[Federal Register Volume 61, Number 144 (Thursday, July 25, 1996)]
[Proposed Rules]
[Pages 38992-39021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18532]



[[Page 38991]]


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Part III





Department of Transportation





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Federal Aviation Administration



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14 CFR Part 440



Financial Responsibility Requirements for Licensed Launch Activities; 
Proposed Rule

Federal Register / Vol. 61, No. 144 / Thursday, July 25, 1996 / 
Proposed Rules

[[Page 38992]]



DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 440

[Docket 28635; Notice 96-8]
RIN 2120-AF98


Financial Responsibility Requirements for Licensed Launch 
Activities

AGENCY: Federal Aviation Administration, Associate Administrator for 
Commercial Space Transportation, DOT.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Associate Administrator for Commercial Space 
Transportation of the Federal Aviation Administration (FAA) currently 
prescribes financial responsibility requirements for licensees 
authorized to conduct commercial space launch activities on a case-by-
case basis, after analyzing the risks associated with licensed 
activities. This proposed rulemaking would codify the Associate 
Administrator's approach to implementing these requirements in rules of 
general applicability. Specifically, the proposed regulations would 
establish how certain risks are allocated among the various launch 
participants and addressed through financial responsibility 
requirements, including statutorily-based reciprocal waivers of claims. 
The proposed regulations would also address eligibility for payment by 
the United States Government of certain third-party claims and this 
Notice requests comments on appropriate means of implementing this 
obligation. The FAA is undertaking this rulemaking initiative to 
implement financial responsibility requirements under the Commercial 
Space Launch Act of 1984, as amended, codified at 49 U.S.C. Subtitle 
IX, ch. 701, Commercial Space Launch Activities.

DATES: Comments must be received by September 23, 1996.

ADDRESSES: Comments should reference the docket number of this notice. 
Commenters should mail four copies of any comments to the FAA Rules 
Docket, Room 915G, Federal Aviation Administration, U.S. Department of 
Transportation, 800 Independence Avenue, SW., Washington, DC 20591. 
Persons wishing to receive acknowledgment of receipt of their comments 
should include a self-addressed, stamped postcard. Copies of materials 
relevant to this rulemaking, including copies of all public comments, 
are kept by the Rules Docket Technician, Room 915G, at the above 
address. The docket is available for inspection between 8:30 a.m. and 5 
p.m., Monday through Friday, excluding Federal holidays.

FOR FURTHER INFORMATION CONTACT: Ms. Esta M. Rosenberg, Attorney-
Advior, Regulations Division, Office of the Chief Counsel, Federal 
Aviation Administration, U.S. Department of Transportation, (202) 366-
9305.

SUPPLEMENTARY INFORMATION:

Background

    The Commercial Space Launch Act of 1984, as amended (the Act), 49 
U.S.C. App. 2601-2623, codified, at 49 U.S.C. Subtitle IX, Commercial 
Space Transportation, ch. 701, Commercial Space Launch Activities, 49 
U.S.C. 70101-70119, authorizes the Secretary of Transportation to 
license and regulate commercial space launches and the commercial 
operation of launch sites carried out within the United States or by 
its citizens. Among the stated purposes of the Act are protection of 
public health and safety, safety of property, and United States 
national security and foreign policy interests, as well as ensuring 
compliance with international treaty obligations of the United States. 
In carrying out the Act, the Secretary is required to encourage, 
promote, and facilitate private sector launch activities. Another 
objective is to facilitate development of a commercial space 
transportation sector that is capable of competing in the international 
market. The Secretary's responsibilities under the Act are carried out 
by the Associate Administrator for Commercial Space Transportation of 
the Federal Aviation Administration (Office). Prior to Fiscal Year 
1996, the Secretary's responsibilies were carried out by the Office of 
Commercial Space Transportation, located within the Office of the 
Secretary of the Department of Transportation (DOT or Department). The 
Commercial Space Transportation Licensing Regulations set forth in 14 
CFR Ch. III remain applicable to regulatory activities administered by 
the Office.

Current Industry Status

    The commercial space industry is expanding and experiencing 
reinvigorated growth with the creation of new technologies and markets. 
U.S. commercial space revenues are estimated at $6.5 billion for 1994 
and prospects are positive for continued growth. As a July 15, 1996, 63 
DOT-licensed launches that have taken place since the first license was 
issued in 1998. Up to three big low earth orbit (LEO) 
telecommunications systems and two little LEO systems are projected for 
launch this decade, resulting in as many as 40 launches and 275 small 
satellites. Many other systems requiring additional launches are being 
planned and may increase projected launch rates.
    The U.S. commercial launch industry is responding to increasing 
demands and heightened international competition with new launch 
concepts and innovative partnerships. In addition to conventional 
suborbital and orbital launches of expendable launch vehicles (ELVs) 
from earth to space, the Office has licensed launches involving a 
variety of innovative space transportation technologies including air-
launched rockets and a reentry vehicle system. The Office has also 
begun discussions with industry on approaches to evaluating new 
reusable launch vehicle and sea-launch technologies. Currently, the 
private sector is conducting launch activities at four Federal launch 
ranges throughout the United States. Five States--Alaska, California, 
Florida, New Mexico, and Virginia--have plans under way for developing 
state-sponsored spaceports.

Evolution of U.S. Commercial Space Transportation Policy.

    The first ten years of the U.S. commercial launch industry have 
been a period of transformation, informed by national policy and world 
events.
    After passage of the Commercial Space Launch Act of 1984, the 
Government instituted policy and legislative initiatives encouraging 
commercial launches. Nevertheless, during this time, in the face of 
competing federal policies favoring maximum use of NASA's Space 
Transportation System and relatively low launch prices for services 
offered by the European launch operator, Arianespace, the U.S. private 
sector appeared reluctant to commit the resources necessary to compete 
for the relatively few launches of commercial satellites then available 
in the international market.
    The commercial launch services market was altered dramatically in 
1986 with the loss of the Space Shuttle Challenger. This event caused 
the United States Government to reverse its policy of reducing reliance 
on ELVs in favor of the Shuttle. On August 15, 1986, President Reagan 
announced a new United States Space Launch Strategy stating that NASA 
would ``no longer be in the business of launching private satellites,'' 
and that the government would be looking to the private sector to 
``become a highly competitive method of launching

[[Page 38993]]

commercial satellites'' and ``clear[ing] away the backlog that has 
built up during this time when our shuttles are being modified.''
    This decision removed the United States Government from direct 
competition with private launch services providers and, because the 
Challenger accident resulted in a backlog of payloads to be launched 
provided a potential market for U.S. launch firms. Shortly thereafter, 
the President initiated a comprehensive review of existing space policy 
for the purpose of providing a clear, unified statement of policy goals 
and directives.
    On February 11, 1988, President Reagan issued a directive on 
National Space Policy that consolidated and updated previous 
Presidential guidance on space activities. The National Space Policy 
recognized for the first time a distinct commercial space sector, 
alongside the military and civilian government sectors, as an integral 
part of an overall national effort to maintain United States space 
leadership. Concurrent with release of the National Space Policy, the 
Administration announced a fifteen-point Commercial Space Initiative 
that reinforced one of the principal objectives of the Act: The 
promotion of a robust commercial launch industry. This objective was to 
be accomplished by, among other things, instituting a more equitable 
allocation of risk between the Government and private sector for 
commercial launch activities at Government ranges. This provision of 
the initiative consisted of two elements: A United States Government 
waiver of claims of property damage to Government property in excess of 
DOT-required insurance; and a United States Government waiver of claims 
covered on DOT-required insurance when loss of injury results from 
Government willful misconduct or recklessness.
    Taken together, these policy initiatives created an environment 
that became more conductive to private investment in and business 
commitments to commercial space launch activities, and Federal agencies 
responded accordingly. Agencies operating United States Government 
launch facilities developed range support agreements to provide for 
commercial use of Government launch property and services in accordance 
with the Act. On April 4, 1988, the Office published DOT's Commercial 
Space Transportation Licensing Regulations, 14 CFR Ch. III, and on June 
22, 1988, issued the first of 33 licenses issued to date.
    Policy guidance supplementing the National Space Policy has been 
formulated to encourage further growth of private sector space 
activities. Most recently, on August 4, 1994, President Clinton 
announced a new National Space Transportation Policy reaffirming the 
Government's commitment to the commercial space transportation industry 
and the Department's critical role in licensing, facilitating and 
promoting commercial launch operations. Under this Policy, the 
Department, along with the Department of Commerce and other agencies as 
appropriate, is charged with developing an implementation plan focusing 
on measures to foster an internationally competitive U.S. launch 
capability. The Department also ensures that U.S. Government space 
technology plans address commercial space launch sector needs.

The 1988 Amendments

General

    The Commercial Space Launch Act Amendments of 1988, Public Law 100-
657 (1988 Amendments), replaced very general insurance requirements 
with a detailed, comprehensive financial responsibility and allocation 
of risk regime for commercial launch activities, including a more 
explicit exposition of the United States Government's risk-related 
rights and obligations. Reaffirmed, as part of the 1988 Amendments, is 
the Department's responsibility to protect United States interests when 
Government property or personnel is involved in supporting licensed 
activities.
    The principal features of the regime include risk-based insurance 
requirements, limited Government payment of certain third-party claims, 
and reciprocal waivers of liability among launch participants. 
Participants in licensed launch activities are protected from 
potentially unlimited liability by: (1) requiring the licensee to 
provide insurance (or otherwise demonstrate financial responsibility) 
based on maximum probable loss determinations that: (a) protects launch 
participants, including the United States Government, from third-party 
liability (in an amount not exceeding the lesser of $500 million or the 
maximum available on the world market at reasonable cost) (49 U.S.C. 
70112(a)), and (b) compensates for damage or loss to United States 
Government property (in an amount not exceeding $100 million) (49 
U.S.C. 70112(a)); and (2) providing for payment by the United States 
Government of successful third-party claims up to $1.5 billion in 
excess of the required amount of third-party liability insurance, 
subject to enactment by Congress of an appropriations law or other 
legislative authority (49 U.S.C. 70113(a)(1)). In addition, the goal of 
allocating risks and costs associated with licensed activities is met 
by requiring participants to enter into reciprocal waivers of claims in 
which each party absorbs certain losses it may sustain as a result of 
licensed activities. 49 U.S.C. 70112(b). Taken together, these 
provisions are intended to achieve a fair allocation among the various 
parties, including the United States Government, of the risks attendant 
to their involvement in commercial launch activities.
    The Office has been implementing the financial responsibility and 
allocation of risk provisions of the 1988 Amendments on a case-by-case 
basis, consistent with the adjudicatory process established by the 
Office in the Commercial Space Transportation Licensing Regulations, 14 
CFR Ch. III. Since early 1989, when the first license was issued after 
the 1988 Amendments became effective, licenses have included a license 
order devoted entirely to insurance and other financial responsibility 
requirements that must be satisfied as conditions of each license. As 
of July 15, 1996, 63 launches have been conducted pursuant to these 
requirements. As a result of this experience, the Office believes that 
many provisions included in license orders may be standardized in rules 
of general applicability. The specific amounts of required insurance 
would be set forth in a license order.
    Although requirements would be standardized, licensees may ask for 
relief from a particular regulatory requirement by petitioning the 
Associate Administrator for Commercial Space Transportation using the 
procedures set forth in Sec. 404.3 of the Commercial Space 
Transportation Licensing Regulations (14 CFR Sec. 404.3).

Allocation of Risk and Payment of Excess Claims Provisions

    The 1988 Amendments focus on two areas of risk allocation: (1) 
Protecting the commercial launch industry against catastrophic losses 
from third-party liability claims; and (2) limiting possible claims 
among launch participants. At the same time, the 1988 Amendments are 
directed at minimizing the potential liability of the United States as 
a launching state under international law; and protecting the United 
States Government, including its agencies, personnel and contractors, 
from liability, loss of injury resulting from the Government's 
participation in commercial launch activities by providing launch 
support to commercial launch services providers.

[[Page 38994]]

    This effort to insulate the United States Government and its 
agencies, personnel and contractors involved in DOT-licensed launch 
activities from a significant measure of exposure to liability, loss or 
injury resulting from licensed activities is important because of the 
Government's liability exposure. This exposure derives from two 
sources. Under international treaty, especially the Treaty on 
Principles Governing the Activities of States in the Exploration and 
Use of Outer Space, including the Moon and Other Celestial Bodies 
(Outer Space Treaty) (entered into force October 1967), and the 
Convention on International Liability for Damage Caused by Space 
Objects (Liability Convention) (entered into force September 1972), the 
United States Government has accepted certain obligations to compensate 
parties outside the United States for damage, including personal injury 
and loss of life, caused by space objects launched from the United 
States or by persons or entities whose activities are supervised or 
overseen by the United States Government. In addition, when the 
Government is involved in private sector launch activities through use 
of its property, facilities, equipment or personnel to support and 
facilitate those activities, the United States Government risks damage 
or injury to its own property and personnel and legal liability for 
other losses. It is the Office's view that, under the 1988 Amendments, 
risk for these losses should be allocated primarily to the 
nongovernmental launch participants, subject to three important 
exceptions, and the statutory requirements for insurance and waivers of 
claims must be construed and implemented to effect this allocation of 
risk. (The term ``nongovernmental'' is used throughout this discussion 
to mean launch participants other than U.S. Government, its agencies, 
contractors and subcontractors, and the employees of each.)
    The three important exceptions are those risks that the U.S. 
Government affirmatively accepts under the Act. They are: (1) The risk 
otherwise borne by the U.S. commercial launch industry of catastrophic 
losses and unlimited liability associated with commercial launch 
activities, up to the statutory limit of $1.5 billion above required 
third-party liability insurance, subject to enactment of legislation, 
49 U.S.C. 70113(a); (2) the risk of property damage or loss to United 
States Government launch property or facilities in excess of required 
insurance, 49 U.S.C. 70112(b)(2); and (3) acceptance of liability for 
death, bodily injury or property damage or loss that results from the 
willful misconduct of the United States Government or its agents, 49 
U.S.C. 70112(e).
    The Office believes that acceptance of these risks by the United 
States Government is necessary in order to accomplish the goals 
underlying the 1988 Amendments; that is for the U.S. commercial launch 
industry to compete effectively against foreign launch services 
providers that offer certain financial assurances from their 
governments,\1\ and to limit the amount of liability insurance that 
must be obtained to protect launch participants without, in industry's 
words, their ``betting the company'' on each launch.
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    \1\ At the time the 1988 Amendments were enacted, entrants to 
the commercial launch industry expressed deep concern over 
potentially open-ended exposure to liability for damages associated 
with launch activities that could undermine the position of United 
States firms vis-a-vis their foreign competitors. For example, while 
customers of Arianespace benefited from full indemnification by the 
French Government for all third-party liability that exceeded 
required insurance levels of 400 million French francs 
(approximately $65 million in 1988), corresponding protection was 
not available to customers of emerging commercial launch services 
providers in the United States. Consequently, from a commercial 
perspective, foreign launch services providers possessed a 
significant competitive advantage over U.S. firms.
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    Not surprisingly, the linchpin of the allocation of risk regime in 
industry's view has been the United States Government's agreement to 
protect launch participants against the risk of catastrophic losses and 
unlimited liability associated with commercial launch activities. 
Pursuant to the 1988 Amendments, the Department seeks to provide this 
protection, or so-called ``indemnification,'' by preparing a 
compensation plan that the President submits to Congress for review and 
approval, and, if necessary, enactment of additional legislative 
authority providing for the payment of claims.
    Significantly, the 1988 Amendments do not expressly mandate 
indemnification of launch participants and, unlike the 1988 Price-
Anderson Amendments. Pub. L. 100-408, the notion of a ``contract of 
indemnification'' does not appear. Rather the 1988 Amendments lay out a 
mechanism by which Congress may enact legislation to appropriate the 
requested funds. Accordingly, it would be inappropriate to refer to the 
payment of excess claims provisions without recognizing the role 
Congress must play in enacting appropriations. Nevertheless, it is the 
Office's view that the 1988 Amendments represent an undertaking by 
Congress to allocate to the United States Government the risk of 
certain losses, including damage to Government property in excess of 
required Government property insurance, and excess third-party claims. 
In this manner, commercial launch operators, their customers, and the 
contractors and subcontractors of each may be relieved from some of the 
risk associated with commercial launch activities. In return, the 
United States Government is protected from liability and loss by 
required insurance at no cost to the Government

Risk-Based Insurance Requirements

    One of the principal features of the 1988 Amendments is the 
Department's mandate to establish risk-based insurance requirements. 
Under the Act, the amount of required insurance is prescribed based on 
the Department's determination of the ``maximum probable loss'' that 
would result from licensed activities.
    Before enactment of the 1988 Amendments, section 16 of the Act 
prescribed general liability insurance requirements. It specified that 
any person launching a launch vehicle or operating a launch site under 
a license issued by the Department have in effect liability insurance, 
at least in the amount that the Department considered necessary for the 
licensed launch or operation, considering the international obligations 
of the United States.\2\ These obligations include, in particular, any 
United States obligations as a signatory to the Liability Convention.
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    \2\ Each person who launches a launch vehicle or operates a 
launch site under a license issued or transferred under this Act 
shall have in effect liability insurance at least in such amount as 
is considered by the Secretary to be necessary for such launch or 
operation, considering the international obligations of the United 
States. The Secretary shall prescribe such amount after consultation 
with the Attorney General and other appropriate agencies.'' 49 
U.S.C. App. 2615.
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    On May 7, 1985, the Office published an Advance Notice of Proposed 
Rulemaking on third-party liability insurance requirements for 
commercial space launch activities (the ANPRM), 50 FR 19280, focusing 
exclusively on implementation issues relating to section 16 of the Act.
    The ANPRM reflected the Office's conclusion that liability 
insurance should be adequate to compensate parties not participating in 
licensed launch activities for losses or damages resulting from those 
activities. The Office sought to identify considerations other than 
international obligations of the United States to be taken into 
account. Other general issues highlighted in the ANPRM were: (1) 
Whether evidence of insurance (including significant levels of risk 
retention) should be the exclusive

[[Page 38995]]

means of demonstrating financial responsibility; and (2) whether the 
Office should require launch services providers to obtain the maximum 
amount of liability insurance commercially available at reasonable 
rates (the standard employed by NASA in requiring insurance for 
commercial payloads launched on the Space Shuttle), or, alternatively, 
whether the Office should conduct an analysis of the risks arising from 
a launch and set appropriate financial responsibility requirements 
based upon that analysis. The ANPRM also sought comments on whether the 
Office should vary liability insurance requirements by vehicle class 
and the duration of licensed activities, and what factors the United 
States Government should consider in deciding whether to seek 
compensation from responsible parties for damages for which the United 
States may be held liable under United States or international law.
    Ten private parties submitted comments in response to the ANPRM. 
They included one commercial operator of a privatized United States 
expendable launch vehicle (ELV) launch system, three entrepreneurial 
launch firms, two space insurance brokers, two government aerospace 
contractors, and two law students.
    Most of the comments addressed the amount of liability insurance 
the Office should require and the appropriate standard for making that 
determination. Only three of the commenters, the insurance brokers and 
an entrepreneurial launch services provider, supported utilization of 
NASA's approach of requiring that launch services providers obtain the 
maximum amount of insurance commercially available at reasonable rates. 
One insurance broker favored applying this standard to the actual 
launch phase only, arguing that risk analysis should be employed in 
setting requirements for on-orbit liability coverage. All of the other 
launch and aerospace firms that commented favored the risk analysis 
approach.
    Commenters differed on the issue of duration of required insurance 
coverage. One commenter favored requiring coverage only for the launch 
phase, another preferred the useful life of a payload, and a third 
recommended insurance be maintained as long as a physical object 
remains in space. Only two commenters addressed the question of whether 
the Office should distinguish among the different ELV launch systems in 
setting third-party liability insurance requirements, both favoring 
making such distinctions if justified by risk analysis. In addition to 
the issues on which the ANPRM requested comment, five commenters argued 
that the United States Government should indemnify private launch firms 
and their contractors for damages that exceed the amount of required 
coverage. One commenter urged that the United States either re-
interpret its responsibilities under, or withdraw from, the Liability 
Convention.
    Following publication of the ANPRM, and in light of most 
commenters' endorsement of insurance requirements based on an analysis 
of risk, the Office developed a risk analysis approach to determining 
acceptable levels of public exposure to hazards associated with 
commercial launches, and it began applying risk analysis techniques on 
an application-specific basis. The Office's risk analysis approach was 
based upon extensive studies it had conducted on the risks associated 
with commercial launches and launch operations, and on the utility of 
various analytical techniques for quantifying them. These studies 
include a three-volume report, dated May 1988, entitled ``Hazard 
Analysis of Commercial Space Transportation'' and an ``Assessment of 
Third Party Liability Insurance Associated with Commercial Expendable 
Launch Vehicles,'' each of which is available from the Office.
    At the time the 1988 Amendments were enacted, the Office was 
preparing a rulemaking action to establish risk analysis as the 
preferred method for determining appropriate levels of insurance for 
licensed activities. The need to propose adoption of this approach 
became moot. In requiring maximum probable loss determinations, 
Congress effectively codified the Office's approach by mandating risk 
analysis as the basis on which the Department establishes required 
levels of financial responsibility under the Act.
    This rulemaking is intended to provide definition to the statutory 
term, ``maximum probable loss,'' in terms of the Office's approach to 
prescribing insurance requirements for each launch license issued. 
``Maximum probable loss'' does not mean maximum possible loss, that is, 
a ``worst case'' scenario regardless of likelihood. The Office 
determines maximum probable loss for licensed launch activities by 
analyzing the known hazards, and the probability of loss, associated 
with specific launch activities. A detailed explanation of maximum 
probable loss methodology is presented in the section-by-section 
analysis below.

