in the NPRM as ``Government personnel'')

properly classified as third parties? If not, how should their claims

against other launch participants for damage, injury, or loss be

addressed, particularly in light of the limits on the Government's

ability under appropriations laws to accede to unfunded contingent

liability? From an insurance perspective, what issues or problems does

the proposed definition present in providing liability insurance

coverage for third-party claims? Should employees of all private party

launch participants also be deemed third parties? If so, how would this

affect CSLA-based liability coverage? If these employees are not third

parties, how should their claims be managed? That is, how should the

various launch participants protect themselves financially from claims

by other launch participants' employees?'' (62 FR 36029, July 3, 1997).

The range of comments received and summarized below underscores the

lack of clarity in the statute. In particular, industry opinion was

divided on the appropriate definition of the term ``third party'' and

the intent of the reciprocal waiver of claims requirement.

Both Boeing, commenting in September 1996, before its merger with

McDonnell Douglas Corporation, and Sea Launch suggested that all

employees of all launch participants should be viewed as ``third

parties'' whose claims must be addressed by the required liability

policy obtained by the licensee.

In support of its position, Boeing stated that the intent of the

CSLA is to provide to all launch participants protection against claims

by those who suffer injury as a result of an errant launch--either

through statutorily-required liability insurance or through the inter-

party waivers required by the CSLA. Because employees are not required

to enter into waiver of claims agreements their individual claims

against the other launch participants are not waived. Yet, according to

Boeing, if employees are not accorded third-party status their claims

may not be covered by the required third-party liability insurance nor

would they be eligible for payment by the Government as part of the

catastrophic loss protection contemplated by the CSLA. (Boeing

erroneously refers to umbrella insurance coverage provided by the U.S.

Government to cover excess third-party claims. The Government does not

maintain insurance to cover catastrophic losses resulting from licensed

launch activities. Rather, the CSLA provides a procedure whereby

Congress may vote to appropriate funds to cover those losses.)

According to Boeing, this is an ironic result because launch

participant employees are the most likely to be injured in the event of

a launch accident. Moreover, absent liability insurance coverage for

employee claims, launch participants would be vulnerable to, and

potentially liable for, claims from launch participant employees and

there is no clear statutory basis for suggesting that launch

participants must indemnify each other for those claims. Finally,

according to Boeing, there is no basis for treating Government

employees differently from all other employees in light of the

statutory definition of ``third party'' which omits any reference to

employees of any entity involved in launch services, and therefore all

employees should be considered ``third parties.''

Boeing also refuted any suggestion that the assumption of

responsibility provisions of the CSLA and reciprocal waiver of claims

agreement imposes a requirement on a party to indemnify another launch

participant for successful claims by that party's own employee. Without

offering an opinion as to the meaning of the assumption of

responsibility provision of the statute, Boeing argued that if Congress

had intended for there to be an indemnification obligation it would

have done so explicitly and the term ``indemnification'' does not

appear in the CSLA. The comment cites a legal encyclopedia in support

of the argument that a party claiming a right to be indemnified against

its own negligence must establish that a contract clearly expresses

such an intention and notes further that such agreements have been held

void as against public policy. The better view, according to the

comment, is that all employees, government and nongovernment, should be

considered third parties.

Sea Launch commented that all employees of the various launch

participants should be considered ``third parties,'' based on the

statutory definition, whose claims would be covered by the required

liability insurance and then by the Government under the excess claims

provision of the statute. Sea Launch echoed many of the concerns

expressed by Boeing in noting that unless considered ``third parties,''

injured employees would be unable to recover for their losses in the

event the negligent party did not maintain adequate coverage for the

claim.

Sea Launch also suggested that if employee claims are not eligible

for payment by the Government as excess third-party claims because they

are covered by their employer's assumption of responsibility, then the

same reasoning should apply to claims of Government personnel. In Sea

Launch's view, it is reasonable to expect the Government to cover

excess claims of Government personnel as third party claims and the

same eligibility should apply to claims of all employees. Finally, Sea

Launch disagreed that covering all employees' claims as third-party

claims would significantly increase the amount of required insurance

because a responsible launch licensee would obtain such coverage in any

event, whether or not required by regulation.

Like Boeing, Sea Launch also did not offer a definitive view on the

intended meaning of the reciprocal waiver of claims provisions of the

statute; however, it postulated that if the assumption of

responsibility is an agreement to indemnify other parties for claims

brought by one's own employees then that obligation should be backed by

financial resources, such as the liability coverage obtained by the

licensee, in order to effectuate the intent of the CSLA. In clarifying

remarks, Sea Launch indicated that the statutory-based assumption of

responsibility is intended to be an affirmative obligation to indemnify

other launch participants in the event one's own employee, a third

party, claims against another participant, and the licensee's liability

policy provides the financial resources covering this obligation. In

other words, the liability policy effectively provides a financial

guaranty that each launch participant will fulfill its contractual

obligation to other launch participants to be responsible for its

employees' losses. Whether the basis for the claim is viewed as the

contractual obligation to indemnify another party, or as a third-party

claim, the policy should respond, according to Sea Launch, because

ultimately it is the employee/third party that must be compensated for

his or her loss. As between a launch participant and its contractor,

Sea Launch commented that it would be a contractual matter that would

be negotiated by the parties outside of the CSLA.

[[Page 45600]]

Kistler offered the view that all employees should be considered

third parties otherwise employees of PPLPs would be limited to workers

compensation while Government personnel would benefit from more

extensive recoveries. The substance of this comment has already been

addressed in the preceding summary of the 1988 Amendments; however, the

agency reiterates here that no employees are required to waive their

claims under the reciprocal waiver of claims agreement and that any

injured employee may elect to pursue legal remedies against a negligent

launch participant other than his or her employer.

Lockheed Martin, Orbital Sciences and McDonnell Douglas put forward

a contrasting view of the intended coverage of the term ``third

party.'' According to these three launch licensees, no employees should

be considered ``third parties'' for purposes of the required liability

insurance coverage. Under their view, the assumption of responsibility

for employee losses requires that each signatory to the reciprocal

agreement indemnify the other signatories for claims made by one's own

employees.

McDonnell Douglas and Orbital Sciences specifically commented that

personnel are part of the entity of which they are members and

therefore no personnel, not even Government personnel, should be

considered ``third parties'' for purposes of required liability

insurance coverage. According to McDonnell Douglas and Orbital

Sciences, an employee's claims are the responsibility of his or her

employer, including the U.S. Government and its contractors. Under the

inter-party waiver agreement, that responsibility includes a

requirement to indemnify other signatories to the agreement in the

event of claims by one's own employee against the other signatories.

As a result of the Boeing-McDonnell Douglas merger, effective

August 1, 1997, the risk management program for commercial launches of

the Delta family of launch vehicles was consolidated within Boeing.

Because of the divergence of views expressed in docket submissions by

McDonnell Douglas and Boeing prior to the merger, the agency sought

clarification from Boeing's Insurance Department, Space and Liability

Risks, as to Boeing's views of appropriate implementation of risk

allocation under the CSLA. By way of clarification, Boeing's insurance

manager endorsed the view espoused by McDonnell Douglas in its written

comments that financial responsibility for one's own employees' losses

is intended to be addressed by the reciprocal waiver of claims

agreement undertaken by each launch participant and not by the

liability policy provided by the launch licensee. By implication, no

employees would be deemed ``third parties'' in the sense that their

claims would not be covered by the required liability policy. Rather,

each signatory to a reciprocal waiver of claims agreement is

responsible for maintaining insurance that responds to its contractual

obligation to indemnify other launch participants in the event of an

employee claim for injury, damage or loss.

Orbital Sciences' insurance broker clarified its comment further by

stating that allowing a launch participant's employee to recover as a

third party against another launch participant would defeat the intent

of the reciprocal waiver of claims provisions of the statute to limit

inter-party claims. Also, allowing additional insureds (both the entity

and its employees) to also be claimants under the same policy could be

done at a cost; however, this approach flies in the face of the CSLA,

according to the comment.

Orbital Sciences' insurance broker further stated that at the time

the 1988 Amendments were enacted, it had been understood that special

consideration was warranted for Government employees because of

limitations on the Government's ability to assume an unfunded

contingent liability to cover successful claims of Government employees

against other launch participants. However, the same treatment was not

believed to be appropriate for employees of Government contractors

because those entities can obtain insurance to cover this

responsibility.

Orbital Sciences reaffirmed its position in supplemental comments

to the docket noting further that its launch insurance did not cover

claims of Government personnel and that doing so could double the cost

of insurance. Orbital Sciences also made the following additional

points: First, Government personnel are not now and ought not be

classified as ``third parties.'' Second, each signatory to the

reciprocal waiver of claims agreement, including the Government, agrees

to indemnify the other signatories for claims made by its own employees

resulting from licensed launch activities. Third, the agency's views,

as expressed in the NPRM and in correspondence with the industry,

represent an inappropriate, unnecessary and unwarranted expansion of

industry's liability burden, as well as a shift of liability from the

Government to the industry. Fourth, the statutory limitation on the

Government's waiver of property damage has no bearing on and does not

in any way limit its assumption of responsibility for employee losses.

Fifth, limitations on the Government's ability to accede to unfunded

contingent liability should not impede the Government's ability to

assume responsibility for its employees' losses and should be handled

in a manner similar to the excess claims provisions of the CSLA. Sixth,

the notion of reasonable cost of insurance is a relative term and in

any event allowing inter-party claims instead of relying upon the

reciprocal waiver regime defeats a fundamental goal of the CSLA.

Seventh, allowing Government personnel to be claimants and insureds

under the same policy is unorthodox and renders the reciprocal waiver

scheme useless. Eighth, under the agency's proposal the licensee's loss

record would be unfairly impacted because its liability policy would

have to respond to claims caused by a grossly negligent launch

participant, defeating the ``immunity'' from such claims that the

reciprocal waiver scheme would otherwise provide. According to Orbital

Sciences, this is particularly problematic where the Government's

contractor is involved because the licensee has no direct control over

that entity or its employees.

