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will be compensated, and the greater the damage, the less the chances for compensation through insurance or otherwise. In a catastrophe, one or more contractors might face liability far in excess of their total financial capability.
Before evaluating statutes, policies, and procedures governing indemnification for catastrophic accidents, which are manmade rather than natural disasters, two terms must be defined:
A catastrophe is a disaster of such magnitude that the resulting claims for personal injury and property damage would exceed the monetary level for which there is reasonably available insurance coverage. Since “reasonably available insurance coverage” is subject to varying definitions, depending on circumstances, any legislative efforts in this area should provide for reducing the term to a numerical value or designate an official to determine the value after a catastrophe has occurred.
Indemnification is an assurance wherein one party frees another from an anticipated loss, or risk of loss, or prevents him from suffering loss or damage due to the legal consequences of an act or forebearance on the part of one of the parties to a contract or some third person. A legislative act is called “indemnification” when it provides a procedure for the Government either to reimburse contractors for payments made in satisfaction of judgments rendered against them or to anticipate adverse judgments and assume the obligation to pay such judgments when rendered.
third parties, including product liability, arising out of their activities. The Government permits liability insurance costs to be included directly or indirectly in contract costs passed on to the Government.
Private insurance performs important functions in covering contractors against thirdparty liability up to a given dollar level. Insurance companies have demonstrated their ability to send large numbers of claims investigators and adjusters quickly to the scene of a major accident. With such expertise, they can process claims quite rapidly and are frequently able to settle many of the resulting claims quickly and out of court. Finally, to an increasing degree, casualty and liability insurance companies have been helping their assured to improve their safety procedures.
If liability insurance is adequate to satisfy judgments against contractors, industry is not only protected, but injured members of the public are assured that their judgments will be paid, provided they establish the liability of the contractor who carries such insurance. Similarly, individuals may carry insurance to protect them individually against loss. To the extent of such coverage, individual victims can obtain relief for injuries and damage caused by catastrophic accidents.
GOVERNMENT PROGRAMS TO DEAL WITH CATASTROPHIC ACCIDENTS
PRIVATE MEANS TO DEAL WITH CATASTROPHIC ACCIDENTS
There are now two primary means of providing relief through the private sector in connection with catastrophic accidents arising from Government programs: private insurance and, for the victims of an accident, civil suit against a negligent Government contractor.
When contractors are exposed to risks so large that they cannot safely assume them themselves, they usually spread such risks by purchasing insurance. Contractors engaged in hazardous Government programs ordinarily carry policies insuring them against liability to
Apart from civil suits and private insurance, a number of statutes authorize Government indemnification of contractors engaged in ultrahazardous or nuclear activities.
Public Law 85–804 * and Defense Procurement Circular No. 103 of August 24, 1972, apply to contracts of the Department of Defense and several other agencies. Under this law, any agency whose activities are connected with national defense can enter into indemnification contracts without regard to existing law. This law is effective during a national emergency declared by Congress or the President and for six months after the termination thereof or until such earlier time as Congress by concurrent resolution may designate.
ASPR 15–205.16. 850 U.S.C. $$ 1481-35 (1970). For further discussion and recommendations concerning this law, see Part G, Chapter 4.
victims of catastrophic accidents occurring in connection with Government programs. Recommendation 5. Enact legislation to provide Government indemnification, above the limit of available insurance, of contractors for liability for damage arising from a catastrophic accident occurring in connection with a Government program.
The President, on December 16, 1950, issued a declaration of national emergency which is still in effect. Executive Order 10789 of November 14, 1958, prescribes the Presidential regulations on using the statutory authority and designates the agencies authorized to utilize its powers. 10 The Executive order provided that actions taken under it had to be within the limits of the amount appropriated and the contract authorization provided therefor, but on July 22, 1971, the President amended the order by issuing Executive Order 11610 which, among other things, deleted the limitation." Thus, there is now no ceiling. Unlimited financial protection is theoretically available in instances where indemnification is applicable. DPC No. 103 implements Executive Order 11610 for the Department of Defense.
Section 2354 of Title 10, United States Code, provides that military departments may indemnify research and development contractors, to the extent the contractors are not compensated by insurance or otherwise, against claims by third persons, including claims for loss of or damage to property from a risk that the contract defines as unusually hazardous.
The Price-Anderson Amendment to the Atomic Energy Act of 1954 declares that the Government will indemnify certain AEC licensees and permits the Government to indemnify other AEC licensees as well as AEC contractors and subcontractors.12 This statute contemplates that the licensees or, as determined by AEC, contractors will have financial protection by means of insurance or self-insurance, and that, up to certain maximums, the indemnification would begin where such insurance stops.
