[Federal Register Volume 63, Number 165 (Wednesday, August 26, 1998)]
[Rules and Regulations]
[Pages 45592-45625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22728]



[[Page 45591]]

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Part IV





Department of Transportation





_______________________________________________________________________



Federal Aviation Administration



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14 CFR Part 440



Financial Responsibility Requirements for Licensed Launch Activities; 
Final Rule

  Federal Register / Vol. 63, No. 165 / Wednesday, August 26, 1998 / 
Rules and Regulations  

[[Page 45592]]



DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 440

[Docket 28635; Amendment No. 98-1]
RIN 2120-AF98


Financial Responsibility Requirements for Licensed Launch 
Activities

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: Under its licensing authority, the Associate Administrator for 
Commercial Space Transportation (AST) of the Federal Aviation 
Administration (FAA) determines financial responsibility requirements 
for licensees authorized to conduct commercial space launch activities. 
This rulemaking establishes procedures for demonstrating compliance 
with those requirements and for implementing risk allocation provisions 
of 49 U.S.C. Subtitle IX, chapter 701, formerly the Commercial Space 
Launch Act of 1984, as amended.

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

FOR FURTHER INFORMATION CONTACT: Ms. Esta M. Rosenberg, Attorney-
Advisor, Regulations Division, Office of the Chief Counsel, Federal 
Aviation Administration, U.S. Department of Transportation, (202) 366-
9320.

SUPPLEMENTARY INFORMATION:

Availability of Final Rules

    An electronic copy of this document may be downloaded, using a 
modem and suitable communications software, from the FAA regulations 
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703-321-3339), the Federal Register's electronic bulletin board service 
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5948).
    Internet users may reach the FAA's web page at http://www.faa.gov/
avr/arm/nprm/nprm.htm or the Federal Register's webpage at http://
www.access.gpo.gov/su__docs/aces/aces140.html for access to recently 
published rulemaking documents.
    Any person may obtain a copy of this final rule by submitting a 
request to the Federal Aviation Administration, Office of Rulemaking, 
ARM-1, 800 Independence Avenue, SW., Washington, DC 20591, or by 
calling (202) 267-9680. Communications must identify the amendment 
number or docket number of this final rule.
    Persons interested in being placed on the mailing list for future 
Notices of Proposed Rulemaking and Final Rules should request from the 
above office a copy of Advisory Circular No. 11-2A, Notice of Proposed 
Rulemaking Distribution System, that describes the application 
procedure.

Small Entity Inquiries

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) requires the FAA to report inquiries from small entities 
concerning information on, and advice about, compliance with statutes 
and regulations within the FAA's jurisdiction, including interpretation 
and application of the law to specific sets of facts supplied by a 
small entity.
    If you are a small entity and have a question, contact your local 
FAA official. If you do not know how to contact your local FAA 
official, you may contact Charlene Brown, Program Analyst Staff, Office 
of Rulemaking, ARM-27, Federal Aviation Administration, 800 
Independence Avenue, SW, Washington, DC 20591, 1-888-551-1594. Internet 
users can find additional information on SBREFA in the Quick Jump 
section of the FAA's web page at http://www.faa.gov and may send 
electronic inquiries to the following Internet address: 9-AWA-
[email protected].

Background

    49 U.S.C. Subtitle IX, chapter 701--Commercial Space Launch 
Activities, formerly the Commercial Space Launch Act of 1984, as 
amended (CSLA), directs the Secretary of Transportation to establish 
insurance (or other financial responsibility) requirements in amounts 
sufficient to address certain risks associated with the conduct of 
licensed launch activities. In addition, the CSLA provides detailed 
requirements for allocating risk among the various launch participants, 
including U.S. Government agencies involved in launch services. Enacted 
in 1988, this comprehensive scheme was intended to facilitate 
development of the U.S. commercial launch industry by allowing it to 
compete effectively in the international marketplace and by providing 
to launch participants certain protections against the risk of 
catastrophic losses that could result from hazardous launch activities. 
The U.S. Government benefits from these provisions by limiting its own 
liability exposure including obligations that arise under international 
treaties. Additionally, a viable commercial launch industry contributes 
to the national interest of the United States.
    The Secretary implements statutory-based financial responsibility 
and risk allocation requirements through the licensing and regulatory 
program carried out by the Federal Aviation Administration's Associate 
Administrator for Commercial Space Transportation (referred to herein 
as the FAA or agency). Under delegated authority, the agency licenses 
commercial space launches and the commercial operation of launch sites 
carried out within the United States or by U.S. citizens abroad. As 
directed by the CSLA, the agency exercises its licensing authority in a 
manner consistent with public health and safety, the safety of 
property, and U.S. national security and foreign policy interests. The 
CSLA is also intended to encourage and facilitate private sector launch 
activities through simplified licensing procedures and use of 
Government-developed space technology, and to enhance U.S. space 
transportation infrastructure with public and private involvement.
    This rulemaking is vital to the agency's goal of creating a stable 
regulatory environment, with predictable costs and benefits, for the 
commercial launch industry. Through a clear enunciation of regulatory 
requirements for insurance and allocation of risk, the commercial 
launch industry will have the information and certainty it requires to 
make informed risk management decisions that affect relationships with 
customers and suppliers.

Notice of Proposed Rulemaking

    The agency issued a notice of proposed rulemaking (NPRM) on July 
25, 1996 (61 FR 38992), soliciting public comments on its proposal for 
implementing financial responsibility and allocation of risk 
requirements. The NPRM provided a 60-day comment period that closed on 
September 23, 1996. A technical corrections document was published on 
August 23, 1996 (61 FR 43814). In response to requests for an extension 
of time in which to submit comments, the agency reopened the comment 
period for an additional 60 days. The comment period closed again on 
December 2, 1996. (See Notice published October 2, 1996 (61 FR 51395).)
    In the NPRM, the agency proposed to codify existing practices, 
except where otherwise indicated, and to standardize its approach to 
implementing the CSLA financial responsibility and allocation of risk 
regime in rules of general applicability.

[[Page 45593]]

    Eight comments were submitted to the docket. Three comments were 
submitted by launch services providers currently licensed by the FAA to 
conduct commercial space launch activities. They are Lockheed Martin 
Corporation (Lockheed Martin), Orbital Sciences Corporation (Orbital 
Sciences) and McDonnell Douglas Corporation (McDonnell Douglas). Boeing 
Commercial Space Company commented on behalf of Sea Launch Limited 
Partnership (Sea Launch), an international joint venture not yet 
licensed by the FAA, and The Boeing Company (Boeing) commented 
separately. Since the close of the comment period in December 1996, The 
Boeing Company merged with McDonnell Douglas Corporation; however, 
McDonnell Douglas Corporation, operating as a wholly-owned subsidiary 
of The Boeing Company, remains responsible for providing commercial 
launch services for the Delta family of launch vehicles. In this 
document, comments submitted by McDonnell Douglas before the merger are 
identified as McDonnell Douglas comments for ease of reference and to 
distinguish them from Boeing's comments. Spaceport Florida Authority 
(Spaceport Florida) was a prospective commercial launch site operator 
at the time it submitted comments and has since obtained an FAA 
license. Hughes Electronics, a communications satellite manufacturer, 
and Intelsat, a public international organization that owns and 
operates a global telecommunications network for members and users, 
also submitted comments. The agency sought clarification of certain 
comments it received and the clarifications are reflected either in the 
discussion below or in the docket maintained by the FAA Rules Docket 
Clerk and available for public inspection.

Second Reopening of Comment Period and Request for Comments

    Several events following the close of the comment period on 
December 2, 1996, resulted in an agency decision to reopen the 
rulemaking docket a second time in order to allow industry an 
additional opportunity to offer views on the content of the NPRM.
    A Delta launch vehicle failure at Cape Canaveral Air Station (CCAS) 
during a Government launch on January 17, 1997, damaged real and 
personal property located at the facility. Although it was not an FAA-
licensed launch, and therefore not subject to CSLA financial 
responsibility requirements, the failure led to heightened scrutiny of 
insurance certificates provided by launch licensees in demonstrating 
satisfaction of FAA license orders.
    The ensuing dialogue between agency officials and industry 
representatives revealed a fundamental lack of understanding within the 
commercial launch services industry of agency requirements with respect 
to coverage for claims of Government employees and employees of 
Government contractors and subcontractors. Since 1989, the agency has 
intended for launch licensees to provide coverage for these claims as 
part of the liability coverage required under a license, and has 
determined the necessary amount of insurance accordingly. However, this 
requirement was not evident to launch licensees until the agency 
provided clarifying information, in writing, in late April and early 
May, 1997.
    Shortly thereafter, the Commercial Space Transportation Advisory 
Committee (COMSTAC) adopted a resolution recommending that the FAA 
publish a supplemental notice of proposed rulemaking for additional 
industry comment before adopting a final rule. In lieu of accepting the 
COMSTAC recommendation, the agency deemed it appropriate to reopen the 
comment period on the outstanding NPRM in order to afford industry an 
additional opportunity to formally express views on the agency's 
approach to financial responsibility and risk allocation for licensed 
launch activities. Reopening the docket also provided to industry the 
first opportunity to comment on these matters with the benefit of the 
agency's proposed definition of the term, ``licensed launch 
activities,'' which appears in a Notice of Proposed Rulemaking on 
Commercial Space Transportation Licensing Regulations (Licensing 
Regulations), published March 19, 1997 (62 FR 13216). A Notice 
reopening the comment period for an additional 30 days was published in 
the Federal Register on July 3, 1997 (62 FR 36028). The Notice posed a 
number of questions regarding the appropriate scope of CSLA-based 
liability insurance requirements and requested specific comments on 
costs and benefits associated with the rulemaking; however, commenters 
were not limited to responding to those questions. Four additional 
comments were submitted to the docket. Lockheed Martin and Orbital 
Sciences supplemented their initial responses and Kistler Aerospace 
Corporation (Kistler) and Marsh & McLennan, an insurance brokerage, 
commented for the first time. (Both the initial and supplemental 
comments of Lockheed Martin and Orbital Sciences are referenced in this 
Supplementary Information and distinguished as appropriate.)
    Upon consideration of all of the comments received, the agency has 
determined that issuance of a final rule is appropriate at this time in 
order to ensure that Government, as well as commercial, interests are 
adequately protected. Absent a clear understanding of how the risks 
that attend licensed launch activities are to be allocated and managed 
under the CSLA, all launch participants, including the U.S. Government, 
may unwittingly remain exposed to uncovered liabilities.
    Costs and benefits of this final rule have been assessed by the 
agency and appear in the final Regulatory Evaluation available for 
public review in the docket.