In further clarification of its remarks, OSC's broker explained

that a licensee's liability policy can be written so as to respond to

the liability assumed by an insured under a contract or agreement,

including the contractual obligation each launch participant assumes

under the reciprocal waiver of claims agreement to be responsible for

its employees' losses. This approach fulfills the important objective

that underlies the reciprocal agreement to be responsible for

employees' losses of keeping litigation costs to a minimum.

Lockheed Martin's initial comments also expressed concern over the

inclusion of Government personnel as ``third parties,'' noting that

including them would have far-reaching effects on the statutory risk

allocation scheme, including the maximum probable loss determination

for third-party losses, the nature and scope of required liability

coverage, coverage for employee claims, scope of the reciprocal waivers

of claims, and the U.S. Government's payment of excess third-party

claims. Lockheed Martin noted that the statutory definition of ``third

party'' does not differentiate between employees of the Government or

its contractors and subcontractors and employees of private party

launch participants (PPLPs). Lockheed Martin

[[Page 45601]]

also questioned the resultant lack of responsibility on the part of the

Government for its employees' claims under the definition of ``third

party'' proposed in the NPRM. Lockheed Martin initially suggested that

it might be beneficial to consider all launch participant employees as

``third parties,'' but noted that this action should not be taken

without understanding the consequences, such as higher insurance

requirements for third-party liability. Lockheed Martin also stressed

the importance of understanding how the agency interprets the

reciprocal agreement between launch participants in which parties agree

to be responsible for injury or losses sustained by their own

employees.

In supplemental comments to the docket, Lockheed Martin

unequivocally objected to defining the term ``third party'' to include

any employees, whether Government-related or private party, and opposed

any interpretation of the term ``third party'' that would relieve the

Government of responsibility for its employees' losses and those of

Government contractor employees under the reciprocal waiver of claims

scheme of the CSLA. Lockheed Martin further stressed that although it

has accommodated the Government's clarification that employees of the

Government and its contractors and subcontractors are to be considered

third parties, this was viewed by Lockheed Martin and its insurers as a

new interpretation that transfers additional risk to the launch

liability policy and could have significant adverse impacts on the

licensee's loss exposure and premiums.

Lockheed Martin believes that the assumption of responsibility for

employee losses imposes on each signatory to the interparty waiver

agreement an obligation to indemnify another signatory/launch

participant for the amount recovered by one's own employee for losses

suffered as a result of licensed launch activities. According to

Lockheed Martin, insurance that is separate and apart from the

licensee's launch liability policy is available to cover this

contractual obligation. In this manner, risk exposures and premium

costs are more fairly distributed among launch participants without

overburdening or distorting the licensee's actual loss record. Further

expanding the definition of ``third party'' to include employees of

Government contractors and other launch participants would effectively

negate the inter-party waiver of claims scheme and leave Lockheed

Martin financially responsible for all such losses, resulting in

premium increases as high as $500,000 per launch, according to Lockheed

Martin's supplemental comments.

Lockheed Martin incorporated by reference comments submitted by

Marsh & McLennan, now J&H Marsh & McLennan, an aerospace insurance

broker. According to Marsh & McLennan, insurance underwriters have long

understood that Government employee claims and claims of Government

contractor employees remained the responsibility of the Government or

its contractors, respectively, as evidenced by the waiver of claims

agreement. While the insurance market can respond to the Government's

requirement that its employees be covered as third party claimants,

inclusion of Government contractor employees is more problematic from

an allocation of risk equity standpoint as it could significantly

affect the cost of insurance, according to the comment. This view is

consistent with that expressed to the agency by an insurance

underwriter who added that requiring coverage for Government contractor

employees could adversely affect launch services providers' ability to

obtain insurance in the future at reasonable rates because their loss

records would reflect claims for which they were not responsible.

To sum up, opponents of the proposed definition of ``third party''

argue that the additional coverage that would be required to comply

with regulatory requirements would result in higher risk exposures and

insurance premiums, that doing so is contrary to or would defeat the

purpose of the reciprocal waiver scheme required by statute, and would

lead to difficulties in implementation in that Government launch

participant (GLP) employees would be both additional insureds protected

from third party liability claims, as well as potential claimants, in

effect making claims against their own liability policy. It could also

allow a negligent employee to recover against another negligent launch

participant, neither of whom is under the licensee's control or

direction. This would unfairly impact the licensee's loss record--

assuming the insurance market is able to respond to the additional

risk.

Final Rule Approach to Risk Allocation for Employee Losses

Having summarized the range of views expressed, the agency

resolves, as a matter of regulation, two issues that are critical to

defining appropriate risk allocation and financial responsibility under

the CSLA. First, the agency concludes that the reciprocal waiver of

claims agreement in which launch participants assume responsibility for

their employees' losses is intended to address financial responsibility

for losses sustained by private party launch participant (PPLP)

employees and remove the risk of such claims from the launch liability

insurance coverage required under the CSLA. Second, although the agency

agrees with those commenters who stated that the liability policy

obtained by the launch licensee is not intended to cover PPLP employee

claims because they are addressed through the reciprocal waiver of

claims agreement, the agency further concludes that the launch

licensee's liability policy is required to cover Government launch

participant (GLP) employee claims up to the limits established by the

agency in license orders. In resolving these issues, the agency

maintains the distinction described in the NPRM between PPLPs and GLPs.

This final rule focuses primarily on risk allocation among private

party launch participants (PPLPs) involved in licensed launch

activities and between PPLPs and Government launch participants (GLPs)

when the Government performs its traditional role as manager of the

Federal launch ranges and provider of range safety services. The NPRM

separately addressed the situation in which a Government agency is a

customer of commercial launch services. The NPRM stated the FAA's view

that because Government agencies cannot agree to an unfunded contingent

liability absent express statutory authority to do so, employees of

Government agency customers are also considered third parties whose

claims would be covered by the licensee's launch liability policy.

However, as explained in the NPRM, a Government-owned payload is not

covered by statutorily-required Government property insurance and the

U.S. Government agency customer accepts responsibility for property

damage to the payload. This approach reflects current agency practice

in establishing risk-based financial responsibility requirements for

third-party liability and Government property damage. That said, the

final rule does not resolve, as a matter of regulation, the form of

reciprocal waiver of claims agreement the Government will utilize when

a Government agency is involved in launch services as a customer and

such agreements will continue to be addressed on an individual basis.

(1) Assumption of Responsibility for Employee Losses

This rulemaking requires that the agency clarify proper

implementation of

[[Page 45602]]

the statutory language appearing in 49 U.S.C. 70112(b)(1) and (2) which

provides that ``each party to the waiver agrees to be responsible for

property damage or loss it sustains, or for personal injury to, death

of, or property damage or loss sustained by its own employees resulting

from an activity carried out under the license.'' (Emphasis added.) As

one commenter queried, is it a restatement or elaboration of the

requirement to provide a waiver? Is it a restatement of a requirement

that a party would have even in the absence of the statute? Is it an

affirmative obligation to indemnify other parties for claims brought

against them by one's own employees?

One possible interpretation of the provision is that the agreement

to be responsible for one's own employees' losses means compliance with

workers compensation insurance requirements, a requirement an employer

would have regardless of the CSLA. Ensuring workers compensation

coverage is provided for employee claims reduces the likelihood that an

injured employee will pursue claims against another launch participant

but does not preclude this possibility. Because workers compensation

laws are left to the states, and significant differences are found

among the various state programs, the agency concludes that a federal

statute is not required, or even appropriate, to ensure compliance with

state law and the FAA therefore views this as an unlikely

interpretation. That is, the statutory provision for assumption of

responsibility is intended to have significance beyond a requirement

already imposed on employers by most (49) states to provide workers

compensation insurance coverage for their employees under existing

state laws.

Another possibility is that by enacting this provision Congress

intended to affect certain workers compensation schemes by removing any

rights of subrogation that an employer's workers compensation insurance

carrier may have under state law. This is also not likely, particularly

for PPLPs whose workers compensation insurance carriers are not

signatories to the reciprocal waiver of claims agreement. State workers

compensation programs vary widely in terms of subrogation rights and it

is not likely that Congress intended to interfere directly in their

implementation.

It is conceivable that Congress intended for the Secretary of

Transportation to waive subrogated claims of Federal agencies under the

Federal Employee Compensation Act (FECA), but doing so would still not

affect the rights of Government employees to independently pursue

claims against other launch participants because their claims are not

waived under the reciprocal waiver of claims agreement. However, it is

possible that fewer claims by Government employees against other launch

participants would be brought if Government agencies' subrogated rights

were waived.

Simply put, FECA is the Federal Government's workers compensation

program. Under FECA, a Federal employee is compensated for work-related

injuries and if the injury was caused by a negligent third party, the

employee is advised to pursue a claim against that negligent party. If

the employee is successful in his claim, he or she is required to

reimburse the Government the amount paid to the employee by the

Government, with certain adjustments for legal fees and other expenses.

Even if the CSLA means that the Government must forego its right to

recover, it does not mean that Government employees forego their rights

as injured claimants to proceed against a negligent launch participant.

The presence or absence of workers compensation coverage does not

eliminate inter-party litigation, a primary objective of the CSLA risk

allocation scheme. Workers compensation provides to an employee an

exclusive remedy against his or her employer for injuries arising out

of and suffered in the course of employment. However, an injured

employee may elect to sue a launch participant other than his or her

employer for negligently causing the injury. Generally, a majority of

jurisdictions would deny to that negligent launch participant the right

to seek contribution from the employer because the workers compensation

remedy is exclusive to the employer. Yet, contribution may be possible

under a substantive indemnity law or on the basis of an indemnity

agreement or if an independent duty is owed by the employer to the

negligent launch participant. In that event, the negligent launch

participant may proceed against the employer by maintaining that a

contractual agreement removes the bar that would otherwise prevent the

negligent launch participant from seeking contribution from the

employer. Even so, variations in state workers compensation programs

may result in a host of issues still being litigated.

Therefore, in the interest of avoiding costly inter-party

litigation, the agency concludes that Congress intended to create an

indemnity obligation making each PPLP financially responsible, by

contract, for its employees' claims or otherwise establishing an

independent duty owed by each employer to the other launch

participants. This responsibility may be termed a legislatively-

mandated contractual indemnification obligation.

