[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25437]

[[Page Unknown]]

[Federal Register: October 14, 1994]



46 CFR Part 540

[Docket Nos. 94-06; 94-21]


Financial Responsibility Requirements for Nonperformance of 
Transportation; Inquiry Into Alternative Forms of Financial 
Responsibility for Nonperformance of Transportation

AGENCY: Federal Maritime Commission.

ACTION: Notice of Inquiry.


SUMMARY: The Proposed Rule in Docket No. 94-06 is held in abeyance, 
pending an Inquiry into alternative methods of establishing financial 
responsibility. The Inquiry's purpose is to determine whether an 
acceptable alternative can be fashioned that will address the industry 
objections to the Proposed Rule, yet ensure that cruise passengers are 
adequately protected in the event of nonperformance of transportation.

DATES: Comments due on or before November 28, 1994.

ADDRESSES: Send comments (original and 20 copies) to: Joseph C. 
Polking, Secretary, Federal Maritime Commission, 800 North Capitol St., 
NW., Washington, DC 20573-0001, (202) 523-5725.

FOR FURTHER INFORMATION CONTACT: Bryant L. VanBrakle, Director, Bureau 
of Tariffs, Certification and Licensing, Federal Maritime Commission, 
800 North Capitol Street NW., Washington, DC 20573-0001, (202) 523-

SUPPLEMENTARY INFORMATION: The Federal Maritime Commission 
(``Commission'' or ``FMC'') administers section 3, Pub. L. 89-777, 46 
U.S.C. app. 817e (``Section 3''). Section 3 requires certain passenger 
vessel operators (``PVOs'') to establish financial responsibility for 
nonperformance of transportation.1 The Commission's regulations 
implementing section 3, contained in 46 CFR part 540, subpart A, 
generally provide that a PVO may evidence its financial responsibility 
by one or more of the following methods: A guaranty, escrow 
arrangement, surety bond, insurance or self-insurance. The amount 
required must equal 110 percent of the PVO's highest UPR over a two-
year period.2 The maximum coverage amount currently required is 
$15 million, subject to a sliding scale.3

    \1\Section 3 provides, in pertinent part:
    (a) No person in the United States shall arrange, offer, 
advertise, or provide passage on a vessel having berth or stateroom 
accommodations for fifty or more passengers and which is to embark 
passengers at United States ports without there first having been 
filed with the Federal Maritime Commission such information as the 
Commission may deem necessary to establish the financial 
responsibility of the person arranging, offering, advertising, or 
providing such transportation, or, in lieu thereof, a copy of a bond 
or other security, in such form as the Commission, by rule or 
regulation, may require and accept, for indemnification of 
passengers for nonperformance of the transportation.
    \2\UPR is defined under 46 CFR 540.2(i) as:
    . . . that passenger revenue received for water transportation 
and all other accommodations, services, and facilities relating 
thereto not yet performed.
    \3\The Commission, in Docket No. 92-19, Revision of Financial 
Responsibility Requirements for Non-Performance of Transportation, 
amended 46 CFR Part 540, Subpart A, to (1) institute this sliding 
scale formula for determining the amount of financial responsibility 
coverage required for operators meeting certain requirements; (2) 
exclude, under certain conditions, revenue from ``whole-ship'' 
arrangements from being considered UPR; and (3) publish a suggested 
form escrow arrangement as a guideline for the industry (57 FR 51887 
(September 14, 1992)).