General Comments

    The three commenters currently licensed by the FAA to conduct 
launch activities, Lockheed Martin, Orbital Sciences and McDonnell 
Douglas, have been subject to the agency's case-by-case implementation 
of financial responsibility requirements since commencing commercial 
launch activities. Accordingly, they are each well-situated to assess 
the significance of the NPRM to their current business practices. Their 
comments indicate that in a number of instances the agency's existing 
practices, as explained in the NPRM, were not apparent to the 
commercial launch industry or their insurers, and in their view the 
NPRM reflects fundamental changes in the agency's approach.
    Two commenters noted that the NPRM reflects a trend towards 
significant reallocation of risk from the Government to commercial 
launch services providers. Two launch licensees indicated that the NPRM 
would require extensive and difficult changes to existing long-term 
contractual arrangements between launch services providers, their 
customers and their contractors. Rather than facilitating the industry, 
the NPRM, if made final, would have damaging and adverse effects on the 
U.S. commercial launch industry, according to these commenters. 
Although the licensees agreed that rulemaking to clarify financial 
responsibility requirements would be useful to the industry, they 
believe that additional opportunities for input and submission of 
comments should be afforded to the industry before issuance of a final 
rule. Two licensees recommended that the FAA utilize the COMSTAC by 
tasking it to review and comment on a redrafted document

[[Page 45594]]

reflecting industry comments on the NPRM.
    The agency has determined that it is appropriate and timely to 
issue a final rule. The FAA's decision follows years of dialogue 
between the agency and the commercial launch industry, a public meeting 
covering financial responsibility matters, and a total comment period 
of 150 days on the NPRM. The agency will not further delay this 
rulemaking proceeding on the basis of the comments received. However, 
the agency's existing regulations allow any interested person to 
petition for amendment or repeal of a regulation and this remedy 
remains available to members of the public who seek a change in these 
final rules, 14 CFR 404.3.
    In its general comments, Lockheed Martin suggested that certain 
issues raised in the NPRM be segmented from this rulemaking and the 
subject of separate, more focused, rulemaking proceedings. The agency 
agrees generally with this comment and, as indicated below, has 
identified issues that may require more detailed regulatory treatment 
beyond the general requirements contained in this final rule.
    McDonnell Douglas has suggested that additional discussions between 
the commercial launch industry, the agency and the Air Force would be 
useful before issuance of final rules in light of ongoing Air Force 
efforts to replace existing commercialization agreements with the 
Commercial Space Operations Support Agreement (CSOSA). The CSOSA would 
also address insurance requirements and allocation of risk between the 
Air Force and range users.
    The agency has participated in discussions between the Air Force 
and the commercial launch services industry to ensure that financial 
responsibility and risk allocation requirements under the CSLA apply to 
range users conducting licensed launch activities. Financial 
responsibility for unlicensed activities would be addressed by the 
CSOSA. The pending rulemaking on Licensing Regulations will determine 
in final rules the point at which lines are drawn by the agency between 
unlicensed and licensed launch activities. Given that understanding, 
the agency does not see the need to tie issuance of these rules to 
execution of a CSOSA.
    McDonnell Douglas further urged that any changes to current 
industry practice that would be effected by proceeding directly to a 
final rule should not apply to licensed launch activities conducted in 
connection with any launch contracts, including options, executed prior 
to issuance of the final rule. In clarifying remarks, McDonnell Douglas 
explained its concern that this rulemaking would affect its costs. 
Where a fixed price contract has been negotiated with a commercial 
customer there would be no opportunity to adjust the price or allocate 
those costs differently. Therefore, in fairness to the industry and to 
facilitate the smooth implementation of these requirements, contract 
negotiations already concluded should not be impacted by this 
rulemaking, according to the commenter.
    The agency maintains that, for the most part, these final rules 
reflect longstanding agency practices and should not impose significant 
additional costs on the industry. A Regulatory Evaluation prepared as 
part of this rulemaking proceeding assesses its cost implications. As 
required, the agency has considered those costs, as well as benefits, 
to the public in determining to issue this final rule. A single 
effective date for imposition of a final rule is necessary to ensure a 
common understanding of CSLA-based financial responsibility and risk 
allocation requirements, and staggered effective dates would be 
unworkable and confusing to all launch participants. Accordingly, the 
FAA rejects the suggestion of deferring the rule's effective date.
    Spaceport Florida provided general comments to the docket 
maintaining the view that the proposed rules do not apply to a licensed 
commercial launch site operator. The agency agrees that the NPRM 
proposes requirements applicable to licensed launch activities. 
Customers of a launch site operator that hold FAA launch licenses would 
be required to comply with the agency's financial responsibility 
requirements. In the agency's view, a licensed launch site operator 
would obtain the benefits and responsibilities of a contractor to the 
launch licensee as a provider of launch property and services. The 
recently concluded memorandum of agreement between the Department of 
Defense, National Aeronautics and Space Administration (NASA) and the 
FAA reflects this approach to risk allocation for licensed commercial 
launch site operators.
    Spaceport Florida further noted that the import of the NPRM would 
be to add to the levels of insurance historically required of launch 
licensees. This would make launch activities conducted within the 
United States more expensive and would hurt the competitive posture of 
the U.S. commercial launch industry vis-a-vis its foreign competitors.
    The agency disagrees with Spaceport Florida's supposition that 
insurance levels will increase if the proposed rules are made final. 
The maximum probable loss methodology as well as the agency's general 
approach to assessing risks to certain property and personnel, as 
described in the NPRM, are utilized currently by the agency in 
establishing required levels of insurance. Insurance requirements will 
not necessarily increase by virtue of this rulemaking.

Risk Allocation Under the 1988 Amendments

    In developing this rulemaking, the agency's goal has been to carry 
out congressional intent and facilitate the competitive posture of the 
U.S. commercial launch industry through statutory-based risk sharing 
arrangements. However, in certain instances, the statutory language has 
left more questions unanswered than settled. For this reason, the 
agency sought industry views and clarification of the appropriate means 
of implementing particular provisions of the statute concerning 
liability insurance coverage and allocation of risks, including the 
requirement for inter-party waivers of claims.
    This final rule represents the agency's position on how best to 
reconcile statutory requirements with the divergent views reflected in 
industry comments, taking into account the Government's limited 
acceptance of risk under the CSLA. In this discussion, the FAA has 
articulated its understanding of basic risk allocation principles of 
the 1988 Amendments (Pub. L. 100-657) and, in particular, the 
reciprocal waiver of claims provisions of 49 U.S.C. 70112(b) which lie 
at the heart of this rulemaking effort.
    As outlined in the NPRM, two principal purposes of risk allocation 
under the 1988 Amendments to the CSLA are to limit the cost of managing 
launch risks by restricting litigation among launch participants and 
protect the commercial launch industry from the risk of catastrophic 
losses from third-party liability claims. The CSLA also insulates the 
U. S. Government from a significant measure of liability exposure at 
little or no cost to the Government. As explained in the NPRM, the 
Government faces liability exposure to third-party claims by virtue of 
its involvement in licensed launch activities through use of its 
property, personnel, facilities, equipment and services to support 
commercial launches and as a result of treaty obligations which impose 
strict liability on the United States for certain damage when the 
United States is a launching