As between a launch participant and its contractors and

subcontractors, the assumption of responsibility could be viewed as a

``contractor-under'' requirement whereby each party provides workers

compensation insurance that would cover its contractors and

subcontractors employees' claims in the event its contractors and

subcontractors failed to provide coverage. Doing so would minimize the

likelihood that an injured employee of a contractor would look to

another launch participant's deep pockets for recourse. (Generally

speaking, state law provisions of this nature are intended to give a

general contractor an incentive to require subcontractors to carry

workers compensation insurance. 2A Larson, Workers Compensation Law,

72.31(b).) However, the FAA declines to interfere with variations in

state workers compensation programs and concludes that it is

unnecessary to do so as long as we regard the assumption of

responsibility to be a contractual indemnification obligation of each

PPLP to the other launch participants to assume financial

responsibility for its own employees' losses.

That said, the agency does not agree with the commenters that a

comparable obligation is accepted by the Government through the

reciprocal waiver of claims agreement. Whereas each PPLP undertakes a

contractual obligation to indemnify other launch participants from

claims of its own employees through the inter-party waiver agreement,

the Government is unable to accept this contractual obligation absent

express authority to do so because it would amount to an unfunded

contingent contractual liability which is prohibited by appropriations

laws. The agency does not believe that the statute authorizes the

Government to undertake an additional unfunded obligation except if a

policy exclusion is deemed ``usual'' or the available limits of the

policy are exhausted. In either of those events, the Government would

be responsible under the CSLA for covering those claims, subject to

Congress appropriating funds for that purpose.

Moreover, the CSLA authorizes the Secretary of Transportation to

establish financial responsibility requirements, consistent with the

CSLA, to protect the Government, its agencies, and personnel from

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

of a

[[Page 45603]]

launch or operation of a launch site involving a facility or personnel

of the Government. 49 U.S.C. 70112(e). The appropriate way to reconcile

this provision with the Government's assumption of responsibility

obligations in 49 U.S.C. 70112(b)(2) is to conclude that the Government

accepts responsibility for its employees' losses but, as in the

Government's waiver for property damage, only to the extent that they

exceed required insurance or other demonstration of financial

responsibility.

The Government's limited agreement to be responsible for losses

sustained by its employees, as reflected in the final rule, is

consistent with similar requirements imposed by the Air Force in

existing commercialization agreements to hold the Government harmless

from third-party liability, including losses suffered by members of the

Armed Forces. Regardless of whether or not an FAA license is issued for

a commercial activity, the Government is not willing to accept

additional financial responsibility for its employees' losses, other

than that imposed under FECA or other comparable Federal compensation

program, when Government personnel are involved in supporting

commercial launch activities and this is the view that is reflected in

the CSLA at 49 U.S.C. 70112(e). Absent further clarification from

Congress, the agency is unwilling to place on the Government

responsibility for covering the liability of other parties whose

negligence causes injury, damage or loss to Government employees

involved in commercial launch services. Moreover, the Government is

foreclosed from insuring this risk under appropriations laws and

therefore it is both necessary and appropriate that claims of

Government employees against the other launch participants be addressed

by the licensee's liability policy.

This approach to covering claims of Government employees results

from the agency's understanding of statutory objectives and the

practical consequences of appropriations laws, as well as the

practicalities of seeking recovery from the Government. The same

approach is not necessary to address the claims of employees of PPLPs.

Therefore, with respect to PPLPs, the agency adopts the view, expressed

by the majority of commenters, that the agreement to be responsible for

losses sustained by one's own employees establishes a contractual,

substantive right in each signatory to the reciprocal agreement to be

indemnified and held harmless from claims of the other signatories'

employees. Commenters offering this understanding of the reciprocal

waiver of claims agreement also stated that insurance, separate from

launch liability insurance, can be obtained by each signatory to the

agreement to cover this contractual obligation.

As a practical matter, the agency's determination that the

Government assumes a limited acceptance of responsibility for its

employees' losses should not impose an unreasonable burden on the

commercial launch industry. Even if the Government assumed

responsibility for losses sustained by Government personnel, a prudent

PPLP would maintain insurance to cover its liability in the event

Congress failed to appropriate funds for this obligation. Rather than

risk an uncovered liability, we believe it should be preferable for all

entities involved in launch services to ensure adequate resources exist

to cover claims of Government employees through the liability policy

obtained by the licensee in accordance with the CSLA.

The issue remains as to whether the agency's approach of addressing

claims of Government employees is appropriate for employees of the

Government's contractors and subcontractors involved in launch

services. Although Government contractors and subcontractors are

private entities not subject to the restrictions of appropriations

laws, the agency maintains that it is appropriate to accord to those

employees the same status as Government employees for this limited risk

management purpose and require that the licensee's liability policy

respond to claims of Government personnel. The waiver requirement set

forth in the statute provides that the Government waives claims ``for''

or ``on behalf of'' its contractors involved in launch services. In

doing so, the Government takes on additional responsibilities to

safeguard the interests and rights of those entities that perform

launch services, at the behest of the Government, in support of

commercial operations. For this reason, Government contractors and

subcontractors should not be required to accept additional liability or

insurance obligations when they perform services in support of

commercial launch operations under contract to the Government. Although

Government contractors and subcontractors could obtain insurance to

cover a contractual indemnification obligation, they are not currently

required to do so. Thus, costs incurred in obtaining this additional

coverage would likely be passed through to the Government as allowable

and allocable costs. Rather than incur additional costs or risks, the

agency has determined to maintain its current practice of requiring

that the liability policy obtained by the licensee under the CSLA

respond to claims of Government contractor and subcontractor employees.

The agency's interpretation of the statutory agreement in which

parties agree to be responsible for losses of their own employees may

be controversial in that it effectively relieves a party of the

financial consequences of its own negligence. At first blush, this

might seem an illogical result, or one that flies in the face of public

policy; however, it is consistent generally with the no-fault, no-

subrogation reciprocal waiver scheme required by the CSLA. Parties may

validly contract for or require indemnification against their own

future negligent acts as long as it is clearly done, as in the revised

form of reciprocal waiver of claims agreement presented in Appendix II

of the final rule. However, it would be contrary to public policy to

allow a party to contract for indemnification against willful

misconduct and the ``Agreement for Waiver of Claims and Assumption of

Responsibility'' contained in Appendix II of the final rule does not

allow a launch participant to be relieved of liability for such

behavior. The agency anticipates that the commercial market will

respond to these requirements by ensuring that only responsible launch

participants will be employed to perform hazardous operations in order

to reduce each participant's risk of financial responsibility for

employee losses.

(2) Liability Insurance Coverage for Third Parties

In making the determinations reflected in the final rule, the FAA

also considered the question of whether the liability policy a launch

licensee obtains ought to respond, in the first instance, to all

employee claims. The approach suggested by Boeing and Sea Launch of

considering all employees to be third parties whose claims must be

covered by the licensee's liability policy under the CSLA is attractive

for several reasons. It ensures sufficient financial resources will be

available to cover employee claims through the liability policy and as

follows: In the event an employee's claims are not compensated by that

policy, either because of an insurance exclusion deemed ``usual''

within the meaning of the statute or exhaustion of policy limits, the

Government may elect to cover the claim under the procedures set forth

in 49 U.S.C. 70113. If the Government fails to do so, then the launch

participant/

[[Page 45604]]

employer's agreement to be responsible for the claim could be invoked

and the sued launch participant would seek indemnification from the

launch participant/employer for the amount of the employee's recovery.

This approach offers the benefit of reconciling the view that employees

of all launch participants may be third parties without stripping the

CSLA-mandated agreement to be responsible for employee losses of

substantive import. However, where the uncovered claim belongs to

Government personnel, the agency would need to resolve whether the

Government's agreement to be responsible for its employees' losses

would be subject to 49 U.S.C. 70113 procedures or absolute.

In evaluating the issue, the agency considered the additional

burdens that would be imposed upon launch licensees if all employees

were deemed third parties whose claims would be addressed by the launch

licensee's liability policy. To do so, the agency surveyed Air Force

installations at which launches take place to ascertain the maximum

number of employees, other than Government personnel (because their

exposure is currently assessed by the agency in setting insurance

requirements), that may be exposed to hazardous operations. Using $3

million as the value of life, the amount currently used by the agency

in making maximum probable loss (MPL) determinations, and applying a

conservative assumption that half the personnel exposed would suffer

casualties within MPL thresholds, the agency determined that liability

insurance levels would increase anywhere from $12-15 million to $54

million depending upon the launch vehicle and the Federal installation

from which it is launched.

Although these increases in loss limits do not seem extraordinary

in light of the statutory ceiling on required liability insurance of

$500 million, the agency understands that directing additional coverage

for claims of all launch participant employees would shift the risk of

such claims to the liability policy and increase its cost, assuming

insurance of this nature could be obtained. The agency considered

whether the imposition of additional costs and risks on the launch

industry that would be associated with this approach is warranted and

justified in light of statutory objectives. Accordingly, the agency re-

examined closely the intent of the 1988 Amendments in light of

liability concerns confronting the commercial launch industry at the

time the 1988 Amendments were enacted.

Extensive hearings on H.R. 3765, a predecessor to the 1988

Amendments, before the Subcommittee on Space Science and Applications

on February 16-17, 1988, are illuminating in this regard. The various

panelists presenting views at the hearings, as well as the Subcommittee

Members, made clear in their remarks that it was the risk of

catastrophic failures and potentially unlimited liability to persons

completely unassociated with launch activities that was at the heart of

the industry's concern in operating in a commercial manner at a time

when insurance capacity was extremely limited.

The testimony suggests that third party liability risks at issue

were risks to the public, that is, the uninvolved, unassociated

innocent bystander having nothing to do with the launch activity, not

employees of launch participants who would at least have some remedy

under workers compensation statutes. In questioning Richard E.

Brackeen, president of Martin Marietta Commercial Titan, Inc.,

Congressman Jack Buechner, R. Mo., asked about the history of claims

for loss or injury of persons who were not involved in activities at

the launch site. In his question, he carved out catastrophic losses to

astronauts and the Challenger disaster, as well as workers compensation

claims. ``I'm talking about people outside of the immediate launch

system. I mean, it seems to me that as we get into these questions of

indemnification, we're talking about a risk analyses [sic] that has to

be done.'' H.R. 3765, The Commercial Space Launch Act Amendments:

Hearings Before the Subcommittee on Space Science and Applications of

the House Comm. on Science, Space, and Technology, 100th Cong., 2d

Sess. 210 (1988).