    By Notice of Proposed Rulemaking published in the Federal Register 
on March 31, 1994 (``NPR'' or ``Proposed Rule''),4 the Commission 
proposed to remove the $15 million unearned passenger revenue (``UPR'') 
ceiling now applicable to passenger vessel financial responsibility 
requirements for nonperformance of transportation. The Commission 
initiated this proposal in part because there is an estimated $700 
million in UPR without section 3 coverage, raising concern that there 
could be insufficient financial responsibility to indemnify the 
travelling public for nonperformance. The Commission also proposed to 
revise the current UPR sliding scale accordingly--and to require 
coverage of 110 percent of UPR up to $25 million per operator, with 
coverage of 90 percent of UPR for amounts exceeding $25 million. The 
NPR also put forth an alternative proposal which would require coverage 
of 110 percent of UPR up to $25 million per operator; 75 percent of UPR 
between $25 million and $50 million per operator; and 50 percent 
coverage for UPR over $50 million per operator. Additionally, the 
Commission proposed to remove self-insurance as an option for section 3 
coverage (except for state or federal entities). Existing self-insured 
commercial operators would be provided one year following the effective 
date of any final rule in this matter to obtain other evidence of 
financial responsibility. In issuing the Proposed Rule, the Commission 
stated that it considered these changes to be necessary to ensure that 
cruise passengers are adequately protected in the event of 
nonperformance of transportation.

    \4\59 FR 15149.

    Comments on the NPR were originally due by May 2, 1994. The comment 
period was subsequently extended to June 10, 1994,5 in response to 
a request for a 90-day extension of the comment period by The Delta 
Queen Steamboat Co., and was again extended in response to a request by 
the International Council of Cruise Lines to extend the comment period 
to June 24, 1994.6

    \5\59 FR 23183 (May 5, 1994).
    \6\59 FR 30567 (June 14, 1994).

    Two Congressional interests,7 four PVOs (two U.S.-Flag8 
and two foreign-flag9), and six trade associations (three 
representing U.S.-flag PVOs,10 one representing foreign-flag 
PVOs,11 one representing surety interests,12 and one 
representing travel agents13) filed comments on the Proposed Rule.

    \7\The U.S. House of Representatives Committee on Merchant 
Marine and Fisheries and Subcommittee on Merchant Marine and 
Fisheries (``Committees'') filed a comment; Congressman W.J. Tauzin 
(D-Louisiana) filed a separate comment.
    \8\Alaska Sightseeing/Cruise West (``Alaska Sightseeing'') is a 
Seattle-based PVO that operates four U.S.-flag vessels ranging in 
capacity from 58 to 101 passengers, and will be deploying a fifth 
overnight vessel in 1995. Its 1993 UPR was just under $5 million, 
and it projects that its UPR will surpass $5 million with the 
deployment of its fifth vessel.
    American Classic Voyages Co. (``AMCV'') was formerly known as 
The Delta Queen Steamboat Co., and now is the corporate parent of 
The Delta Queen Steamboat Co. (``Delta Queen'') and American Hawaii 
Cruises (``AHC'').
    \9\Carnival Corporation (``Carnival'') is the parent company of 
Carnival Cruise Lines, Holland America Lines and Windstar Cruises, 
which operate eighteen cruise vessels which embark passengers at 
U.S. ports and which it states comprise the largest cruise business 
in the world.
    Kloster Cruise Limited (``Kloster'') does business under the 
trade names Norwegian Cruise Line and Royal Viking Line. It is also 
the parent company of Royal Cruise Line Limited. Kloster states that 
it is the third largest cruise ship operator in the world.
    \1\0The National Cruise Ship Alliance is an organization of 
business, government and labor representatives that promotes the 
development of a U.S.-flag cruise ship industry. It is involved with 
legislation pending in Congress to attract foreign built cruise 
ships to U.S. ports and encourage the construction of new U.S.-flag 
cruise vessels.
    The Transportation Institute represents 140 U.S.-flag shipping 
companies engaged in foreign and domestic trades, including AMCV.
    The Passenger Vessel Association is a 500-member trade 
association of U.S.-flag passenger vessel owners, operators and 
suppliers which operate some 1,200 vessels and carry about 80 
million people each year. Its members include the American companies 
which offer overnight cruises, all on U.S.-built, U.S.-crewed, U.S.-
flag vessels. With the exception of AMCV, these companies all are 
small, generally family-owned businesses whose vessels range in size 
from 49 to 138 passengers and operate throughout the Americas, from 
Venezuela to Alaska.
    \1\1The members of the International Council of Cruise Lines 
(``ICCL'') have approximately 90% of the cruise industry berth 
capacity. ICCL's letterhead lists Carnival Cruise Lines, Celebrity 
Cruise Lines, Commodore Cruise Line, Costa Cruise Lines NV, Crown 
Cruise Line, Crystal Cruises, Cunard Line Ltd., Dolphin Cruise Line, 
Epirotiki Lines, Fantasy Cruise Lines, Holland America Line, Majesty 
Cruise Line, Norwegian Cruise Line, Premier Cruise Lines, Ltd., 
Princess Cruises, Regency Cruises, Inc., Royal Caribbean Cruises, 
Ltd., Royal Cruise Line, Royal Viking Line, Seabourn Cruise Line, 
Sun Line Cruises, Inc., and Windstar Cruises.
    \1\2The Surety Association of America represents 650 surety 
companies that provide 95% of the surety bonds written in the United 
    \1\3Midwest Agents Selling Travel (``MAST'') is a trade 
association of over 300 upper Midwestern retail travel agencies 
which have an estimated $60,000,000 in cruise sales annually, and 
approximately $10,000,000 in consumer deposits with PVOs at any 
given time.