[[Page 45595]]

state (Convention on International Liability for Damage Caused by Space 
Objects (Liability Convention), entered into force September 1972). The 
United States also bears international responsibility for national 
activities in outer space carried on by non-governmental entities which 
require authorization and continuing supervision by the appropriate 
State Party, according to Article VI of the Treaty on Principles 
Governing the Activities of States in the Exploration and Use of Outer 
Space, including the Moon and Other Celestial Bodies (Outer Space 
Treaty), entered into force October 1967.
    In order to ensure the comprehensive intent of the CSLA risk 
allocation scheme is fulfilled, the agency sought to identify all 
potential sources of claims against the various launch participants for 
injury, damage or loss and the financial resources that would be 
available to respond to those claims, either through insurance, self-
insurance or congressional appropriations. Sources of claims can be 
separated into two broad groups: (1) those entities and individuals who 
are involved in licensed launch activities, and (2) those entities and 
individuals who are not involved in licensed launch activities. The 
agency then sought to identify potential targets of claims to ensure 
that their liability exposure would be addressed. These entities can 
also be classified into two groups: (1) the licensee, its customer, and 
the contractors and subcontractors of each involved in launch services, 
referred to collectively in this document as private party launch 
participants (PPLPs), and (2) the United States and its agencies, and 
their contractors and subcontractors, involved in licensed launch 
activities, referred to collectively herein as Government launch 
participants (GLPs). These categorizations are important because 
implementation of the benefits and responsibilities that flow from the 
CSLA risk allocation scheme depends upon how an entity is 
characterized. Traditionally, AST has utilized the classification of 
PPLPs and GLPs in license orders establishing financial responsibility 
requirements.
    Absent the CSLA risk allocation scheme, each launch participant is 
vulnerable to claims from other launch participants for injury, damage 
or loss to property and personnel as well as persons having no 
involvement in launch activities. The CSLA alters relationships among 
launch participants in several ways.
    First, the CSLA directs that each PPLP enter into a mutual or 
reciprocal waiver of claims whereby each launch participant agrees to 
waive claims it may have against the other launch participants for its 
own property damage or loss and further agrees to be responsible for 
property damage or loss it sustains as a result of licensed launch 
activities. When implemented properly, each of the entities 
participating in the launch should be effectively estopped or 
foreclosed from asserting claims for property damage or loss against 
the other launch participants, and each launch participant is relieved 
of the threat and cost of inter-party litigation as well as the need to 
obtain liability insurance covering its potential liability to other 
launch participants for property damage or loss for which it might 
otherwise be legally responsible. However, the waiver of claims 
agreement is not intended to replace contractual rights and remedies 
negotiated by the parties, such as the right to a replacement launch in 
the event of a failed launch attempt.
    Example 1: Launch company A's contractor is negligent and damages 
satellite customer B's spacecraft. By executing the statutory waiver of 
claims agreement, B has waived its right to pursue a claim for damages 
against A and A's contractor based on the latter's negligent act.
    Second, the CSLA further directs the Government to execute a 
similar waiver of claims agreement with PPLPs when the Government is 
involved in launch services by virtue of its property or personnel; 
however, the Government's acceptance of risk under the statutory waiver 
of claims agreement is more limited than that undertaken by PPLPs. For 
property damage, the Government's waiver is limited to claims in excess 
of the required amount of Government property insurance. The CSLA 
instructs the Department of Transportation (DOT) to enter into the 
agreement for, or on behalf of, the Government, executive agencies of 
the Government involved in launch services, and the Government's 
contractors and subcontractors involved in launch services, 
collectively referred to herein and in agency license orders as 
Government launch participants (GLPs). The agency views this provision 
as establishing for the Government's contractors and subcontractors 
involved in licensed launch activities third-party beneficiary rights 
in the waiver agreement between the DOT and PPLPs.
    Example 2: Launch company A's vehicle is destroyed seconds after 
ignition and lift-off causing extensive damage to the Government-owned 
launch pad from which the launch took place. As a condition of A's 
license, the agency required that A obtain insurance covering damage to 
Government property at the launch site in the amount of $40 million, 
based upon the agency's determination of maximum probable loss. If the 
amount of damage to the launch pad is assessed at $60 million, the 
Government absorbs $20 million of loss to its property because it has 
waived claims for property damage in excess of the required amount of 
insurance.
    Third, the CSLA provides that each signatory to a reciprocal waiver 
of claims agreement must also agree to be responsible for personal 
injury, property damage or loss sustained by its own employees 
resulting from licensed launch activities. Individuals employed by the 
various launch participants do not waive claims for their own property 
damage or loss or for personal injury suffered on the job under the 
CSLA reciprocal waiver of claims requirement. An employee who is 
injured or suffers loss in the course of employment as a result of 
licensed launch activities may recover workers compensation from his or 
her employer. Alternatively, that employee may elect to pursue his or 
her legal remedies against another launch participant whose negligence 
caused or contributed to the injury or loss. Ascertaining where 
financial responsibility lies under the CSLA for covering individual 
employee claims has proven to be one of the more controversial issues 
in this rulemaking.
    The CSLA also alters traditional insurance practices with respect 
to third-party liability coverage. Under the CSLA, each launch 
participant involved in licensed launch activities is also an 
additional insured under the statutorily-mandated liability policy 
obtained by the launch licensee and is covered in the event of third-
party claims, up to the required level of insurance. In this manner, 
entities participating in the launch are relieved of the need to obtain 
separate liability policies covering the shared risk of third-party 
liability. This approach of insuring all launch participants against 
third-party liability maximizes the capacity of the space launch 
insurance market to cover the risk of third-party claims.
    Example 3: Launch company A's launch vehicle is destroyed mid-
flight and debris impacts a nearby community. Community residents file 
suit naming both launch company A and its customer, satellite company 
B, as defendants and joint tortfeasors. Launch company A's liability 
policy must respond to cover both A's and B's liability, up to the 
limits of the policy established by the agency, unless a policy 
exclusion applies.

[[Page 45596]]

    Finally, the CSLA provides a mechanism whereby the Government 
accepts the risk of third-party claims that exceed the limits of the 
liability insurance established by the agency, subject to approval of a 
compensation plan prepared by the agency and congressional 
appropriation of funds. This catastrophic risk protection is frequently 
referred to within the space transportation industry as 
``indemnification'' although that term does not appear in the statute. 
In the previous example, if successful claims against A and B exceed 
the amount of insurance established by the FAA for A's launch, the FAA 
would prepare a compensation plan for the President to submit to 
Congress for an additional appropriation or other legislative 
authority, up to $1.5 billion (as adjusted for inflation occurring 
after January 1, 1989) above the amount of insurance established by the 
FAA. Above that amount, A and B would remain liable for judgments 
against them.
    Identified earlier in this discussion, is the troublesome issue of 
determining how the CSLA is intended to address financial 
responsibility for employee losses and injuries. Defining the class of 
``third parties'' whose claims would be covered by the statutorily-
required liability policy has also been one of the more problematic 
issues associated with this rulemaking. The two issues are closely 
related, as explained below.
    In this final rule, the FAA concludes that although all employees 
of the various entities involved in licensed launch activities meet the 
statutory definition of the term ``third party,'' the statutorily-
mandated liability policy is not intended to respond to PPLP employee 
claims. Rather, the CSLA imposes on PPLPs financial responsibility for 
covering their employees' claims in a manner that is separate from the 
launch liability coverage a licensee must obtain. In essence, the 
agreement undertaken by each PPLP to be responsible for its employees' 
losses contractually obligates each PPLP to indemnify and hold the 
other launch participants harmless in the event of claims by one's own 
employees for injury, property damage or loss.
    From the comments received and clarifications provided by licensees 
concerning their existing risk management programs, the agency 
understands that different methods are employed to provide the 
financial responsibility that covers this additional obligation. Some 
launch liability policies will respond to a contractual obligation 
assumed by an insured under the policy, including the obligation 
assumed under the reciprocal waiver of claims agreement to be 
responsible for one's own employees' losses. Alternatively, launch 
participants may rely on separate insurance, such as their 
comprehensive general liability policy, to respond to this obligation. 
Either way, the agency concludes that financial responsibility for PPLP 
employee losses is intended to be addressed, first, through employer-
provided workers compensation coverage, and second, through contractual 
obligations undertaken by each PPLP through the reciprocal waiver of 
claims agreement in the event one's own employee claims against another 
launch participant for loss or injury.
    A different approach is utilized for claims of GLP employees, 
referred to in the NPRM as Government personnel. Because of limitations 
under appropriations laws on the Government's ability to assume an 
unfunded contingent financial responsibility and the additional costs 
that would otherwise flow to the Government if additional risks were 
imposed on Government contractors and subcontractors, the Government 
does not accept the additional financial responsibility of indemnifying 
other launch participants in the event of GLP employee claims within 
the limits of the liability policy. Therefore, GLP employee claims 
against other launch participants must be covered by the licensee's 
launch liability policy, together with other third-party claims.
    By removing from the statutorily-required liability coverage those 
claims that have the greatest probability of occurrence, that is, PPLP 
claims for property damage or loss and claims of PPLP employees for 
injury, property damage or loss, along with the attendant risks and 
costs that would accompany inter-party litigation in the event of such 
claims, the universe of risks covered by statutory-based insurance is 
significantly reduced. In this manner, the launch liability insurance 
market is able to cover all launch participants' potential liability to 
uninvolved persons and claims of GLP employees. The agency understands 
that insurance satisfying CSLA-based requirements is available at 
reasonable cost under current market conditions.
    Detailed immediately below is a more complete discussion of the 
agency's initial proposal on risk allocation, specifically as it 
relates to coverage for employee losses, industry comments on the 
proposal and the agency's rationale for adopting this final rule. 
Comments on other substantive areas of the rulemaking are summarized 
and addressed following this discussion in the section-by-section 
analysis.