In passing the 1988 Amendments, Congress determined that financial

resources had to be available to cover claims by the public in the

event a launch accident caused injury or damage to uninvolved persons.

These resources would also satisfy the obligations of the United States

under the Outer Space Treaties in the event of damage caused by a

launch from the United States to a foreign territory. Earlier testimony

suggests reason to believe that claims between the launch participants,

including their employees, were regarded as first and second party

claims that would be addressed through reciprocal waiver agreements,

and not as third-party claims. In this manner, and in combination with

the waiver by launch participants of first party damage or loss, the

highest risk claims would be removed from liability coverage at a time

when insurance capacity was extremely limited. This is consistent with

the views expressed in this rulemaking by some commenters and their

insurance brokers that employees are considered part of their employing

entity whose claims were intended to be addressed through reciprocal

waiver of claims agreements and separately from the third-party claims

of uninvolved persons.

The legislative history points to a unique conclusion with respect

to Government employees, however. As reported out of the House

Committee on Science, Space and Technology, the definition of ``third

party'' in H.R. 4399 included United States personnel involved in

launch services as part of the definition thereby excluding them from

``third party'' status. The Senate Report accompanying the 1988

Amendments indicates generally that the definition of the term ``third

party'' is ``intended to be any person not associated directly with

commercial launch operations.'' S. Rep. No. 100-593, 100 Cong., 2d

Sess. at p. 8 (1988). Yet, the report language expressly reserves third

party status for Government personnel directly associated with

commercial launch operations and reference to Government personnel was

removed from the definition of ``third party'' in the bill. Public Law

100-657, known as the ``Commercial Space Launch Act Amendments of

1988'' also makes no reference to Government personnel in the

definition of ``third party.'' Thus, the FAA concludes that a

deliberate decision was made to reclassify Government employees as

third parties. Despite the lack of clarity in the statutory definition,

ample basis exists to include Government employees in the universe of

potential third-party claimants.

The agency has also been advised by aerospace insurance brokers

that the special circumstances of Government appropriations law was

understood within the insurance community at the time the 1988

Amendments were enacted and that accommodation for covering Government

employee claims could be made. This is accomplished by ensuring that

Government employees are regarded as third parties for purposes of

ensuring that the launch licensee's liability policy will respond to

their claims for injury, damage or loss.

The agency does not find the same indications that the launch

licensee's liability policy was intended to respond to claims of

employees of PPLPs involved in a launch. Even if these

[[Page 45605]]

employees are ``third parties'' within the statutory definition of the

term, the agency concludes that the mandatory agreement by each PPLP to

be responsible for its employees' losses is a substantive requirement

which supersedes the need to address their claims through the required

liability policy. According to the insurance community, this

interpretation is consistent with the universe of risks underwriters

have agreed to accept by insuring launch liability. The agency is

advised that underwriters have agreed to provide coverage for an

unorthodox breadth of risks, as required by the CSLA--a single

liability policy covering all launch participants as additional

insureds--with the understanding that the claims having the highest

risk of occurrence (claims for injury by individuals involved in

licensed launch activities) would be addressed through other means,

specifically, the waiver of claims and assumption of responsibility

obligations of the CSLA. It is unclear whether the launch insurance

market could or would respond to the imposition of additional risks

from PPLP employee claims. Including coverage for GLP employee claims

has been accommodated, but evidently not without some resistance. The

agency does not find it necessary to further strain insurance capacity

by considering all employees as third parties whose claims must be

covered by the liability policy when we believe the assumption of

responsibility provides the appropriate response, and the final rule

reflects this view.

The agency concludes that Government employees, but not PPLP

employees, must be considered third parties whose claims against other

launch participants will be responded to by the licensee's liability

policy. Ensuring that the liability policy is available to cover claims

of Government employees provides financial protection to all launch

participants from Government employee claims. The following scenario

and alternative results illustrate the financial risks that would

confront all launch participants if Government employee claims were not

eligible for coverage under the liability policy:

Scenario: Government employee ``A'' is injured at Cape Canaveral

Air Station while monitoring licensed launch activities. The injury to

``A'' results from the launch licensee's negligence in performing the

hazardous licensed operation of integrating the payload with the launch

vehicle. The launch licensee's customer also performed in a negligent

manner contributing to ``A's'' injuries. ``A'' files a claim under the

Federal Employee Compensation Act (FECA), and receives prompt

notification of his entitlement to compensation from the Government for

his injury. FECA provides employee ``A'' an exclusive remedy against

the Government for job-related injuries. Whether or not the

Government's subrogated rights are waived under the CSLA, ``A'' may

elect to sue the launch licensee and its customer, alleging that their

negligence caused his injury. The launch licensee is a well-known

launch services provider with considerable financial assets. Its

customer is a not-for-profit research institution. ``A'' determines to

sue the launch licensee alleging that its negligence caused his

injuries and does not name the customer in the lawsuit. Assume that

``A'' will be successful and obtain a judgment of $1 million against

the launch licensee.

Alt. 1: Under the view expressed by the agency in this final rule,

the launch licensee has obtained a launch liability policy covering its

liability to ``A.'' The liability policy responds to ``A's'' claim.

Under the final rule, the licensee's insurer waives all rights of

subrogation against the other insureds covered by the policy. Even if

``A'' had named the customer in his suit, the claim would be covered by

the launch licensee's liability policy because the customer as well as

other PPLPs and GLPs are named as additional insureds under the policy.

Alt. 2: The launch licensee's liability policy does not respond to

``A's'' claim because it excludes coverage for claims of any insured's

employees against any other insured under the policy. The launch

licensee presents the reciprocal waiver of claims agreement to the

Government and argues that the Government has agreed to be financially

responsible for its employees. Although FECA provides to ``A'' an

exclusive remedy against the Government, the licensee's action is not

barred if it can establish either a substantive right to indemnity

under the Federal Tort Claims Act or a contractual right to indemnity

under the reciprocal waiver agreement dictated by the CSLA. Assuming

that ``A'' did not perform in a negligent manner and that the

Government was not negligent in its supervision of ``A,'' and the

licensee cannot establish any other duty owed to it by the Government,

the launch licensee will not be successful under the Federal Tort

Claims Act and must establish a contractual obligation on the part of

the United States to indemnify it for ``A's'' recovery. The agency has

long held the view that the Anti-Deficiency Act precludes the

Government from accepting an unfunded contingent liability and does not

find in the CSLA language a clear, unequivocal removal of this

restriction. Moreover, even if a special appropriation were requested

to cover the launch licensee's liability to ``A,'' Congress may refuse

to appropriate the funds, leaving ``A'' with a $1 million judgment

against the launch licensee.

Alt. 3: The launch licensee's liability policy does not respond to

``A's'' claim because it excludes coverage for claims of any insured's

employees against any other insured under the policy and the licensee

impleads its customer as a third-party defendant thereby defeating the

CSLA objective of avoiding inter-party litigation. As a practical

matter, the launch licensee has deeper pockets than the customer who

may or may not have sufficient insurance or assets to cover its

liability, leaving the licensee potentially responsible for satisfying

the entire judgment from other general liability insurance coverage or

corporate assets.

The first alternative described above provides the best outcome by:

(i) relieving each participant of the need to obtain separate liability

insurance to cover Government employee claims; (ii) providing

reasonable assurance of financial protection to Government employees

exposed to risk of loss in supporting commercial launch activities; and

(iii) avoiding inter-party litigation.

In the final rule, the definition of ``third party'' is revised to

remove the express exclusion of employees of private party launch

participants. As revised, the regulation does not preclude coverage by

a licensee's launch liability policy for claims by employees of PPLPs.

A licensee may obtain additional liability coverage in excess of

amounts required under the terms of a launch license to cover claims of

other parties' employees. However, the amount of insurance required by

the agency does not reflect this additional source of claims nor can

claims of other parties' employees dilute or diminish the amount of

insurance that must remain available to respond to the intended class

of third-party claimants, that is, persons uninvolved in the launch as

well as claims of GLP employees. As long as those claims are satisfied,

the Government would have no say as to whether a licensee's liability

policy may respond to satisfy claims of other launch participants'

employees if such coverage is available under the terms of the policy,

either as a liability claim or to cover the contractual indemnification

obligation of an insured. However, in the event the liability insurance

is exhausted, claims

[[Page 45606]]

of employees of PPLPs would be the responsibility of their employer

under the reciprocal waiver agreement and not eligible for Government

payment under 49 U.S.C. 70113. Because providing additional coverage

for losses sustained by employees of PPLPs may result in some

additional expense, the agency leaves it to the parties to negotiate

appropriate cost-sharing arrangements if they elect to pursue this

route.

To summarize briefly, the preceding discussion of risk allocation

under the 1988 Amendments began by characterizing sources of claims for

injury, damage or loss as falling within two groups: 1) those entities

and individuals involved in licensed launch activities, and 2) those

entities and individuals not involved in licensed launch activities.

Those involved in licensed launch activities include PPLPs, GLPs, and

their employees. Financial responsibility for claims of either group is

provided as follows: Whereas PPLPs are required to waive claims for

their own property damage or loss and obligate themselves contractually

to cover or indemnify another launch participant in the event of losses

sustained by one's own employee, the Government accepts a more limited

responsibility. Through its participation in the reciprocal waiver of

claims scheme, the Government agrees to waive claims for its own and

its contractors' and subcontractors' property damage at a Federal range

facility in excess of the amount of Government property insurance

required under the license. The Government also accepts responsibility

for losses of its employees and its contractors' and subcontractors'

employees only to the extent they are not covered by required liability

insurance, either because of a ``usual'' policy exclusion or because

the policy limits have been exhausted. Claims of entities and

individuals not involved in licensed launch activities would be

addressed by the single liability policy obtained by the launch

licensee to cover claims by any third party, as defined in this

rulemaking, against any PPLP or GLP. Claims in excess of the required

amount of liability insurance become the responsibility of the

Government, subject to appropriation of funds, up to $1.5 billion (as

adjusted for inflation occurring after January 1, 1989) above the

amount of insurance that the agency requires.