Implementation Issues Following the 1988 Amendments

    In early 1989, the Risk Management Working Group of the Commercial 
Space Transportation Advisory Committee (COMSTAC) \3\ developed 
implementation positions on the 1988 Amendments, including a 
recommendation that the scope of required liability insurance coverage 
be commensurate with the scope of potential liability of those persons 
involved in providing launch services--the licensee, its customer, the 
U.S. Government, and the contractors and subcontractors of each--
resulting from activities carried out under the license. In its view, 
potential liability arose with the licensee's entry upon the launch 
complex. Additionally, the waiver of claims provisions and the so-
called ``indemnification'' provisions of the Act were viewed as being 
equally broad in scope. The COMSTAC further recommended that post-
launch protection under the Act remain in place for at least three 
years following ignition of the launch vehicle for flight.
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    \3\ The COMSTAC, a duly chartered federal advisory committee 
consisting of public and private sector representatives appointed by 
the Secretary to advise on matters affecting the commercial space 
transportation industry, has taken a very active role in reviewing 
and commenting on the Office's implementation of the 1988 
Amendments. Based on its reviews, the COMSTAC submitted formal 
recommendations to the Secretary. These recommendations are 
available in the docket for this proposed rulemaking.
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    In carrying out its licensing responsibilities, the Office began 
issuing licenses in 1989, authorizing a specific launch and preparatory 
launch site operations associated with the conduct of that launch. This 
approach was intended to satisfy industry's expectations, including 
those voiced by COMSTAC, and be consistent with the Department's 
understanding of the 1988 Amendments. Within two years, the Office 
issued the first of several operator licenses issued to date. Under 
this approach, the Office licensed and established financial 
responsibility requirements for site operations associated with the 
conduct of a program of commercial launches for a two-year period.
    This approach to licensing reflected an understanding between the 
Office and the U.S. Air Force, as the Department of Defense (DOD) 
element responsible for management of the Eastern Range, encompassing 
Cape Canaveral Air Station, and the Western Range, encompassing 
Vandenberg Air Force Base, to avoid conflicting insurance and liability 
requirements when commercial launch operators

[[Page 38996]]

conduct operations on Air Force ranges in support of commercial launch 
activities under a range use agreement. Despite this understanding with 
the Air Force, certain questions remain between the Office and the Air 
Force as well as other Federal agencies that operate and manage Federal 
range facilities.
    A September 1992 COMSTAC resolution reaffirmed COMSTAC's view that 
the financial responsibility regime should be construed broadly so as 
to cover all activities conducted by a licensee on a Federal range. 
Under this view, referred to as ``gate-to-gate'' licensing, all of a 
licensee's activities conducted on a Federal range in support of its 
commercial launch operations would be subject to DOT-determined 
financial responsibility requirements and eligibility for so-called 
indemnification. To address this and other uncertainties associated 
with the intended scope of the 1988 Amendments, the resolution 
recommended that the Department seek clarification by legislative 
means.

October 27-28, 1994 Public Meeting

    The Office convened a two-day public meeting on October 27-28, 
1994, to elicit industry views on, among other things, a range of 
issues associated with implementation of the 1988 Amendments. The 
meeting concentrated on licensing issues associated with commercial 
launch operations and the commercial operation of launch sites. One of 
the focal points of the meeting was a discussion of the appropriate 
scope of a license authorizing commercial launch activities and its 
relationship to financial responsibility and allocation of risk 
requirements.
    At the public meeting and in written comments submitted to the 
docket, industry remained fairly consistent in its view that the 
Office's licensing authority should be broadly construed to address 
risks associated with the flight of a launch vehicle and pre-flight 
hazardous operations in order to protect public health and safety. One 
commenter suggested that, as a starting point, it would be useful to 
look at those unusually hazardous activities for which the Government 
agrees to offer indemnification under other authority, such as Public 
Law 85-804, in attempting to determine the range of activities properly 
encompassed by the Department's licensing authority.
    Two launch services providers and one DOD element commented that 
all pre-launch processing on a Federal range should be licensed for 
purposes of the Act's financial responsibility requirements and setting 
the levels of required insurance. Other commenters observed that it is 
no longer sufficient to limit DOT licensing to activities done on a 
Federal range because, increasingly, launch operators are engaging in 
hazardous pre-launch processing activities off the range, either to 
reduce their costs or because they are not permitted to use Government 
facilities where comparable, off-range commercial services exist. A 
number of commenters, including a DOD element, an insurance broker, a 
prospective commercial spaceport operator and two launch services 
providers, suggested that DOT-licensed activities should include 
hazardous, as distinct from ultra-hazardous, operations defined in 
terms of risk, not geography, because the Office's mandate is 
protection of public safety. The prospective spaceport operator also 
suggested using the license as a kind of safety net to avoid gaps in 
regulatory oversight. In contrast, another Government agency 
representative offered a different approach, noting that other 
regulatory regimes would apply to hazardous operations when conducted 
somewhere other than at a Federal range.
    As an example of hazardous operations requiring licensing, a number 
of commenters, including a payload processing facility, stated that 
payload processing, whether conducted on a Federal range or at a 
privately operated facility located off the Federal range, should be 
covered by a DOT license. One launch company noted that manufacturing 
is not sufficiently hazardous as to warrant DOT licensing, but certain 
testing is. However, a prospective spaceport operator noted that 
manufacturing may be hazardous and, if so, should be covered by a DOT 
license. Another prospective spaceport operator stated that licensing 
matters should be separated from the issue of indemnification 
altogether, and noted that one could conceive of licensed activity 
without indemnification if the purpose of licensing is protection of 
public safety. The commenter suggested a narrower approach than that of 
licensing all activities conducted by a launch licensee on a Federal 
range, noting that material may be stored at the range for a long time 
in advance of a scheduled launch.
    Two DOD elements advocated that the Office establish maximum 
probable loss requirements for all commercial activities conducted on a 
Federal range facility. One of the agencies also indicated that the 
Office should set maximum probable loss requirements any time 
Government property would be placed at risk for commercial purposes, 
including coverage for commercial development and demonstration 
activities conducted on a Federal range.
    One launch services provider noted the benefits to the public of 
requiring statutory financial responsibility and allocation of risk 
requirements, along with so-called indemnification, in that third-party 
recovery for losses need not depend upon the financial health of a 
launch company. For example, without Government regulation, small 
start-up companies with limited financial means might buy less 
insurance than the Office would otherwise prescribe in insurance 
requirements.
    Another launch services provider noted that the financial 
responsibility requirements should be coextensive with a license. That 
is, the Government should provide indemnification to the extent 
activities are covered by a license. Likewise, according to the launch 
services provider, if there is no indemnification offered by the 
Government for an activity then it can be inferred that the Office has 
not licensed that activity. The commenter noted that this is not clear 
today.
    In a related rulemaking, the Office is planning to address, more 
specifically, such issues as the appropriate scope of a license to 
conduct commercial launches and the activities subject to the 
Department's licensing authority. As part of that rulemaking, the 
Office intends to address comprehensively those comments received at 
the public meeting concerning the appropriate scope of a license and 
licensable activities. The instant rulemaking focuses on implementation 
of financial responsibility requirements and the allocation of risks 
that attend licensed launch activities, as those activities are defined 
in a license issued by the Office.

The Proposed Regulations

Scope and Objectives

    The proposed regulations are intended to implement the full range 
of statutorily-imposed financial responsibility requirements and carry 
out the Department's responsibility under the Act to protect U.S. 
interests when Government property or personnel is involved in 
supporting licensed launch activities. The proposed regulations also 
clarify the means by which the commercial launch industry and its 
customers are provided with the assurances and protections that have 
been considered critical to their survival.
    This rulemaking does not address financial responsibility 
requirements for the operation of a launch site. To date, all U.S. 
commercial launches have taken place from U.S. Government facilities.

[[Page 38997]]

The Office believes that this fact will change in the not too distant 
future. Plans for developing state-sponsored spaceports in five states 
are under way and the Office is currently developing regulations that 
would apply to prospective applicants for licenses to operate launch 
sites or spaceports. The Office is also in the process of developing 
policies applicable to the appropriate implementation of financial 
responsibility requirements for launch site operators, including 
spaceports, consistent with the Act. As part of this effort, the Office 
requests comments on the full range of financial responsibility and 
risk allocation issues associated with licensing the operation of a 
launch site.
    More specifically, under the Act, a licensee is required to obtain 
two forms of insurance (or otherwise demonstrate financial 
responsibility) to compensate for certain claims ``resulting from an 
activity carried out under the license''--liability insurance that 
protects participants in launch services from third-party liability and 
property insurance that protects Government property. 49 U.S.C. 
70112(a). No distinction is made in the Act between the holder of a 
license to launch a launch vehicle and the holder of a license to 
operate a launch site. As one commenter pointed out at the October 1994 
public meeting, the legislative history accompanying the 1988 
Amendments provides no guidance as to whether, or how, financial 
responsibility and allocation of risk requirements would apply to a 
licensed operator of a launch site.
    One view under consideration by the Office is that the insurance 
that is required under a license to conduct licensed launch activities 
would be sufficient to protect United States interests as well as those 
of a licensed launch site operator. This view presumes that the 
potentially catastrophic risks that the 1988 Amendments intended to 
address are those associated with hazardous launch operations, and that 
the risks attendant to the industrial activity of managing a launch 
site can be managed effectively through available industrial risk 
insurance as a cost of doing business, and through contractual 
agreements between the site operator and its customers and contractors. 
Risks to the launch site operator change when licensed launch 
activities are conducted at the site, and the launch site operator 
should be protected as an additional insured under the launch 
licensee's liability policy because of the launch site operator's 
involvement in launch services. With respect to risks associated with 
other activities, a launch site operator can protect itself by 
requiring adherence to its own safety procedures and requirements and 
through business decisions regarding the need to obtain insurance.
    At the public meeting, one commenter representing a prospective 
spaceport licensee suggested an approach consistent with this view. The 
commenter noted that site operations not related to a particular launch 
may not be covered by the Act, and that the launch operator and launch 
site operator, rather than the Office, can allocate responsibilities 
between themselves. Launch-specific activities carried out at the site 
would be covered under the Act, in the commenter's view. However, 
another commenter at the public meeting noted that a state-sponsored 
spaceport could serve a consortium of commercial users, and the 
relationship between them may not be one of prime contractor and 
subcontractor. Another prospective state-sponsored spaceport 
representative commented that there is no need for the Office to 
license a spaceport operator if it is under the supervision and 
oversight of another Federal agency, such as the Air Force, and 
conducting operations as a subcontractor to the launch company. 
Similarly, a DOD element commented that the Office should review safety 
operations of a state-sponsored spaceport located on a Federal range 
facility only for purposes of determining maximum probable loss.
    Additional comments are solicited on the appropriate implementation 
of the financial responsibility and allocation of risk regime with 
respect to licensed launch site operators, including state-sponsored 
spaceports. Comments should address the requirements that would apply 
to an operator of a commercial launch site located on private property 
and that located on or adjacent to a Federal range facility.
    Implementation by the Office of the financial responsibility and 
allocation of risk requirements through license orders has resulted in 
some uncertainty and controversy over the scope of required insurance 
as well as the Government's obligation to cover excess third-party 
claims. Some issues result directly from the terminology used in the 
Act and have been voiced by both the Office and industry in a variety 
of fora, such as the October 1994 public meeting and COMSTAC meetings. 
Others have been aired by industry, from time to time, expressing 
disagreement with or concern over the Office's implementation of the 
requirements. In come instances, industry has offered a view contrary 
to that held by the Office, as reflected in license orders. In others, 
industry has complained that lack of clarity leaves both industry and 
the U.S. Government vulnerable to unintended disputes over the 
appropriate mechanism for compensating claims.
    The proposed regulations, as well as the Act, acknowledge that the 
commercial space industry must bear certain risks and costs associated 
with launch activities. However, the Office believes these risks and 
costs to be reasonable in light of the potential benefits industry 
receives.\4\ Moreover, the Office believes that issuing regulations 
will result in an additional benefit to the commercial space industry. 
That is, the increased certainty and clarity that will result from 
issuance of final regulations should prove beneficial to industry by 
allowing it to manage risks appropriately, through insurance and other 
business decisions and compete effectively in an increasingly 
competitive world market. At the same time, the Office remains mindful 
of the Government's unique interests and concerns.
---------------------------------------------------------------------------

    \4\ An economic impact assessment has been prepared and is 
available in the public docket for this proposed rulemaking for 
review and comment.
---------------------------------------------------------------------------

    In addition to protecting the United States Government from certain 
liability risks, this rulemaking proposal also recognizes the 
importance of valuable national range assets to the continued growth, 
vitality, viability and competitiveness of the U.S. commercial launch 
industry. One of the principal objectives of the statutory requirements 
is to ensure that these assets are protected, and that in the event of 
damage or loss, funds are available to restore the affected launch 
property to its present condition and use. Thus, when Government 
facilities or personnel are involved in licensed launch activities, the 
Department is authorized to establish requirements for proof of 
financial responsibility and other assurances necessary to protect the 
Government and its executive agencies and personnel from liability, 
death, bodily injury, or property damage or loss as a result of 
licensed activities. However, the Government is not relieved of 
liability that results from willful misconduct of the Government or its 
agents.
    In protecting the interests of Government personnel, the statutory 
financial responsibility and allocation of risk requirements also 
recognize the role Government contractors and subcontractors, and their 
respective employees, perform in supporting commercial launch-related 
operations on Federal range facilities on behalf of

[[Page 38998]]

the Government. For this reason, in establishing financial 
responsibility and allocation of risk requirements, the Department also 
ensures that their interests are protected. The Office solicits views 
on whether its approach to protecting Government contractors' and 
subcontractors' interests should be adopted in a final rule.
    To facilitate the reader's review of this proposal, the Office's 
rationale for allocating and addressing certain risks is presented 
below under appropriate topic headings, preceding the section-by-
section analysis. This approach should prove useful to the reader in 
understanding how certain risks would be addressed through both the 
required demonstration of financial responsibility and waivers of 
claims among the launch participants. The section-by-section analysis 
that follows describes and discusses specific provisions of the 
proposed implementing regulations which, taken together, effectuate the 
intent of the Act.

Protection of Government Personnel

    In providing direct support for commercial launch operations, 
either through its agencies or contractors, the U.S. Government 
necessarily exposes itself and certain Government personnel to 
potential losses and liabilities. Accordingly, under the approach the 
Office has adopted in the proposed regulations, certain Government 
personnel need to be afforded a variety of protections through the 
financial responsibility and allocation of risk regime. These 
protections are necessary to ensure that the U.S. Government does not 
bear any greater risk than it affirmatively accepts under the statute.
    Through the proposed regulations, risks to Government personnel, 
including employees of Government contractors and subcontractors, posed 
by their involvement in licensed launch activities are addressed as 
follows:
    1. Government personnel, including employees of the Government, its 
agencies, and its contractors and subcontractors, involved in licensed 
launch activities, would be included within the definition of third 
parties.
    2. Government personnel, including employees of the Government, its 
agencies, and its contractors and subcontractors, involved in licensed 
launch activities, would be named as additional insured under the 
required third-party liability policy.
    3. Claims for damage or loss to property belonging to the 
Government, its agencies, contractors and subcontractors, involved in 
licensed launch activities, would be covered under the required 
Government property policy, even if the damage or loss is caused by 
Government personnel, including employees of the Government, its 
agencies, and its contractors and subcontractors, involved in licensed 
launch activities, absent their willful misconduct.
    These three forms of protection from risk are explained below, in 
order.
    1. The proposed regulations would clarify that Government employees 
are included within the definition of third parties. This is 
significant because it means that Government employees' claims for 
property damage or bodily injury would be compensated under the third-
party liability insurance policy (or other demonstration of financial 
responsibility) required of the licensee up to the limit the Office 
establishes, within the statutory ceiling, based upon the Office's 
determination of maximum probable loss. (An explanation of the Office's 
risk-basing methodology for setting insurance requirements is set forth 
in the section-by-section analysis, below.)
    The definition of third parties would also include employees of 
U.S. Government contractors and subcontractors involved in licensed 
launch activities to ensure that their claims would also be covered by 
the required third-party liability insurance policy, in accordance with 
the statue.
    This approach is in accord with the definition of ``third party'' 
contained in the statute, 49 U.S.C. 70102(11), and the legislative 
history which expressly states that ``Government personnel directly 
associated with the commercial launch operations are still classified 
as third parties.'' S. Rep. No. 100-593, 100 Cong., 2d Sess. 8 (1988). 
This protection is necessary to minimize the risk the U.S. Government 
would otherwise bear if it were to accept responsibility for these 
claims under the Act.
    Currently, through a reciprocal waiver of claims agreement executed 
by the Office on behalf of the U.S. Government, the United States 
waives and releases claims it may have against the licensee and 
customer and their respective contractors and subcontractors, and 
agrees to be responsible, for property damage it sustains in excess of 
required insurance, and for bodily injury or property damage sustained 
by its employees in excess of required insurance. \5\ The Government is 
required to extend this waiver of claims and assumption of 
responsibility to its contractors and subcontractors. This practice 
would be altered under the proposed regulations in the following way. 
Because claims of Government employees and employees of Government 
contractors and subcontractors against the other launch participants 
would be covered as third-party claims under the liability insurance 
policy that the licensee obtains, the U.S. Government would not be 
required to assume responsibility for them as part of the reciprocal 
waiver of claims required in 49 U.S.C. 70112(b)(2). This approach 
deviates from the current practice of the Office but, we believe, more 
precisely reflects the intent of the statute.
---------------------------------------------------------------------------

    \5\ The reciprocal waiver of claims agreement is used by the 
Office to implement the Government's statutory responsibility to 
waive claims. 49 U.S.C. 70112(b)(2) requires a Government waiver 
only to the extent claims exceed the amount of insurance that is 
required to protect Government property. However, under current 
practice, the agreement provides that claims for injury or losses 
suffered by employees of the Government are waived only to the 
extent those claims exceed the required amount of third-party 
liability insurance. One reason the Office has taken this approach 
is that if Government employee claims for bodily injury or property 
damage were compensated under the property policy rather than the 
liability policy, the Government's waiver of claims for property 
damage could be triggered too soon leaving Government claims for 
property damage or loss uncompensated.
---------------------------------------------------------------------------

    Given that Government personnel are deemed third parties, their 
claims against the other launch participants would be presented as part 
of the successful third-party claims for which industry would seek 
payment from the Government under the payment of excess claims 
provision of the statute (so-called ``indemnification''). In essence, 
the Government's agreement to protect launch participants from third-
party claims in excess of required insurance would extend to cover the 
outstanding claims of its employees, and Government contractor and 
subcontractor employees, after the limits of the insurance policy 
obtained by the licensee have been reached.
    An alternative view--that Government personnel should not be 
considered third parties--has been suggested by representatives of the 
commercial space launch industry. This view suggests that the 1988 
Amendments assigned to the United States Government an assumption of 
responsibility and risk for losses sustained by Government personnel, 
including Government employees and employees of Government contractors 
and subcontractors, who are involved in licensed activities. This 
assumption of risk would be in addition to the three areas of risk the 
Government has agreed to accept under the Act, as delineated above. The 
Office does not agree.
    Considering Government personnel as third parties enables their 
claims to be covered by required third-party liability insurance under 
49 U.S.C.

[[Page 38999]]

70112(a)(3)(A)(i). Absent this protection for Government employees, the 
Government would be assuming an unfunded contingent liability for the 
successful claims of Government employees against other launch 
participants, without explicit statutory authority for doing so. This 
is contrary to appropriations laws. The Office does not believe that 
explicit statutory authority is provided by the Government waiver of 
claims provision of the Act, which limits the Government's waiver to 
excess property damage claims. 49 U.S.C. 70112(b)(2). Absent this 
protection for employees of Government contractors and subcontractors, 
additional costs to protect Government contractors and subcontractors 
from these risks would likely be passed to the Government, defeating 
the statutory directive to protect the Government from certain 
liability risks, at no cost to the Government.
    In the Office's view, this approach is beneficial to both the U.S. 
Government and nongovernmental launch participants. Nongovernmental 
launch participants are protected from claims by Government personnel, 
including employees of the Government's contractors and subcontractors, 
for loss of injury, by means of required liability insurance and 
procedures for U.S. Government payment of excess third-party claims, up 
to $1.5 billion above the required amount of liability insurance. The 
U.S. Government is protected in the event its personnel, as well as 
those operating on behalf of the Government, are exposed to risk of 
property damage or bodily injury because their claims will be 
compensated under the liability policy the licensee obtains at no cost 
to the Government. Considering Government personnel as third parties is 
not intended to supplant the individual rights of Government employees 
to file claims under the Federal Employees' Compensation Act (FECA), or 
the rights of Government contractor employees under workers 
compensation laws.
    2. Government personnel would be protected from third-party 
liability, absent their willful misconduct. The statute explicitly 
requires that the Government, ``executive agencies and personnel, 
contractors, and subcontractors of the Government'' be protected under 
an insurance policy required under section 70112(a), ``to the extent of 
their potential liability for involvement in launch services, at no 
cost of the Government.'' 49 U.S.C. 70112(a)(4). Therefore, under the 
liability policy, Government personnel are both protected parties, or 
additional insureds, and potential claimants.
    3. Under the property policy required under 49 U.S.C. 
70112(a)(1)(B), United States Government property is protected from 
damage from any source as a result of licensed activities, that is, 
even if the damage is caused by Government personnel, absent their 
willful misconduct.