Notice of Proposed Rulemaking

Proposed Approach to Government Risk Allocation

    Under the NPRM, financial risks associated with commercial launch 
activities would be allocated primarily to the commercial entities 
engaged in such activities. The only exceptions are for those financial 
risks expressly assigned to the Government by the CSLA. They are: (1) 
the risk otherwise borne by the U.S. commercial launch industry of 
catastrophic losses and unlimited liability associated with commercial 
launch activities, up to the statutory limit of $1.5 billion (as 
adjusted for inflation occurring after January 1, 1989) above required 
third-party liability insurance, subject to enactment of legislation, 
49 U.S.C. 70113(a); (2) the risk of property damage or loss to U.S. 
Government launch property or facilities in excess of required 
insurance, 49 U.S.C. 70112(b)(2); and (3) acceptance of liability for 
death, bodily injury or property damage or loss that results from the 
willful misconduct of the United States or its agents, 49 U.S.C. 
70112(e).
    All other financial risks would be allocated under the NPRM to 
commercial entities engaged in the commercial launch business. Through 
reciprocal waiver of claims agreements, private party launch 
participants (PPLPs) would be required to accept responsibility for 
their own property damage or loss and for injury or loss sustained by 
their employees. Except for insurance required by the CSLA, the NPRM 
proposed to leave to the various launch participants the determination 
of how best to cover their resultant financial responsibilities.
    Financial protection for the Government would be provided through 
required insurance and the reciprocal waiver of claims scheme. 
Insurance covering the Government's risk would be in the form of: (1) 
liability insurance that protects the Government from third-party 
liability, including liability imposed on the United States by virtue 
of treaty obligations; and (2) property insurance up to a prescribed 
amount that covers Government property, range assets and property of 
Government launch participants (GLPs), on or near a Federal range 
facility, that is exposed to risk of loss or damage as a result of 
licensed launch activities.
    The CSLA reciprocal waiver of claims scheme would benefit the 
Government by freeing GLPs from the risk of claims

[[Page 45597]]

for property damage or loss by PPLPs. The Government would waive claims 
for property damage or loss occurring at a Federal range facility, on 
behalf of itself and GLPs, to the extent losses exceed the required 
amount of Government property insurance. The Government could also 
waive property damage claims, consistent with the CSLA, where a policy 
exclusion is deemed ``usual'' for the type of insurance involved. 
Unlike the additional financial responsibilities accepted by PPLPs for 
their employees' losses, the NPRM further explained that the Government 
does not accept this responsibility with respect to losses suffered by 
Government personnel, defined as employees of GLPs, because they would 
be deemed ``third parties'' whose claims must be addressed by the 
launch licensee's liability policy.
    The NPRM proposed that Government contractors and subcontractors 
involved in launch services would be treated no differently than the 
United States for purposes of required insurance coverage and risk 
allocation. The rationale offered for the agency's approach was three-
fold: (1) that contractors and subcontractors of the United States are 
third-party beneficiaries of the Government's waiver of claims 
agreement with the licensee, its customer, and their respective 
contractors and subcontractors, (2) to relieve the Government of 
certain costs and burdens that would otherwise flow to it in the event 
of damage to property of Government contractors and subcontractors, and 
(3) to avoid violation of the Anti-Deficiency Act which prohibits the 
Government from agreeing to assume an unfunded contingent liability 
absent specific statutory authority to do so.
    The approach proposed to risk allocation for Government contractors 
and subcontractors was intended to facilitate commercial use of Federal 
range launch property and services. When a commercial user contracts 
with a Government agency for use of a Federal range facility, the 
commercial user also obtains the benefit of certain services provided 
by the Government through its contractors and subcontractors. Services 
include base operations support, equipment, maintenance and other 
ancillary activities that support Federal range operations. Although 
the Government has a means of accounting for contractor services 
utilized in support of commercial operations and is able to allocate 
direct costs to commercial users, the Government does not contract 
differently in terms of risk allocation depending upon whether the 
support or services provided are in support of commercial as opposed to 
government launches. Therefore, if Government contractors were 
confronted with additional risks of liability and financial 
responsibilities arising out of their support for commercial launch 
operations and had to obtain additional insurance to cover those risks, 
either the cost of the additional insurance would be charged to the 
Government as an allowable cost but one that is not recoverable from 
the commercial user or the contractor could refuse to assume the risk 
of additional liability and decline to do business with the Government 
or to support commercial operations.
    To avoid these results, and to limit financial exposure of the 
Government, the agency has consistently treated Government contractors 
and subcontractors as though they stand in the Government's shoes for 
purposes of insurance and risk allocation. Accordingly, the NPRM 
proposed to continue the agency's longstanding practice of imposing on 
Government contractors and subcontractors only the limited obligation 
to waive claims and assume responsibility for employee losses in excess 
of required property and liability insurance, respectively, that the 
agency currently accepts when entering into a reciprocal waiver of 
claims agreement on behalf of the Government and its agencies involved 
in licensed launch activities. Thus, under the NPRM, and consistent 
with existing license orders, property belonging to Government 
contractors and subcontractors involved in launch services at a Federal 
range facility would be covered by the insurance provided for damage or 
loss to Government property, even if those entities maintain their own 
property insurance. Similarly, Government contractor and subcontractor 
employees would be accorded ``third party'' status whose claims would 
be addressed by the launch licensee's liability policy. In addition, 
Government personnel would be named as additional insureds under the 
launch licensee's liability policy and their potential liability to 
third parties would also be covered.

Proposed Risk Allocation for Employee Losses

(1) Definition of ``Third Party''

    In the NPRM, the agency proposed a new definition of the term 
``third party'' to facilitate understanding and implementation of the 
agency's approach to risk allocation for employee losses. The term 
``third party'' is especially significant in this rulemaking because it 
is used to determine the universe of potential third-party claimants 
under the required liability insurance obtained by the licensee, 
determines eligibility for payment by the U.S. Government of excess 
third-party claims, and has implications bearing on the proper 
implementation of reciprocal waiver of claims agreements whereby launch 
participants assume responsibility for losses sustained by their own 
employees as a result of licensed launch activities. The definition of 
``third party'' must be examined with each of these considerations in 
mind to ensure a fair allocation of risk as contemplated by the CSLA.
    The statutory definition of ``third party'' is one of exclusion. It 
means ``a person except--(A) the United States Government or the 
Government's contractors or subcontractors involved in launch services; 
(B) a licensee or transferee under (49 U.S.C. Subtitle IX, ch. 701); 
(C) a licensee's or transferree's contractors, subcontractors, or 
customers involved in launch services; or (D) the customer's 
contractors or subcontractors involved in launch services. 49 U.S.C. 
70102(11). Conspicuous by its absence from the statutory definition is 
any mention of employees of the various launch participant entities 
involved in launch services, including the Government. Therefore, 
employees of all entities involved in launch services may be considered 
``third parties'' under the statutory definition because they are not 
excepted from the definition. In essence, the CSLA defines a third 
party as any person that is not directed by the statute to sign a 
reciprocal waiver of claims agreement.
    Nevertheless, the definition of ``third party'' proposed in the 
NPRM explicitly included Government personnel, defined to include 
Government employees and employees of Government contractors and 
subcontractors involved in launch services for licensed launch 
activities, and excluded employees of private party launch participants 
(PPLPs). The definition, as proposed, differentiates between employees 
of PPLPs and those of Government launch participants (GLPs) because 
under the NPRM the former's claims are intended to be addressed through 
reciprocal waiver of claims agreements and the latter's are intended to 
be covered by the required liability policy. This distinction was 
justified as necessary (and intended by Congress) because, in the 
agency's view, financial responsibility for all claims of Government 
employees and employees of Government contractors and

[[Page 45598]]

subcontractors against other launch participants has not been assumed 
by the Government. Under the proposed definition, claims for damage or 
loss suffered by Government personnel against other launch participants 
would be covered up to the limits of the liability insurance required 
of a launch licensee. The Government would only be responsible for 
covering its employees' claims against other launch participants, as 
well as other third-party claims, if the liability policy would not 
respond because of a policy exclusion deemed usual for the type of 
insurance or if the policy limits were exhausted. Claims of employees 
of PPLPs would not be covered by the liability policy and would have to 
be addressed through some other means. Accordingly, the NPRM definition 
of the term ``third party'' nearly echoes the statutory definition, 
with the following proviso: ``Government personnel, as defined in this 
section (at 440.3(a)(6)) are third parties. For purposes of these 
regulations, employees of other launch participants identified in 
paragraphs (a)(15)(i) (B) and (C) of this section are not third 
parties.''
    In practice, this definition is consistent with the agency's 
approach since 1989, to setting risk-based insurance requirements. That 
is, for all launch licenses issued to date, the amount of liability 
insurance required as a condition of each license takes into 
consideration the value of the maximum probable loss from claims by 
Government personnel for death, bodily injury, or property damage or 
loss. It does not account for potential claims of PPLP employees.