Section-by-Section Analysis

Summarized in this section are specific comments addressing

particular provisions of the proposed rule or responding to the

agency's request for views on matters not covered above, followed by

the agency's response to the comments. The agency has also identified

certain provisions in the NPRM that would benefit from additional

elaboration. Each is discussed below in numerical order. Nonsubstantive

changes in the regulatory text of the final rule are not specifically

identified or discussed.

Section 440.1--Scope; Basis

Section 440.1 as proposed indicates that the financial

responsibility and allocation of risk requirements of this rulemaking

apply to all licensed launch activities. There are no changes to this

section in the final rule.

Kistler submitted comments and recommendations for the agency's

consideration to the extent these rules would apply to launches of

reusable launch vehicles (RLVs). Legislation under consideration in

Congress would authorize the agency to license separately the reentry

of an RLV and impose financial responsibility requirements to cover

risks associated with the reentry event. Currently, launch, but not

reentry, of an RLV would be covered by existing statutory requirements

for financial responsibility. Accordingly, the agency intends for these

rules to apply to licensed RLV launch activities, as defined in a

license, and will develop rules for reentry financial responsibility

once specific licensing authority over reentry is enacted.

Section 440.3--Definitions

The term ``contractors and subcontractors'' as defined in

Sec. 440.3(a)(2) of the NPRM prompted two comments. The proposed

definition would encompass entities involved directly or indirectly in

licensed launch activities, including suppliers of property and

services and component manufacturers. McDonnell Douglas and Orbital

Sciences expressed concern that broadening the definition from that

contained in the form of Agreement for Waiver of Claims and Assumption

of Responsibility (Cross-Waiver Agreement) currently in use by the

agency would impose additional burdens on the licensee and its

customers to implement the reciprocal waiver of claims requirements of

Sec. 440.17, in the following ways. Long-term contracts with

subcontractors at every tier would have to be amended at significant

burden and expense. By corollary, the licensee (and its customer) would

be required to accept greater responsibility under the proposed form of

reciprocal waiver of claims agreement set forth in Appendix II to the

NPRM in the event it failed to pass on, or flow down, the cross-waiver

requirements to all of its contractors and subcontractors. Commenters

were also concerned that the expanded definition would remove the

licensee's prerogative of either obtaining waiver of claims agreements

from its contractors or indemnifying other parties for failure to

implement properly the waiver of claims agreements. McDonnell Douglas

clarified its comment by noting that the proposed definition would be

acceptable if the indemnification option were preserved.

The agency believes these concerns are misplaced. The proposed

definition has been broadly crafted in order to ensure that the

liability insurance protection required of a launch licensee under the

CSLA is available to cover third-party claims against any contractor or

subcontractor involved directly or indirectly in licensed launch

activities. Consistent with the CSLA scheme, the definition would

include any contractor or subcontractor that has potential liability

exposure to third parties as a result of licensed launch activities.

However, in the section-by-section discussion of proposed Sec. 440.17--

Reciprocal Waiver of Claims Requirements, the NPRM explains that not

all of those entities are expected or required to participate in the

reciprocal waiver of claims scheme in order to carry out its purpose.

Only those participants, including contractors and subcontractors,

whose personnel or property are at risk in the conduct of licensed

launch activities and who therefore could pursue claims against other

participants in the event of injury, damage or loss need enter into the

reciprocal waiver of claims agreement. (61 FR at 39012, July 25, 1996).

The indemnification provisions referred to by the commenters appear

in paragraph 5 of the proposed form of reciprocal waiver of claims

agreement in Appendix II of the NPRM. These provisions continue the

agency's current practice of providing a contractual remedy to launch

participants who must defend against claims brought by other launch

participants' contractors or subcontractors because of the latter

party's failure to implement properly the extension, or flow down,

provisions of the agreement with its contractors and subcontractors.

The indemnification and hold harmless provisions in paragraph 5 of the

proposed form of agreement at Appendix II are not intended to relieve a

launch participant of its responsibility to implement waivers of claims

with its contractors and subcontractors by allowing the launch

participant to elect

[[Page 45607]]

whether or not to comply. The reciprocal waiver of claims scheme works

best when PPLPs implement the waiver of claims requirements fully and

properly because failure to do so will result in additional costs and

burdens to a party that must defend against a claim. (Commenters raised

the very same arguments in opposition to the Government's view that it

need not flow down the waiver requirements to its contractors and

subcontractors. However, because the Government would be responsible

for uncovered property losses sustained by those entities, the agency

believes that the approach proposed in the NPRM wherein the Government

would waive claims on behalf of its contractors and subcontractors

should not be objectionable.)

The revised form of reciprocal waiver of claims agreement appearing

in this final rule at Appendix II continues the current practice of

requiring a three-party agreement to be executed by the licensee, its

customer and the agency on behalf of the Government and imposing an

express indemnification obligation on signatories to the agreement for

failure to implement properly the flow down provisions of the agreement

to contractors and subcontractors. Consistent with current practice,

the agency leaves implementation of these provisions to launch

participants and does not intend to monitor compliance with the flow-

down requirements.

Two comments were submitted regarding the proposed definition of

``customer'' in section 440.3(a)(3). Hughes Electronics, a

communications satellite manufacturer, endorsed the proposed

definition, in that it would include any person to whom the procurer of

launch services conditionally sells, leases, assigns or otherwise

transfers its rights in the payload. Sea Launch suggested broadening

the definition to include not just any person to whom the procurer of

launch services has transferred a right in the payload, but also any

person to whom the procurer of launch services has transferred a right

to the launch services but remains in privity of contract with the

launch services provider, such as when the procuring party transfers or

brokers those rights to another party. The agency agrees with the

comment and has revised the definition accordingly in the final rule

and Appendix II agreement.

Through the broad definition of the term ``customer,'' the agency

intends that the financial responsibility and risk allocation

provisions of the CSLA, including rights to liability insurance

coverage and eligibility for Government payment of excess liability

claims, as well as the responsibility to participate in the reciprocal

waiver of claims scheme, apply not just to the procurer (or transferee)

of launch services, but also to any person having any rights in the

payload to be launched. A question arises as to whether a person who

places property on board a payload to obtain launch or payload

services, or who has rights in the payload, should properly be viewed

as a customer (or customer of the customer) or a contractor in that it

is supplying property. The question is raised in the context of

determining whether, and in what capacity, the person whose property is

on the payload is expected to accede to the reciprocal waiver of claims

scheme. The more traditional view of this person as a customer is

correct and his or her rights and responsibilities under the cross-

waiver agreement are equivalent to those of the customer who signs the

three-party agreement with the licensee and the agency on behalf of the

Government. Thus, it must be clearly understood that the customer who

executes the three-party reciprocal waiver of claims agreement required

as a condition of the license does so on behalf of all of its

customers. It is incumbent upon that party to implement the extension,

or flow down, provisions of the agreement to its customers and the same

indemnification protections would be afforded the other launch

participants in the event of the signatory customer's failure to do so.

In essence, while the customer's customer becomes a third-party

beneficiary of the three-party waiver of claims agreement, it is also

expected to sign a waiver agreement and assume the burdens of a

customer that signs the reciprocal waiver agreement with DOT and the

licensee. The definition of ``customer'' is further modified in the

final rule to include any person who places property on board a payload

for the purpose of obtaining launch or payload services and the form of

reciprocal waiver of claims agreement in Appendix II of the final rule

is also revised to reflect the additional indemnification obligations

of the customer.

The term ``Government personnel'' remains unchanged in the final

rule and is used to facilitate the distinction between employees of

Government launch participants (GLPs) whose claims must be addressed by

the launch licensee's liability policy and employees of private party

launch participants (PPLPs) whose claims are the responsibility of

their employer, as discussed above. The agency considers FAA personnel

who carry out inspections or compliance monitoring activities at the

launch site to be Government personnel.

No comments were received on the proposed definition of

``liability'' contained in Sec. 440.3(a)(8). However, the agency wishes

to clarify that legal liability of the United States under

international law may include treaty obligations of the United States

and the liability insurance policies obtained by licensees must cover

those obligations. No change in the proposed definition is required.

For reasons explained above in the supplementary information, the

proposed definition of the term ``third party'' is revised in the final

rule by removing the following sentence: ``For purposes of these

regulations, employees of other launch participants identified in

paragraphs (a)(15)(i)(B) and (C) of this section are not third

parties.'' The licensee's liability policy may respond to losses

sustained by employees of PPLPs either as a third-party or contractual

liability and the agency is not foreclosing that possibility. However,

the public is advised that the agency does not consider potential

losses of PPLP employees in determining the required amount of

liability insurance and does not find in the statute congressional

intent to address those losses through the excess claims provisions of

49 U.S.C. 70113.

Definitions of other terms not specifically addressed herein remain

as proposed in the NPRM.

Section 440.5--General

Section 440.5 as proposed sets forth the basic requirement that

launch licensees must comply with financial responsibility and

allocation of risk requirements established by the agency. Once

established, the prescribed financial responsibility requirements

become the exclusive requirements of the Government for financial

responsibility, allocation of risk and related matters covered by 49

U.S.C. 70112 and 70113. Other agencies may impose requirements to

address matters that are not covered by the financial responsibility

provisions of 49 U.S.C. 70112, such as unemployment insurance or

comprehensive automobile liability, and licensees are not relieved of

the obligation to comply with them.

Proposed Sec. 440.5(b) provides that the agency will prescribe in a

license order the amount of financial responsibility a licensee must

obtain. Similarly, any modifications of that amount would also be

established through license orders.

Lockheed Martin, McDonnell Douglas and Orbital Sciences registered

concern

[[Page 45608]]

over the agency's assertion of continuing authority to revise

requirements based upon changes in exposed property or risks,

indicating that such revisions create uncertainty and could impact cost

and availability of insurance.

Operator licenses are currently issued for a two-year period, and

may be renewed upon application by a licensee. It is reasonable to

expect that some change will occur in the property or number of third

parties exposed to risk of loss over the course of several years and

the agency must be able to respond appropriately to those changes.

