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insurance. The maximum possible loss involves that extraordinary incident which rarely, if ever, occurs. The conceptual maximum possible loss will likely exceed available liability insurance at reasonable cost.
To protect the interests of (1) the third party, i.e., the general public, (2) the Government, and (3) the payload owner, manufacturers and the provider of space launch services, it is proposed that the risks between the industry and the Government (on behalf of the general public) for third-party liability and damage to Government property be allocated on a layered or "horizontal" basis. As now required under the Air Force model agreement, the commercial space launch services provider would assume responsibility for the first layer of risk, up to the maximum amount of reasonably available liability insurance, at no cost to the Government, with the Government, as well as the customers and contractors and subcontractors of the launch services provider, as named insured. This insurance could provide the following types of coverage, with the specific amount of insurance per launch to be determined by the Government, taking into account the risk characteristics of the particular launch vehicle and other related factors:
(1) Third-party liability insurance, which would cover any reasonably foreseeable loss to the public, based upon the experience of the past 30 years of launch vehicle operation by all nations. (2) Insurance for damage to Government property, which would be payable to the Government as a named insured.
Assuming significant levels of insurance capacity are available, the total probable maximum risks of thirdparty liability and damage to Government property would most likely be covered; the space launch services providers, their contractors, subcontractors and customers, and the U.S. Government are "named insureds" against this probable maximum loss by insurance paid for by the commercial users. The second layer of risk, that which could not be commercially insured at reasonable cost, would then be assumed or contained by the Government pursuant to existing or new legislative authority, as necessary, or, alternatively, limited by law or treaty to prescribed levels of total industry exposure. The United States taxpayers, who have derived and will continue to derive benefits from a successful and viable U.S. commercial space effort, will benefit by the protection afforded by the insurance coverage obtained at no cost to the Government against probable losses, in return for which the commercial users should be protected from potential disabling liability which could undermine the continued availability and expansion of these programs. Such a distribution of risk seems reasonable and fair to all concerned:
the Nation, the taxpayers and the emerging commercial launch industry.
The mechanism by which the Government would assume, or contain, the commercially uninsurable risk is not specifically dealt with in this position paper. There are precedents for a Government indemnity, such as that granted by Congress to NASA to permit it to indemnify, as well as provide commercial insurance to, the users of the space shuttle, and any other Government space vehicle (Public Law No. 96-48, October 1, 1979, 42 U.S.C. 2458b). There is also the precedent of the Price-Anderson Act of 1957 (Act of September 2, 1957, Public Law No. 85-256, 71 Stat. 576-77, as amended, 42 U.S.C. 2110 (1970)), which capped the public liability of nuclear reactor licenses and authorized the Government to indemnify up to that cap to the extent private insurance capacity was unavailable. Special insurance pooling arrangements were established to optimize the private insurance capacity. There is also the precedent of the subsequent, and most recent, revisions to Price-Anderson, which maintain a cap on liability but increase the level of private insurance protection through retrospective premium assessments on the commercial licensees.
Whether an indemnity approach, a liability cap approach, or some combination of Government-provided insurance of last resort plus indemnity or cap in excess of the sum of private and Government insurance, is the most appropriate specific protective mechanism against commercially uninsurable risk is, as noted above, not the subject of this position paper. The policy conclusion of this paper is that the commercially uninsurable risks must be contained by some appropriate Government action if the ELV industry is to be viable and competitive.
The U.S. Government self-insures its property losses above the prescribed maximum insurance coverage available at reasonable cost.
Adequate commercial insurance capacity to cover the potential probable maximum loss is a key requirement. Such capacity may be achievable through conventional methods of aggregated coverages or through a centrallymanaged underwriting facility that might be similar in structure to that previously developed by NASA for the Shuttle program with the insurance industry. Objectives of insurance arrangements would include:
availability of the maximum insurance capacity at reasonable cost;
equitable distribution of coverage among those at risk;
efficient administration of claims; and
support of U.S. Government officials statutorily responsible for determining the level and quality of insurance coverage of space launch operations.