In 1962 Congress also authorized the Veterans Administration to indemnify contractors engaged in research into prostheses and related devices. 13
INADEQUACIES OF PRIVATE
The present means of providing relief through the private sector are inadequate for relieving the consequences of catastrophic accidents arising from Government-connected programs.
First, the amount of insurance available is not sufficient to pay judgments for losses sustained by the injured public when the total damage reaches catastrophic proportions. Normally, when a company is exposed to risks so large that it is unable to assume them, it spreads the risk by purchasing insurance. The enormity of a potential catastrophe in some Government programs is such that sufficient insurance would not be available. Therefore, contractors could be liable for amounts which would bankrupt them but still leave huge portions of the injuries and losses uncompensated.
Second, private insurance held by potential victims is an incomplete means of relief. It will not be carried by a high percentage of disaster victims and, even when it is carried, it only affords protection up to a certain dollar limit.
Finally, even to the extent a contractor is covered by liability insurance, if a catastrophe were to arise out of a Government program, payment to insured members of the public would depend ordinarily on their establishing liability for damages. The victim might have difficulty proving the accident to be the responsibility of one or more contractors, particularly if the accident destroyed the evidence or if the evidence were unavailable because of Government security classifications.
COMPENSATION AND INDEMNIFICATION
Recommendation 4. Enact legislation to assure prompt and adequate compensation for
Proc. No. 2914, 3 CFR, 1949–1953 Comp., at 99, 50 U.S.C. App. Prec. 1 (1970). 10 3 CFR, 1954-1958 Comp., at 426, 50 U.S.C. 1431 (1970). 11 3 CFR, 1971 Comp., at 190, 50 U.S.C. $ 1431 (Supp. I, 1971). 12 42 U.S.C. § 2210 (1970). 13 38 U.S.C. & 216 (1970).
INADEQUACIES OF EXISTING
In general, the existing laws of the United States are inadequate to cope with two basic problems which would arise from a domestic catastrophic accident resulting from a Government program: (1) the need for a means to provide prompt financial assistance to victims of the accident and (2) the need to shield contractors and subcontractors from uninsurable risks.
In the 1966 Price-Anderson Amendment to the Atomic Energy Act of 1954, Congress has recognized these problems but only with respect to certain activities of the Atomic Energy Commission." No other congressional policy so clearly encourages broad use of indemnification protection as does the Price-Anderson Amendment.
Unlike the Price-Anderson Amendment, neither 10 U.S.C. 2354 nor Public Law 85804 15 provide for interim relief to the injured public or provide for a waiver of defenses.
Both 10 U.S.C. 2354 and Public Law 85–804 are silent on the subject of financial protection. These important policy determinations are left to the individual agencies rather than established by the Congress. Such a situation invites inconsistent treatment; for example, for a given contract or program, an agency could decide that no insurance should be carried by the contractor, thereby substituting the Government as the insurer starting with the first dollar of damages.
Unlike the Price-Anderson Amendment, neither 10 U.S.C. 2354 nor Public Law 85–804 provides for a ceiling on total recoveries in a particular catastrophe, or for scaling down claims.
Neither 10 U.S.C. 2354 nor Public Law 85– 804 provides for consolidation of suits. A largescale incident might injure persons in more than one state. In the same catastrophe, victims residing in different states may be subject to different laws. The Price-Anderson Amendment authorizes, but does not require, all claimants to sue in the same Federal district court. This is useful in that victims can obtain more nearly uniform treatment.
The use of indemnity authority under 10 U.S.C. 2354, Public Law 85–804, and PriceAnderson is a matter of contract-by-contract bargaining as to whether specifically defined risks in a Government program are within the
scope of the appropriate statute. As a result of this prerequisite of negotiation to obtain indemnity protection, it is difficult for subcontractors and suppliers to obtain like coverage, except under Price-Anderson which automatically extends the coverage of prime contract indemnities to all subcontractors and suppliers.
Specifically, 10 U.S.C. 2354 embraces only the military departments and has no application to hazardous research and development programs of other agencies. Even in this regard, inconsistent treatment has resulted between different agencies and even within the same agency. Some of the inconsistencies are due to the ambiguity of the statute's provision that claims must “arise out of the direct performance of the contract." 16
Public Law 85–804 contains no declaration of congressional policy that protection should be provided to the public and to Government contractors from catastrophes arising out of Government programs; however, its legislative history and the promulgation of Executive Orders 10789 17 and 11610 18 make it clear that the law was intended to provide indemnity in certain procurements and that the ultimate burden should be borne by the Government. Although the Executive orders extended the application of Public Law 85–804 to 11 agencies, including NASA, it may be that significant programs under the aegis of other agencies have been omitted. Further, NASA adopted a policy against utilizing Public Law 85–804 for indemnification purposes because of the uncertain remedy it provides a contractor.19 Although these Executive orders extend use of Public Law 85–804 to production programs involving nuclear risks, they are not clear with respect to possible overlap with the PriceAnderson Amendment.