Property Protection for Government Launch Participants

    In addition to protection from third-party liability, as explained 
above, Government launch participants are protected from the risk of 
their own property losses where their property, facilities, equipment 
or personnel, are used to support commercial launch operations. In the 
Office's view, this risk is allocated primarily to the licensee, who is 
required under 49 U.S.C. 70112(a)(1)(B) to obtain liability insurance 
(or otherwise demonstrate financial responsibility), up to the $100 
million statutory ceiling, to compensate for the maximum probable loss 
from claims by the U.S. Government against a person for damage or loss 
to Government property resulting from an activity carried out under the 
license. The Government waives claims for property damage to the extent 
those claims exceed the required amount of insurance or result from 
willful misconduct of the government or its agents.
    This requirement to protect Government property addresses an 
important objective--to assure that facilities used by commercial 
launch operators can be restored promptly to current launch-ready 
status. These facilities are considered critical to U.S. national 
security interests and funds must be readily available to repair them 
in the event they are damaged as a result of commercial launch 
activities.
    Two recurring issues are the scope of Governmental property that 
must be protected by property insurance and the extent to which 
Government property that is either on a Federal range but not used to 
support a licensee's launch, or off the Federal range entirely, is 
required to be covered by insurance. Government property on a Federal 
range that is not used for commercial launch support purposes may 
include anything from a U.S. Post Office to launch vehicles or 
components that are intended for use exclusively in Government launch 
operations.
    The Office's view is that any U.S. Government property that is on a 
Federal range facility is exposed to damage or loss as a result of 
licensed launch activities conducted on that facility. Accordingly, 
coverage for all such property must be provided to ensure the U.S. 
Government is fully compensated. The only exception would be for a 
Government payload where the Government is the customer for the 
licensed launch activity. (A discussion of how different types of 
Government property on a Federal range facility are considered in 
establishing insurance requirements for Government property is 
presented in the section-by-section analysis accompanying proposed 
Sec. 440.7, Determination of Maximum Probable Loss.)
    It is also the Office's view that Government range facility assets 
that are not on the launch facility from which the launch takes place, 
but are identified as being exposed to damage or loss as a result of 
licensed launch activities, should also be covered by the required 
property insurance. For example, a licensed launch at Cape Canaveral 
Air Station, Florida, could expose Government assets on neighboring 
Kennedy Space Center (KSC) to damage or loss. Under the proposed 
regulations, the Office would include these assets in determining 
appropriate insurance levels for Government property and prescribe that 
property at KSC be covered. The Office believes that this approach is 
necessary and reasonable to carry out the statutory mandate of 
protecting Government range assets exposed to risk from commercial 
launch activities. Similarly, a licensed launch conducted at a 
commercially operated launch site or spaceport situated on, or adjacent 
to, a Federal range facility, would expose the Federal range facility 
to risk of damage or loss. Accordingly, insurance to protect the 
Federal range facility placed at risk would be required even if there 
were no Government involvement in supporting licensed launch activities 
conducted at the commercial launch site.
    In the Office's view, Government property that is involved in 
licensed launch activities but is located at a site that is remote from 
the launch site would be covered by the third-party liability insurance 
protection required of the licensee because risk to that property 
should be no greater than the risk posed to other third-party property. 
Government property meeting this description would include, for 
example, remote Government tracking stations and other support 
facilities located downrange from the Federal range facility at which 
the launch takes place.
    Accordingly, Government property that is not located on the Federal 
range facility from which the launch takes place or not located at a 
neighboring

[[Page 39000]]

Federal range facility would be included under the third-party 
liability insurance protection required of the licensee. This would 
include any unrelated Government property located outside of a Federal 
range facility, such as a U.S. Post Office building.
    It has been suggested that the additional cost of covering all 
Government property, wherever located, would be prohibitive. However, 
the Office views the U.S. Government as situated similarly to any other 
third party for purposes of calculating maximum probable loss for 
property damage claims off the range, subject to the limited exception 
noted above for nearly Federal range facility assets located in close 
proximity to, or adjacent to, a Federal range. This is because the 
probability of damaging unrelated government property away from the 
launch site is no different from that of damaging private property off 
the launch site. The Office does not believe that this coverage should 
increase the cost of liability insurance or expand the risks covered by 
the policy.
    In summary, all Government property on a Federal range facility, 
whether or not involved in licensed launch activities, must be covered 
by the required Government property insurance policy (or other 
demonstration of financial responsibility). Federal range facility 
assets adjacent to or in close proximity to the launch site where 
licensed launch activities take place would also be covered by required 
property insurance. Government property located away from the Federal 
range facility that is used to support licensed launch activities, such 
as downrange tracking stations, are not covered by the required 
Government property insurance policy, nor is Government property that 
is located off the Federal range facility and totally unrelated to 
licensed launch activities. Instead, with respect to these Government 
assets, the Government is a third party and its claims for loss or 
damage would be covered under the required third-party liability 
insurance policy (of other demonstration of financial responsibility), 
up to the limits required by the Office.
    Some of the confusion surrounding the required coverage of 
Government property results from the manner in which licensees have 
satisfied the financial responsibility requirements for protecting 
Government property. Some licensees have obtained two types of policies 
to address Government property. One policy typically provides coverage 
for United States Government property, including property of United 
States Government contractors and subcontractors, that the licensee 
utilizes or otherwise has in its care, custody or control at the site 
where licensed launch activities take place. The second policy provides 
third-party liability coverage for all other property, including 
Government property located elsewhere on the Federal range facility. In 
the first policy, the United States and its contractors and 
subcontractors are the named insureds; in the second policy, the 
additional insureds are the same parties as those protected in 
satisfying the third-party liability insurance requirement. This 
approach accommodates certain customary insurance practices in covering 
property losses but is not required by the Office.
    However, where a licensee elects to protect certain Government 
property under its third-party liability insurance policy, coverage 
cannot be allowed to limit or dilute the availability of insurance 
proceeds to cover third-party liability claims. To avoid this 
possibility, some licensees have submitted a liability insurance 
certificate indicating two levels of coverage, i.e., one amount to 
cover claims for damage to Government property that is not in the 
licensee's care, custody or control and another amount for ``other' 
third-party liability, claims.
    The proposed regulations would continue the Office's current 
practice, implemented through license orders, of requiring coverage for 
property of Government contractors and subcontractors under the 
Government property policy. The Office's rationale for doing so 
includes the following considerations. Absent certain protections for 
Government contractors and subcontractors, the Government would bear 
greater risk and incur greater expense than is contemplated under the 
statute's risk and incur greater expense than is contemplated under the 
statute's risk allocation regime. Section 70112(b)(2) of the Act 
requires the Secretary of Transportation to enter into reciprocal 
waivers of claims under the licensee, its customer, and the contractors 
and subcontractors of each, ``for the Government, executive agencies of 
the Government involved in launch services, and contractors and 
subcontractors involved in launch services. * * *'' The waiver applies 
only to the extent that claims are more than the amount of Government 
property insurance or other demonstration of financial responsibility 
required under 49 U.S.C. 70112(a)(1)(B). By waiving claims ``for'' its 
contractors and subcontractors involved in launch services, the 
Government passes certain rights and responsibilities to its 
contractors and subcontractors, consistent with those the Government 
accepts, including the waiver of claims for property damage above 
required insurance. In light of the waiver the Government undertakes on 
behalf of its contractors, the Government would necessarily assume 
greater risk or costs if the Government's contractors and 
subcontractors were not also protected by required Government property 
insurance. If there were no insurance protection provided by the 
licensee for property of Government contractors and subcontractors 
involved in launch services, those parties would be likely to seek 
compensation for their losses from the Government. Thus, the Government 
would be accepting the risk of property losses in excess of required 
insurance, plus, ad a practical matter, responsibility for property 
losses incurred by its contractors and subcontractors. Alternatively, 
Government contractors and subcontractors could purchase property 
insurance protection, as a licensee has suggested; however, the cost 
would likely be passed through to the Government as an allowable cost 
under a contract with the Government. This is contrary to the statutory 
directive that the Government be afforded certain protections at no 
cost to the Government.
    In determining to adopt this approach in the proposed regulation, 
the Office also considered whether coverage for property of Government 
contractors and subcontractors could be provided under the third-party 
liability insurance protection the licensee is required to obtain. This 
approach is contrary to the definition of ``third party'' contained in 
the statute at 49 U.S.C. 70102(11) and was not further considered.
    There is one important distinction in the requirement to protect 
property of Government contractors and subcontractors in the Office's 
view, however. That is, with respect to the Government and its 
agencies, all Government property on a Federal range facility must be 
protected. With respect to Government contractors and subcontractors, 
only property on a Federal range facility belonging to those 
contractors and subcontractors involved in licensed launch activities 
must be covered under the property policy. Government contractors and 
subcontractors that do not support licensed launched activities or 
whose property is located away from a Federal range facility would be 
protected as third parties under the liability policy, and their claims 
for injury, damage or loss would be compensated by the required third-
party liability policy. For

[[Page 39001]]

example, a food concessionnaire located on a Federal range facility 
would be considered a third party for purposes of insurance and risk 
allocation.
    One licensee has noted its disagreement with the Office's 
requirement. In the licensee's view, requiring this coverage is 
contrary to the statute and legislative history. The licensee has 
sought clarification of the Office's requirements to avoid the 
potential for duplicative, or possibly unnecessary, coverage under the 
liability and property policies.
    The Office disagrees with the licensee's contention for the reasons 
explained above. The U.S. Government utilizes contractors and 
subcontractors in carrying out certain activities at Federal range 
facilities. Accordingly, for purposes of risk allocation and protection 
of the U.S. Government, its contractors and subcontractors stand in the 
shoes of the Government and its agencies involved in launch services. 
The Office believes that any other view would defeat reasonable 
implementation of the Amendments.
    The Office believes that a variety of risk management approaches to 
protecting Government property may be acceptable as long as the 
statutory objectives are achieved; that is, providing for the 
compensation of property damage sustained by the United States, its 
agencies involved in launch services, and its contractors and 
subcontractors, resulting from activities carried out under the license 
and ensuring that policy proceeds will be made available to the 
Government to effect needed repairs in the event of any damage 
resulting from licensed launch activities. These objectives can best be 
met through a non-fault, non-subrogation, comprehensive all-risk type 
of property policy that would compensate the U.S. Government on behalf 
of itself and Government launch participants, as additional insureds, 
in the event of any occurrence resulting in property damage, regardless 
of fault, absent willful misconduct by the Government or its agents. In 
order to satisfy statutory objectives, the policy must respond to 
damage caused by Government launch participants, as well as Government 
personnel, i.e., employees of the Government and its contractors and 
subcontractors. An exception may be allowed where insurance is not 
available because of a policy exclusion that is determined by the 
Secretary of Transportation to be usual for the type of insurance 
involved. In those instances, the Secretary, following consultation 
with other interested Federal agencies, may waive claims for property 
damage from the first dollar of loss. In all other circumstances, 
coverage must be provided to protect U.S. Government property from any 
damage incurred during or as a result of licensed launch activities, 
regardless of fault, absent willful misconduct by the Government or its 
agents.

Government Customer

    When the licensee's customer is a United States Government agency, 
the agency is treated the same as any nongovernmental customer for 
purposes of determining the appropriate amount of property insurance 
required of the licensee and in terms of the U.S. Government's waiver 
of claims or property damage or less above the required amount of 
property insurance under 49 U.S.C. 70112(b)(2). That is, a Government 
payload is not covered by the required Government property insurance 
and the United States Government agency-customer accepts responsibility 
for property damage to the payload. For other purposes, the government 
agency customer is an agency of the United States involved in licensed 
activities. This is an important distinction because employees of a 
U.S. Government agency are third parties and their claims against other 
launch participants for bodily injury or property damage are covered by 
the third-party liability policy required under 49 U.S.C. 
70112(a)(1)(A), even when the agency that employs them is involved in 
the launch as the customer. The basis for the Office's distinction is 
grounded in appropriations law. An agreement on the part of the United 
States Government to be responsible for claims of its employees for 
injury or damage from the first dollar of loss, other than employee 
claims compensated under FECA, would be an unfunded contingent 
liability which, in the Office's view, is not statutorily sanctioned. 
Rather, through statutorily-mandated insurance insurance protections, 
waiver of claims requirements and payment of excess claims provisions, 
Congress has limited the unfunded contingent liability the U.S. 
Government may accept. The Office believes its approach to protecting 
the U.S. Government when it is a customer of commercial launch services 
providers is consistent with the limit of risk the Government has 
agreed to accept under the statute.
    To summarize the Office's view of the statutory allocation of risk 
regime, whereas nongovernmental parties involved in licensed launch 
activities accept responsibility for property damage or loss they 
sustain and for injury or loss sustained by their employees, the United 
States Government is covered on both accounts by insurance secured by 
the licensee. Should the loss exceed the amount of required insurance 
that a licensee has secured to cover such claims, then the Government 
assumes responsibility for loss of or damage to its property (and 
property of its contractors and subcontractors) in accordance with 
required reciprocal waivers of claims under 49 U.S.C. 70112(b)(2). 
Should the loss exceed the required insurance a licensee has secured to 
cover third-party liability, then the Government, in effect, assumes 
limited responsibility for losses above that amount sustained by 
Government personnel by agreeing to pay excess third-party claims. At 
the same time, nongovernmental parties are effectively protected from 
claims for Government property losses by required insurance and the 
Government's waiver of claims in excess of insurance; and from third-
party claims, including claims of Government personnel, by required 
liability insurance and by procedures for U.S. Government payment of 
third-party claims up to $1.5 billion in excess of insurance.

Section-by-Section Analysis

Part 440, Subpart A--Financial Responsibility for Licensed Launch 
Activities

Section 440.1--Scope; Basis

    Proposed Sec. 440.1 identifies the activities to which the Office's 
proposed financial responsibility and allocation of risk requirements 
would apply as all commercial space launch activities that are 
authorized to be carried out under a launch issued by the Office.

Section 440.3--Definition

    Section 440.3 defines terms used in part 440 that are not otherwise 
defined in 14 CFR Ch. III. Terms defined in Sec. 401.5 of the 
Commercial Space Transportation Licensing Regulations have the same 
meaning for purposes of this part unless otherwise indicated. Some of 
the terms, as defined in the proposed regulation, are self-explanatory 
and required no additional elaboration. Other terms are discussed 
below.
    The term ``contractors and subcontractors'' is defined in this 
section to address parties intended to be covered by the phrase 
``contractors and subcontractors involved in launch services'' in 49 
U.S.C. 70112 and 70113. This is important because these contractors and 
subcontractors have certain responsibilities and enjoy certain benefits 
under the statute relating specifically to the requirements

[[Page 39002]]

for insurance (or other form of financial responsibility), reciprocal 
waivers of claims and the U.S. Government's payment under certain 
circumstances of successful third party claims in excess of required 
liability insurance.
    As used in the Act, the term ``contractors and subcontractors'' is 
generally modified by the phrase, ``involved in launch services.'' The 
term ``launch services'' is defined by the Act to include ``(A) 
activities involved in the preparation of a launch vehicle and payload 
for launch; and (B) the conduct of a launch.'' 49 U.S.C. 70102(5). When 
this term is coupled with ``contractors and subcontractors'' for 
purposes of sections 70112 and 70113 of the statute, a literal reading 
could narrowly limit the group of covered contractors and 
subcontractors to service providers involved strictly in on-site launch 
preparatory and support activities. The Office does not believe that 
this interpretation is consistent with the overall objective of the 
financial responsibility and payment of excess claims provisions of the 
statute, which is to ensure financial protection and an equitable 
sharing of risks among the parties exposed to potentially catastrophic 
losses from a launch accident. The group of covered parties should not 
be limited only to the most obvious and visible launch participants 
that are engaged in preparing the launch vehicle and payload for launch 
and conducting the launch at the launch range. This group should also 
encompass, for example, the manufacturer that produces a component part 
for installation in the launch vehicle or payload, or the supplier that 
delivers a piece of equipment or other physical object used to prepare 
for or conduct a launch, as well as the contractor that constructs or 
refurbishes a launch pad specifically for licensed launch activities. 
In other words, to the extent a third-party loss is attributable to the 
direct or direct involvement of contractors or subcontractors who have 
provided goods or services in connection with licensed launch 
activities, the required insurance should cover their resulting 
liability. It is important to note that the statute addresses claims 
that result from an activity carried out under a license. Third-party 
claims that do not result from licensed activities are not addressed by 
the financial responsibility requirements of the statute. For example, 
third-party claims that arise during the manufacture of a component 
part would not be covered by required insurance.
    Accordingly, the term ``contractors and subcontractors'' as set 
forth in proposed Sec. 440.3 would include all contractors and 
subcontractors at any tier that participate in or contribute to the 
conduct of licensed launch activities, including suppliers of property 
and services and component manufactures of a launch vehicle or payload. 
The Office requests comments on the practical ability to protect all of 
these parties through required insurance.
    The definition of the term ``customer'' in proposed Sec. 440.3 is 
intended to respond to concerns that the protections afforded ``the 
customer'' under the statutory allocation of risk regime be available 
not only to the party that actually contracts with the commercial 
launch services provider and prospective licensee, but also to the 
intended beneficiary or recipient of launch services when the latter 
party is different from the former. For example, this situation 
typically arises in the context of ``turnkey'' contracts for on-orbit 
delivery of a satellite. Under this type of arrangement, the ultimate 
owner/operator of the satellite contracts with a satellite manufacturer 
to produce the satellite and secure launch services to deliver the 
satellite to a prescribed orbit. The satellite manufacturer purchases 
launch services directly from a commercial launch services provider, 
and transfers title to the satellite only after successful completion 
of the launch and on-orbit tests to confirm that the satellite is 
functioning properly. For this reason, the term ``customers'' also 
includes a person to whom the procurer of launch services conditionally 
sells, leases, assigns, or otherwise transfers its rights in the 
payload or a part thereof. Another example is the purchaser of an 
interest in the satellite, e.g., transponders, from the party that owns 
the satellite whether that party has purchased launch services directly 
or has contracted for on-orbit delivery on a ``turnkey'' basis. Another 
example is the customer who has placed its property on board the 
payload in order to receive an on-orbit service, such as microgravity 
experiments. The Office believes that these parties should be viewed as 
``customers'' in order to enable U.S. commercial launch services 
providers to compete with foreign operators, consistent with one of the 
objectives of the 1988 Amendments. The proposed definition of 
``customer'' therefore includes the person who enters into a launch 
services agreement with the licensee, as well as any person to whom the 
customer has, conditionally or otherwise, sold, leased, assigned or 
otherwise transferred any of its rights in the payload to be launched.
    The term ``customer'' does not include the ultimate beneficiary of 
the payload services, as opposed to launch services, because doing so 
could theoretically include any person who uses a television or makes a 
long-distance telephone call, and goes beyond the intended scope of the 
Act.
    When the licensee's customer is a U.S. Government agency, it is not 
intended that the agency be treated any differently from a 
nongovernmental customer with respect to the payload. Thus, as 
discussed in greater detail in the accompanying supplementary 
information under the heading, ``Government Customer,'' and in the 
analysis of Sec. 440.17 of the proposed regulations, the Government 
payload is not covered by required Government property insurance and 
the U.S. Government agency involved accepts responsibility for property 
damage to the payload. For other purposes, the Government customer is 
an agency of the United States involved in licensed launch activities 
and, as such, it is a named insured in required insurance and its 
employees are deemed third parties.
    A definition of the term ``Government personnel'' has been included 
in proposed Sec. 440.3 for purposes of identifying those employees of 
the Government and its contractors and subcontractors entitled to 
protection and coverage by required insurance.
    A definition of the term ``hazardous operations'' is included to 
add clarity to the list of information required by the Office to 
perform a determination of maximum probable loss. The definition 
proposed is consistent with the Office's study, ``Hazard Analysis of 
Commercial Space Transportation,'' prepared in May 1988, and is 
intended to capture activities that create a potential for an accident 
that would result in damage or injury.
    The term ``liability'' refers to any legal obligation, whether 
arising under United States, international or foreign law, to pay 
claims for bodily injury or property damage resulting from licensed 
launch activities.
    The term ``licensed launch activities'' is intended to reflect the 
activities subject to the Department's authority under the Act to 
license the launch of a launch vehicle. For purposes of applying the 
proposed regulations, it focuses specifically on activities authorized 
to be conducted under a particular license issued by the Office.
    The term ``maximum probable loss'' (or MPL) refers to the Office's 
determination, in the form of a dollar amount, of the greatest 
potential losses for bodily injury and property damage