    There is virtually unanimous support for the Commission's existing 
UPR coverage requirements, and widespread questioning of the need for 
the Proposed Rule. Many commenters draw attention to the Commission's 
many recent proceedings in this area, and assert that there have been 
no industry changes warranting this proposal. Positions range from 
strong Congressional and U.S.-flag PVO opposition to any further 
changes to current coverage requirements, to conditional support of a 
modified version of the Proposed Rule by foreign-flag interests. There 
is no support for the Proposed Rule outright; however, Carnival 
supports the Proposed Rule's coverage requirements for those PVO's 
unable to meet its self-insurance proposal.
    Many commenters take issue with the Proposed Rule's requirement for 
essentially unlimited coverage for UPR. They contend that Pub. L. 89-
777's purpose is to insure that PVOs are financially responsible to 
perform transportation, and interpret the statute and the Commission's 
past interpretations as requiring evidence of financial responsibility, 
not a financial guaranty.
    U.S.-flag advocates state that the proposal to discontinue self-
insurance for commercial PVOs would unfairly impact U.S.-flag 
operators; foreign-flag advocates criticize it for unduly restricting a 
maturing industry. U.S.-flag advocates also criticize the impact of the 
Proposed Rule's increased coverage requirements and associated 
collateralization requirements upon smaller U.S.-flag PVOs, noting that 
they face much higher operating costs than their foreign competition. 
In addition, a number of commenters urge the Commission to perform a 
cost/benefit analysis on the Proposed Rule's impact.
    Many U.S.-flag advocates assert that the impact of the Proposed 
Rule's increased coverage requirements would be severe enough to cause 
the cruise industry to generally relocate its embarkations to nearby 
foreign ports in the Caribbean, Mexico and Canada, thus avoiding FMC 
jurisdiction and eliminating protection to the U.S. travelling public. 
However, neither of the commenting foreign-flag PVOs nor ICCL in any 
way intimate that this would be likely to happen.
    The NPR included an alternative coverage requirement,14 and 
asked for suggestions for other approaches to ensure adequate UPR 
coverage. This aspect of the proposal drew considerable comment; 
although the initial approach set forth in the Proposed Rule drew no 
unconditional support, the foreign-flag PVO interests in particular 
supported a modified version of the Proposed Rule's alternative 
approach. Other alternatives were also offered.

    \1\4The alternative proposal would require coverage of 110 
percent of UPR up to $25 million per operator; 75 percent of UPR 
between $25 million and $50 million per operator; and 50 percent 
coverage for UPR over $50 million per operator.