(2) Assumption of Responsibility for Employee Losses

    The NPRM explained the assumption of responsibility for losses 
sustained by one's own employees as a mutual undertaking by each entity 
to ``cover'' losses of its own employees, and leaves to each launch 
participant the determination of how best to manage their resultant 
risk. As one possible approach, the agency offered that launch 
participants could maintain other liability insurance to cover the 
financial risk that arises out of this contractual obligation.
    The Government is not able to assume an unfunded contractual 
liability under appropriations laws absent explicit statutory authority 
to do so, and the agency does not view the statute as providing the 
necessary authority except to the extent third-party claims may be the 
subject of an additional appropriation under the statutory payment of 
excess claims procedures presented in 49 U.S.C. 70113. Therefore, 
according Government employees the status of a ``third party'' ensures 
that financial resources will be available, through the licensee's 
liability policy, to cover Government employee claims against other 
launch participants and avoids the need for each launch participant to 
maintain insurance covering their potential liability for such claims. 
It also reconciles the statutory assumption of responsibility 
obligation with limitations on the Government's ability to assume an 
unfunded contingent liability except where Congress has clearly 
provided a mechanism for doing so and allowed the Government to accept 
this risk. For example, Public Law 85-804 authorizes certain agency 
heads to enter into contracts for national defense purposes which 
expressly provide that the United States will hold harmless and 
indemnify its contractors for third-party claims, loss or damage to 
contractor property and loss or damage to Government property, without 
regard to appropriations laws applicable to Government contracting. 
This authority is limited to claims or losses arising out of or 
resulting from unusually hazardous or nuclear risks.
    To avoid passing additional costs to the Government, third-party 
status is also accorded to employees of Government contractors and 
subcontractors involved in launch services under current practice and 
this is the approach reflected in the NPRM.
    In 1993, the agency revised the form of Agreement for Waiver of 
Claims and Assumption of Responsibility (Agreement) that accompanies 
each launch license to clarify that the Government waives claims and 
assumes responsibility for property damage it sustains and for any 
bodily injury or property damage sustained by its own employees only to 
the extent that those claims exceed the amount of property and 
liability insurance required under the CSLA. Under current practice, it 
is this limited waiver, release of claims and assumption of 
responsibility that the Government obligates itself to extend to its 
contractors and subcontractors under paragraph 4(c) of the Agreement 
now in use. In this regard, the FAA maintains that the approach to risk 
allocation set forth in the NPRM is, in practical effect, consistent 
with current practice. However, because Government employee claims 
would be regarded as third-party claims the agency proposed to remove 
reference to responsibility for losses sustained by Government 
employees from the proposed form of agreement presented in Appendix II 
of the NPRM. Additionally, because employees of Government contractors 
and subcontractors would also be deemed third parties, the Government 
would not be required to obligate its contractors and subcontractors to 
accept responsibility for their employees' losses and reference to this 
obligation was also omitted from the proposed form of agreement 
presented in Appendix II.
    In summary, whereas PPLPs would waive claims against the other 
launch participants and agree to be responsible for their own property 
damage or loss and for losses sustained by their employees, the 
Government's waiver would be limited to property damage suffered by 
GLPs at the launch site, in excess of required property insurance. 
Claims of Government personnel would be covered by the required 
liability insurance up to the limits specified by the agency. Uncovered 
claims of Government personnel would be included in a compensation plan 
submitted to Congress as part of a request for appropriations to cover 
excess third-party claims.

Comments on the NPRM

    The agency requested comments on the approach to risk allocation 
proposed in the NPRM in light of the following considerations: (1) 
absence of any indication in the CSLA or legislative history that 
employees of nongovernmental launch participants are intended to be 
included in the definition of ``third parties,'' whereas the 
legislative history explicitly indicates that Government employees are 
to be considered ``third parties,'' S. Rep. No. 100-593, 100th Cong., 
2d Sess. 8 (1988); (2) absence of any indication that the Government 
would compensate the claims of employees of PPLPs as excess third-party 
claims; (3) considering employees of launch participants as third 
parties would run counter to the assumption of responsibility for their 
losses required by the statute; and (4) third-party liability insurance 
requirements would likely increase if employees of all launch 
participants are considered third parties.
    Industry reaction to the NPRM and the agency's clarification of 
insurance requirements in the spring of 1997, following a Delta launch 
vehicle failure earlier in the year, led the agency to reopen the 
docket for an additional 30-day comment period. In doing so, the agency 
queried whether employee claims are intended to be addressed by the 
liability policy a launch licensee obtains to cover all launch 
participants' third-party liability. Alternatively, we

[[Page 45599]]

asked whether the reciprocal waiver of claims agreement in which launch 
participants agree to assume responsibility for losses sustained by 
their employees imposes additional financial responsibilities on the 
parties to cover these claims. More specifically, the Notice announcing 
the reopened docket requested answers to the following questions: ``Are 
employees of the Federal Government and its contractors and 
subcontractors (defined in the NPRM as ``Government personnel'') 
properly classified as third parties? If not, how should their claims 
against other launch participants for damage, injury, or loss be 
addressed, particularly in light of the limits on the Government's 
ability under appropriations laws to accede to unfunded contingent 
liability? From an insurance perspective, what issues or problems does 
the proposed definition present in providing liability insurance 
coverage for third-party claims? Should employees of all private party 
launch participants also be deemed third parties? If so, how would this 
affect CSLA-based liability coverage? If these employees are not third 
parties, how should their claims be managed? That is, how should the 
various launch participants protect themselves financially from claims 
by other launch participants' employees?'' (62 FR 36029, July 3, 1997).
    The range of comments received and summarized below underscores the 
lack of clarity in the statute. In particular, industry opinion was 
divided on the appropriate definition of the term ``third party'' and 
the intent of the reciprocal waiver of claims requirement.
    Both Boeing, commenting in September 1996, before its merger with 
McDonnell Douglas Corporation, and Sea Launch suggested that all 
employees of all launch participants should be viewed as ``third 
parties'' whose claims must be addressed by the required liability 
policy obtained by the licensee.
    In support of its position, Boeing stated that the intent of the 
CSLA is to provide to all launch participants protection against claims 
by those who suffer injury as a result of an errant launch--either 
through statutorily-required liability insurance or through the inter-
party waivers required by the CSLA. Because employees are not required 
to enter into waiver of claims agreements their individual claims 
against the other launch participants are not waived. Yet, according to 
Boeing, if employees are not accorded third-party status their claims 
may not be covered by the required third-party liability insurance nor 
would they be eligible for payment by the Government as part of the 
catastrophic loss protection contemplated by the CSLA. (Boeing 
erroneously refers to umbrella insurance coverage provided by the U.S. 
Government to cover excess third-party claims. The Government does not 
maintain insurance to cover catastrophic losses resulting from licensed 
launch activities. Rather, the CSLA provides a procedure whereby 
Congress may vote to appropriate funds to cover those losses.) 
According to Boeing, this is an ironic result because launch 
participant employees are the most likely to be injured in the event of 
a launch accident. Moreover, absent liability insurance coverage for 
employee claims, launch participants would be vulnerable to, and 
potentially liable for, claims from launch participant employees and 
there is no clear statutory basis for suggesting that launch 
participants must indemnify each other for those claims. Finally, 
according to Boeing, there is no basis for treating Government 
employees differently from all other employees in light of the 
statutory definition of ``third party'' which omits any reference to 
employees of any entity involved in launch services, and therefore all 
employees should be considered ``third parties.''
    Boeing also refuted any suggestion that the assumption of 
responsibility provisions of the CSLA and reciprocal waiver of claims 
agreement imposes a requirement on a party to indemnify another launch 
participant for successful claims by that party's own employee. Without 
offering an opinion as to the meaning of the assumption of 
responsibility provision of the statute, Boeing argued that if Congress 
had intended for there to be an indemnification obligation it would 
have done so explicitly and the term ``indemnification'' does not 
appear in the CSLA. The comment cites a legal encyclopedia in support 
of the argument that a party claiming a right to be indemnified against 
its own negligence must establish that a contract clearly expresses 
such an intention and notes further that such agreements have been held 
void as against public policy. The better view, according to the 
comment, is that all employees, government and nongovernment, should be 
considered third parties.
    Sea Launch commented that all employees of the various launch 
participants should be considered ``third parties,'' based on the 
statutory definition, whose claims would be covered by the required 
liability insurance and then by the Government under the excess claims 
provision of the statute. Sea Launch echoed many of the concerns 
expressed by Boeing in noting that unless considered ``third parties,'' 
injured employees would be unable to recover for their losses in the 
event the negligent party did not maintain adequate coverage for the 
claim.
    Sea Launch also suggested that if employee claims are not eligible 
for payment by the Government as excess third-party claims because they 
are covered by their employer's assumption of responsibility, then the 
same reasoning should apply to claims of Government personnel. In Sea 
Launch's view, it is reasonable to expect the Government to cover 
excess claims of Government personnel as third party claims and the 
same eligibility should apply to claims of all employees. Finally, Sea 
Launch disagreed that covering all employees' claims as third-party 
claims would significantly increase the amount of required insurance 
because a responsible launch licensee would obtain such coverage in any 
event, whether or not required by regulation.
    Like Boeing, Sea Launch also did not offer a definitive view on the 
intended meaning of the reciprocal waiver of claims provisions of the 
statute; however, it postulated that if the assumption of 
responsibility is an agreement to indemnify other parties for claims 
brought by one's own employees then that obligation should be backed by 
financial resources, such as the liability coverage obtained by the 
licensee, in order to effectuate the intent of the CSLA. In clarifying 
remarks, Sea Launch indicated that the statutory-based assumption of 
responsibility is intended to be an affirmative obligation to indemnify 
other launch participants in the event one's own employee, a third 
party, claims against another participant, and the licensee's liability 
policy provides the financial resources covering this obligation. In 
other words, the liability policy effectively provides a financial 
guaranty that each launch participant will fulfill its contractual 
obligation to other launch participants to be responsible for its 
employees' losses. Whether the basis for the claim is viewed as the 
contractual obligation to indemnify another party, or as a third-party 
claim, the policy should respond, according to Sea Launch, because 
ultimately it is the employee/third party that must be compensated for 
his or her loss. As between a launch participant and its contractor, 
Sea Launch commented that it would be a contractual matter that would 
be negotiated by the parties outside of the CSLA.