[[Page 39003]]

that can reasonably be expected to occur as a result of licensed launch 
activities. The Office determines the value of the maximum probable 
loss attributable to licensed launch activities by analyzing the known 
hazards, the consequences (amount of loss), and probability of loss 
associated with such activities. It does not mean maximum possible 
loss, that is, a ``worst case'' scenario regardless of likelihood. 
Rather, assessing maximum probable loss employs risk analysis 
methodology. The analysis takes into account the characteristics of one 
or more launches in similar circumstances, the proximity of persons and 
property on and around the launch site and the likelihood of injury and 
damage within an established probability threshold. (A more elaborate 
explanation of the Office's methodology for determining the value of 
maximum probable loss is provided in the section-by-section analysis 
accompanying Sec. 440.7.)
    Through risk analysis, the Office determines two results: the 
probability an undesirable event will occur and the consequences 
(measured as the amount of loss) of that event. The Office then 
compares these results to a threshold probability of occurrence 
selected by the Office in order to determine whether the results are 
reasonable to expect, or probable, and therefore warrant financial 
protection against their occurrence. Typically, the larger, or more 
catastrophic, the potential loss or damage, the less likely it is to 
occur. The threshold probability is the probability value selected by 
the Office at and below which loss or damage that can be reasonably 
expected to occur is measured. Loss or damage that has a likelihood of 
occurring that is equal to or greater than the threshold probability is 
considered probable. Accordingly, insurance to protect against that 
amount of damage or loss is required. Loss or damage that has a 
likelihood of occurring that is less than the threshold probability is 
not reasonably likely to occur and is therefore considered improbable. 
Accordingly, insurance to protect against such loss or damage is not 
required. In summary, maximum probable loss is the dollar value 
determined by the Office as the upper bound of loss that can reasonably 
be expected to result from licensed launch activities. Loss or damage 
exceeding the upper bound would result from events that are so very 
unlikely as to be unreasonable to expect. That is, they are not 
sufficiently probable.
    Currently, the Office utilizes two different threshold 
probabilities in determining third-party and Government property 
maximum probable loss. The threshold probability used for determining 
third-party MPL, exclusive of Government personnel, is on the order of 
one in ten million. The threshold probability for determining 
Government property MPL and third-party MPL for Government personnel is 
on the order of one in one hundred thousand. The thresholds are defined 
to accommodate the difficulty of setting precise bounds on risks that, 
by definition, are somewhat remote.
    The Office's selection of on the order of one in ten million as the 
threshold probability (the probability of occurrence) for determining 
third-party MPL is based upon the Government's experience in supporting 
launch activities at Federal ranges. Because of the stringent safety 
requirements used at Federal range facilities, the general public in 
the vicinity of the range has little chance of being adversely affected 
by a launch event. As a result, the likelihood of a third-party 
casualty resulting from a launch from a Federal range should be no 
greater than on the order of one in one million. If the Office used one 
in one million as the threshold probability for determining third-party 
MPL, no third-party loss would reasonably be expected to occur, the MPL 
would be zero, and no third-party liability insurance would be 
required. The Office does not believe that this was the result Congress 
intended in adopting maximum probable loss as the basis for setting 
financial responsibility requirements. Accordingly, the Office's view 
is that the Act requires a reasonable and measurable amount of 
financial responsibility by licensees and has selected the very low 
threshold of on the order of one in ten million probability of 
occurrence as the threshold probability that achieves this result. The 
MPL determination using this threshold signifies that there is less 
than on the order of a one in ten million chance that claims for third-
party losses would exceed the required amount of insurance. Stated 
another way, the insurance requirement set by the Office is the maximum 
magnitude of loss such that there is less than on the order of one in 
ten million chance of exceeding this amount.
    The Office utilizes on the order of one in one hundred thousand as 
the threshold probability for determining Government property insurance 
requirements because Federal range facilities, by their very nature and 
intended purpose, will be exposed to hazardous activities and may 
suffer some damage. Thus, the Government appropriately accepts greater 
risk than third parties and the MPL is determined using the higher 
threshold probability. This assumption of some amount of risk may, in 
part, account for the lower statutory ceiling on insurance requirements 
and the Government's waiver of claims for damage above the amount of 
required insurance. Similarly, Government personnel, including 
employees of Government contractors and subcontractors, accept greater 
risk than the general public or other third parties through their 
exposure to or involvement in hazardous operations. For this reason, 
the third-party MPL determination includes risks to Government 
personnel measured at the probability threshold of on the order of one 
in one hundred thousand, rather than on the order of one in ten 
million.
    In the Office's experience, this approach results in insurance 
requirements that are reasonable, within the statutory ceiling for 
required insurance, and adequate to protect U.S. Government interests.
    The proposed definition of the term ``third party'' reflects the 
definition contained in 49 U.S.C. 70102(11). However, the Office's 
definition of ``third party'' clarifies the statutory definition by 
expressly including as third parties United States Government 
personnel, including employees of Government contractors and 
subcontractors, to the extent that they are directly involved in 
providing launch support or launch services for licensed launch 
activities. The purpose of the definition is to ensure that liability 
insurance, or other form of acceptable financial responsibility, 
required under Sec. 440.5(b) of the proposed regulations is available 
to cover the claims of Government personnel, as well as persons not 
involved in licensed launch activities, who are injured or otherwise 
sustain a loss as a consequence of those activities. Government 
personnel who contract personally and directly with a licensee or other 
nongovernmental launch participant to provide a service are not 
considered Government personnel for purposes of these regulations when 
performing that service. In addition, the proposed definition would 
expressly exclude employees of other launch participants because their 
claims for injury or loss are not intended to be included in the 
Office's determination of required third-party liability insurance. 
Responsibility for employee losses is assumed by each employer under 
the reciprocal waiver of claims required under Sec. 440.17 of the 
proposed regulations, and those employee claims are not eligible for 
payment by the U.S. Government in the event of excess third-party 
claims.

[[Page 39004]]

    The term ``United States'' is intended to refer to the United 
States Government in its entirety and as the collective sum of its 
various parts.

Section 440.5--General

    Although issuance of a license constitutes legal authorization to 
carry out the activities specified therein, certain conditions must be 
satisfied for the licensee to proceed with authorized activities.
    Section 440.5(a), as proposed, would establish the fundamental 
requirement that authorization to conduct licensed launch activities 
pursuant to a license issued by the Office is contingent upon the 
licensee's demonstration of financial responsibility and compliance 
with risk allocation requirements as set forth in proposed regulations. 
In addition to insurance required by this part, a licensee may be 
required by other agencies of the United States Government to obtain 
other types of liability or property insurance covering activities 
involving United States launch property, launch services or personnel. 
Other insurance requirements may include workers compensation, 
unemployment insurance, employer's liability, comprehensive automobile 
liability, environmental liability, or insurance required by Federal, 
State or local environmental protection laws and regulations. These 
other insurance requirements are not set forth in license orders issued 
by the Office; however, licensees are not relieved of the requirement 
to comply with them.
    In addition, as further explained in the section-by-section 
analysis accompanying Sec. 440.15(b), the financial responsibility 
requirements prescribed under the proposed regulations would preempt 
those provisions in agreements between the licensee and the United 
States, or any agency thereof, involving United States launch property 
or launch services that address financial responsibility, allocation of 
risk, and related matters covered by 49 U.S.C. 70112 and 70113. The 
objective of this preemption is to avoid duplicative requirements, but 
not to relieve the licensee of contractual or legal obligations 
intended to address interests other than those served by the statute.
    Section 440.5(b) would codify the Office's existing practice of 
setting the required amount of financial responsibility in license 
orders. As a procedural matter, the Office has relied on the issuance 
of license orders to supplement the license and prescribe specific 
terms, conditions and limitations, including financial responsibility 
requirements, on a case-by-case basis. Many of these terms and 
conditions would now be set forth in rules of general applicability. 
The amount of financial responsibility that must be obtained would 
continue to be set forth in a license order. The license order would 
generally be issued concurrently with the license, although there may 
be circumstances when it would follow issuance of the license. The 
Office may also revise financial responsibility requirements in a 
subsequent license order in the event of a change in exposed property 
or risks affecting the required amount of coverage. In any event, to 
the extent the license order reflects the Office's determination of 
maximum probable loss, the timing of its issuance would be subject to 
the provisions of proposed Sec. 440.7.
    Propose Sec. 440.5(c) states the fundamental principle that 
evidence of financial responsibility provided by the licensee is no 
substitute for actual financial responsibility of the licensee. In the 
event the licensee fails to obtain or maintain insurance or financial 
responsibility in amounts and according to the terms and conditions 
prescribed, the licensee would bear the risk and be liable for claims 
resulting from licensed launch activities that would otherwise have 
been covered. In addition, in the event of a defense raised, or 
exclusion, to coverage under the policy that relieves the insurer from 
compensating claims, the licensee would remain responsible for 
satisfying the claim. The only exception to this fundamental principle 
provided under the statue is where the Secretary of Transportation 
specifically determines that an exclusion is usual for the type of 
insurance involved, and the United States Government agrees to provide 
for paying claims from the first dollar of loss. As explained in the 
section-by-section analysis accompanying Sec. 440.19, a policy 
exclusion would be considered ``usual'' only if insurance covering the 
excluded risk is not commercially available at reasonable rates. The 
licensee is required to submit a certification to that effect when 
demonstrating compliance with financial responsibility requirements. No 
final determination is made by the Department unless and until an 
occasion arises when the Department is called upon to prepare a 
compensation plan covering excluded claims. If it then becomes evident 
that insurance was, in fact, available at commercially reasonable 
rates, the Government need not pay claims from the first dollar of loss 
and the licensee remains responsible for the liability.
    Failure by the licensee to comply with these requirements may 
result in suspension or revocaton of the license and also subjects the 
licensee to other penalties as provided in section 405.7 of this 
chapter.

Section 440.7--Determination of Maximum Probable Loss

    Section 440.7, as proposed, describes the Office's procedures for 
assessing and issuing a determination of maximum probable loss (MPL) on 
which financial responsibility requirements are based. Section 440.7(a) 
would provide that a determination of maximum probable loss resulting 
from licensed launch activities forms the basis of the financial 
responsibility order issued by the Office.
    Section 440.7(b) would provide the timing for the Office's issuance 
of the MPL determination, consistent with the Act. The Act provides 
that MPL determinations must be made no later than 90 days after a 
licensee or transferee requires it and has submitted all of the 
information needed to make a determination. In practice, the Office 
begins the risk analysis required for the MPL determination during the 
180-day license application review period. Doing so enables the Office 
to issue financial responsibility requirements concurrently with a 
license so as not to delay commencement of licensed launch activities.
    On a very few occasions, the Office has been unable to issue the 
MPL determination concurrently with the license. This result may occur 
for several reasons. In order to conduct the analyses, the Office 
requires from the applicant information described in Appendix I to the 
proposed regulations and may also request information from Federal 
range facilities involved in proposed launch activities or exposed to 
risk of damage or loss as a result of proposed activities. Incomplete 
information, either from the applicant or from the Federal range 
facility, can extend the amount of time necessary for the Office to 
complete and issue the MPL determination. Typically, a delayed 
determination results from submission by the applicant of incomplete 
information on which to perform the necessary risk analyses. Until the 
Office has complete and sufficient information the 90-day period does 
not begin. A delayed determination as a result of incomplete 
information is not untimely. In addition, the Act requires that the 
Office consult with heads of other appropriate Federal agencies in 
issuing financial responsibility requirements. The Office's practice 
has been to share its

[[Page 39005]]

MPL analyses with affected Federal agencies and request comments within 
three weeks. The Office's experience has shown that three weeks may not 
be sufficient for other Federal agencies to complete their reviews and 
issuance of the MPL determination may necessarily be delayed.
    Accordingly, proposed Sec. 440.7(b) would provide that the Office 
notify a licensee or transferee of any delays in issuing the MPL 
determination beyond the statutory 90-day period. The Office intends 
that this provision would be invoked only in circumstances beyond the 
Office's control, such as protracted consultation with other Federal 
agencies.
    Proposed Sec. 440.7(c) refers to Appendix I to the proposed 
regulations which prescribes information requirements for issuing a 
maximum probable loss determination. Appendix I is intended to be a 
comprehensive list of information requirements, some of which could be 
waived by the Office if, as a result of consultation with the 
applicant, the Office finds that the information is not necessary in 
light of the particular launch proposal. Once information is provided, 
the person requesting the MPL determination is responsible for 
reporting any changes that could affect the outcome of the risk 
analyses.
    As provided in proposed Sec. 440.7(d), the Office may amend or 
adjust its maximum probable loss determination to reflect any new 
information relevant to an accurate assessment of risk. In lieu of 
submitting duplicative information, a person requesting a MPL 
determination who has previously been issued one may certify that there 
has been no change from information previously submitted. This 
provision is intended to reduce the regulatory burden on licensees who 
conduct similar launch activities under separate licenses.
    An MPL determination must accompany every license authorizing 
launch activities and is therefore typically performed in conjunction 
with the Office's review of a license application. Section 440.7(e) 
would address the situation in which the Office is requested to issue a 
determination of maximum probable loss resulting from activities that 
are not the subject of a specific license application. A determination 
made under this section would not be governed by the 90-day requirement 
set forth in Sec. 440.7(b).
Methodology for Determining Maximum Probable Loss
    The Office derives the value of the maximum probable loss that may 
result to third parties and Government property from licensed launch 
activities through case-by-case risk analyses. The Office considers 
factors ranging from the kinds of hazardous operations, as defined in 
proposed Sec. 440.9, to be conducted under a license, to the number of 
third parties that may be exposed to risk in the event of a launch 
accident. Failure modeling techniques, the Office's experience in 
preparing numerous MPL determinations, and engineering judgment all 
play roles in the final determination. A more complete description of 
the Office's approach to hazard analysis and risk analysis techniques 
appears in a study, entitled ``Hazard Analysis of Commercial Space 
Transportation,'' released by the Office in May 1988. A copy may be 
obtained from the Office upon request. In addition, the Office is 
preparing a comprehensive description of its procedural methodology for 
determining maximum probable loss in a separate report to be made 
available to the public. A brief summary of the Office's approach to 
determining MPL is presented below to explain the underlying rationale 
for the information requirements referenced in proposed Sec. 440.7(c) 
and listed in appendix I to part 440.
    In addition to information required from the applicant, the office 
obtains certain information from the Federal range facility in order to 
assess properly the value of Government property exposed to risk. This 
information is not reflected in regulatory requirements. Typically, 
this information consists of identification of facilities the Federal 
range facility has authorized for use by the licensee and the value of 
those facilities, other range facilities that the Federal range 
facility identifies as exposed to risk as a result of the licensee's 
proposed launch activities due to their proximity to the licensee's 
hazardous operations, the number of Government personnel that the 
Federal range facility believes would be exposed to risk, and range-
required risk mitigation measures.
    Much of the information required to complete the MPL determination 
is provided as part of the application to conduct a launch. However, 
because any person can request a maximum probable loss determination at 
any time, information requirements for obtaining a determination are 
included as part of this proposed regulation. The proposed information 
requirements are not intended to place an additional or duplicative 
burden on prospective licensees and can be satisfied by specific 
reference to the license application.
    Appendix I describes the full range of information required from an 
applicant to complete the MPL determination. In certain circumstances, 
not all of the information would be required and the Office will advise 
the applicant accordingly during pre-application consultation. For 
example, where a launch from an isolated location would not expose any 
identifiable Government property to risk, the Office would waive those 
information requirements directed at assessing risk to Federal range 
facility assets. A launch proposal may involve vehicles and risks 
similar to those previously considered by the Office and the Office may 
waive information requirements it believes would be unnecessary or 
duplicative in light of existing analyses. Where the Office can 
determine, on the basis of the launch proposal, that certain risks need 
not be considered in order to calculate MPL, the Office will waive the 
requirements that pertain to those risks.
    The complexity of the MPL analysis will depend upon the risks that 
attend a specific launch proposal. At its most complicated, a complex 
launch vehicle involving hazardous operations and flight paths that 
expose people and property on and off-range to risk, the Office is able 
to employ a variety of risk analysis tools, such as computer models 
that estimate impact probabilities, potential property damage and 
casualty expectations. For all proposals, government property and 
third-part losses are considered in separate MPL analyses.
    The Office's objective is to determine the value of the maximum 
magnitude of loss that is sufficiently probable to warrant financial 
responsibility protection. That is, within the stated probability 
thresholds, as defined in proposed Sec. 440.3, the Office must 
establish a maximum value of loss. By corollary, the maximum magnitude 
of loss within the probability threshold drives the MPL value. This 
means that the Office need not consider every single accident scenario 
that falls within the threshold probability. Those having relatively 
minimal damage consequences need not be individually considered. 
Rather, the office's focus is on finding the maximum value of loss that 
would result from an accident that is within the specified threshold 
probability of occurrence. The Office does so by identifying 
specifically the hazardous activities to be conducted under a license, 
Government and third-party property placed at risk by those activities, 
and the number of third parties placed at risk. Then, the Office 
identifies a range of accident or failure scenarios and estimates the 
probability

[[Page 39006]]

of occurrence for each scenario. The Office then estimates the value of 
loss for various accident scenarios.
    The Office utilizes several methodologies, in order of preference, 
to estimate the probability of occurrence of the different scenarios. 
The order of preference begins with actual experience or existing 
models, and descends to expert probability analysis as the second best 
alternative, followed by professional engineering judgment.
    Estimating the value of loss for each accident scenario is done 
similarly, using different methodologies in an order of preference. 
Actual experience is most reliable and is used wherever it exists and 
is directly applicable to a launch proposal. For pre-flight licensed 
launch activities, the Office uses estimates that are informed by 
facility damage tables developed for the Federal range facilities, 
building design specifications, and engineering judgment. Computer 
models, such as the Facility Damage and Personnel Injury (DAMP) 
programs, may be used to estimate damage during and immediately 
following vehicle life-off. For third-party casualties, the Office 
develops an Expectation of Casualty figure for off-range population and 
Government personnel at risk.
    As noted above, low loss scenarios need not be considered unless a 
possible accident scenario involves losses that, when combined, may be 
significant in determining the value of the maximum probable loss. 
However, in many instances, accident scenarios are mutually exclusive. 
For example, a pre-flight accident that destroys the launch vehicle 
means there will be no launch, and there is no need to aggregate the 
damage from a pre-flight accident of this nature and a post-launch 
accident in determining the maximum value of loss.
    In summary, the Office performs a detailed estimate of property 
damage and casualties for the different accident scenarios that fall 
within the threshold probability of occurrence in order to determine 
the maximum value of loss. The MPL value becomes the amount associated 
with the most costly accident scenario falling within the threshold 
probability of occurrence.
Government Property
    The Office's maximum probable loss determination for Government 
property damage takes into account U.S. Government property situated on 
a Federal range facility, wherever located. As noted above in the 
Supplementary Information, the Office includes as part of its 
determination Government range assets on adjacent Federal range 
facilities that are exposed to risk of damage or loss as a result of 
licensed launch activities.
    The Office historically has not considered temporarily placed or 
``transient'' Government property, including launch vehicles and 
payloads, in calculating the maximum probable loss determination. The 
Office bases its approach on several considerations. First, the Federal 
range facility is responsible for maintaining a schedule of launch 
activities. The Government is therefore aware of upcoming commercial 
launch activities and, by exposing its transient or movable property to 
the possibility of damage or loss due to commercial launch activities, 
accepts certain risks. Second, readily movable property may no longer 
be present at the time the licensee ultimately conducts licensed launch 
activities. If that property were included in the MPL determination, 
the licensee may be unfairly burdened with too great an insurance 
requirement. One alternative would be to adjust, either upward or 
downward, the amount of property insurance that would be required just 
prior to commencing licensed activities. This approach is arguably 
contemplated by the statue, which provides for the Secretary to amend 
the maximum probable loss determination when new information so 
warrants. However, last minute adjustments to the MPL determination due 
to the Government's action of placing its property at risk, could prove 
administratively burdensome for both the Office and the licensee, whose 
launch could be delayed by having to demonstrate additional financial 
responsibility due to last minute changes in requirements. Third, 
including transient or Government property temporarily located on the 
Federal range, such as launch vehicles and payloads, could readily 
drive the MPL value above the $100 million statutory ceiling for 
required insurance. Although the Act contains provisions whereby the 
Department is directed to review annually the statutory ceilings on 
required insurance and report to Congress proposed adjustments to 
conform with changed liability expectations and the insurance market, 
the Office views the $100 million statutory ceiling on the Government 
property insurance requirement as a clear indication that Congress did 
not intend for these Government assets, which typically cost in excess 
of $100 million each, to be included as part of the range assets on 
which the MPL determination is based.
    The Office makes an important distinction between transient, 
movable property that is not included in the MPL determination and 
property that has been placed in a storage facility on the Federal 
range. The latter is included in the MPL determination. The rationale 
for the Office's distinction is that certain facilities are intended, 
by design, to house Government property on a temporary or long-term 
basis. However, where Government property has been stored in a facility 
not designed or intended for storage, thereby exposing the property to 
additional risk, the Office believes it would be unreasonable to impose 
the cost of this additional risk on the licensee. The Office therefore 
excludes the stored property from its MPL determination. In addition, 
to the extent this stored property, such as rocket motors or 
explosives, may contribute to the possible extent of damage to 
Government facilities, the Office does not factor the additional losses 
that may be attributed to that property in determining the MPL value.
    In taking the approach of excluding certain transient, movable 
Government property, the Office is aware that failure to include it 
could expose the Government to greater risk of loss. However, the 
Office believes that its approach reflects the intent underlying the 
comparatively low statutory ceiling on the Government property 
insurance requirement, and is reasonable in light of the Government's 
assumption of risk in placing property on the Federal range facility in 
a manner that exposes it to damage or loss from commercial launch 
activities. For these reasons, the Office believes that its approach is 
the better one. Nevertheless, it is important to bear in mind that, 
whether or not the value of certain property is included in making the 
MPL determination, damage or loss to any Government property, whether 
fixed or movable, located on the Federal range facility must be covered 
by the insurance policy the licensee obtains under 49 U.S.C. 
70112(a)(1)(B). Comments are requested on the Office's approach to 
considering non-fixed Government property in determining Government 
property insurance requirements.
Current Replacement Value
    In determining maximum probable lose for Government property, the 
Office bases its findings on the current replacement value of the 
property. The notion of current replacement value takes into account 
the current use and function of a Government facility, not its 
originally intended use. For example, the current replacement value for 
a facility that was originally built to support engineering operations 
but is no longer needed for that purpose and is