    ICCL and Kloster support the Commission's alternative proposal to 
remove the current $15 million ceiling and to implement a sliding 
scale, provided (1) that it is gradually phased-in; and (2) the 
Commission amends its self-insurance requirements to make self-
insurance reasonably available to creditworthy operators, regardless of 
the location of their qualifying assets. These commenters also propose 
that (1) only existing UPR be covered, rather than the PVO's highest 
UPR during the preceding two years; and (2) coverage requirements and 
self-insurance tests should encompass the organization as a whole, 
thereby enabling a corporate parent to obtain coverage for its entire 
    Citing American Hawaii Cruises' bankruptcy filing and trade press 
articles concerning the securing of financing for a Kloster Cruise 
ship, MAST endorses moves to ensure liquid funds are readily available 
to protect consumers in the event of a default. It suggests that the 
Commission give the cruise industry 90 days--under a grant of limited 
antitrust immunity--to develop its own plan to ensure total and timely 
consumer protection. Should the industry fail to act in a way 
satisfactory to the Commission, MAST suggests consideration of higher 
    Alaska Sightseeing recommends that the Commission instead require 
110% coverage for UPR up to $5 million, and 50% coverage for UPR over 
$5 million, with no maximum. It also suggests retaining self-insurance 
for U.S. corporations operating U.S.-flag vessels.
    AMCV requests that the current self-insurance option be maintained 
and that the existing coverage ceiling be left in place. It stresses 
that self-insurance is an important alternative for U.S. companies and 
should be retained. It therefore urges that self-insurance not be 
simply discarded, but that any concerns should be addressed 
individually. It suggests, for example, that the percentage threshold 
of net worth as a function of UPR could be increased above 110% to 
provide an additional cushion of coverage.
    AMCV's first proposal is that PVOs be required to fully disclose 
any shortfall between coverage and UPR, and to advise their passengers 
of the availability of additional insurance coverage. Its second 
proposal is a new rulemaking to consider a berth-based formula, an 
indexed increase in the ceiling, or other alternatives to address the 
coverage ``gap''.
    Carnival believes that the current gap between UPR and coverage 
levels is a legitimate issue: recent fleet growth has substantially 
increased the gap between coverage and actual UPR. Carnival therefore 
suggests that UPR coverage requirements be designed to adjust as PVOs 
increase in size, and to avoid the need to return to this issue every 
few years. However, it submits that the Proposed Rule's removal of 
self-insurance would penalize the most financially sound PVOs. It 
instead suggests that self-insurance standards be strengthened and made 
available to PVOs which have either (i) an ``investment grade rating'' 
of its debt by at least two accepted bond rating agencies; or (ii) 
which meet certain minimum financial ratios (liquidity of at least 100% 
of the PVO's UPR plus at least three times its UPR in tangible net 
worth (excluding intangible assets such as good will)). Thus, Carnival 
states that the Commission would be accepting the financial standards 
the rating agencies and Wall Street use to adjudge a maturing industry, 
arguing that a PVO meeting its proposed self-insurance tests clearly 
has the resources to satisfy passenger claims for UPR. In the event 
that a PVO is unable to self-insure by meeting either the investment 
grade ratings test or the minimum financial ratios test, Carnival 
supports a significant increase in coverage requirements. In light of 
the total amount of UPR, Carnival submits that the Commission's first 
alternative of bonding 110% of UPR up to $25 million, and 90% of UPR 
exceeding $25 million appears reasonable.


    We continue to believe that the Proposed Rule represents a legally-
appropriate approach to address the Section 3 coverage issues that are 
before the Commission. However, in view of the general opposition to 
the Proposed Rule, the Commission has determined to hold it in abeyance 
pending the exploration of additional alternatives. The Commission 
wishes to ensure that full consideration is given to other means of 
establishing financial responsibility which are more acceptable to the 
industry. The Commission is therefore instituting this inquiry to 
determine the feasibility of the PVO industry addressing coverage 
requirements through (1) the vehicle of voluntary association(s) (such 
association(s) would be in addition to the current individual methods 
of evidencing financial responsibility for non-performance); and (2) 
retained but strengthened self-insurance requirements, as outlined more 
fully below. The Commission believes that these approaches could 
provide a level of protection to the travelling public comparable to 
that envisioned by the Proposed Rule, but with less of an impact upon 
the industry.