[[Page 45600]]

    Kistler offered the view that all employees should be considered 
third parties otherwise employees of PPLPs would be limited to workers 
compensation while Government personnel would benefit from more 
extensive recoveries. The substance of this comment has already been 
addressed in the preceding summary of the 1988 Amendments; however, the 
agency reiterates here that no employees are required to waive their 
claims under the reciprocal waiver of claims agreement and that any 
injured employee may elect to pursue legal remedies against a negligent 
launch participant other than his or her employer.
    Lockheed Martin, Orbital Sciences and McDonnell Douglas put forward 
a contrasting view of the intended coverage of the term ``third 
party.'' According to these three launch licensees, no employees should 
be considered ``third parties'' for purposes of the required liability 
insurance coverage. Under their view, the assumption of responsibility 
for employee losses requires that each signatory to the reciprocal 
agreement indemnify the other signatories for claims made by one's own 
employees.
    McDonnell Douglas and Orbital Sciences specifically commented that 
personnel are part of the entity of which they are members and 
therefore no personnel, not even Government personnel, should be 
considered ``third parties'' for purposes of required liability 
insurance coverage. According to McDonnell Douglas and Orbital 
Sciences, an employee's claims are the responsibility of his or her 
employer, including the U.S. Government and its contractors. Under the 
inter-party waiver agreement, that responsibility includes a 
requirement to indemnify other signatories to the agreement in the 
event of claims by one's own employee against the other signatories.
    As a result of the Boeing-McDonnell Douglas merger, effective 
August 1, 1997, the risk management program for commercial launches of 
the Delta family of launch vehicles was consolidated within Boeing. 
Because of the divergence of views expressed in docket submissions by 
McDonnell Douglas and Boeing prior to the merger, the agency sought 
clarification from Boeing's Insurance Department, Space and Liability 
Risks, as to Boeing's views of appropriate implementation of risk 
allocation under the CSLA. By way of clarification, Boeing's insurance 
manager endorsed the view espoused by McDonnell Douglas in its written 
comments that financial responsibility for one's own employees' losses 
is intended to be addressed by the reciprocal waiver of claims 
agreement undertaken by each launch participant and not by the 
liability policy provided by the launch licensee. By implication, no 
employees would be deemed ``third parties'' in the sense that their 
claims would not be covered by the required liability policy. Rather, 
each signatory to a reciprocal waiver of claims agreement is 
responsible for maintaining insurance that responds to its contractual 
obligation to indemnify other launch participants in the event of an 
employee claim for injury, damage or loss.
    Orbital Sciences' insurance broker clarified its comment further by 
stating that allowing a launch participant's employee to recover as a 
third party against another launch participant would defeat the intent 
of the reciprocal waiver of claims provisions of the statute to limit 
inter-party claims. Also, allowing additional insureds (both the entity 
and its employees) to also be claimants under the same policy could be 
done at a cost; however, this approach flies in the face of the CSLA, 
according to the comment.
    Orbital Sciences' insurance broker further stated that at the time 
the 1988 Amendments were enacted, it had been understood that special 
consideration was warranted for Government employees because of 
limitations on the Government's ability to assume an unfunded 
contingent liability to cover successful claims of Government employees 
against other launch participants. However, the same treatment was not 
believed to be appropriate for employees of Government contractors 
because those entities can obtain insurance to cover this 
responsibility.
    Orbital Sciences reaffirmed its position in supplemental comments 
to the docket noting further that its launch insurance did not cover 
claims of Government personnel and that doing so could double the cost 
of insurance. Orbital Sciences also made the following additional 
points: First, Government personnel are not now and ought not be 
classified as ``third parties.'' Second, each signatory to the 
reciprocal waiver of claims agreement, including the Government, agrees 
to indemnify the other signatories for claims made by its own employees 
resulting from licensed launch activities. Third, the agency's views, 
as expressed in the NPRM and in correspondence with the industry, 
represent an inappropriate, unnecessary and unwarranted expansion of 
industry's liability burden, as well as a shift of liability from the 
Government to the industry. Fourth, the statutory limitation on the 
Government's waiver of property damage has no bearing on and does not 
in any way limit its assumption of responsibility for employee losses. 
Fifth, limitations on the Government's ability to accede to unfunded 
contingent liability should not impede the Government's ability to 
assume responsibility for its employees' losses and should be handled 
in a manner similar to the excess claims provisions of the CSLA. Sixth, 
the notion of reasonable cost of insurance is a relative term and in 
any event allowing inter-party claims instead of relying upon the 
reciprocal waiver regime defeats a fundamental goal of the CSLA. 
Seventh, allowing Government personnel to be claimants and insureds 
under the same policy is unorthodox and renders the reciprocal waiver 
scheme useless. Eighth, under the agency's proposal the licensee's loss 
record would be unfairly impacted because its liability policy would 
have to respond to claims caused by a grossly negligent launch 
participant, defeating the ``immunity'' from such claims that the 
reciprocal waiver scheme would otherwise provide. According to Orbital 
Sciences, this is particularly problematic where the Government's 
contractor is involved because the licensee has no direct control over 
that entity or its employees.
    In further clarification of its remarks, OSC's broker explained 
that a licensee's liability policy can be written so as to respond to 
the liability assumed by an insured under a contract or agreement, 
including the contractual obligation each launch participant assumes 
under the reciprocal waiver of claims agreement to be responsible for 
its employees' losses. This approach fulfills the important objective 
that underlies the reciprocal agreement to be responsible for 
employees' losses of keeping litigation costs to a minimum.
    Lockheed Martin's initial comments also expressed concern over the 
inclusion of Government personnel as ``third parties,'' noting that 
including them would have far-reaching effects on the statutory risk 
allocation scheme, including the maximum probable loss determination 
for third-party losses, the nature and scope of required liability 
coverage, coverage for employee claims, scope of the reciprocal waivers 
of claims, and the U.S. Government's payment of excess third-party 
claims. Lockheed Martin noted that the statutory definition of ``third 
party'' does not differentiate between employees of the Government or 
its contractors and subcontractors and employees of private party 
launch participants (PPLPs). Lockheed Martin

[[Page 45601]]

also questioned the resultant lack of responsibility on the part of the 
Government for its employees' claims under the definition of ``third 
party'' proposed in the NPRM. Lockheed Martin initially suggested that 
it might be beneficial to consider all launch participant employees as 
``third parties,'' but noted that this action should not be taken 
without understanding the consequences, such as higher insurance 
requirements for third-party liability. Lockheed Martin also stressed 
the importance of understanding how the agency interprets the 
reciprocal agreement between launch participants in which parties agree 
to be responsible for injury or losses sustained by their own 
employees.
    In supplemental comments to the docket, Lockheed Martin 
unequivocally objected to defining the term ``third party'' to include 
any employees, whether Government-related or private party, and opposed 
any interpretation of the term ``third party'' that would relieve the 
Government of responsibility for its employees' losses and those of 
Government contractor employees under the reciprocal waiver of claims 
scheme of the CSLA. Lockheed Martin further stressed that although it 
has accommodated the Government's clarification that employees of the 
Government and its contractors and subcontractors are to be considered 
third parties, this was viewed by Lockheed Martin and its insurers as a 
new interpretation that transfers additional risk to the launch 
liability policy and could have significant adverse impacts on the 
licensee's loss exposure and premiums.
    Lockheed Martin believes that the assumption of responsibility for 
employee losses imposes on each signatory to the interparty waiver 
agreement an obligation to indemnify another signatory/launch 
participant for the amount recovered by one's own employee for losses 
suffered as a result of licensed launch activities. According to 
Lockheed Martin, insurance that is separate and apart from the 
licensee's launch liability policy is available to cover this 
contractual obligation. In this manner, risk exposures and premium 
costs are more fairly distributed among launch participants without 
overburdening or distorting the licensee's actual loss record. Further 
expanding the definition of ``third party'' to include employees of 
Government contractors and other launch participants would effectively 
negate the inter-party waiver of claims scheme and leave Lockheed 
Martin financially responsible for all such losses, resulting in 
premium increases as high as $500,000 per launch, according to Lockheed 
Martin's supplemental comments.
    Lockheed Martin incorporated by reference comments submitted by 
Marsh & McLennan, now J&H Marsh & McLennan, an aerospace insurance 
broker. According to Marsh & McLennan, insurance underwriters have long 
understood that Government employee claims and claims of Government 
contractor employees remained the responsibility of the Government or 
its contractors, respectively, as evidenced by the waiver of claims 
agreement. While the insurance market can respond to the Government's 
requirement that its employees be covered as third party claimants, 
inclusion of Government contractor employees is more problematic from 
an allocation of risk equity standpoint as it could significantly 
affect the cost of insurance, according to the comment. This view is 
consistent with that expressed to the agency by an insurance 
underwriter who added that requiring coverage for Government contractor 
employees could adversely affect launch services providers' ability to 
obtain insurance in the future at reasonable rates because their loss 
records would reflect claims for which they were not responsible.
    To sum up, opponents of the proposed definition of ``third party'' 
argue that the additional coverage that would be required to comply 
with regulatory requirements would result in higher risk exposures and 
insurance premiums, that doing so is contrary to or would defeat the 
purpose of the reciprocal waiver scheme required by statute, and would 
lead to difficulties in implementation in that Government launch 
participant (GLP) employees would be both additional insureds protected 
from third party liability claims, as well as potential claimants, in 
effect making claims against their own liability policy. It could also 
allow a negligent employee to recover against another negligent launch 
participant, neither of whom is under the licensee's control or 
direction. This would unfairly impact the licensee's loss record--
assuming the insurance market is able to respond to the additional 
risk.