[[Page 39007]]

now used as an excess storage facility would most likely be lower than 
its original construction cost, even if a launch accident meant its 
total loss. The Office's rationale is that the cost of restoring 
property to its original use when the Government itself has chosen not 
to maintain the property in its original condition imposes an unfair 
cost on the licensee. The reverse situation may also occur, whereby 
restoring property to its current use may cost more than restoring it 
to its original use. This could occur where property has been up-graded 
or modified to support another purpose than originally intended. In 
that event, the Office believes that it is fair and appropriate to 
require insurance that covers the maximum probable loss to the 
property's current value, up to the statutory ceiling. In all 
circumstances, the Office consults with Federal range authorities in 
valuing Government property.
Third-Party Property Damage
    Under the proposed regulations, third-party property includes all 
property owned by persons or entities other than the licensee and its 
customer, and the contractors, subcontractors, and employees of each, 
involved in licensed launch activities, the Government's contractors 
and subcontractors involved in licensed launch activities, and the 
Government (except for property located on a Federal range facility). 
It includes the personal property belonging to Government personnel 
involved in licensed launch activities, and all off-range private and 
public property other than property on nearby or adjacent Federal range 
facilities for which Government property insurance coverage is 
required.
    The risk analysis performed to determine the value of third-party 
property maximum probable loss utilizes three approaches to estimating 
property values: (1) Specific determinations, (2) averaging, and (3) 
setting an upper bound or ceiling. The Office selects the appropriate 
methodology to use on a case-by-case basis, taking into account such 
factors as the availability of information, the launch site, and the 
range of risks to third parties presented by a particular launch 
proposal. The Office may use all three methods of estimating third-
party property losses in one MPL determining, depending upon the type 
and amount of property exposed to loss or damage as a result of 
licensed launch activities. In all instances, the Office utilizes a 
conservative approach to ensure the adequacy and sufficiency of its MPL 
determination and third-party liability financial responsibility 
requirement.
    The first estimation methodology, specific determinations, entails 
obtaining actual property values and determining the likelihood and 
consequences of an accident affecting that property. This method is 
typically used for very high-value property in the area that would be 
most exposed to risk. The second method, averaging, can be accomplished 
in several ways. One way is to average estimated property values in a 
homogeneous area through such means as county or city tax assessment 
records. Another is to assume that an accident will occur in the high-
value part of the risk area and determine the average of the high-value 
property exposed to risk. This conservative approach assures that the 
MPL determination will be sufficient to cover losses to this high-value 
property. The third method, setting an upper bound, also yields a 
conservative result. This approach utilizes the Office's experience by 
considering the nature and size of the area exposed to risk, e.g., 
urban, suburban, rural, industrial, farm, or some combination, and 
comparing it to third-party property considered at risk in past MPL 
analyses and to know values of Government property placed at risk. 
Setting an upper bound involves a qualitative assessment of the value 
of third-party property at risk and is based on the Office's extensive 
experience in assessing risk.
Third-Party Casualties
    The Office must also consider third-party casualties in determining 
maximum probable loss to third parties. Doing so requires an analysis 
of the number of persons exposed to risk and assigning a value of life. 
Department guidance issued in 1993 for preparing economic evaluations 
suggests using $2.5 million as the value of life in estimating one's 
willingness to pay for safety measures in order to reduce one's 
probability of death. However, the Office is mindful of the distinction 
between the value of life used for purposes of estimating the cost of 
safety requirements in regulations and for seeking damages in civil 
litigation. Accordingly, the Office utilizes the somewhat higher figure 
of three million dollars as the value of a life to assure a 
conservative, but reasonable, result.
    The Office requests comments on the appropriate means of assessing 
the value of third-party property and the value of life for purposes of 
determining maximum probable loss to third parties. In their comments, 
commenters are requested to consider the impact on insurance 
requirements that could result from a change in methodology.

Section 440.9--Insurance Requirements for Licensed Launch Activities

    This section would establish in a regulation financial 
responsibility requirements in the form of insurance as a condition of 
every license issued by the Office authorizing commercial space launch 
activities. A licensee would also be allowed to demonstrate an 
equivalent amount of financial responsibility through means other than 
insurance.
    Proposed Sec. 440.9(b) would establish the requirement that a 
licensee obtain a policy of liability insurance to pay claims of third 
parties for bodily injury or property damage resulting from licensed 
launch activities. In accordance with 49 U.S.C. 70112(a)(4), the 
parties protected under the insurance policy as insureds, or additional 
insureds, are the United States, its agencies, and its contractors and 
subcontractors, and their respective personnel, involved in licensed 
launch activities; and the licensee, the customer, and their respective 
contractors and subcontractors involved in licensed launch activities. 
Because Government personnel, as defined in proposed Sec. 440.3, are 
included within the proposed definition of ``third party,'' Government 
personnel may be both third-party claimants whose claims are 
compensable by required liability insurance, as well as additional 
insureds.
    Under proposed Sec. 440.9(c), the amount of required insurance is 
based on the Office's determination of maximum probable loss from 
third-party claims resulting from licensed launch activities. As 
provided by statute, the amount of coverage required by the Office may 
not exceed $500 million, or the maximum liability insurance available 
on the world market at reasonable cost. It should be noted that the 
maximum limit on insurance applies to the aggregate of claims for any 
particular launch, as provided by 49 U.S.C. 70112(a)(3). A policy may 
cover more than one launch. However, the amount of insurance prescribed 
by the Office in a license order must be available to cover the total 
of third-party claims resulting from each launch event. For example, if 
a licensee intends to conduct a series of launches under an operator 
license and third-party claims resulting from the first launch are 
compensated by the liability policy, the amount of coverage for each 
succeeding launch must be the amount required by the license order. 
Coverage may not be reduced by the amount of claims paid

[[Page 39008]]

as a result of previous launch activities conducted under the same 
license.
    Section 440.9(d) would establish in a regulation the requirement 
that a licensee must obtain a policy of insurance to compensate for 
damage to or loss of property at a Federal range facility that is 
owned, leased or occupied by, or in the care, custody or control of, 
the United States, its agencies, and its contractors and subcontractors 
involved in licensed launch activities, that results from licensed 
launch activities. The maximum probable loss determination to support 
this requirement focuses on valuable national assets located at Federal 
range facilities that are put at greatest risk by licensed activities; 
however, all Government property (and that of its agencies, contractors 
and subcontractors involved in licensed launch activities) at a Federal 
range facility must be protected. This would include Government range 
facilities surrounding or adjacent to the proposed launch site. The 
Office's experience in administering financial responsibility 
requirements to protect Government property has been previously 
described in the supplementary information accompanying this proposal 
under the heading, ``Property Protection for Government Launch 
Participants.'' The Office does not object to any reasonable approach 
on the part of a licensee that is taken to meet this requirement as 
long as the ultimate objective is achieved, that is, providing for the 
compensation of property damage sustained at Federal range facilities 
by the United States, its agencies, contractors and subcontractors 
involved in licensed launch activities, resulting from activities 
carried out under a license. However, the Office believes that, at a 
minimum, naming the U.S. Government and its agencies, contractors and 
subcontractors, involved in licensed launch activities, as additional 
insureds is necessary to accomplish this objective. Comments are 
requested on whether the Government should also be named the loss payee 
and be responsible for administering payment of insurance proceeds to 
its contractors and subcontractors.
    Under proposed Sec. 440.9(e), the amount of required insurance 
would be based on the Office's determination of maximum probable loss 
attributable to property damage claims of the United States, its 
agencies involved in launch services, and its contractors and 
subcontractors involved in licensed launch activities; however, the 
amount would not exceed $100 million. As noted in the analysis 
accompanying proposed Sec. 440.9(c), the maximum limit on insurance 
applies to the aggregate of claims for any particular launch. Covered 
claims are those against a person, including Government employees, for 
damage or loss to Government property, including the property of 
Government contractors and subcontractors, resulting from licensed 
launch activities. In this respect, the named insureds are different 
from those on the liability policy.
    Section 440.9(f) would provide that, in lieu of obtaining policies 
of insurance, the licensee may demonstrate financial responsibility in 
an alternative form--such as insurance purchased from a risk retention 
group authorized under the Risk Retention Amendments of 1986, surety 
bonds, letters of credit, or some combination--that reflects 
substantially the same terms and conditions of the requirements set 
forth in these regulations. Whatever the form of financial 
responsibility proposed in lieu of insurance, the licensee must 
demonstrate that it meets the requirements for financial 
responsibility.
    Section 6 of the 1988 Amendments to the Commercial Space Launch Act 
provides special incentives to certain satellites affected by National 
Security Decision Directive 254. This directive, issued by President 
Reagan in August 1986, following the Challenger accident, essentially 
ended NASA's role in launching commercial and foreign satellites. 
Section 6 of the 1988 Amendments provides that if certain eligibility 
criteria are met, the requirement that the licensee obtain property 
insurance covering loss of or damage to United States Government 
property does not apply. The Office believes that there are no 
remaining ``eligible satellites'' that have not been launched or 
otherwise accounted for and no provision is made in the proposed 
rulemaking to cover them. Comments are requested as to whether this 
provision may be properly omitted in final regulations.

Section 440.11--Duration of Coverage; Modifications

    Proposed Sec. 440.11(a) would specify when financial responsibility 
must be in place. Section 440.11(a), as proposed, would provide that 
required insurance coverage or other form of financial responsibility 
must attach upon commencement of licensed launch activities, and remain 
in full force and effect until the later of: (i) The completion of 
licensed launch activities, as defined by the Office in a regulation, 
or (ii) until risk resulting from licensed launch activities to third 
parties and Government property is sufficiently small, as determined by 
the Office through the risk analysis conducted to determine maximum 
probable loss, that financial responsibility is no longer necessary. 
The duration of financial responsibility requirements for a particular 
launch is specified by the Office in a license order.
    The statutory requirement for a licensee to obtain insurance or 
otherwise demonstrate financial responsibility refers to providing 
compensation for claims ``resulting from an activity carried out under 
the license.'' 49 U.S.C. 70112(a)(1). Based upon this language, the 
Office's view is that insurance requirements attach upon commencement 
of licensed launch activities but do not necessarily cease upon 
completion of a licensed launch, defined for orbital launches as the 
point when any remaining fuel is emptied from the upper stage, the 
vehicle tank is vented and otherwise ``safed,'' and the upper stage is 
no longer subject to the operator's control. Hazard analyses performed 
by the Office to determine maximum probable loss have shown that the 
greatest exposure for which insurance is typically required exists at 
the time of lift-off and flight, and that there is virtually no 
quantifiable risk to third parties or to United States Government 
property after completion of a nominal launch. The Office has found 
that thirty days is an appropriate amount of time in which to determine 
whether an orbital launch has been nominal or whether an anomaly has 
occurred that could affect risks to third parties or the Government. 
For this reason, historically, the Office has provided in license 
orders applicable to orbital launches that insurance coverage is 
required to attach upon commencement of licensed activities and remain 
in force ``for a period of thirty (30) days following payload insertion 
into orbit.'' For suborbital launches, insurance has been required to 
be maintained at least until motor impact and payload recovery. 
However, in the event of a launch anomaly, the Office may amend the 
license order to require that the licensee maintain insurance until the 
Office determines that risks to third parties and Government property 
are sufficiently small that insurance is no longer needed.
    When the licensee is no longer required to maintain insurance under 
the license, both the Government's waiver of excess property damage 
claims under Sec. 440.17(c), and the Government payment of excess 
third-party claims provisions under Sec. 440.19, would apply from the 
first dollar of loss. However, it is important to note that the

[[Page 39009]]

Act requires that the third-party claim result from the licensed 
activity in order for the Government payment of excess third-party 
claims provision to apply. When that nexus no longer exists, neither 
does the Government's acceptance of the risk of such claims. In every 
instance, a factual determination would be required as to whether a 
sufficient nexus exists between the licensed activity and the third-
party claim. In terms of business planning, it has been the Office's 
experience that for nominal launches, licensees may procure insurance 
for periods of time in excess of thirty days in accordance with 
individual risk management practices because the premium rate 
difference to cover any additional period of time tends to be 
negligible.
    As noted in the preceding Supplementary Information, questions have 
arisen over time with respect to the appropriate scope of a license 
authorizing pre- and post-flight ground operations and associated 
requirements for insurance coverage. As to pre-flight activities, the 
Office intends to address the question of the appropriate scope of a 
license authorizing launch activities in a separate rulemaking. With 
respect to post-launch ground operations, the Office believes that 
damage to Government property or property of Government contractors and 
subcontractors, as well as to third parties, could occur during clean-
up and from removal of launch-related equipment and material and that 
insurance should remain in place to protect against such claims. In 
this regard, it is significant to note that the Act requires financial 
responsibility to protect against claims ``resulting from an activity 
carried out under license'' (emphasis supplied) (49 U.S.C. 
70112(a)(1)). Comments are requested on the proposed duration of 
required insurance with respect to ground operations, including clean-
up and removal of launch-related equipment from the launch site. 
Comments are also requested on the extent to which insurance should be 
required to compensate claims of third-parties and the Government for 
short-term environmental damage, or alternatively, whether clean-up or 
short-term environmental damage to Government property should be 
charged to the licensee as a direct cost.
    The Office is also requesting comments on the extent to which 
insurance to protect against claims for long-term environmental or 
property damage should be required, its availability, and mechanisms 
for assuring adequate coverage has been obtained. The Office is aware 
that long-term environmental damage risks are typically excluded from 
launch insurance coverage because of, among other things, the 
difficulties of insuring against claims that may not arise until long 
after the risk period (generally launch plus a number of days) is 
concluded. Commenters should address whether such claims should be 
included in determining maximum probable loss for licensed launch 
activities and whether the existing statutory ceilings are adequate if 
such claims are included. In considering the issue, commenters are 
requested to suggest mechanisms for ensuring that funds are available 
to address long-term environmental damage that results from commercial 
launch activities. Commenters are also requested to address whether and 
the extent to which insurance to protect against property damage that 
results from orbital debris long after a launch has been completed 
should be required.
    Section 440.11(b), as proposed, would provide that the licensee may 
not replace, cancel, change or withdraw the insurance or other form of 
financial responsibility required, or in any way modify it to reduce 
the limits of liability or the extent of coverage, and that any form of 
financial responsibility may not be permitted to expire prior to the 
time specified by the Office in a license order, unless the Office is 
notified in advance and expressly approves of the modification. The 
purpose of this requirement is to ensure that the licensee has adequate 
coverage in place that meets the requirements of the applicable license 
order.

Section 440.13--Standard Conditions of Coverage

    Proposed Sec. 440.13(a) identifies the terms and conditions that 
must be included in any insurance policy obtained to satisfy the 
requirements of proposed Sec. 440.9. With some modification, the 
proposed terms and conditions of insurance coverage have been required 
by the Office in license orders issued on a case-by-case basis in order 
to carry out the office's responsibilities under the statute, and to 
the Office's knowledge, have not been difficult to obtain.
    Section 440.13(a)(1) would provide in a regulation that any 
required policy of insurance must provide that bankruptcy or insolvency 
of the insured (licensee) or any additional insured does not relieve 
the insurer of any of its obligations under the policy. This 
requirement is commonly found in liability insurance policies. Its 
presence is desirable because under common law, if an insurance 
agreement were construed as only an agreement to indemnify against 
loss, under certain circumstances the insurer could avoid payment of 
third-party claims altogether where the insured was declared insolvent. 
This condition is intended to remove any doubt that the policy insures 
against liability to pay damages and is not merely an agreement to 
indemnify against loss.
    Section 440.13(a)(2), as proposed, would provide that the policy 
limits for any required insurance policy apply separately to each 
occurrence and in the aggregate with respect to claims resulting from 
licensed activities associated with a particular launch. This provision 
would further the intent of 49 U.S.C. 70112(a)(3), which prescribes 
insurance ceilings applicable to ``the total claims related to one 
launch, * * *'' As noted above, where insurance is obtained by a 
licensee for a number of launches under an operator license, the limits 
of the policy must be available for each licensed launch and may not be 
reduced due to claims resulting from a prior occurrence.
    Proposed Sec. 440.13(a)(3) would state that any required policy of 
insurance must provide for the payment of claims from the first dollar 
of loss, without regard to any deductible, to the policy limits, except 
in the limited circumstances allowed in the regulation. The Office 
discourages the use of a deductible because of the clear statutory 
mandate to ensure comprehensive protection for all insureds from 
liability for third-party claims and prompt restoration of United 
States range assets. If this coverage entails additional cost to the 
licensee, it is not unreasonable relative to the policy objectives 
underlying the statute. Risk retention arrangements between the 
licensee and its insurer may be used as a means of reducing the policy 
premium.
    Nevertheless, the Office understands that licensees may desire a 
small deductible amount from their coverage in order to reduce policy 
premiums and the Office has included a provision in the proposal that 
would allow the reasonable use of deductible amounts. However, to 
ensure that statutory objectives are achieved, a deductible would be 
allowed only if the amount of the deductible is placed in a an escrow 
account established to cover claims resulting from licensed launch 
activities or if the licensee can demonstrate to the office that it has 
that amount readily available to it, with no prior liens or obligations 
on the funds. The Office believes that use of a deductible is 
appropriate only for comparatively small sums and should not be used as 
a means of avoiding insurance.

[[Page 39010]]

Comments are requested on whether the proposed approach is reasonable. 
Where Government property is concerned, commenters should bear in mind 
the objective that proceeds must be made immediately available to 
restore Government property to its prior condition and use, and that 
any delays (e.g., in the event assets must be liquidated to pay claims) 
would be counter to the statute. The Government may also be exposed to 
claims by its contractors and subcontractors for their property damage 
where insurance proceeds are not immediately available to cover those 
loses. Any inability to obtain promptly full payment of such claims 
could expose the Government to administrative and legal expenses the 
Government seeks to avoid through required insurance.
    Section 440.13(a)(4), as proposed, limits the defenses available to 
the insurer to avoid paying claims under the policy. It states that a 
required policy of insurance must provide that the actions of the 
insured or any additional insured shall not result in invalidation of 
the policy; however, an insured or additional insured itself may be 
denied coverage under a policy for claims against it in the event of 
any breach or violation by it of any warranties, declarations, or 
conditions contained in the policy. Action by the insured includes 
nonpayment of the policy premium. Thus, although the Office views the 
licensee as ultimately responsible for paying additional insureds under 
the policy as a result of the licensee's nonpayment of the premium.
    As a general rule, liability and property insurance policies issued 
by insurance underwriters contain certain standard exclusions of 
coverage as well as particular exclusion depending on the activities 
for which insurance is sought. Proposed Sec. 440.13(a)(5) acknowledges 
that the insurance policies required under Sec. 440.9 may contain 
certain exclusion from coverage. Those exclusion must be specified.
    In the event of a claim for property damage or bodily injury that 
is not covered by insurance, the liability for such damage and injury 
would ordinarily fall on the licensee or additional insured in the 
absence of some form of indemnification. The Secretary of 
Transportation is empowered, under 49 U.S.C. 70113(a)(2), to provide 
for payment of third-party claims that are the subject of insurance 
policy exclusions that ``are usual for the type of insurance involved'' 
and for which insurance is therefore not available to cover the claim. 
49 U.S.C. 70113(a)(2). In addition, under 49 U.S.C. 70112(b)(2), the 
Secretary may, following interagency consultation, waive claims for 
property damage not covered by required property insurance by reason of 
exclusions that are ``usual for the type of insurance involved'' such 
that insurance is not available. 49 U.S.C. 70112(b)(2). As a result, a 
claim that is not compensated by insurance because it falls within an 
insurance exclusion determined by the Office to be usual would 
essentially permit first-dollar payment by the United States Government 
without regard to the thresholds provided, respectively, in 49 U.S.C. 
70113(a)(1) and 70112(b)(2).
    However, in determining what may be considered usual exclusions for 
the type of insurance involved, the Office is necessarily mindful of 
the direction from Congress that first-dollar payments by the United 
States for such exclusions should not be an inducement for insurers to 
begin restricting the scope of coverage in their insurance contracts 
with licensees. Moreover, payments for claims excluded from third-party 
liability coverage, like payments generally of third-party claims in 
excess of required insurance under 49 U.S.C. 70113, are subject to 
certain conditions including Congressional approval of a compensation 
plan and appropriation of funds.
    There are no identical exclusions found in each and every policy. 
Variations exist among U.S., London, continental European and other 
overseas insurance markets. Moreover, exclusions may be added by an 
insurer depending on the particular market and types of risks involved, 
or can often be ``bought out'' by an endorsement or by a separate 
policy. Also, exclusions may be added or existing exclusions modified 
as a result of judicial interpretations the insurance market neither 
intended nor anticipated in setting its premium rates. Based on 
insurance market conditions and loss experience, future exclusions may 
vary from customary or usual exclusions today. Consequently, the 
proposed regulations define a usual exclusion as one for which coverage 
is not commercially available at reasonable rates. Licensees must 
certify at the time they demonstrate compliance with insurance 
requirements that insurance covering the excluded risks is unavailable 
at reasonable rates in order for the United States Government to 
provide for payment of claims from the first dollar of loss. However, 
the licensee's certification does not finally resolve that a particular 
exclusion will be deemed to be ``usual.'' That is, in the event the 
Office determines that insurance was available at reasonable rates the 
Secretary need not provide for payment of claims from the first dollar 
of loss. Comments are requested on other appropriate criteria for 
determining whether an exclusion may be considered ``usual.''
    Proposed Secs. 440.13(a)(6)-416.13(a)(8) would prescribe, in 
regulations, additional insurance requirements that have been 
customarily imposed by the Office in license orders in carrying out its 
statutory mandate.
    Comments are requested on any other terms and conditions that would 
be appropriate to require in rules of general applicability.