Reasonable allocation of launch operation risks through adoption of one of the alternative proposed solutions described above generates several significant benefits:
1. Development of a strong, economically viable and internationally competitive space transportation industry will provide the foundation for the "assured access to space" needed to meet our country's goals in space.
2. Provision of very substantial insurance protection for the U.S. Government, at no cost to it, covering liability for injury and/or damage to third parties and to Government personnel and property up to the "maximum probable" loss, will protect the Government from any losses associated with commercial space launch operations in all foreseeable circumstances.
3. Government assumption or limitation of uninsurable very low probability risks will remove a major road-block endangering full development of the commercial space transportation industry. 4. The attractiveness to American industry in utilizing space for commercial purposes will be enhanced, to the benefit of our international balance of trade, and to the Government, which will be able to purchase launch vehicle services for its own needs at lower unit prices.
The United States, its taxpayers, and the commercial space industry will all mutually benefit from a reasonable and fair allocation of space launch operation risks. The industry will provide substantial benefits directly to
the Government at the industry's expense as a quid pro quo to the Government's acceptance in the public interest of a very low probability of some excess liability at a future date, but at no current cost to the Government.
AIAA TECHNICAL COMMITTEE ON LEGAL ASPECTS OF
AERONAUTICS AND ASTRONAUTICS
Mr. C. Dennis Ahearn
Mr. William J. Benman, Jr. Attorney-at-Law
Mr. Bruce S. Brumberg
Chairman: Mr. Daniel E.Cassidy
Brown, Rudnick, Freed & Gesmer
Mr. John Cavanagh
Mr. Randal R. Craft, Jr.
Haight, Gardner, Poor & Havens
Dr. Stephen E. Doyle
Aerojet Tech Systems Company
Mr. Arthur M. Dula
Mr. William D. English
Mr. Edward A. Frankle
Mr. Bernard Fried
System Development Corporation
Dr. Michael Fulda
Fairmont State College
Mr. John B. Gantt
Hunton & Williams
Dr. J. Henry Glazer
Mr. Nathan C. Goldman
Marsh & McLennan, Inc.
Mr. Theodore R. Harper
Mr. James A. Kane, Jr.
Ms. Barbara Luxenberg
Ball Aerospace Systems Division
Ms. C.B. McGilvray
Ball Aerospace Systems Division
Mr. Mark J. Meltzer
Mr. John E. O'Brien
Dr. Irwin M. Pikus
Mr. Michael L. Slack
Mr. Francis R. Slaughter
Lt. Col. Milton L. Smith
Ms. Susan McGuire Smith
NASA Marshall Space Flight Center
Mr. Thomas N. Tate
Aerospace Ind. Assoc. of America
Ms. Lillian M. Trippett
Cte. on Science, Space & Tech.
Col. William B. Wirin
United States Air Force
Mr. NELSON. The Administration's view seems to be that sufficient commercial insurance will be able to be available when the industry develops in order to cover the risk. Would you agree with that?
Mr. ENGLISH. Well, based upon the input we had from the insurance industry the answer was categorically no. Now I think, Mr. Chairman, you have to remember the distinction between the probable exposure and the possible exposure. For the probable exposure there's a real potential to have the insurance protection. For the possible, or maximum credible incident, the insurance industry felt that the accumulation of risks would exceed the available insurance in the world market.
Mr. NELSON. And what is your answer to the availability of probable insurance? The maximum probable-what's the buzz word?loss?
Mr. ENGLISH. Yes, maximum probable loss.
Well, Mr. Chairman, that's one of the issues that's still open. We do need to see a risk analysis coming out of the United States Government in terms of, particularly, the property exposure risk that would be associated in the local environment where the launch took place, and we don't have that yet. I understand that is an ongoing activity within the Government. That is an important consideration, to determine an estimated probable level of risk. Mr. CASSIDY. Mr. Chairman
Mr. NELSON. Mr. Cassidy?