The basic framework of the Price-Anderson Amendment is sound, and it forms a model for the broad indemnification authority that is necessary. However, Price-Anderson is limited to nuclear accidents arising out of or connected with AEC contractual activities or joint programs in which the AEC is a participant. An
18 W. Sohier, "Protection Against the Risk of Catastrophic Acci. dents in Government Programs,” in Hearings on H.R. 474, supra note 1, appendix 21, at 2341, 2343-2344.
17 3 CFR, 1954-1958 Comp., at 426, 50 U.S.C. & 1431 (1970).
14 42 U.S.C. $ 2210 (1970).
extraordinary nuclear occurrence must involve an AEC contractor or subcontractor and must occur “during the course of the contract activity." Though there is no provision for automatic indemnification flowing directly from the statute, a victim of a serious nuclear occurrence is required to prove only that he or his property has been damaged and that the damage resulted from the occurrence. PriceAnderson does not specifically establish the basis of legal liability for nuclear incidents, whether strict liability or otherwise nor does it establish a Federal statute of limitations for such incidents. Moreover, Price-Anderson does not (1) automatically make waivers of defenses applicable, (2) specifically direct the AEC to require the waivers, (3) require an assumption of liability by any person, (4) provide for the exclusive liability of any person, or (5) provide for the exclusive liability of the facility operator.
If the foreign victim were to sue the United States in the local courts of his country in which a catastrophe occurred, the United States could invoke the principle of sovereign immunity. There is little doubt that sovereign immunity applies to such inherently “sovereign” activities as weapon programs and space activities. 21
Title 10 of the United States Code provides for prompt settlement of indirect or noncombat activities of United States armed forces causing damage to, or loss of, real or personal property of any foreign country or of its citizens including personal injury or death. No claim may be for more than $15,000.22
Finally, the Outer Space Committee of the United Nations has in process the ratification of a “Convention on International Liability for Damage Caused by Space Objects,” an international agreement providing for full and prompt compensation to victims of accidents. The agreement would make a space-launching country absolutely liable to pay compensation for damage caused by its space object on the earth's surface or to aircraft in flight.
LIABILITY FOR CATASTROPHES
There is less chance of calamitous accidents arising out of U.S. Government programs abroad than in this country. Still, if such a cataclysm did occur in a foreign country, the victim would have limited means of obtaining redress.
The Government might authorize payments which would afford relief if they were prompt and adequate, but they might be so long in coming to the victims that additional hardship would result from the delay. If the victim were to sue the manufacturer of a defective instrument or component which allegedly caused the accident, he could expect delays from protracted litigation that would be uncertain as to outcome. He would have the same obstacles to his recovering as victims in the United States now face.
A foreign victim could not sue the U.S. Government in American courts because the Federal Tort Claims Act 20 excepts “any claim arising in a foreign country” when both the conduct causing injury and the injury itself occurred in a foreign country. Not so clear is whether the act would cover cases involving conduct in the United States causing injury in a foreign country. 20 28 U.S.C. § 2680(k) (1970).
In summary, present means are inadequate for compensating for the consequences of a catastrophic accident arising from a Government program. They do not assure in advance prompt relief to members of the public who may be victims of such a catastrophe, and they do not protect Government contractors from potentially ruinous liabilities. We recommend that both deficiencies be corrected.
The report of Study Group 8 (Negotiations and Subcontracting),23 contains specific proposals, including alternatives, with respect to these objectives. They include (a) provisions for interim payments to victims, (b) alternative mechanisms for determination and payment of total compensation to injured parties, and (c) approaches to indemnification of contractors. The proposals of the study group, though more specific and detailed in some aspects, generally are compatible with our recommendations.
21 Legislative Drafting Research Fund of Columbia University, Catastrophic Accidents in Government Programs in Hearings on H.R. 474. supra note 1, appendix 18, at 2143, 2277 n. 304.
22 10 U.S.C. $ 2734 (1970).
List of Recommendations
1. That the Government, with appropriate exceptions, generally act as a self-insurer for the loss of or damage to Government property resulting from any defect in items supplied by a contractor and finally accepted by the Government.
2. Apply the Government policy of selfinsurance to subcontractors on the same basis as to prime contractors.
3. Ensure that, where items delivered by a contractor to the Government are transferred by the Government to a third party, the third party has no greater rights against
the contractor or its subcontractors than the Government would have if it retained the item.
4. Enact legislation to assure prompt and adequate compensation for victims of catastrophic accidents occurring in connection with Government programs.
5. Enact legislation to provide Government indemnification, above the limit of available insurance, of contractors for liability for damage arising from a catastrophic accident occurring in connection with a Government program.