A. Voluntary Association(s)

    In Docket No. 92-37, Financial Responsibility for Non-Vessel-
Operating Common Carriers, the Commission permitted a group or 
association of non-vessel-operating common carriers (``NVOCC's'') to 
collectively issue bonds to meet financial responsibility coverage 
requirements imposed upon NVOCC's by the Shipping Act of 1984. Because 
this approach has proven successful with respect to NVOCC's, the 
Commission is considering its applicability and adaptability to PVO 
requirements under Public Law 89-777. At the same time, the Commission 
recognizes that, because an association approach would necessarily 
involve concerted carrier activity, such an approach could present 
issues under the antitrust laws to the extent such activity is not 
exempted under agreements effective pursuant to the Shipping Act of 
1984, 46 U.S.C. app. 1701 (``1984 Act'')15 and/or approved 
pursuant the Shipping Act, 1916, 46 U.S.C. app. 801 (``1916 
Act'').16 The Commission invites comment on these issues.

    \1\5The 1984 Act governs concerted ocean common carrier activity 
in the U.S. foreign waterborne trades.
    \1\6The 1916 Act governs concerted activity of common carriers 
by water in interstate commerce in the transportation by water of 
passengers on the high seas or the Great Lakes on regular routes 
from port to port between one U.S. State, Territory, District or 
possession and any other U.S. State, Territory, District or 
possession or between places in the same Territory, District or 

    In general terms, the voluntary association concept would work in a 
manner whereby the involved association would accept liability for all 
or a part of a PVO's section 3 liability, pursuant to a Commission-
approved surety bond or guaranty in an amount equal to the combined UPR 
of the two members having the highest amount of UPR during the past two 
years. We have set forth below one possible methodology which the 
Commission could take to implement this alternative and is proffered 
for comments concerning this alternative's viability. Such an approach 
could revise the Commission's rules under 46 CFR part 540, subpart A in 
the following four respects.
    First, it could revise the heading of 46 CFR 540.5 to read:

``Sec. 540.5  Insurance, guaranties, escrow accounts, self-
insurance, associations''.

    Second, it could add a new Sec. 540.5(e) to read:

    (e) Where a group or association of passenger vessel operators 
accepts liability for all or part of a passenger vessel operator's 
or a ticket issuer's financial responsibility under section 3 of 
Pub. L. 89-777, the group or association of passenger vessel 
operators must file either a Form FMC-132A Surety Bond or a Form 
FMC-133A Guaranty clearly identifying each passenger vessel operator 
or ticket issuer and each passenger vessel covered. In such cases 
the group or association's coverage must be in the amount equal to 
the combined unearned passenger revenue of the two members having 
the highest amount of unearned passenger revenue on the date within 
the 2 fiscal years immediately prior to the filing of the group or 
association's coverage.

    Third, it could redesignate current Sec. 540.5 (e) and (f) as 
Sec. 540.5 (f) and (g), respectively.
    Finally, it could add a new Sec. 540.9(l) as follows:

    (l) Evidence of financial responsibility of the type provided 
for in Secs.  540.5 and 540.6 of this part established through and 
filed with the Commission by a group or association of passenger 
vessel operators or ticket issuers on behalf of its members, is 
subject to the following conditions and procedures:
    (1) Each group or association of passenger vessel operators or 
ticket issuers shall notify the Commission of its intention to 
participate in such a program and furnish documentation as will 
demonstrate its authenticity and authority to represent its members, 
such as articles of incorporation, bylaws, etc.;
    (2) Each group or association of passenger vessel operators or 
ticket issuers shall provide the Commission with a list certified by 
its Chief Executive Officer containing the names of those passenger 
vessel operators or ticket issuers to which it will provide 
coverage, in whole or in part; the manner and amount of existing 
coverage each covered passenger vessel operator or ticket issuer 
has; an indication that the existing coverage provided each 
passenger vessel operator or ticket issuer is provided by a surety 
bond issued by a surety company found acceptable to the Secretary of 
the Treasury, or by insurance or guaranty issued by a firm 
acceptable to the Commission; and the name, address and facsimile 
number of each surety, insurer or guarantor providing coverage 
pursuant to this section. Each group or association of passenger 
vessel operators or ticket issuers shall notify the Commission 
within thirty (30) days of any changes to its list.
    (3) The group or association shall provide the Commission with a 
sample copy of each type of existing financial responsibility 
coverage used by member passenger vessel operators or ticket 
    (4) Each group or association of passenger vessel operators or 
ticket issuers shall be responsible for ensuring that each member's 
financial responsibility coverage will discharge that member's legal 
liability to indemnify the passengers of the member's vessels for 
nonperformance of transportation within the meaning of section 3 of 
Public Law 89-777. Each group or association of passenger vessel 
operators or ticket issuers shall be responsible for requiring each 
member to provide it with valid proof of financial responsibility 
    (5) Where the group or association of passenger vessel operators 
or ticket issuers determines to secure on behalf of its members 
other forms of financial responsibility, as specified by this 
subpart to indemnify passengers for nonperformance of transportation 
within the meaning of section 3, Public Law 89-777, not covered by a 
member's individual financial responsibility coverage, such 
additional coverage must:
    (i) Allow claims to be made in the United States directly 
against the group or association's Surety, Insurer or Guarantor 
against each covered member for nonperformance of transportation 
within the meaning of section 3 of Public Law 89-777; and
    (ii) Be for an amount up to the UPR for each covered member up 
to a maximum of the UPR in the amount equal to the combined unearned 
passenger revenue of the two members having the highest amount of 
unearned passenger revenue on the date within the 2 fiscal years 
immediately prior to the filing of the group or association's 
    (6) The coverage provided by the group or association of 
passenger vessel operators or ticket issuers on behalf of its 
members, in whole or in part, shall be provided by:
    (i) In the case of a surety bond, a surety company found 
acceptable to the Secretary of the Treasury and issued by such a 
surety company on Form FMC-132A; and
    (ii) In the case of insurance and guaranty, a firm recognized 
and approved by the Commission.

B. Reinforced Self-Insurance

    Strongly-argued support remains for continuing at least a modified 
version of self-insurance. The Commission is concerned that its present 
self-insurance standards may be inadequate, but it will consider an 
approach whereby it would restore its former ((net worth = 100% UPR) + 
(working capital = 100% UPR)) standard,17 but require prospective 
self-insurers to provide alternative coverage for a percentage (e.g., 
50% or 25%) of their uncovered UPR, through either a traditional 
guaranty, surety, escrow agreement or lien or other security 
instrument, or through participation in a coverage association along 
the above-described lines. The Commission would, however, still require 
qualifying assets to be located in the United States.

    \1\7The former standard provided that the Commission could, for 
good cause shown, waive the requirement as to the amount of working 

C. Coverage Requirements

    PVO's electing to secure coverage through an association of the 
nature described above would be required to effect coverage either 
equal to that PVO's individual exposure under the coverage requirements 
ultimately adopted in this matter, or the association could be required 
to cover the combined UPR attributable to its two largest members. The 
Commission invites comment on other variants that might also provide 
adequate coverage.
    We also solicit comments on any other form of security or proposal 
that would provide adequate coverage for the travelling public.


    The Commission's initiation of this proceeding is not in any way 
intended to suggest that the PVO industry is unstable or has at any 
time failed to meet its responsibilities under Public Law 89-777. At 
the same time, we remain concerned that our present requirements may 
not provide sufficient coverage in the event of future nonperformance. 
The Commission affirms its willingness to consider innovative methods 
of ensuring an adequate degree of Public Law 89-777 coverage without 
unduly burdening the PVO industry and appreciates the input it has 
received to date on the development of its rules in this area.
    Now therefore, it is ordered that this Notice of Inquiry be 
published in the Federal Register; and
    Is further ordered, that the Proposed Rule in Docket No. 94-06 is 
hereby held in abeyance pending further notice.

    By the Commission,
Joseph C. Polking,
[FR Doc. 94-25437 Filed 10-13-94; 8:45 am]