Mr. CASSIDY. We used in the paper the concept of maximum probable. Whether in fact the specific numbers can be generated with sufficient assurance of accuracy, you know, is to be determined. But within the constrains of the concept, what one has to realize is it's a policy question; and that is, is the Government going to continue in its practice of providing indemnification above available insurance regardless of how it may be derived? Because there is a finite amount of third-party liability, as there is for almost any kind of insurance. And this paper really addresses it from the viewpoint of the policy, and the governmental policy of continuing its practice which, as has been testified earlier, is the standard used throughout the world by other launch activities.
Mr. NELSON. And so where you hear a statement that say-for example, Dr. Cook says that it ought to be left flexible and that you should not adhere to a policy of setting a limit above which the Government will indemnify. You disagree with that policy?
Mr. CASSIDY. I don't think it's necessary to put numbers in legislation. That may be my only major complaint with the legislation. Mr. NELSON. But, as far as the Government indemnifying above a certain level as defined by maximum probable risk is where you would agree?
Mr. CASSIDY. Yes, sir.
Mr. NELSON. Is that right? You agree with the Government indemnifying above that level?
Mr. CASSIDY. Above whatever is available, right.
Mr. ENGLISH. That's right.
Mr. NELSON. Okay.
Mr. CASSIDY. And whatever can be insured. Because there is a finite limit
Mr. NELSON. All right. Now——
Mr. CASSIDY [continuing]. That may be and they may change the time.
Mr. NELSON. And let's take one little nuance on that. Whatever above the Government indemnifying above whatever is available, but then you've got to get in there what is also affordable, in order to be competitive internationally.
Mr. CASSIDY. Exactly. That has to be in the equation, availability and affordability; and, of course, that's the responsibility, one believes at this point, of Department of Transportation to make that assessment.
Mr. ENGLISH. Yes. That was the methodology by which NASA focused on it.
Mr. NELSON. Okay. How would you distinguish commercial launch risk from other high risk commercial activities?
Mr. ENGLISH. That's an excellent question, Mr. Chairman. I think you have to look at-and this is what the AIAA committee attempted to do-to look at the overall circumstances. In terms of the status of this industry, it is an embryonic industry; it is being asked to take over an activity that has been traditionally Government-owned and operated; it's capital intensive and there is a significant revenue uncertainty, particularly given the buildup of European and other international competition in launch services. You have to look at the totality of risks and requirements of private industry, and the desire on the part of the government, which is highly appropriate, to move away from the single-thread system we had with the Shuttle. When you look at the confluence of these circumstances and facts, the conclusion is that there needs to be a special incentive that might not be necessary for the airline industry, or for any other well-established industry that has a sound economic base with a long history and a sound insurance base with broad-based actuarial experience.
So it is a combination not only of what the risk is but the circumstances in which you are trying to get this industry involved and brought into an effort.
Now maybe that says, Mr. Chairman, that there should be a sunset provision associated with this type of indemnification proposal. That is, it is effective only for a specified number of years, in order to see whether industry forecasts actually materialize.
Mr. NELSON. Thank you. Tell us about your panel's reviewing insurance arrangements among the foreign launch competition.
Mr. ENGLISH. In terms of the foreign competition and what it is doing? We looked at some of the actual contracts that have been entered into between Arianespace and its customers. We talked to the satellite industry; that is, the companies that actually buy those services from foreign launch competitors, and we got their perspective with respect to what they are used to and what they expect to get from the U.S. industry. And our conclusion was that foreign competitors follow the NAŠA pattern rather closely. The Outer Space Liability Treaty also set certain requirements that prompted foreign competitors to introduce an indemnification scheme into their launch service arrangements. They offer a combination of insurance, up to a certain level, and indemification above that level.