Changes may result from actions of the licensee, such as a change in

launch plans, the Government, or third parties. For example, a change

in launch trajectory may heighten or reduce risks to third parties or

Government property. Similarly, a person uninvolved in a licensee's

activities may establish facilities on a launch site, possibly

increasing risk to third-party property and increasing the value of the

maximum probable loss (MPL) determination associated with licensed

launch activities. A change in the MPL, in either direction, should

properly be reflected in the mandated amount of insurance coverage.

The FAA does not anticipate frequent or rapid fluctuations in

required levels of insurance. As indicated in the NPRM, transient

Government property is not included as part of the MPL analysis.

Although it must be covered by the licensee's insurance, the amount of

insurance coverage required would not depend upon the presence or

absence of transient Government property on any given day and it is not

the Government's intent to alter this approach in retaining discretion

to revise requirements. No change to this provision is required in the

final rule to address the commenters' concern.

A number of comments were directed at Sec. 440.5(c), which states

the fundamental principle that a demonstration by a licensee of

financial responsibility for liability, loss or damage suffered by the

United States as a result of licensed launch activities is not a

substitute for actual financial responsibility. Section 440.5 of the

NPRM further provides the only circumstances under which the licensee

would be relieved of this responsibility, as follows: (1) when

liability, loss or damage sustained by the United States results from

willful misconduct of the United States or its agents, including

Government personnel; (2) third-party claims for bodily injury or

property damage covered by the licensee's liability insurance exceed

the amount of financial responsibility established by the agency under

the regulations up to $1.5 billion (as adjusted for inflation occurring

after January 1, 1989) above that amount and are payable under the

payment of excess claims provision of the CSLA (49 U.S.C. 70113); (3)

claims for loss or damage to property of the U.S. Government, its

agencies, contractors and subcontractors exceed the required amount of

Government property insurance; and (4) in the event the licensee has no

liability for third-party claims arising out of any particular launch

that exceed $1.5 billion (as adjusted for inflation occurring after

January 1, 1989).

Lockheed Martin requested that the agency reconcile various

statements regarding the Government's responsibility in the event of

its own willful misconduct with other provisions in the proposed

regulations concerning waiver of claims and assumption of

responsibility.

Section 70112(e) of the CSLA directs the Secretary of

Transportation to establish financial responsibility requirements and

other assurances necessary to protect the Government and its agencies

and personnel from liability, death, bodily injury, or property damage

or loss as a result of licensed activities involving Government

facilities or personnel. 49 U.S.C. 70112(e). Significantly, 49 U.S.C.

70112(e) does not relieve the licensee's obligation to cover claims for

damage to Government property or personnel that result from willful

misconduct of the Government or its agents. However, it does provide

that the Secretary may not relieve the Government of liability under

this subsection for death, bodily injury, or property damage or loss

resulting from the willful misconduct of the Government or its agents.

As a matter of public policy, the Government ought not be able to

assert claims against the licensee or any other person for property

damage that it suffers as a result of its own willful misconduct or

that of its agents. In the limited circumstances in which willful

misconduct by the Government or its agents results in property damage

or loss to Government property, the licensee is relieved of ultimate

responsibility for the claim under Sec. 440.5(c)(1) of the final rule.

Consistent with current practice, the Agreement for Waiver of Claims

and Assumption of Responsibility presented in Appendix II of the final

rule also requires that the licensee hold the Government and its

agencies, servants, agents, employees and assignees harmless from

liability for property damage or injury except where, among other

things, the claim results from willful misconduct of the Government or

its agents. Because Government contractors and their employees are not

typically considered agents of the Government in most circumstances,

the final rule is revised to remove reference to Government personnel

in Sec. 440.5(c)(1); paragraph 7(b) of the form of agreement presented

in Appendix II of the final rule is similarly revised.

Two additional revisions appear in Sec. 440.5(c) of the final rule.

First, section 440.5(c)(3) effectively provides that the licensee is

relieved of ultimate responsibility for damage to or loss of GLP

property in excess of Government property insurance required under

Sec. 440.9(d). As a matter of public policy and consistent with current

practice, licensees are not relieved of financial responsibility for

excess Government property damage where the Government's claims result

from the licensee's willful misconduct and this policy is now reflected

in Sec. 440.5(c)(3) of the final rule. No change is necessary in the

Agreement for Waiver of Claims and Assumption of Responsibility in

Appendix II of the rule because, consistent with current practice, it

provides that waivers of claims shall not apply where the claims result

from willful misconduct of any of the parties.

Second, several commenters pointed out an inadvertent omission in

Sec. 440.5(c)(4), as proposed. This exception to the licensee's

ultimate responsibility for liability or losses sustained by the United

States from licensed launch activities is intended to refer to claims

in excess of $1.5 billion above the amount of required insurance, and

is corrected in the final rule. The Agreement for Waiver of Claims and

Assumption of Responsibility appearing in Appendix II of this final

rule is also corrected.

Lockheed Martin further objected to Sec. 440.5(c)(4), as corrected.

It believes the practical effect would be to make the licensee jointly

and severally liable with other launch participants for damages in

excess of the required amount of insurance plus the $1.5 billion

payable under 49 U.S.C. 70113, unless the licensee could prove no

liability whatsoever. Lockheed Martin objected that limiting this

provision to those instances in which the licensee proves it has no

liability would be unduly burdensome to launch licensees. Lockheed

Martin also noted that requiring a licensee to be solely responsible

for these claims could even be uninsurable if the exposure were viewed

by insurers as an unlimited indemnification, presumably of the

[[Page 45609]]

other launch participants, regardless of fault.

The intent of this provision is to ensure that the Government's

liability will be covered as directed by 49 U.S.C. 70112(e) and the

agency has retained the proposed approach in the final rule. However,

nothing in this rule prevents a licensee from contractually allocating

this risk with other PPLPs so that the cost of the liability would be

shared among responsible PPLPs.

Section 440.7--Determination of Maximum Probable Loss

This section of the final rule sets forth the agency's procedure

for issuing maximum probable loss (MPL) determinations that form the

basis for financial responsibility requirements contained in license

orders. Lockheed Martin commented on this section of the NPRM by

indicating that it is difficult to understand how actual determinations

are made and what the impact of the NPRM would be on existing MPL

determinations.

It has not been the agency's intent to announce changes to its MPL

methodology through this rulemaking. Rather, the agency has attempted

to shed some light on the methodology employed in setting insurance

requirements pending completion and issuance of a comprehensive report

on MPL. In doing so, the agency learned that its inclusion of certain

risks in the MPL analysis, such as risks to Government personnel, was

not clearly understood within the commercial launch industry. To avoid

additional misunderstandings and to facilitate industry's ability to

obtain financial protection from launch risks, the agency agrees with

the comment recommendation to make its analytical documentation

available to licensees upon request. In fact, this is the agency's

current practice although few licensees have made such requests.

Two launch licensees, Orbital Sciences and McDonnell Douglas,

commented on the 90-day period in which the agency issues its MPL

determination following receipt of all required information. Section

440.7(b) provides for notification to a licensee if issuance of the MPL

determination will be delayed due to statutorily-mandated interagency

consultations. The commenters expressed concern that an open-ended

review period is contrary to the CSLA's intent to protect launch

licensees by limiting and clearly defining the review period. The

agency understands the industry's need to receive MPL determinations in

order to obtain required insurance in a timely manner. Moreover, until

the agency establishes its financial responsibility requirements,

insurance requirements imposed by the Federal range facility remain in

place and are not preempted or superceded by the agency's risk-based

requirements under the CSLA. The agency commits to facilitating as

efficient and expedited an interagency review as practicable but hopes

the industry will understand those infrequent occasions when the

process is not as fluid as intended.

Kistler also expressed reservations that the 90-day provision for

issuing an MPL determination would compromise the fast turn-around

anticipated for RLV operations. Kistler suggested that MPL

determinations could be issued for a class of launches and payloads at

the time a license is issued, and that the determination could

``stand'' unless a proposed launch or payload falls outside of

specified parameters. In that event, only the changed information

should be required of the licensee for purposes of recalculating the

MPL determination using the initial determination as a baseline. The

agency agrees with Kistler and, in practice, already implements the

approach proposed in Kistler's recommendations. The agency notes that

Kistler is not yet licensed to conduct launch activities and therefore

may not be familiar with the agency's approach to establishing

insurance requirements that cover a range of authorized launch

activities within identified parameters.

Section 440.7(d) provides that the agency amends an MPL

determination, if warranted, before completion of licensed launch

activities when new information requires an adjustment in insurance

requirements. Lockheed Martin, Orbital Sciences, and McDonnell Douglas

expressed concern that the ability to amend insurance requirements

would create uncertainty for the industry and add unpredictability to

the industry's ability to manage risks. Marsh & McLennan offered its

concerns that licensees and their brokers be allowed sufficient time--

at least 30 to 60 days--to work with underwriters to increase policy

limits and noted that doing so may be impossible if insurance market

capacity is insufficient to provide increased limits at a reasonable

price.

As indicated above in the discussion of comments to Sec. 440.5, the

agency is apprised of new information from time to time in the life of

a license, currently a two-year renewable term for operator licenses,

that affects the MPL determination. In some cases, the MPL may even be

reduced on the basis of this information. It would be irresponsible to

ignore changes in the risks that attend launch activities; however, the

FAA intends to provide licensees a sufficient period of time in which

to comply with revised insurance requirements.

Kistler objected to increasing insurance requirements mid-flight.

Section 440.7(d), as proposed, was intended to allow the agency

flexibility to address longer term changes in risk that would affect

insurance determinations for the remaining life of a launch license.

The need to do so is driven, generally, by the agency's practice of

issuing licenses that cover a multitude of launches or that remain

effective for a multi-year, renewable term. It was not intended to

alter risk allocation arrangements between the launch participants and

the Government in mid-flight by revising required levels of insurance

after ignition. The agency does not agree that any change to this

provision is required in the final rule.

Appendix I of the final rule contains information requirements

relevant to establishing MPL. Information concerning post-flight

processing operations may become unnecessary if the agency defines

licensed launch activities as ending, for purposes of ground

operations, upon successful lift-off of a launch vehicle. In that

event, the agency would amend its requirements by removing post-flight

processing operations from Appendix I.