Section 440.15--Demonstration of Compliance

    As proposed, Sec. 440.15(a) would require the licensee to 
demonstrate that it has complied with the insurance and allocation of 
risk requirements under the proposed regulations no later than thirty 
days before commencing licensed launch activities. However, a license 
order may require a licensee to demonstrate compliance in less than 
thirty days where the license or license order is issued less than 
thirty days before the licensee intends to commence licensed launch 
activities. It is strongly recommended that licensees submit required 
documentation demonstrating compliance with these requirements well in 
advance of the thirty-day period to ensure that the Office has adequate 
opportunity to review the submission and confirm compliance by the time 
the licensee wishes to commence licensed activities. It has been the 
Office's experience that thirty days is a reasonable length of time to 
address any issues that arise as a result of the licensee's submission. 
Where a licensee uses a form of financial responsibility other than 
insurance to demonstrate compliance, the Office require sixty days to 
review the submission and ensure its sufficiency.
    Section 440.15(b) would establish in a regulation that once the 
licensee has fully demonstrated compliance with part 440 financial 
responsibility and allocation of risk requirements, these requirements 
preempt any conflicting or inconsistent requirements in any agreements 
the licensee may have previously entered into with other agencies of 
the United States concerning access to or use of United States launch 
property or launch services. This express preemption is necessary 
because there has been a significant amount of confusion in the past 
concerning the effect of similar or additional insurance requirements 
imposed by agreements governing

[[Page 39011]]

access to United States launch facilities. As stated above in the 
section-by-section analysis accompanying Sec. 440.5(c), the object of 
this preemption is to avoid imposing duplicative and inconsistent 
obligations on the licensee, but not to relieve the licensee of 
contractual or legal obligations intended to address interests other 
than those served by the statute. The Office evidences its 
determination that a licensee has fully complied with part 440 
requirements in a letter issued to the licensee.
    Under the proposal Sec. 440.15(c) would establish requirements for 
a licensee to provide the Office with proof of insurance. It is 
extremely important for the Office to secure adequate assurance that 
the licensee has obtained the insurance required under the regulations. 
However, the Office believes that it is unnecessary and impractical to 
review each policy constituting part of an insurance submission to 
ensure compliance. Accordingly, proposed Sec. 440.15(c) and (d) would 
provide for certain certifications and representations from the 
licensee and its insurer, respectively. The licensee must certify that 
it has obtained insurance in conformance with the part 440 regulations 
and the applicable license order. In addition, the licensee must file 
with the Office one or more certificates of insurance evidencing 
coverage, as prescribed by the Office, under currently effective and 
properly endorsed policies applicable to licensed launch activities. A 
certificate of insurance must specify any policy exclusions or 
limitations in detail, in accordance with proposed Sec. 440.13(a)(5a). 
In addition, the licensee would be required to certify that insurance 
is not commercially available at reasonable rates in order for the 
exclusion to be found usual for the type of insurance and the United 
States Government to provide for payment of claims from the first 
dollar of loss. The licensee would also be required to submit duly 
executed waiver of claims agreements, signed by the licensee and its 
customer. The licensee's certifications must be signed by a duly 
authorized officer of the licensee and may be submitted in one 
document.
    Section 440.15(d), as proposed, would specify certain insurance 
certificate requirements. Each certificate of insurance must be signed 
by the insurer and accompanied by a signed opinion of the insurer 
stating that the policy obtained by the licensee complies with the 
requirements set forth in part 440.
    Section 440.15(e) would further require the licensee to maintain, 
and make available for inspection by the Office upon request, all 
required policies of insurance and other documents necessary to 
demonstrate compliance with part 440 requirements. Although this 
section essentially imposes a mandatory recordkeeping requirement upon 
the licensee, the Office believes that the maintenance and 
administration of these records by the licensee is consistent with the 
Office's regulatory authority to monitor compliance with the license. 
Moreover, it is considerably less burdensome and time-consuming for 
both the Office and the licensee than requiring submittal of all the 
policy documents to the Office.
    Proposed Sec. 440.15(f) recognizes that the licensee may propose to 
satisfy financial responsibility requirements in a form other than 
insurance. A licensee may do so, provided it otherwise satisfies 
regulatory requirements. In practice, licensees have furnished 
insurance in order to meet the financial responsibility requirements 
prescribed by the Office pursuant to the statue. Under existing 
insurance market conditions, third-party liability insurance is 
obtainable to prescribed limits at reasonable cost. A presentation by 
the Risk Management Working Group of the COMSTAC at its meeting on May 
18, 1995, projected market capacity as sufficient to satisfy launch 
insurance demand in 1995. In addition, property insurance, where 
required, may be accommodated within the licensee's existing property 
and casualty insurance program and is therefore easily obtained.
    While the Act does state that a licensee may demonstrate financial 
responsibility in a form other than insurance, it does not specify what 
other forms of financial responsibility would be acceptable. A number 
of alternatives are possible and the Office necessarily will examine 
any proposal for demonstrating financial responsibility through 
alternative means on a case-by-case basis to determine whether it 
otherwise satisfies the requirements for demonstrating financial 
responsibility.

Section 440.17--Reciprocal Waiver of Claims Requirements

    This section, as proposed, establishes requirements for reciprocal 
waivers of claims among launch participants. These requirements are 
additional conditions of a license.
    Proposed Sec. 440.17(b) would implement 49 U.S.C. 70112(b)(1), 
which requires the licensee to implement reciprocal waivers of claims 
with its contractors and subcontractors, its customers, and the 
contractors and subcontractors of its customer, whereby each party 
agrees to be responsible for loss or damage it sustains. Parties to a 
waiver of claims agreement waive two types of claims: Claims for their 
own property damage, and claims they may have against another launch 
participant as a result of losses for property damage or bodily injury 
sustained by their employees, resulting from licensed launch 
activities.
    49 U.S.C. 70112(b)(2) requires the Secretary of Transportation, for 
the United States, its agencies involved in licensed launch activities, 
and its contractors and subcontractors, to enter into reciprocal 
waivers of claims with the licensee, its customer, and their respective 
contractors and subcontractors involved in launch services. In the 
Office's view, the purpose of this provision is to establish the 
Government's waiver of claims against the private sector launch 
participants and acceptance of responsibility for property damage that 
exceeds the level of Government property insurance obtained by the 
licensee under 49 U.S.C. 70112(a)(1)(B).
    The approach taken in proposed Sec. 440.17(c), of requiring a 
formal three-party agreement among the United States, the licensee and 
its customer, deviates from the form suggested by a literal reading of 
the Act. However, the Office believes that this approach is the most 
desirable and efficient one to effectuate the overall purpose of the 
statutory reciprocal waiver of claims requirements: To limit the 
universe of potential claims that could arise out of licensed launch 
activities, and to eliminate the need for each participant in licensed 
launch activities to obtain separate liability insurance protection 
against such claims. This approach has also proved manageable for the 
launch services industry in executing agreements with customers and the 
U.S. Government.
    Section 440.17(c), as proposed, would require that the licensee, 
its customer and the Department of Transportation on behalf of the U.S. 
Government enter into a three-party agreement as set forth in appendix 
II to part 440. The form of the Agreement for Waiver of Claims and 
Assumption of Responsibility (Agreement) presented in Appendix II 
deviates from the current practice of the Office and is intended to 
clarify the scope of the waiver that the United States provides when it 
is involved in licensed launch activities, and the waiver it requires 
in return. Simply put, the Department of Transportation, on behalf of 
the United States, its agencies involved in licensed launch activities, 
and its contractors and subcontractors, would agree to waive claims 
against the

[[Page 39012]]

licensee, its customer and the contractors and subcontractors of the 
licensee and its customer, and accept responsibility for losses to 
property of the Government launch participants, only to the extent that 
such claims exceed the level of insurance the licensee must obtain 
under Sec. 440.9(d). As a reciprocal undertaking, the licensee and its 
customer each would waive claims against the other party and the United 
States and its agencies involved in licensed launch activities, and 
against the contractors and subcontractors of each of those parties, 
and accept responsibility for damage to its own property and losses 
sustained by its own employees, respectively.
    Whereas other parties to the three-party reciprocal waiver of 
claims agreement would agree to waive and accept responsibility for 
claims for property damage or bodily injury sustained by its employees, 
the U.S. Government need not do so. Because Government personnel are 
third parties, their claims for bodily injury or property damage would 
be compensated by the third-party liability insurance the licensee is 
required to obtain. Claims in excess of required insurance would become 
eligible for payment by the Government under the payment of excess 
claims provisions of the statute. 49 U.S.C. 70113. Although the 
approach reflected in the proposed form of Agreement is not currently 
reflected in existing license orders, the Office believes it more 
accurately reflects the allocation of risks intended by the statute and 
correctly responds to the Government's inability under appropriations 
law to accede to unfunded contingent liability, unless so authorized.
    In addition, under the proposed from of the Agreement, the licensee 
and its customer would further agree to extend, or flow down, the 
waiver obligations to their respective contractors and subcontractors, 
and all three principals to the Agreement--including the Department--
would agree to indemnify the other parties from claims by their 
contractors and subcontractors arising out of the indemnifying party's 
failure properly to implement or extend the waiver.
    One launch company has objected to the indemnification provisions 
required under the three-party reciprocal waiver of claims agreement 
currently employed by the Office and included in this proposal for all 
interparty waiver of claims agreements. In the launch company's view, 
this provision is not required by statute and adds liability and risk 
over and above that imposed by a breach of contract remedy, which the 
launch company believes would be the appropriate remedy for failure to 
flow down the cross-waiver requirement.
    The Office's view is that a contractual undertaking to indemnify 
another party for one's own failure to implement properly the 
agreements flow-down requirements is preferable. It would provide a 
strong incentive for parties to be attentive to the flow-down 
requirement. This is significant because of the limitation on the 
Office's ability to monitor each licensee's and customer's cross-
waivers with their myriad contractors and subcontractors. It would also 
provide a ready remedy for parties who sustain loss because of another 
party's failure to flow down the cross-waiver requirement.
    In those situations where the licensee's customer is a Government 
agency, the provisions applicable to the customer are the same as those 
for an agency involved in licensed launch activities for purposes of 
the reciprocal waiver of claims requirement. However, because the 
Government property insurance requirement does not cover the Government 
payload, the Government waives claims for property damage and assumes 
responsibility for damage or loss to the payload from the first dollar 
of loss.
    Some concern has been expressed within the commercial space launch 
industry over the assumption of responsibility for employee losses 
required of signatories to the waiver of claims agreement. In the 
Office's view, this is a risk that can be effectively managed without 
imposing unreasonable economic burdens on launch participants.
    The assumption of responsibility by nongovernmental launch 
participants for their own employees' losses represents a mutual 
undertaking by each entity to cover losses of its employees. Although 
employees of nongovernmental launch participants would not be ``third 
parties'' whose claims are compensated under the liability insurance 
required under the proposed regulations, launch participants could 
protect themselves by ensuring that their general liability policies 
would respond to compensate such claims. The Office believes that a 
variety of measures may be utilized by launch participants to manage 
the mandatory assumption of responsibility. At the same time, the 
objective of the risk allocation scheme--to limit the need for each 
launch participant to obtain broad liability coverage to protect itself 
from the universe of potential third-party claims--would be realized. 
The Office requests comments on its approach to implementing the waiver 
of claims and assumption of responsibility requirements of the Act. In 
doing so, commenters should bear in mind that there is no indication in 
the Act or its legislative history that employees of nongovernmental 
launch participant, unlike employees of Government launch participants, 
are intended to be included in the definition of ``third parties'' for 
purposes of these regulations. Nor is there any indication that the 
Government would agree to pay their claims as excess third-party claims 
(so-called ``indemnification'') to the extent employees' claims exceed 
required insurance. Moreover, considering employees of launch 
participants as third parties under the statutory definition would run 
counter to the assumption of responsibility for their loses mandated by 
the statute. Also, if such employees were included as ``third 
parties,'' the amount of third-party liability coverage the licensee 
would be required to obtain would likely increase significantly.
    It is important to note that not all private participants in 
licensed launch activities are necessarily expected to accede to the 
reciprocal waiver of claims scheme in order to effect its purpose. Only 
those participants who have their personnel or property involved in 
licensed launch activities, and who may make claims against other 
participants as a result of loss or damage sustained by their personnel 
or property in the event of an accident, should be expected to enter 
into reciprocal waivers of claims. If all participants having personnel 
or property involved in licensed launch activities have acceded to the 
reciprocal waiver scheme, they would be foreclosed from making any 
claims against each other.
    A question has been raised by a payload company as to the Office's 
requirements when multiple customers contract with a launch operator 
for launch services or there is more than one customer's payload on the 
launch manifest for a single launch. In those cases, executing a single 
waiver of claims agreement that includes each customer as a party to 
the agreement, or executing separate but appropriately modified 
agreements, would serve to ensure all parties have been included and 
protected as intended.
    There has been some question as to the meaning and appropriate 
implementation of the provision in 49 U.S.C. 70112(b)(2), which 
requires the Secretary to enter into reciprocal waivers of claims 
``for'' the Government's contractors and subcontractors involved in 
launch services. The Office has interpreted this provision to mean that 
contractors and

[[Page 39013]]

subcontractors of the United States are intended to be included as 
beneficiaries of the waiver of claims by the licensee, the customer and 
their respective contractors and subcontractors; and that the United 
States, through its appropriate agencies involved in licensed 
activities, is responsible for protecting their interests.
    The proposed form of Agreement set forth in Appendix II to the 
proposed regulation continues the current practice of excluding from 
the waiver and assumption of responsibility claims for bodily injury or 
property damage resulting from willful misconduct of the parties. It 
also continues the current practice of requiring that parties waive 
claims, regardless of fault. Questions have been raised as to whether 
claims resulting from gross negligence are also excluded from the 
intended scope of the waiver. The Office believes that carving out an 
exception for gross negligence from the reciprocal waiver of claims 
could result in parties attempting, in effect, to nullify or avoid 
required waivers of claims by alleging sufficient evidence of gross 
negligence to withstand legal challenge, thereby defeating one of the 
purposes of the Agreement. The Office has not elected to do so in the 
proposed form of Agreement.
    The Office believes its approach is consistent with the statutory 
intent of requiring launch participants to enter into a no-fault waiver 
of claims agreement in order to eliminate the need for additional 
insurance to protect against claims for damage caused by a party to the 
launch to any other party to the launch and to limit the total universe 
of claims resulting from a launch. Comments are solicited from the 
public on the proposed Agreement implementing 440.11(b), which is set 
out in Appendix II to the proposed regulation. If differs from the form 
that currently accompanies financial responsibility license orders but 
more closely conforms to the Office's view of the objectives of the 
statutory waiver requirements. A part to the Agreement wishing to 
modify its form may petition the Associate Administrator under the 
procedures set forth in 404.3 of the Regulations.

Section 440.19--United States Payment of Excess Third-Party Liability 
Claims

    Payment by the United States of successful claims of third parties 
resulting from licensed launch activities, as provided in 49 U.S.C. 
70113, is subject to appropriations laws or enactment of other 
legislative authority providing for the payment of claims submitted as 
part of a compensation plan prepared by the Office. The total amount of 
excess third-party claims that may be paid by the United States will 
not be greater than $1,500,000,000 (as adjusted for inflation occurring 
after January 1, 1989) above the amount of insurance required under 
Sec. 440.9(c). However, to the extent a third-party claim results from 
the willful misconduct of a launch participant, the Government is not 
required to provide for payment of the claim. The statute limits this 
exception to willful misconduct by a licensee or transferee; however, 
the Office believes that any launch participant's willful misconduct 
relieves the Government from providing for payment of third-party 
claims against that launch participant under 49 U.S.C. 70113(a)(2).
    In the event a successful claim is not covered by required 
insurance due to a policy exclusion that is found to be usual because 
insurance is not commercially available at reasonable cost, the 
Government would pay such claims from the first dollar of loss up to 
$1,500,000,000 (as adjusted for inflation occurring after January 1, 
1989), again, subject to appropriate legislative action.
    Excluded from the statutory obligation of the Secretary of 
Transportation to provide for payment of successful third-party claims 
are claims against contractors and subcontractors of the United States 
and its agencies involved in licensed activities. It has been suggested 
that this exclusion was inadvertent, and the Office believes that this 
is the better view. On the other hand, the Office is mindful of the 
availability of Government indemnification that may benefit such 
contractors and subcontractors pursuant to statutes other than 49 
U.S.C. Subtitle IX. However, provision of this protection by the 
Government to its contractors and subcontractors may be made only under 
certain narrow circumstances, and is not routinely done. Where it is 
not done, a Government contractor or subcontractor would be required to 
purchase liability insurance to protect itself from third-party claims 
in excess of the liability policy obtained by the licensee, and would 
pass the cost through to the Government as an allowable cost under the 
contract. Therefore, absent legislative clarification, the Office is of 
the view that the United States would afford its contractors and 
subcontractors the protections offered to other launch participants 
under the payment of excess claims provisions of the statute, after the 
limits of the liability policy obtained by the licensee have been 
reached. However, this approach is not intended to interfere with or 
encumber the Government's enforcement of contractual rights and 
remedies with respect to its contractors. Public comment is sought as 
to whether this interpretation of 49 U.S.C. 70113 is in keeping with 
the overall risk allocation scheme of the Act.
    Under proposed Sec. 440.19(d), the Government would pay claims from 
the first dollar of loss upon expiration of the prescribed period of 
time for which the licensee is responsible for maintaining financial 
responsibility. Industry representatives have suggested that the 
Government's obligation to pay claims remains for three years following 
the launch event. However, the statutory payment of excess claims 
provision is limited to a successful claim of a third party against a 
launch participant ``resulting from an activity carried out under the 
license * * * for death, bodily injury or property damage or loss 
resulting from an activity carried out under the license.'' The statute 
further limits payment of excess claims ``to the extent the total 
amount of successful claims related to one launch'' exceeds the 
required amount of third-party liability insurance and is not more than 
$1,500,000,000 above that amount. 49 U.S.C. 70113(a). The Office 
believes that these provisions may be intended as a limitation on the 
claims that would be eligible for so-called indemnification by the 
Government. The Office requests comments on the nexus that must exist 
between a third-party claim and the licensed launch activity in order 
for the claim to be eligible for payment by the Government.
    Proposed Sec. 440.19(e) would establish procedural conditions for 
invoking the Government's payment of excess third-party claims 
provisions of the Act, including notice and participation or assistance 
in the defense by the United States of any claim or lawsuit by a third 
party arising out of licensed launch activities. This is consistent 
generally with the Government's usual practice for responding to 
similar claims.
    Some industry representatives, as well as the COMSTAC, have 
recommended that the statutory provisions for Government payment of 
excess third-party claims should be memorialized in a contract between 
the United States Government and the intended beneficiaries of these 
provisions, similar to the indemnification agreements the Nuclear 
Regulatory Commission is required to enter into on behalf of the United 
States under the 1988 Price-Anderson Amendments, Pub. L. 100-408, to 
protect licensed operators of nuclear reactors from catastrophic 
losses. The Office believes that 49 U.S.C. 70113

[[Page 39014]]

does not constitute or establish an indemnification obligation on the 
part of the United States like that set forth in the Price-Anderson 
regime which, among other things, expressly requires a contractual 
undertaking and specifies necessary contractual provisions. 42 U.S.C. 
2210. In contrast, 49 U.S.C. 70113 is largely procedural in nature. Any 
payment that the Secretary proposes be made under the statute is 
contingent on Congressional approval of a compensation plan and 
appropriation of funds or other legislative authority. Accordingly, the 
recommendation to reflect the Government's agreement for payment of 
excess claims in a contract is not included in this proposal.
    As provided the statute and proposed section 440.19(f), in the 
event of catastrophic losses, the Office would prepare a compensation 
plan specifying the total amount of claims, suggesting sources of 
funding that may be available to pay the claims, and proposing any 
legislation necessary to authorize appropriation of funds and otherwise 
implement the plan. In addition, as provided by the Act, the Office is 
authorized to withhold payment of a claim that has not been decided by 
a Federal court if the Office finds the amount is unreasonable.
    The Office welcomes comments from the public on appropriate 
implementation of 49 U.S.C. 70113 payment provisions. Comments would 
assist the Office in developing a future rulemaking that would address, 
more specifically, the mechanism for seeking payment by the Government 
of excess third-party claims.