Final Rule Approach to Risk Allocation for Employee Losses

    Having summarized the range of views expressed, the agency 
resolves, as a matter of regulation, two issues that are critical to 
defining appropriate risk allocation and financial responsibility under 
the CSLA. First, the agency concludes that the reciprocal waiver of 
claims agreement in which launch participants assume responsibility for 
their employees' losses is intended to address financial responsibility 
for losses sustained by private party launch participant (PPLP) 
employees and remove the risk of such claims from the launch liability 
insurance coverage required under the CSLA. Second, although the agency 
agrees with those commenters who stated that the liability policy 
obtained by the launch licensee is not intended to cover PPLP employee 
claims because they are addressed through the reciprocal waiver of 
claims agreement, the agency further concludes that the launch 
licensee's liability policy is required to cover Government launch 
participant (GLP) employee claims up to the limits established by the 
agency in license orders. In resolving these issues, the agency 
maintains the distinction described in the NPRM between PPLPs and GLPs.
    This final rule focuses primarily on risk allocation among private 
party launch participants (PPLPs) involved in licensed launch 
activities and between PPLPs and Government launch participants (GLPs) 
when the Government performs its traditional role as manager of the 
Federal launch ranges and provider of range safety services. The NPRM 
separately addressed the situation in which a Government agency is a 
customer of commercial launch services. The NPRM stated the FAA's view 
that because Government agencies cannot agree to an unfunded contingent 
liability absent express statutory authority to do so, employees of 
Government agency customers are also considered third parties whose 
claims would be covered by the licensee's launch liability policy. 
However, as explained in the NPRM, a Government-owned payload is not 
covered by statutorily-required Government property insurance and the 
U.S. Government agency customer accepts responsibility for property 
damage to the payload. This approach reflects current agency practice 
in establishing risk-based financial responsibility requirements for 
third-party liability and Government property damage. That said, the 
final rule does not resolve, as a matter of regulation, the form of 
reciprocal waiver of claims agreement the Government will utilize when 
a Government agency is involved in launch services as a customer and 
such agreements will continue to be addressed on an individual basis.

(1) Assumption of Responsibility for Employee Losses

    This rulemaking requires that the agency clarify proper 
implementation of

[[Page 45602]]

the statutory language appearing in 49 U.S.C. 70112(b)(1) and (2) which 
provides that ``each party to the waiver agrees to be responsible for 
property damage or loss it sustains, or for personal injury to, death 
of, or property damage or loss sustained by its own employees resulting 
from an activity carried out under the license.'' (Emphasis added.) As 
one commenter queried, is it a restatement or elaboration of the 
requirement to provide a waiver? Is it a restatement of a requirement 
that a party would have even in the absence of the statute? Is it an 
affirmative obligation to indemnify other parties for claims brought 
against them by one's own employees?
    One possible interpretation of the provision is that the agreement 
to be responsible for one's own employees' losses means compliance with 
workers compensation insurance requirements, a requirement an employer 
would have regardless of the CSLA. Ensuring workers compensation 
coverage is provided for employee claims reduces the likelihood that an 
injured employee will pursue claims against another launch participant 
but does not preclude this possibility. Because workers compensation 
laws are left to the states, and significant differences are found 
among the various state programs, the agency concludes that a federal 
statute is not required, or even appropriate, to ensure compliance with 
state law and the FAA therefore views this as an unlikely 
interpretation. That is, the statutory provision for assumption of 
responsibility is intended to have significance beyond a requirement 
already imposed on employers by most (49) states to provide workers 
compensation insurance coverage for their employees under existing 
state laws.
    Another possibility is that by enacting this provision Congress 
intended to affect certain workers compensation schemes by removing any 
rights of subrogation that an employer's workers compensation insurance 
carrier may have under state law. This is also not likely, particularly 
for PPLPs whose workers compensation insurance carriers are not 
signatories to the reciprocal waiver of claims agreement. State workers 
compensation programs vary widely in terms of subrogation rights and it 
is not likely that Congress intended to interfere directly in their 
implementation.
    It is conceivable that Congress intended for the Secretary of 
Transportation to waive subrogated claims of Federal agencies under the 
Federal Employee Compensation Act (FECA), but doing so would still not 
affect the rights of Government employees to independently pursue 
claims against other launch participants because their claims are not 
waived under the reciprocal waiver of claims agreement. However, it is 
possible that fewer claims by Government employees against other launch 
participants would be brought if Government agencies' subrogated rights 
were waived.
    Simply put, FECA is the Federal Government's workers compensation 
program. Under FECA, a Federal employee is compensated for work-related 
injuries and if the injury was caused by a negligent third party, the 
employee is advised to pursue a claim against that negligent party. If 
the employee is successful in his claim, he or she is required to 
reimburse the Government the amount paid to the employee by the 
Government, with certain adjustments for legal fees and other expenses. 
Even if the CSLA means that the Government must forego its right to 
recover, it does not mean that Government employees forego their rights 
as injured claimants to proceed against a negligent launch participant.
    The presence or absence of workers compensation coverage does not 
eliminate inter-party litigation, a primary objective of the CSLA risk 
allocation scheme. Workers compensation provides to an employee an 
exclusive remedy against his or her employer for injuries arising out 
of and suffered in the course of employment. However, an injured 
employee may elect to sue a launch participant other than his or her 
employer for negligently causing the injury. Generally, a majority of 
jurisdictions would deny to that negligent launch participant the right 
to seek contribution from the employer because the workers compensation 
remedy is exclusive to the employer. Yet, contribution may be possible 
under a substantive indemnity law or on the basis of an indemnity 
agreement or if an independent duty is owed by the employer to the 
negligent launch participant. In that event, the negligent launch 
participant may proceed against the employer by maintaining that a 
contractual agreement removes the bar that would otherwise prevent the 
negligent launch participant from seeking contribution from the 
employer. Even so, variations in state workers compensation programs 
may result in a host of issues still being litigated.
    Therefore, in the interest of avoiding costly inter-party 
litigation, the agency concludes that Congress intended to create an 
indemnity obligation making each PPLP financially responsible, by 
contract, for its employees' claims or otherwise establishing an 
independent duty owed by each employer to the other launch 
participants. This responsibility may be termed a legislatively-
mandated contractual indemnification obligation.
    As between a launch participant and its contractors and 
subcontractors, the assumption of responsibility could be viewed as a 
``contractor-under'' requirement whereby each party provides workers 
compensation insurance that would cover its contractors and 
subcontractors employees' claims in the event its contractors and 
subcontractors failed to provide coverage. Doing so would minimize the 
likelihood that an injured employee of a contractor would look to 
another launch participant's deep pockets for recourse. (Generally 
speaking, state law provisions of this nature are intended to give a 
general contractor an incentive to require subcontractors to carry 
workers compensation insurance. 2A Larson, Workers Compensation Law, 
72.31(b).) However, the FAA declines to interfere with variations in 
state workers compensation programs and concludes that it is 
unnecessary to do so as long as we regard the assumption of 
responsibility to be a contractual indemnification obligation of each 
PPLP to the other launch participants to assume financial 
responsibility for its own employees' losses.
    That said, the agency does not agree with the commenters that a 
comparable obligation is accepted by the Government through the 
reciprocal waiver of claims agreement. Whereas each PPLP undertakes a 
contractual obligation to indemnify other launch participants from 
claims of its own employees through the inter-party waiver agreement, 
the Government is unable to accept this contractual obligation absent 
express authority to do so because it would amount to an unfunded 
contingent contractual liability which is prohibited by appropriations 
laws. The agency does not believe that the statute authorizes the 
Government to undertake an additional unfunded obligation except if a 
policy exclusion is deemed ``usual'' or the available limits of the 
policy are exhausted. In either of those events, the Government would 
be responsible under the CSLA for covering those claims, subject to 
Congress appropriating funds for that purpose.
    Moreover, the CSLA authorizes the Secretary of Transportation to 
establish financial responsibility requirements, consistent with the 
CSLA, to protect the Government, its agencies, and personnel from 
liability, death, bodily injury, or property damage or loss as a result 
of a