Section 440.9--Insurance Requirements for Licensed Launch Activities

Section 440.9 presents in a regulation the requirement for launch

licensees to obtain two types of insurance coverage--one for third-

party liability and one for damage or loss to Government property at a

Federal range facility. Section 440.9(b) requires that the third-party

liability policy protect Government personnel as additional insureds.

Sea Launch indicated its belief that employees of the PPLPs should also

be identified as additional insureds. Lockheed Martin queried why

Government personnel would be treated differently than other employees.

The agency agrees with the commenters and currently requires that

all launch participant employees be protected from third-party

liability. This coverage is routinely provided in liability policies

that name, among the additional insureds, employees of the various

launch participants acting within the scope of their employment. The

CSLA singles out personnel employed by Government agencies in the

statutory requirement set forth in 49 U.S.C. 70112(a)(4), and for this

reason so did Sec. 440.9(b), as proposed. The final rule is revised to

require liability coverage for third-party claims against

[[Page 45610]]

employees of all launch participants involved in licensed launch

activities.

The CSLA specifically mandates protection for the Government, its

executive agencies and personnel from liability, death, bodily injury

or property damage or loss as a result of a launch or operation of a

launch site involving a facility or personnel of the Government. 49

U.S.C. 70112(e). Thus, the agency concludes that it is reasonable and

necessary that employees of the Government be classified as both

additional insureds and third parties. And, for reasons detailed above

in the discussion of risk allocation, passes on similar status and

benefits to employees of Government contractors and subcontractors

involved in licensed launch activities. Some of the comments received

point out that employees are viewed, for insurance purposes, as part of

the entity that employs them and therefore it would be unusual, and not

customary, to also view them as claimants against the policy.

Accordingly, the approach adopted in the final rule with respect to

Government personnel is the exception.

Section 440.9(c) provides that the agency will prescribe liability

insurance requirements not to exceed the lesser of $500 million or the

maximum available on the world market at a reasonable cost, as

determined by the agency. Marsh & McLennan offered, as a caveat to this

provision, that insurers of weak or questionable solvency that provide

coverage at reasonable cost may not be financially able to cover claims

and that care should be taken in determining what is available at

reasonable cost. The agency appreciates this caution and hopes to avoid

this situation by requiring that policies be placed with insurers of

recognized reputation and responsibility, as provided in

Sec. 440.13(a)(8) of the final rule. A future rulemaking may be

necessary to provide criteria for assessing an insurer's acceptability

to the agency.

Section 440.9(d) sets forth the requirement for Government property

insurance and requires coverage for property of Government contractors

and subcontractors at a Federal range facility. In its comments,

Lockheed Martin observed that doing so relieves the Government from the

obligation to pass on to its contractors and subcontractors the waiver

of claims provisions of Sec. 440.17, as reflected in the form of

agreement in Appendix II to the NPRM, and relieves those contractors

and subcontractors from the obligation to assume responsibility for

their property damage or loss. The comment stated that the rationale

for disparate treatment of Government contractors and subcontractors as

compared to PPLPs' contractors and subcontractors is unclear.

The agency's rationale for treating Government contractors and

subcontractors differently than PPLPs is based on statutory language.

Whereas 49 U.S.C. 70112(b)(1) directs the licensee to make a reciprocal

waiver of claims with its contractors, subcontractors, and customers,

and the contractors and subcontractors of its customers, involved in

launch services, 49 U.S.C. 70112(b)(2) directs the Secretary of

Transportation to make, for the Government, executive agencies of the

Government involved in launch services, and contractors and

subcontractors involved in launch services, a reciprocal waiver of

claims with the licensee and other PPLPs. (Emphasis added.) This

difference in language is meaningful. As stated in the NPRM, the agency

views Government contractors and subcontractors as third-party

beneficiaries of the reciprocal waiver agreement and the Government is

responsible for protecting their interests. In addition, by waiving

claims for property damage in excess of required insurance on behalf of

its contractors and subcontractors, the Government accepts the

additional risk of their property damage. The additional risk to the

Government is managed in two ways. First, the licensee is required to

obtain property insurance covering damage or loss to property of

Government contractors and subcontractors involved in licensed launch

activities, in addition to Government-owned property. Second,

Government contractors and subcontractors must also maintain insurance

for their property, the cost of which is charged to the Government as

an allowable cost. In the event Government contractor property is

damaged, the Government would look first to the licensee's property

policy for coverage in order to relieve financial risks to the

Government. The contractor's insurance would cover the second tier of

risk up to policy limits. In both instances, the risk of loss above

statutorily-required insurance is borne by the Government.

A technical correction is added to Sec. 440.9(d) to more accurately

reflect Government contractor and subcontractor property that must be

covered under this insurance requirement as that belonging to

contractors and subcontractors involved in licensed launch activities.

As stated in the NPRM, other Government contractor and subcontractor

property would be covered by a licensee's launch liability policy (61

FR 39000-39001).

An inadvertent omission is corrected in Sec. 440.9(e) of the final

rule by providing that the maximum amount of property insurance that

would be required under this provision is the lesser of $100 million or

the maximum amount available on the world market at a reasonable cost,

as determined by the agency.

Two commenters, Orbital Sciences and McDonnell Douglas, objected to

the agency's view that all Government property located on the Federal

range facility must be covered by insurance, wherever located. The

commenters viewed this requirement as excessive and offered, as an

alternative, that only Government property located in the launch hazard

corridor as defined by the National Range Safety Office should be

covered. In clarifying remarks, McDonnell Douglas suggested that

perhaps Government property outside this corridor should be self-

insured by the Government and that reclassifying it as third-party

property may simply shift the risk (and therefore the cost of

insurance) to different insurance rather than limiting industry's risk

exposure for damage to Government property. Orbital Sciences submitted

supplemental comments in which it narrowed further the scope of

Government property that it believes should be covered by insurance as

that within the care, custody and control of the licensee. Orbital

Sciences asserted that the cost of insuring other Government property,

even that within the launch hazard corridor, could be prohibitive and

that a requirement to insure such property does not account for

differences in liability and property insurance.

The agency considered defining the specific property at a Federal

range facility that must be covered by property insurance and found

this approach cumbersome and unnecessarily limiting and risky for the

Government. Although accident scenarios can be used to identify the

property most exposed to risk, they may not cover the full range of

accidents which, by definition, are unpredictable events. Also, this

alternative approach would eliminate from coverage any transient

property not identified by the Government in its insurance requirements

but that was on the site at the time of a launch accident and therefore

must be covered by insurance.

The agency's approach to assuring coverage for Government range

assets exposed to risk from commercial launch activities is necessarily

comprehensive. The CSLA is clear that financial responsibility and

other assurances are necessary to protect the Government

[[Page 45611]]

from the risk of damage or loss when its property or personnel are

exposed to risk from licensed activities. The agency views as

significant the distinction in the CSLA between liability insurance for

third-party claims and Government property insurance protection that

must respond to Government claims against any person. The purpose of

the Government property insurance requirement is to ensure funds are

immediately available to restore valuable range assets and property

damaged by a commercial launch effort. This requirement is not limited

to the space launch complex within the immediate care, custody and

control of the licensee. An errant launch vehicle may expose other

range property to risk. For example, an Athena-2 launch from Launch

Complex 46, operated by Spaceport Florida Authority under an FAA

license, at CCAS exposes both Launch Complex-36A and 36B, utilized for

Atlas launches, to risk of damage or loss within the MPL threshold for

quantifying Government property risks. Accordingly, coverage for all

range assets, as well as Government contractor property involved in a

licensed launch, is consistent with CSLA objectives and risk allocation

principles. Furthermore, the agency does not regard the Government's

waiver of claims for excess property damage as extending beyond the

Federal range facility at which a launch takes place and any adjacent

or nearby range assets. As explained in the NPRM, no greater risk or

cost to licensees should result from considering off-site, non-launch

related Government property as equivalent to any other third-party

property for purposes of liability coverage. Section 440.9(c), as

revised in the final rule, makes clear that claims for such property

damage or loss are covered by the licensee's launch liability policy.

This provision reflects the FAA's existing practice in establishing

financial responsibility requirements for third-party liability and

should not be construed as requiring excess insurance for waived

Government property damage claims.

The agency currently affords a fair amount of latitude to the

commercial launch industry in providing coverage for Government

property. For example, the agency has allowed the licensee's property

policy to cover only that Government property which is in the

licensee's care, custody and control, and risks to all other Government

range property to be addressed through the licensee's liability policy,

as long as doing so does not reduce the amount of coverage that must be

available to cover third-party liability. The agency accepts this

approach based on its understanding that it relieves a burden on the

launch industry and conforms with certain insurance industry practices

for insuring property. Also, because all launch participants are

insureds, the liability policy is expected to respond to Government

claims for damage or loss to range assets, regardless of fault, absent

willful misconduct by the Government or its agents. The agency will

continue to allow certain Government property to be addressed through

the liability policy as long as doing so does not defeat the statutory

objective of ensuring funds are quickly made available to restore or

replace damaged Government assets. However, the agency is not willing

to compromise the effectiveness or breadth of coverage it requires for

Government range assets and property.

Section 440.11--Duration of Coverage

Section 440.11(a) provides that insurance coverage must attach upon

commencement of licensed launch activities and remain in effect for the

time period specified in the license order. The time period is intended

to extend up to the point when risk to third parties and Government

property is sufficiently small, as determined through the agency's risk

analysis, such that insurance is no longer necessary. As proposed,

Sec. 440.11(a) would allow the agency to amend the required duration in

the event of a launch anomaly to ensure that insurance remains in place

until the resultant risks are considered to be sufficiently small. As

explained in the section-by-section analysis of the NPRM, the period of

time required for orbital launch insurance is typically 30 days

measured generally from payload insertion. Thirty days is considered to

be sufficient time to assess the possible consequences of a launch

anomaly, such as delivery to a wrong orbit or failure of a payload to

separate from the vehicle's second stage such that reentry is likely,

and determine whether extended insurance coverage appears to be

necessary.