Statutory Authority for This Proposed Rule

    This proposal is issued pursuant to 49 U.S.C. Subtitle IX, ch. 
701--Commerical Space Launch Activities, sections 70101-70119, formerly 
the Commercial Space Launch Act of 1984 (CSLA), as amended (49 U.S.C. 
App. 2601-2623). In 1988, Congress amended the CSLA by replacing 
general insurance requirements with a detailed financial responsibility 
and allocation of risk regime for licensed operations. The provisions, 
referred to as the 1988 Amendments, include procedures whereby the 
United States Government requires risk-based insurance to compensate 
for third-party liability and Government property damage claims, waives 
certain claims for its property damage and, subject to an appropriation 
law or other legislative authority, agrees to provide for payment of 
third-party claims in excess of required liability insurance. In 
addition, the 1988 Amendments require launch participants to enter into 
reciprocal waivers of claims in which the parties agree to absorb 
certain losses and the nongovernmental launch participants agree to be 
responsible for claims of their employees for damage or loss.
    The Office has been implementing the 1988 Amendments on a case-by-
case basis, through license orders issued with each license authorizing 
commercial space launch activities. Based upon its experience, the 
Office proposes to standardize requirements into rules of general 
applicability, wherever practicable.
    Under 49 U.S.C. Subtitle IX, ch. 701, the Secretary is responsible 
for licensing and otherwise regulating commercial space launches and 
the commercial operation of launch sites carried out within the United 
States or by its citizens. In doing so, the Secretary is charged with 
protecting public health and safety, safety of property, and United 
States national security and foreign policy interests, and must ensure 
compliance with international treaty obligations of the United States, 
including the United Nations Treaties on Outer Space. The Secretary is 
also responsible for establishing requirements for proof of financial 
responsibility and other assurances necessary to protect the Government 
and its agencies and personnel from certain losses as a result of 
licensed activities involving Government facilities or personnel. 49 
U.S.C. 70112(e).
    The Associate Administrator for Commercial Space Transportation of 
the Federal Aviation Administration was delegated the Secretary's 
authority for carrying out the Secretary's responsibilities under the 
statute, effective November 15, 1995. The Commercial Space 
Transportation Licensing Regulations set forth in 14 CFR Ch. III apply 
to regulatory activities administered by the Office.

Paper Work Reduction Act

    14 CFR part 440, as proposed, contains information collection 
requirements. In accordance with the Paperwork Reduction Act of 1995, 
44 U.S.C. 3501 et seq., the information collection requirements 
associated with this rule are being submitted to the Office of 
Management and Budget for review. The required information will be used 
to determine appropriate levels of financial responsibility and to 
determine whether licensees have complied with financial responsibility 
requirements as set forth in regulations and in a license order issued 
by the Office. The information to be collected includes data required 
for determining maximum probable loss, the three-party cross-waiver of 
claims agreement and evidence of insurance or other form of financial 
responsibility. Launch licensees must demonstrate financial 
responsibility at least 30 days before commencing licensed launch 
activities. The frequency of required submissions may depend upon the 
frequency of licensed launch activities; however, a license may 
authorize more than one launch. Respondents are all licensees 
authorized to conduct licensed launch activities. In addition to the 
licensee, its customers and the contractors and subcontractors of each 
are required to enter into reciprocal waiver of claims agreements. 
Estimated Average Burden Hours Per Respondent: 261 hours.
    The Office considers comments by the public on the proposed 
collection of information in order to evaluate the accuracy of the 
Office's estimate of the burden of the proposed collection of 
information, the quality, utility and clarity of the information to be 
collected, and possible ways to minimize the burden of the collection.
    In submitting comments to OMB, commenters should keep in mind that 
OMB is required to make a decision concerning the collection of 
information contained in the proposed regulations between 30 and 60 
days after publication of this document in the Federal Register.
    Comments on the proposed information collection requirements should 
be submitted to: Office of Management and Budget, Washington, DC 20503, 
Attention: Desk Officer for the Federal Aviation Administration, U.S. 
Department of Transportation. It is requested that comments sent to OMB 
also be sent to the rulemaking docket for this proposed action, Room 
612, Federal Aviation Administration, U.S. Department of 
Transportation, 800 Independence Avenue, SW., Washington, DC 20591.

Impact Analyses

    Proposed changes to Federal regulations must undergo several 
economic analyses. First, Executive Order 12866 directs that agencies 
shall propose or adopt a regulation only upon a determination that the 
benefits of the intended regulation justify its costs. Second, the 
Regulatory Flexibility Act of 1980 requires agencies to analyze the 
economic effect of regulatory changes on small entities. Third, the 
Office of Management and Budget (OMB) directs agencies to assess the 
effect of regulatory changes on international trade. In addition, under 
regulatory policies and procedures of the Department of Transportation 
(44 FR

[[Page 39015]]

11034; February 26, 1979), this proposed rule is considered significant 
because there is substantial public interest in the rulemaking. This 
rule has been reviewed by OMB under Executive Order 12866.

Economic Impacts

    Executive Order 12866 directs that each Federal agency proposing to 
adopt a regulation may do so only upon a reasoned determination that 
the benefits of the intended regulation justify its costs. The Office 
has prepared a detailed analysis of the economic effects that would be 
associated with the proposed rule. Its findings are set forth in an 
economic impact assessment, copies of which are available from the FAA 
Rules Docket. As part of its analysis, the Office considered 
alternatives, taking into account that the principal requirements of 
the proposed rule are mandated by statute.
    Under the 1988 Amendments, as implemented by the Office in 
regulations, required insurance would be available to compensate third 
parties, including certain Government personnel, who may suffer bodily 
injury or property damage as a result of licensed launch activities. 
Additionally, required insurance protects all launch participants from 
third party claims and provides cost savings to each participant by 
relieving them of the need to obtain separate liability insurance 
covering those risks. Potential costs of litigation should be 
eliminated as a result of required cross-waivers of claims among launch 
participants. There is a reallocation of expected costs of claims of 
$20,000 over a four-year period from the U.S. commercial space launch 
industry to the United States, as a consequence of the Government's 
payment of excess third-party claims under the Act, up to a $1.5 
billion exposure for liability. Additional costs to the Government to 
administer requirements imposed under the 1988 Amendments and the 
proposed regulations are expected to have an upper limit of $673,000 
over four years.

Impacts on Small Entities

    The Regulatory Flexibility Act of 1980 (RFA) was enacted by 
Congress to ensure that small entities are not unnecessarily or 
disproportionately burdened by Federal regulations. The Office analyzed 
the economic impact of the proposed regulations on small commercial 
entities, as part of its economic impact assessment. For purposes of 
the analysis, the Office utilized the Standard Industrial 
Classification codes and size standards for business entities relating 
to space vehicles, which define small entities as those comprised of 
fewer than 1000 employees. 13 CFR 121.601. Because the commercial 
launch industry is evolving new ways of doing business, the Office also 
considered as small commercial entities those firms offering or 
planning to offer commercial space transportation services that have 
not had long-term relationships with the U.S. Government as a 
contractor-manufacturer of expendable launch vehicles or components, or 
have not received rights to use government-developed launch vehicles. 
These are few in number.
    The economic impacts on small commercial entities resulting from 
the 1988 Amendments to the Act are largely benefits. The Office's 
analysis reveals only non-quantifiable costs to commercial entities as 
a result of the proposed regulations. They include minimal paperwork 
costs and costs that may result from having to obtain insurance in 
advance of licensed launch activities to demonstrate compliance with 
financial responsibility requirements. Neither of these costs would 
have a disproportionate impact on small commercial entities. Based upon 
the Office's economic impact assessment, the Office has determined that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities.

International Trade Impact Assessment

    The impact of the proposed rule on international trade is expected 
to be beneficial. The proposal rule would codify in regulations the 
financial responsibility and allocation of risk requirements imposed 
under the 1988 Amendments to the Commercial Space Launch Act of 1984, 
codified at 49 U.S.C. Subtitle IX, ch. 701. One of the primary 
objectives of the 1988 Amendments was to enable U.S. launch services 
providers to compete more effectively with foreign competitors.
    Customers may enjoy enhanced understanding of the benefits and 
responsibilities that attend licensed launch activities carried out 
within the United States or by its citizens. By clarifying the U.S. 
Government's agreement, subject to appropriations laws or other 
additional legislative authority, to provide for the payment of excess 
third-party claims above required insurance, the proposed regulations 
may enable U.S. companies to negotiate more effectively with foreign 
customers who must choose between U.S. and other competing launch 
services providers.

Federalism Implications

    The proposed regulations would not have substantial direct effects 
on the states, on the relationship between the Federal government and 
the states, or on the distribution of power and responsibilities among 
the various levels of government. Therefore, in accordance with 
Executive Order 12612, it is determined that the proposed regulation 
does not have sufficient federalism implications to warrant the 
preparation of a Federalism Assessment.

List of Subjects in 49 CFR Part 440

    Armed forces; Claims; Federal building and facilities; Government 
property; Indemnity payments; Insurance; Reporting and recordkeeping 
requirements; Rockets; Space transportation and exploration.

Proposed Regulation

    In consideration of the foregoing, the Office of the Associate 
Administrator for Commercial Space Transportation proposes to amend the 
Commercial Space Transportation Licensing Regulations, 14 CFR Ch. III, 
as follows:
    1. Subchapter C of Chapter III, Title 14, Code of Federal 
Regulations, would be amended by adding a new part 440 to read as 
follows:

PART 440--FINANCIAL RESPONSIBILITY

Subpart A--Financial Responsibility for Licensed Launch Activities

Sec.
440. 1  Scope; Basis.
440. 3  Definitions.
440. 5  General.
440. 7  Determination of maximum probable loss.
440. 9  Insurance requirements for licensed launch activities.
440. 11  Duration of coverage; modifications.
440. 13  Standard conditions of insurance coverage.
440. 15  Demonstration of compliance.
440. 17  Reciprocal waiver of claims requirement.
440. 19  United States payment of excess third-party liability 
claims.

    Authority: 49 U.S.C. 70101-70119; 49 CFR 1.47.


Sec. 440.1  Scope; Basis.

    This part sets forth financial responsibility and allocation of 
risk requirements applicable to commercial space launch activities that 
are authorized to be conducted under a launch license issued pursuant 
to this subchapter.


Sec. 440.3  Definitions.

    (a) For purposes of this part--
    (1) Bodily injury means physical injury, sickness, disease, 
disability, shock, mental anguish, or mental injury sustained by any 
person, including death.

[[Page 39016]]

    (2) Contractors and subcontractors means those entities that are 
involved at any tier, directly or indirectly, in licensed launch 
activities, and includes suppliers of property and services, and the 
component manufacturers of a launch vehicle or payload.
    (3) Customer means the person who procures launch services from the 
licensee, and any person to whom the customer has sold, leased, 
assigned, or otherwise transferred its rights in the payload (or any 
part thereof) to be launched by the licensee, including a conditional 
sale, lease, assignment, or transfer of rights.
    (4) Federal range facility means a Government-owned installation at 
which launches take place.
    (5) Financial responsibility means statutorily required financial 
ability to meet liability as required under 49 U.S.C 70101-70119.
    (6) Government personnel means employees of the United States, its 
agencies, and its contractors and subcontractors, involved in launch 
services for licensed launch activities. Employees of the United States 
include members of the Armed Forces of the United States.
    (7) Hazardous operations means activities, processes, and 
procedures that, because of the nature of the equipment, facilities, 
personnel, or environment involved or function being performed, may 
result in bodily injury or property damage.
    (8) Liability means a legal obligation to pay claims for bodily 
injury or property damage resulting from licensed launch activities.
    (9) License means an authorization to conduct licensed launch 
activities, issued by the Office under this subchapter.
    (10) Licensed launch activities means the launch of a launch 
vehicle as defined in a regulation or license issued by the Office and 
carried out pursuant to a license.
    (11) Maximum probable loss (MPL) means the greatest dollar amount 
of loss for bodily injury or property damage that is reasonably 
expected to result from licensed launch activities;
    (i) Losses to third parties, excluding Government personnel, that 
are reasonably expected to result from licensed launch activities are 
those having a probability of occurrence on the order of no less than 
one in ten million.
    (ii) Losses to Government property and Government personnel that 
are reasonably expected to result from licensed launch activities are 
those having a probability of occurrence on the order of no less than 
one in one hundred thousand.
    (12) Office means the Associate Administrator for Commercial Space 
Transportation of the Federal Aviation Administration, U.S. Department 
of Transportation.
    (13) Property damage means partial or total destruction, 
impairment, or loss of tangible property, real or personal.
    (14) Regulations means the Commercial Space Transportation 
Licensing Regulations, codified at 14 CFR Ch. III.
    (15) Third party means.
    (i) Any person other than:
    (A) The United States, its agencies, and its contractors and 
subcontractors involved in launch services for licensed launch 
activities;
    (B) The licensee and its contractors and subcontractors involved in 
launch services for licensed launch activities; and
    (C) The customer and its contractors and subcontractors involved in 
launch services for licensed launch activities.
    (ii) Government personnel, as defined in this section, 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.
    (16) United States means the United States Government, including 
its agencies.
    (b) Except as otherwise provided in this section, any term used in 
this part and defined in 49 U.S.C. 70101-70119, or in Sec. 401.5 of 
this chapter shall have the meaning contained therein.


Sec. 440.5  General.

    (a) No person shall commence or conduct launch activities that 
require a license unless that person has obtained a license and fully 
demonstrated compliance with the financial responsibility and 
allocation of risk requirements set forth in this part.
    (b) The Office shall prescribe the amount of financial 
responsibility a licensee is required to obtain, and any additions to 
or modifications of the amount, in a license order issued concurrently 
with or subsequent to the issuance of a license.
    (c) Demonstration of financial responsibility under this part shall 
not relieve the licensee of ultimate responsibility for liability, 
loss, or damage sustained by the United States resulting from licensed 
launch activities, except to the extent that:
    (1) Liability, loss, or damage sustained by the United States 
results from willful misconduct of the United States or its agents, 
including Government personnel;
    (2) Covered claims by third parties for bodily injury or property 
damage arising out of any particular launch exceed the amount of 
financial responsibility required under Sec. 440.9(c) of this part and 
do not exceed $1,500,000,000 (as adjusted for inflation occurring after 
January 1, 1989) above such amount, and are payable pursuant to 49 
U.S.C. 70113 and Sec. 440.19 of this part;
    (3) Covered claims for property loss or damage exceed the amount of 
financial responsibility required under Sec. 440.9(e) of this part; or
    (4) The licensee has no liability for claims by third parties for 
bodily injury or property damage arising out of any particular launch 
that exceed $1,500,000,000 (as adjusted for inflation occurring after 
January 1, 1989).
    (d) A licensee's failure to comply with the requirements in this 
part may result in suspension or revocation of a license, and subjects 
the licensee to civil penalties as provided in part 405 of this 
chapter.


Sec. 440.7  Determination of maximum probable loss.

    (a) The Office shall determine the maximum probable loss (MPL) from 
claims by a third party for bodily injury or property damage, and the 
United States, its agencies, and its contractors and subcontractors for 
covered property damage or loss, resulting from licensed launch 
activities. The maximum probable loss determination forms the basis for 
financial responsibility requirements issued in a license order.
    (b) The Office issues its determination of maximum probable loss no 
later than ninety days after a licensee or transferee has requested a 
determination and submitted all information required by the Office to 
make the determination. The Office shall consult with Federal agencies 
that are involved in, or whose personnel or property are exposed to 
risk of damage or loss as a result of, licensed launch activities 
before issuing a license order prescribing financial responsibility 
requirements and shall notify the licensee or transferee if timely 
issuance of the MPL determination is not possible due to interagency 
consultation.
    (c) Information requirements for obtaining a maximum probable loss 
determination are set forth in Appendix I to this part. Any person 
requesting a determination of maximum probable loss shall submit 
information in accordance with Appendix I requirements, unless the 
Office has waived requirements. In lieu of submitting required 
information, a person requesting a maximum probable loss determination 
may designate and

[[Page 39017]]

certify certain information previously submitted for a prior 
determination as complete, valid, and equally applicable to its current 
request. The requester is responsible for the continuing accuracy and 
completeness of information submitted under this part and shall 
promptly report any changes in writing.
    (d) The Office shall amend a determination of maximum probable loss 
required under this section at any time prior to completion of licensed 
launch activities as warranted by supplementary information provided to 
or obtained by the Office after the MPL determination is issued. Any 
change in financial responsibility requirements as a result of an 
amended MPL determination shall be set forth in a license order.
    (e) The Office may make a determination of maximum probable loss at 
any time other than as set forth in paragraph (b) of this section upon 
request by any person.


Sec. 440.9  Insurance requirements for licensed launch activities.

    (a) As a condition of each launch license, the licensee shall 
comply with insurance requirements set forth in this section and in a 
license order issued by the Office, or may otherwise demonstrate the 
required amount of financial responsibility.
    (b) The licensee shall obtain and maintain in effect a policy or 
policies of liability insurance, in an amount determined by the Office 
under paragraph (c) of this section, that protects the following 
persons as additional insureds to the extent of their respective 
potential liabilities against claims by a third party for bodily injury 
or property damage resulting from licensed launch activities:
    (1) The licensee, its customer, and their respective contractors 
and subcontractors;
    (2) The United States, its agencies, and its contractors and 
subcontractors; and
    (3) Government personnel.
    (c) The Office shall prescribe for each licensee the amount of 
insurance required to compensate the total of third-party claims for 
bodily injury or property damage resulting from licensed launch 
activities in connection with any particular launch. The amount of 
insurance required is based upon the Office's determination of maximum 
probable loss; however, it will not exceed the lesser of:
    (1) $500 million; or
    (2) The maximum liability insurance available on the world market 
at a reasonable cost, as determined by the Office.
    (d) The licensee shall obtain and maintain in effect a policy or 
policies of insurance, in an amount determined by the Office under 
paragraph (e) of this section, that covers claims by the United States, 
it agencies, and its contractors and subcontractors for property damage 
or loss resulting from licensed launch activities. Property covered by 
this insurance shall include all property owned, leased, or occupied 
by, or within the care, custody, or control of, the United States, its 
agencies, and its contractors and subcontractors, at a Federal range 
facility. Insurance shall protect the United States, its agencies, and 
it contractors and subcontractors.
    (e) The Office shall prescribe for each licensee the amount of 
insurance required to compensate claims for property damage under 
paragraph (d) of this section resulting from licensed launch activities 
in connection with any particular launch. The amount of insurance is 
based upon a determination of maximum probable loss; however, it will 
not exceed $100 million.
    (f) In lieu of a policy of insurance, a licensee may demonstrate 
financial responsibility in another manner meeting the terms and 
conditions applicable to insurance as set forth in this part. The 
licensee shall describe in detail the method proposed for demonstrating 
financial responsibility and how it assures that the licensee is able 
to cover claims as required under this part.


Sec. 440.11  Duration of coverage; modifications.

    (a) Insurance coverage required under Sec. 440.9, or other form of 
financial responsibility, shall attach upon commencement of licensed 
launch activities, and remain in full force and effect until the later 
of completion of licensed launch activities as defined by the Office in 
regulations, or until risk to third parties and Government property as 
a result of licensed launch activities is sufficiently small, as 
determined by the Office through the risk analysis conducted to 
determine MPL, that financial responsibility is no longer necessary. 
The required duration of financial responsibility shall be specified in 
a license order, and may be amended in the event a launch anomaly 
results in additional risks to third parties or Government property.
    (b) Financial responsibility required under this part may not be 
replaced, canceled, changed, withdrawn, or in any way modified to 
reduce the limits of liability or the extent of coverage, nor expire by 
its own terms, prior to the time specified in a license order, unless 
the Office is notified in advance and expressly approves the 
modification.


Sec. 440.13  Standard conditions of insurance coverage.

    (a) Insurance obtained under Sec. 440.9 shall comply with the 
following terms and conditions of coverage:
    (1) Bankruptcy or insolvency of an insured, including any 
additional insured, shall not relieve the insurer or any or its 
obligations under any policy.
    (2) Policy limits shall apply separately to each occurrence and to 
the total claims arising out of licensed launch activities in 
connection with any particular launch.
    (3) Except as provided herein, each policy shall pay claims from 
the first dollar of loss, without regard to any deductible, to the 
limits of the policy. A licensee may obtain a policy containing a 
deductible amount if the amount of the deductible is placed in an 
escrow account or otherwise demonstrated to the unobligated, 
unencumbered funds of the licensee, available to compensate claims at 
any time claims may arise.
    (4) Policies shall not be invalidated by any action or inaction of 
the licensee or any additional insured, including nonpayment by the 
licensee of the policy premium, and shall insure the licensee and each 
additional insured regardless of any breach or violation of any 
warranties, declarations, or conditions contained in the policies by 
the licensee or any additional insured (other than a breach of 
violation by the licensee or an additional insured, and then only as 
against that licensee or additional insured).
    (5) Exclusions from coverage shall be specified.
    (6) Insurance shall be primary without right of contribution from 
any other insurance that is carried by the licensee or any additional 
insured. Each policy shall expressly provide that all of its 
provisions, except the policy limits, operate in the same manner as if 
there were a separate policy with and covering the licensee and each 
additional insured.
    (7) Each policy shall be placed with an insurer of recognized 
reputation and responsibility that is licensed to do business in any 
State, territory, possession of the United States, or the District of 
Columbia.
    (8) Except as to claims resulting from the willful misconduct of 
the United States or its agents, the insurer shall waive any and all 
rights of subrogation against each of the parties protected by required 
insurance.
    (b) [Reserved]

[[Page 39018]]

Sec. 440.15  Demonstration of compliance.

    (a) A licensee must submit evidence of financial responsibility and 
compliance with allocation of risk requirements under this part, as 
follows, unless a licensee order specifies fewer days due to the 
proximity of the licensee's intended date for commencement of licensed 
launch activities:
    (1) The three-party cross-waiver of claims agreement required under 
Sec. 440.17(c) of this part shall be submitted at least 30 days before 
commencement of licensed launch activities;
    (2) Evidence of insurance shall be submitted at least 30 days 
before commencement of licensed launch activities; and
    (3) Evidence of financial responsibility in a form other than 
insurance, ad provided under Sec. 440.9(f) of this part, shall be 
submitted at least 60 days before commencement of licensed launch 
activities.
    (b) Upon a complete demonstration of compliance with financial 
responsibility and allocation of risk requirements under this part, the 
requirements shall preempt any provisions in agreements between the 
licensee and an agency of the United States governing access to or use 
of United States launch property or launch services for licensed launch 
activities which address financial responsibility, allocation of risk 
and related matters covered by 49 U.S.C. 70112, 70113.
    (c) A licensee must demonstrate compliance as follows:
    (1) The licensee shall provide proof of insurance required under 
Sec. 440.9 by:
    (i) Certifying to the Office that it has obtained insurance in 
compliance with the requirements of this part and any applicable 
license order;
    (ii) Filing with the Office one or more certificates of insurance 
evidencing insurance coverage by one or more insurers under a currently 
effective and properly endorsed policy or policies of insurance, 
applicable to licensed launch activities, on terms and conditions and 
in amounts prescribed under this part, and specifying policy 
exclusions;
    (iii) In the event of any policy exclusions or limitations of 
coverage that may be considered usual under Sec. 440.19(c) of this 
part, or for purposes of implementing the Government's waiver of claims 
for property damage under the Act, certifying that insurance covering 
the excluded risks is not commercially available at reasonable cost; 
and
    (iv) Submitting to the Office, for signature by the Department on 
behalf of the United States Government, the duly executed waiver of 
claims and assumption of responsibility agreement required by 
Sec. 440.17(c) of this part.
    (2) Certifications required under this section shall be signed by a 
duly authorized officer of the licensee.
    (d) Certificate(s) of insurance required under paragraph (c)(1)(ii) 
of this section shall be signed by the insurer issuing the policy and 
accompanied by an opinion of the insurer that the insurance obtained by 
the licensee complies with the specific requirements for insurance set 
forth in this part and any applicable license order.
    (e) The licensee shall maintain, and make available for inspection 
by the Office upon request, all required policies of insurance and 
other documents necessary to demonstrate compliance with this part.
    (f) In the event the licensee demonstrates financial responsibility 
using means other than insurance, as provided under Sec. 440.9(f) of 
this part, the licensee shall provide proof that it has met the 
requirements set forth in this part and in a license order issued by 
the Office.


Sec. 440.17  Reciprocal waiver of claims requirements.

    (a) As a condition of each launch license, the licensee shall 
comply with reciprocal waiver of claims requirements as set forth in 
this section.
    (b) The licensee shall implement reciprocal waivers of claims with 
its contractors and subcontractors, its customer(s) and the customer's 
contractors and subcontractors, under which each party waives and 
releases claims against the other parties to the waivers and agrees to 
assume responsibility for property damage it sustains and for bodily 
injury or property damage sustained by its own employees resulting from 
licensed launch activities, regardless of fault.
    (c) For each licensed launch in which the U.S. Government, its 
agencies, or its contractors and subcontractors is involved in licensed 
launch activities or where property insurance is required under 
Sec. 440.9(d) of this part, the Department of Transportation, the 
licensee, and its customer shall enter into a three-party reciprocal 
waiver of claims agreement in the form set forth in Appendix II to this 
part. If the licensee's customer is an agency of the U.S. Government, 
the Agreement shall be modified to reflect that, for purposes of the 
Agreement, the customer is a Government agency involved in licensed 
launch activities except that the government customer waives claims and 
accepts responsibility for damage or loss to its property.
    (d) The licensee, its customer, and the United States but only to 
the extent provided in legislation, shall agree in any waiver of claims 
agreements required under this part to indemnify another party to the 
agreement from claims by the indemnifying party's contractors and 
subcontractors arising out of the indemnifying party's failure to 
implement properly the waiver requirement.


Sec. 440.19  United States payment of excess third-party liability 
claims.

    (a) The United States shall pay successful claims (including 
reasonable expenses of litigation or settlement) of a third party 
against the licensee, the customer, and the contractors and 
subcontractors of the licensee and the customer, and the contractors 
and subcontractors of the United States and its agencies involved in 
licensed launch activities to the extent provided in an appropriation 
law or other legislative authority providing for payment of claims in 
accordance with 49 U.S.C. 70113, and to the extent the total amount of 
such claims arising out of any particular launch:
    (1) Exceeds the amount of insurance required under Sec. 440.9(b); 
and
    (2) Is not more than $1,500,000,000 (as adjusted for inflation 
occurring after January 1, 1989) above that amount.
    (b) Payment by the United States under paragraph (a) of this 
section shall not be made for any part of such claims for which the 
bodily injury or property damage results from willful misconduct by the 
party seeking payment.
    (c) The United States shall provide for payment of claims by third 
parties for bodily injury of property damage that are payable under 49 
U.S.C. 70113 and not covered by required insurance under Sec. 440.9(b), 
without regard to the limitation under paragraph (a)(1) of this 
section, because of an insurance policy exclusion that is usual. A 
policy exclusion is considered usual only if insurance covering the 
excluded risk is not commercially available at reasonable rates. The 
licensee must submit a certification in accordance with 
Sec. 440.15(c)(1)(iii) of this part for the United States to cover such 
claims.
    (d) Upon the expiration of the policy period prescribed in 
accordance with Sec. 440.11(a), the United States shall provide for 
payment of claims that are payable under 49 U.S.C. 70113 from the first 
dollar of loss up to $1,500,000,000 (as adjusted for inflation 
occurring after January 1, 1989).
    (e) Payment by the United States of excess third-party claims under 
49 U.S.C. 70113 shall be subject to:

[[Page 39019]]

    (1) Prompt notice by the licensee to the Office that the total 
amount of claims arising out of licensed launch activities exceeds, or 
is likely to exceed, the required amount of financial responsibility. 
For each claim, the notice must specify the nature, cause, and amount 
of the claim or lawsuit associated with the claim, and the party or 
parties who may otherwise be liable for payment of the claim;
    (2) Participation or assistance in the defense of the claim or 
lawsuit by the United States, at its election;
    (3) Approval by the Office of any settlement, or part of a 
settlement, to be paid by the United States; and
    (4) Approval by Congress of a compensation plan prepared by the 
Office and submitted by the President.
    (f) The Office will:
    (1) Prepare a compensation plan outlining the total amount of 
claims and meeting the requirements set forth in 49 U.S.C. 70113;
    (2) Recommend sources of funds to pay the claims; and
    (3) Propose legislation as required to implement the plan.
    (g) The Office may withhold payment of a claim if the Office finds 
that the amount is unreasonable, unless it is the final order of a 
United States Court.

Appendix I--Information Requirements for Obtaining a Maximum Probable 
Loss Determination for Licensed Launch Activities

    Any person requesting a maximum probable loss determination 
shall submit the following information to the Office, unless the 
Office has waived a particular information requirement under 14 CFR 
440.7(c):

I. General Information

    A. Mission description.
    1. A description of mission parameters, including:
    a. Launch trajectory;
    b. Orbital inclination; and
    c. Orbit altitudes (apogee and perigee).
    2. Flight sequence.
    3. Staging events and the time for each event.
    4. Impact locations.
    5. Identification of the launch range facility, including the 
launch complex on the range, planned date of launch, and launch 
windows.
    6. If the applicant has previously been issued a license to 
conduct launch activities using the same launch vehicle from the 
same launch range facility, a description of any differences planned 
in the conduct of proposed activities.
    B. Launch Vehicle Description.
    1. General description of launch vehicle and its stages, 
including dimensions.
    2. Description of major systems, including safety systems.
    3. Description of rocket motors and type of fuel used.
    4. Identification of all propellants to be used and their hazard 
classification under the Hazardous Materials Table, 49 CFR 172.101.
    5. Description of hazardous components.
    C. Payload.
    1. General description of the payload, including type (e.g., 
telecommunications, remote sensing), propellants, and hazardous 
components or materials, such as toxic or radioactive substances.
    D. Flight Termination System.
    1. Identification of any flight termination system (FTS) on the 
launch vehicle, including a description of operations and component 
location on the vehicle.

II. Pre-flight Processing Operations

    A. General description of pre-flight operations including 
vehicle processing consisting of an operational flow diagram showing 
the overall sequence and location of operations, commencing with 
arrival of vehicle components at the launch range facility through 
final safety checks and countdown sequence, and designation of 
hazardous operations, as defined in 14 CFR 440.3. For purposes of 
these information requirements, payload processing, as opposed to 
integration, is not a hazardous operation.
    B. For each hazardous operation, including but not limited to 
fueling, solid rocket motor build-up, ordnance installation, 
ordnance checkout, movement of hazardous materials, and payload 
integration:
    1. Identification of location where each operation will 
performed, including each building or facility identified by name or 
number.
    2. Identification of facilities adjacent to the location where 
each operation will be performed and therefore exposed to risk, 
identified by name or number.
    3. Maximum number of third-party personnel, including but not 
limited to Government personnel, who may be exposed to risk during 
each operation. For Government personnel, identification of his or 
her employer.
    4. Identification of launch range facility policies or 
requirements applicable to the conduct of operations.

III. Flight Operations

    A. Identification of launch range facilities exposed to risk 
during launch vehicle lift-off and flight.
    B. Identification of accident failure scenarios, probability 
assessments for each, and estimation of risks to third parties and 
Government property due to property damage or bodily injury. 
Scenarios shall cover the range of launch trajectories, inclinations 
and orbits for which authorization is sought in the license 
application. The estimation of risks for each scenario shall take 
into account the number of third parties at risk as a result of 
lift-off and flight of a launch vehicle (on-range, off-range, and 
down-range) and specific, unique facilities exposed to risk.
    C. On-orbit risk analysis assessing risks posed by a launch 
vehicle to operational satellites.
    D. Reentry risk analysis assessing risks to third parties as a 
result to reentering debris or reentry of the launch vehicle or its 
components.
    E. Trajectory data as follows: Nominal and 3-sigma lateral 
trajectory data in x, y, z and X, Y, Z coordinates in one-second 
intervals, data to be pad-centered with x being along the initial 
launch azimuth and continuing through impact for suborbital flights, 
and continuing through orbital insertion or the end of powered 
flight for orbital flights.
    F. Tumble-turn data for guided vehicles only, as follows: For 
vehicles with gimbaled nozzles, tumble turn data with zeta angles 
and velocity magnitudes stated. A separate table is required for 
each combination of fail times (every two to four seconds), and 
significant nozzle angles (two or more small angels, generally 
between one and five degrees).
    G. Identification of debris lethal areas and the projected 
number and ballistic coefficient of fragments expected to result 
from flight termination, initiated either by command or self-
destruct mechanism, for lift-off, land overflight, and reentry.

IV. Post-flight Processing Operations

    A. General description of post-flight ground operations 
including overall sequence and location of operations for removal of 
vehicle components and processing equipment from the launch range 
facility and for handling of hazardous materials, and designation of 
hazardous operations.
    B. Identification of all facilities used in conducting post-
flight processing operations.
    C. For each hazardous operation:
    1. Identification of location where each operation is performed, 
including each building or facility identified by name or number.
    2. Identification of facilities adjacent to location where each 
operation is performed and exposed to risk, identified by name or 
number.
    3. Maximum number of third-party personnel, including but not 
limited to Government personnel, who may be exposed to risk during 
each operation. For Government personnel, identification of his or 
her employer.
    4. Identification of launch range facility policies or 
requirements applicable to the conduct of operations.

Appendix II--Agreement for Waiver of Claims and Assumption of 
Responsibility

    THIS AGREEMENT is entered into this ____ day of __________, by 
and among [Licensee] (the ``Licensee''), [Customer] (the 
``Customer'') and the Department of Transportation, on behalf of the 
United States Government (collectively, the ``Parties''), to 
implement the provisions of section 440.7(c) of the Commercial Space 
Transportation Licensing Regulations, 14 CFR Ch. III (the 
``Regulations'').
    In consideration of the mutual releases and promises contained 
herein, the Parties hereby agree as follows:

1. Definitions

    ``Customer'' means the above-named Customer on behalf of the 
Customer and any

[[Page 39020]]

person to whom the Customer has sold, leased, assigned, or otherwise 
transferred its rights in the payload (or any part thereof) to be 
launched by the licensee, including a conditional sale, lease, 
assignment, or transfer of rights.
    ``License'' means License No. ____ issued on ________, by the 
Associate Administrator for Commercial Space Transportation, Federal 
Aviation Administration, Department of Transportation, to the 
Licensee, including all license orders issued in connection with the 
License.
    ``Licensee'' means the Licensee and any transferee of the 
Licensee under 49 U.S.C. Subtitle IX, ch. 701.
    ``United States Government'' means the United States, its 
agencies involved in Licensed Launch Activities, and its contractors 
and subcontractors involved in Licensed Launch Activities.
    Except as otherwise defined herein, terms used in this Agreement 
and defined in 49 U.S.C. Subtitle IX, ch. 701--Commercial Space 
Launch Activities, or in the Regulations, shall have the same 
meaning as contained in 49 U.S.C. Subtitle IX, ch. 701, or the 
Regulations, respectively.

2. Waiver and Release of Claims

    (a) Licensee hereby waives and releases claims it may have 
against Customer, Customer's Contractors and Subcontractors, and the 
United States Government, for Property Damage it sustains and for 
Bodily Injury or Property Damage sustained by its own employees, 
resulting from Licensed Launch Activities, regardless of fault.
    (b) Customer hereby waives and releases claims it may have 
against Licensee, its Contractors and Subcontractors, and the United 
States Government, for Property Damage it sustains and for Bodily 
Injury or Property Damage sustained by its own employees, resulting 
from Licensed Launch Activities, regardless of fault.
    (c) The United States Government hereby waives and releases 
claims it may have against Licensee and Customer, and against their 
respective Contractors and Subcontractors, for Property Damage it 
sustains, to the extent that claims it would otherwise have for such 
damage exceed the amount of insurance or demonstration of financial 
responsibility required under section 440.9(e) of the Regulations, 
14 CFR Sec. 440.9(e), regardless of fault.

3. Assumption of Responsibility

    (a) Licensee and Customer shall each be responsible for Property 
Damage it sustains and for Bodily Injury or Property Damage 
sustained by its own employees, resulting from Licensed Launch 
Activities, regardless of fault.
    (b) The United States Government shall be responsible for 
Property Damage it sustains, to the extent that claims it would 
otherwise have for such damage exceed the amount of insurance or 
demonstration of financial responsibility required under section 
440.9(e) of the Regulations, 14 CFR Sec. 449.9(e), regardless of 
fault.

4. Extension of Assumption and Waiver

    (a) Licensee shall extend the waiver and release of claims and 
the requirement of the assumption of responsibility as set forth in 
paragraphs 2(a) and 3(a), respectively, to its Contractors and 
Subcontractors by requiring them to waive and release all claims 
they may have against Customer, Customer's Contractors and 
Subcontractors, and the United States Government, and to agree to be 
responsible, for Property Damage they sustain and for Bodily Injury 
or Property Damage sustained by their own employees, resulting from 
Licensed Launch Activities, regardless of fault.
    (b) Customer shall extend the waiver and release of claims and 
the requirement of the assumption of responsibility as set forth in 
paragraphs 2(b) and 3(a), respectively, to its Contractors and 
Subcontractors by requiring them to waive and release all claims 
they may have against Licensee, the Licensee's Contractors and 
Subcontractors, and the United States Government, and to agree to be 
responsible, for Property Damage they sustain and for Bodily Injury 
or Property Damage sustained by their own employees, resulting from 
Licensed Launch Activities, regardless of fault.

5. Indemnification

    (a) Licensee shall hold harmless and indemnify Customer and its 
directors, officers, servants, agents, subsidiaries, employee and 
assignees, or any of them, and the United States Government and its 
directors, officers, servants, agents, subsidiaries, employee and 
assignees, or any of them, from and against liability, loss or 
damage arising out of claims that Licensee's Contractors and 
Subcontractors may have for Property Damage sustained by them and 
for Bodily Injury or Property Damage sustained by their employees, 
resulting from Licensed Launch Activities.
    (b) Customer shall hold harmless and indemnify Licensee and its 
directors, officers, servants, agents, subsidiaries, employees and 
assignees, or any of them, and the United States Government and its 
directors, officers, servants, agents, subsidiaries, employees and 
assignees, or any of them, from and against liability, loss or 
damage arising out of claims that Customer's Contractors and 
Subcontractors, or any person on whose behalf Customer enters into 
this Agreement, may have for Property Damage sustained by them and 
for Bodily Injury or Property Damage sustained by their employees, 
resulting from Licensed Launch Activities.
    (c) To the extent provided in advance in an appropriation law or 
to the extent there is enacted additional legislative authority 
providing for the payment of claims, the United States shall hold 
harmless and indemnify Licensee and Customer and their respective 
directors, officers, servants, agents, subsidiaries, employees and 
assignees, or any of them, from and against liability, loss or 
damage arising out of claims that any person on whose behalf the 
Department enters into this Agreement may have for Property Damage 
sustained by them, resulting from Licensed Launch Activities.

6. Assurances under 49 U.S.C. 70112(e)

    Notwithstanding any provision of this Agreement to the contrary, 
Licensee shall hold harmless and indemnify the United States 
Government and its agencies, servants, agents, employees and 
assignees, or any of them, from and against liability, loss or 
damage arising out of claims for Bodily Injury or Property Damage, 
resulting from Licensed Launch Activities, regardless of fault, 
except to the extent that: (i) As provided in section 7(b) of this 
Agreement, claims result from willful misconduct of the United 
States Government or its agents; (ii) claims for Property Damage 
sustained by the United States Government exceed the amount of 
insurance or demonstration of financial responsibility required 
under section 440.9(e) of the Regulations (14 CFR Sec. 440.9(e)); 
(iii) claims by a Third Party for Bodily Injury or Property Damage 
exceed the amount of insurance or demonstration of financial 
responsibility required under section 440.9(c) of the Regulations 
(14 CFR Sec. 440.9(c)), and do not exceed $1,500,000,000 (as 
adjusted for inflation after January 1, 1989) above such amount, and 
are payable pursuant to the provisions of 49 U.S.C. 70113 and 
section 440.19 of the Regulations (14 CFR Sec. 440.19); or (iv) 
Licensee has no liability for claims exceeding $1,500,000,000 (as 
adjusted for inflation after January 1, 1989).

7. Miscellaneous

    (a) Nothing contained herein shall be construed as a waiver or 
release by Licensee, Customer or the United States Government of any 
claim by an employee of the Licensee, Customer or the United States 
Government, respectively, including a member of the Armed Forces of 
the United States, for Bodily Injury or Property Damage, resulting 
from Licensed Launch Activities.
    (b) Notwithstanding any provision of this Agreement to the 
contrary, any waiver, release, assumption of responsibility or 
agreement to indemnify herein shall not apply to claims for Bodily 
Injury or Property Damage resulting from willful misconduct of any 
of the Parties, the Contractors and Subcontractors of any of the 
Parties, and the directors, officers, agents and employees of any of 
the foregoing.
    (c) In the event that more than one customer is involved in 
Licensed Launch Activities, references herein to Customer shall 
apply to, and be deemed to include, each such customer severally and 
not jointly.
    (d) The Agreement shall be governed by and construed in 
accordance with United States Federal law.
    In Witness Whereof, the Parties to this Agreement have caused 
the Agreement to be duly executed by their respective duly 
authorized representatives as of the date written above.

Licensee

By:
Its:

Customer

By:
Its:

Department of Transportation

By:
Its: Associate Administrator for Commercial Space Transportation, 
Federal Aviation Administration


[[Page 39021]]


    Issued in Washington, DC., this 17th day of July 1996.
Patti Grace Smith,
Acting Associate Administrator for Commercial Space Transportation, 
Federal Aviation Administration.
[FR Doc. 96-18532 Filed 7-24-96; 8:45 am]
BILLING CODE 4910-13-M