The agency's current practice is to require that insurance remain

in place for 30 days following flight of the launch vehicle. As

explained in the NPRM, the agency has viewed 30 days as an appropriate

length of time in which to determine whether an anomalous situation has

occurred, the consequences of which are yet unknown. The agency also

has taken the position in the past that in the event such a situation

arises, the agency can require the licensee to maintain its insurance

for more than 30 days, until risks to third parties or the Government

can be determined to be sufficiently small such that insurance is no

longer needed. This approach was utilized early in the agency's

licensing program when an Intelsat payload failed to separate from the

second stage of a Titan launch vehicle. The agency considered that the

second stage and payload would reenter the earth's atmosphere, with the

possibility of reentry impacts and resultant damage, and advised the

licensee that if reentry did not occur within the 30-day period

specified in the license for insurance duration, the agency would

require the licensee to extend its policy coverage. (This eventuality

was considered by the agency in assessing MPL. At issue was the

required duration of insurance, not the sufficiency of amount.) The

agency's authority to dictate this extension and the licensee's ability

to respond were never tested because reentry took place within three

weeks of the launch event.

Lockheed Martin, Orbital Sciences, and McDonnell Douglas objected

to the proposal that would allow the agency to extend the required

duration of insurance coverage in the event of a launch anomaly. All

three licensees stated that this requirement was not in conformance

with insurance practices and would be difficult and costly, if not

impossible, to fulfill. McDonnell Douglas objected on the grounds that

doing so places unrealistic and open-ended liability on the commercial

launch industry and therefore undermines the National Space Policy and

CSLA goals of promoting the growth and international competitiveness of

the industry. Lockheed Martin pointed to this proposal as a clear

instance of the Government's efforts to reallocate risks from the

Government to the licensee. Lockheed Martin opined that if risk

analysis is the basis for the agency's determination of the appropriate

duration of insurance, then the anomaly should be viewed as foreseeable

and addressed in the MPL analysis and determination. In the event the

anomaly was so improbable that it would not be a factor in determining

MPL, under the CSLA the Government assumes the risk either by waiving

property damage claims or providing indemnification for third-party

losses. Marsh & McLennan cautioned that uncertainties in the insurance

market make it difficult to know whether coverage available and

provided one year will be available the next and these market factors

should be taken into account in determining the required duration of

insurance requirements.

[[Page 45612]]

Based on these comments, the agency has reconsidered its views on

the appropriate duration of insurance coverage, keeping in mind that

Arianespace provides customers with a 3-year indemnification for

liability. The difficulty in establishing appropriate time limits on

insurance stems from the statutory language and the Government's

continuing prospect of fault-based liability under the Outer Space

Treaties long after the launch is concluded. The Government's exposure

under the Liability Convention, in particular, suggests that insurance

should be required to remain in place for as long a time as

practicable. However, absent the quid pro quo notion underlying the

allocation of risk provisions of the CSLA, that is, if there will be no

Government payment of excess claims (or ``indemnification'') for damage

not proximately caused by the launch event, the agency would feel

reluctant in requiring long-term insurance.

In reevaluating its position on the appropriate duration of

insurance, the agency considered an event test, a time test, and a

combination of the two.

Under an event test, the duration of insurance coverage could be

tied to a specific event for a nominal launch, such as payload

separation or safing of the vehicle's upper stage, as explained in the

NPRM. However, if an anomalous event occurred, it would be difficult to

identify a particular point in time at which insurance coverage could

terminate. Forecasting a range of anomalous on-orbit scenarios could be

extremely time-consuming, yield great uncertainty and result in

extremely long timeframes (up to hundreds of years, perhaps) associated

with measurable risk.

Alternatively, a time test could be fashioned to capture only near-

term anomalous events that could result in third-party losses or damage

to Government property, such as anomalous payload delivery or

separation that results in an unplanned reentry or collision. However,

it could also result in an extremely long-term insurance requirement

because anomalous situations could result in adverse conditions

remaining long after launch vehicle flight is concluded. These

situations are difficult to predict, because the space environment is

constantly changing with additional placement of objects on orbit and

the effects of orbital decay.

The agency has determined that a combination of event and time

tests should be utilized in setting the required duration of insurance

for licensed launch activities. The result is similar to the current

requirement of the agency that insurance remain in place for 30 days

following launch, measured generally from the time of payload

separation. However, the revised requirement in the final rule limits

the duration of insurance to 30 days following launch and removes the

agency's discretion to impose extended insurance requirements on

licensees during the 30-day period.

Accordingly, for risks associated with orbital launches, the agency

believes the appropriate insurance duration is 30 days following

launch, measured from payload separation for nominal launches or

attempted separation in the event an anomaly results in unsuccessful

payload separation. For other launch anomalies or failures, the 30-day

requirement runs from initiation of launch vehicle flight. For

suborbital launches, insurance duration is at least through motor

impact and payload recovery; however, the agency may prescribe a

different duration in a license order depending upon the results of its

risk analysis. Suborbital launches may, in the foreseeable future,

include reusable launch vehicle activities that must be evaluated on a

case-by-case basis. The agency reserves discretion to conclude that a

different duration of required insurance is appropriate for such

activities based on its case-by-case evaluation of suborbital reusable

launch vehicle missions and their attendant risks.

For purposes of ground operations the licensee is required to

maintain insurance at all times during occupancy of a Federal range

facility under a launch license.

Despite limitations on the duration of required insurance, the

space industry should be cognizant of its liability in the event its

space object damages another on-orbit space object or reenters at any

time, and manage risks appropriately. The industry should also be aware

of views previously expressed by congressional staff that a sufficient

causal nexus does not exist between a launch and a planned payload

reentry that causes third-party damage or loss to invoke the

Government's responsibilities under 49 U.S.C. 70113.

In the NPRM, the agency requested views on the appropriate causal

nexus that must exist between a launch event and a third-party claim in

order for the payment of excess claims provisions of the CSLA to be

applicable. Under 49 U.S.C. 70113(a), the Government provides for the

payment of successful claims against a launch participant ``resulting

from an activity carried out under the license.* * * '' (emphasis

added) As pointed out in the Supplementary Information accompanying the

NPRM, the Government's responsibilities under 49 U.S.C. 70113 apply

from the first dollar of loss when the licensee is no longer required

to maintain insurance under the license if the claim results from the

licensed activity. However, events associated with a launch may result

in damage years after the launch is concluded and it is not clear at

what point events become too attenuated from the launch to be

considered eligible for consideration under 49 U.S.C. 70113.

Only Sea Launch responded and questioned the wisdom or practicality

of attempting to characterize this nexus beyond the statutory language

of ``resulting from an activity carried out under the license.'' In

doing so, the comment noted that a proximate cause analysis would be

required and would depend on the unique facts of the situation. The

agency agrees that determining eligibility for payment of excess third-

party claims is necessarily a fact-based inquiry and will depend on the

particular circumstances giving rise to the claim and does not propose

to issue rules of general applicability to determine eligibility

requirements.

Section 440.11(b) provides that financial responsibility shall not

expire by its own terms prior to the time specified in a license order.

Many licenses are issued for a multi-year period and may be renewed

upon application of the licensee; however, the agency understands that

certificates evidencing insurance coverage are typically valid for one

year. This has not been a problem as long as evidence of policy renewal

is provided to the agency sufficiently in advance of the certificate

expiration date to allow the agency ample review time. Accordingly, the

final rule is revised to provide that a renewal certificate must be

provided at least 30 days in advance of the expiration date of the

current certificate. A licensee may petition the agency for a waiver or

extension of this or any time requirement in the final rule if it is

unable to comply.

Environmental and Clean-Up Costs

The agency's current practice of determining maximum probable loss

from claims resulting from licensed launch activities does not include

assessment of the environmental consequences associated with licensed

launch activities. These risks are difficult to quantify and, to the

extent coverage is not available, assigning a dollar value to these

risks could increase required amounts of insurance without assuring

coverage.

[[Page 45613]]

As part of the NPRM discussion on the appropriate duration of

required insurance, the agency requested comments on a number of

related issues having to do with environmental consequences of launch

activities. First, to what extent should insurance be required to

compensate claims of third parties and the Government for short-term,

or immediate, environmental damage or, alternatively, whether the costs

of cleaning up hazardous waste or removing this type of damage should

be paid by the launch licensee to the Government as part of launch

services which are charged as a direct cost under the CSLA. Second, to

what extent should insurance be required to protect against claims for

long-term environmental or property damage. As part of this request for

views, the agency asked commenters to address the implications on MPL

determinations of requiring insurance coverage for these potential

claims and the adequacy of existing insurance ceilings under the CSLA

($100 million for Government property coverage and $500 million for

third-party liability insurance, or the maximum available on the world

market at a reasonable cost if insurance up to those amounts is not

available). Third, whether and to what extent insurance to protect

against property damage resulting from orbital debris long after the

launch is completed should be required. The damage contemplated by the

question could be to other on orbit or airborne objects or to property

on the ground in the event of reentering debris.

Only Lockheed Martin offered a view with respect to the immediate

environmental consequences associated with a launch event. Lockheed

Martin indicated that this type of immediate consequence should not be

treated as a matter for ``direct cost'' charges to the launch licensee,

but should be addressed in terms of an appropriate allocation of

financial responsibility for the risk.

In clarifying its view, Lockheed Martin distinguished between

environmental consequences and the usual activities involved in

readying a launch pad or complex for future use. Typically, Lockheed

Martin would clean up the launch complex from which its launch has

taken place in anticipation of the next launch campaign. For example,

it would remove any ground debris and restore the complex to its prior

condition, as required under the terms of its agreement with the

Federal range facility. If it failed to do so, the Federal range could

provide this service and under these circumstances could charge the

direct cost of doing so.

Lockheed Martin pointed to the legislative history accompanying the

1988 Amendments to the CSLA which lists the types of Government support

that were envisioned to be provided under direct costing principles as:

operations and maintenance services and range support costs. Operations

and maintenance services include facilities engineering support,

vehicle and equipment support, launch complex support, power system

support, and roads and ground support. Range support costs include

logistics, ordinance support, radar support, communications support,

tracking support, documentation, fire services, range safety, work

control (administration), security services and meteorological

services. S. Rep. 100-593, 100th Cong., 2d Sess., at p. 24. It appears

that launch complex maintenance and range services are appropriate for

direct cost charging. In the commenter's view

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