[[Page 45603]]

launch or operation of a launch site involving a facility or personnel 
of the Government. 49 U.S.C. 70112(e). The appropriate way to reconcile 
this provision with the Government's assumption of responsibility 
obligations in 49 U.S.C. 70112(b)(2) is to conclude that the Government 
accepts responsibility for its employees' losses but, as in the 
Government's waiver for property damage, only to the extent that they 
exceed required insurance or other demonstration of financial 
responsibility.
    The Government's limited agreement to be responsible for losses 
sustained by its employees, as reflected in the final rule, is 
consistent with similar requirements imposed by the Air Force in 
existing commercialization agreements to hold the Government harmless 
from third-party liability, including losses suffered by members of the 
Armed Forces. Regardless of whether or not an FAA license is issued for 
a commercial activity, the Government is not willing to accept 
additional financial responsibility for its employees' losses, other 
than that imposed under FECA or other comparable Federal compensation 
program, when Government personnel are involved in supporting 
commercial launch activities and this is the view that is reflected in 
the CSLA at 49 U.S.C. 70112(e). Absent further clarification from 
Congress, the agency is unwilling to place on the Government 
responsibility for covering the liability of other parties whose 
negligence causes injury, damage or loss to Government employees 
involved in commercial launch services. Moreover, the Government is 
foreclosed from insuring this risk under appropriations laws and 
therefore it is both necessary and appropriate that claims of 
Government employees against the other launch participants be addressed 
by the licensee's liability policy.
    This approach to covering claims of Government employees results 
from the agency's understanding of statutory objectives and the 
practical consequences of appropriations laws, as well as the 
practicalities of seeking recovery from the Government. The same 
approach is not necessary to address the claims of employees of PPLPs. 
Therefore, with respect to PPLPs, the agency adopts the view, expressed 
by the majority of commenters, that the agreement to be responsible for 
losses sustained by one's own employees establishes a contractual, 
substantive right in each signatory to the reciprocal agreement to be 
indemnified and held harmless from claims of the other signatories' 
employees. Commenters offering this understanding of the reciprocal 
waiver of claims agreement also stated that insurance, separate from 
launch liability insurance, can be obtained by each signatory to the 
agreement to cover this contractual obligation.
    As a practical matter, the agency's determination that the 
Government assumes a limited acceptance of responsibility for its 
employees' losses should not impose an unreasonable burden on the 
commercial launch industry. Even if the Government assumed 
responsibility for losses sustained by Government personnel, a prudent 
PPLP would maintain insurance to cover its liability in the event 
Congress failed to appropriate funds for this obligation. Rather than 
risk an uncovered liability, we believe it should be preferable for all 
entities involved in launch services to ensure adequate resources exist 
to cover claims of Government employees through the liability policy 
obtained by the licensee in accordance with the CSLA.
    The issue remains as to whether the agency's approach of addressing 
claims of Government employees is appropriate for employees of the 
Government's contractors and subcontractors involved in launch 
services. Although Government contractors and subcontractors are 
private entities not subject to the restrictions of appropriations 
laws, the agency maintains that it is appropriate to accord to those 
employees the same status as Government employees for this limited risk 
management purpose and require that the licensee's liability policy 
respond to claims of Government personnel. The waiver requirement set 
forth in the statute provides that the Government waives claims ``for'' 
or ``on behalf of'' its contractors involved in launch services. In 
doing so, the Government takes on additional responsibilities to 
safeguard the interests and rights of those entities that perform 
launch services, at the behest of the Government, in support of 
commercial operations. For this reason, Government contractors and 
subcontractors should not be required to accept additional liability or 
insurance obligations when they perform services in support of 
commercial launch operations under contract to the Government. Although 
Government contractors and subcontractors could obtain insurance to 
cover a contractual indemnification obligation, they are not currently 
required to do so. Thus, costs incurred in obtaining this additional 
coverage would likely be passed through to the Government as allowable 
and allocable costs. Rather than incur additional costs or risks, the 
agency has determined to maintain its current practice of requiring 
that the liability policy obtained by the licensee under the CSLA 
respond to claims of Government contractor and subcontractor employees.
    The agency's interpretation of the statutory agreement in which 
parties agree to be responsible for losses of their own employees may 
be controversial in that it effectively relieves a party of the 
financial consequences of its own negligence. At first blush, this 
might seem an illogical result, or one that flies in the face of public 
policy; however, it is consistent generally with the no-fault, no-
subrogation reciprocal waiver scheme required by the CSLA. Parties may 
validly contract for or require indemnification against their own 
future negligent acts as long as it is clearly done, as in the revised 
form of reciprocal waiver of claims agreement presented in Appendix II 
of the final rule. However, it would be contrary to public policy to 
allow a party to contract for indemnification against willful 
misconduct and the ``Agreement for Waiver of Claims and Assumption of 
Responsibility'' contained in Appendix II of the final rule does not 
allow a launch participant to be relieved of liability for such 
behavior. The agency anticipates that the commercial market will 
respond to these requirements by ensuring that only responsible launch 
participants will be employed to perform hazardous operations in order 
to reduce each participant's risk of financial responsibility for 
employee losses.

(2) Liability Insurance Coverage for Third Parties

    In making the determinations reflected in the final rule, the FAA 
also considered the question of whether the liability policy a launch 
licensee obtains ought to respond, in the first instance, to all 
employee claims. The approach suggested by Boeing and Sea Launch of 
considering all employees to be third parties whose claims must be 
covered by the licensee's liability policy under the CSLA is attractive 
for several reasons. It ensures sufficient financial resources will be 
available to cover employee claims through the liability policy and as 
follows: In the event an employee's claims are not compensated by that 
policy, either because of an insurance exclusion deemed ``usual'' 
within the meaning of the statute or exhaustion of policy limits, the 
Government may elect to cover the claim under the procedures set forth 
in 49 U.S.C. 70113. If the Government fails to do so, then the launch 
participant/

[[Page 45604]]

employer's agreement to be responsible for the claim could be invoked 
and the sued launch participant would seek indemnification from the 
launch participant/employer for the amount of the employee's recovery. 
This approach offers the benefit of reconciling the view that employees 
of all launch participants may be third parties without stripping the 
CSLA-mandated agreement to be responsible for employee losses of 
substantive import. However, where the uncovered claim belongs to 
Government personnel, the agency would need to resolve whether the 
Government's agreement to be responsible for its employees' losses 
would be subject to 49 U.S.C. 70113 procedures or absolute.
    In evaluating the issue, the agency considered the additional 
burdens that would be imposed upon launch licensees if all employees 
were deemed third parties whose claims would be addressed by the launch 
licensee's liability policy. To do so, the agency surveyed Air Force 
installations at which launches take place to ascertain the maximum 
number of employees, other than Government personnel (because their 
exposure is currently assessed by the agency in setting insurance 
requirements), that may be exposed to hazardous operations. Using $3 
million as the value of life, the amount currently used by the agency 
in making maximum probable loss (MPL) determinations, and applying a 
conservative assumption that half the personnel exposed would suffer 
casualties within MPL thresholds, the agency determined that liability 
insurance levels would increase anywhere from $12-15 million to $54 
million depending upon the launch vehicle and the Federal installation 
from which it is launched.
    Although these increases in loss limits do not seem extraordinary 
in light of the statutory ceiling on required liability insurance of 
$500 million, the agency understands that directing additional coverage 
for claims of all launch participant employees would shift the risk of 
such claims to the liability policy and increase its cost, assuming 
insurance of this nature could be obtained. The agency considered 
whether the imposition of additional costs and risks on the launch 
industry that would be associated with this approach is warranted and 
justified in light of statutory objectives. Accordingly, the agency re-
examined closely the intent of the 1988 Amendments in light of 
liability concerns confronting the commercial launch industry at the 
time the 1988 Amendments were enacted.
    Extensive hearings on H.R. 3765, a predecessor to the 1988 
Amendments, before the Subcommittee on Space Science and Applications 
on February 16-17, 1988, are illuminating in this regard. The various 
panelists presenting views at the hearings, as well as the Subcommittee 
Members, made clear in their remarks that it was the risk of 
catastrophic failures and potentially unlimited liability to persons 
completely unassociated with launch activities that was at the heart of 
the industry's concern in operating in a commercial manner at a time 
when insurance capacity was extremely limited.
    The testimony suggests that third party liability risks at issue 
were risks to the public, that is, the uninvolved, unassociated 
innocent bystander having nothing to do with the launch activity, not 
employees of launch participants who would at least have some remedy 
under workers compensation statutes. In questioning Richard E. 
Brackeen, president of Martin Marietta Commercial Titan, Inc., 
Congressman Jack Buechner, R. Mo., asked about the history of claims 
for loss or injury of persons who were not involved in activities at 
the launch site. In his question, he carved out catastrophic losses to 
astronauts and the Challenger disaster, as well as workers compensation 
claims. ``I'm talking about people outside of the immediate launch 
system. I mean, it seems to me that as we get into these questions of 
indemnification, we're talking about a risk analyses [sic] that has to 
be done.'' H.R. 3765, The Commercial Space Launch Act Amendments: 
Hearings Before the Subcommittee on Space Science and Applications of 
the House Comm. on Science, Space, and Technology, 100th Cong., 2d 
Sess. 210 (1988).
    In passing the 1988 Amendments, Congress determined that financial 
resources had to be available to cover claims by the public in the 
event a launch accident caused injury or damage to uninvolved persons. 
These resources would also satisfy the obligations of the United States 
under the Outer Space Treaties in the event of damage caused by a 
launch from the United States to a foreign territory. Earlier testimony 
suggests reason to believe that claims between the launch participants, 
including their employees, were regarded as first and second party 
claims that would be addressed through reciprocal waiver agreements, 
and not as third-party claims. In this manner, and in combination with 
the waiver by launch participants of first party damage or loss, the 
highest risk claims would be removed from liability coverage at a time 
when insurance capacity was extremely limited. This is consistent with 
the views expressed in this rulemaking by some commenters and their 
insurance brokers that employees are considered part of their employing 
entity whose claims were intended to be addressed through reciprocal 
waiver of claims agreements and separately from the third-party claims 
of uninvolved persons.
    The legislative history points to a unique conclusion with respect 
to Government employees, however. As reported out of the House 
Committee on Science, Space and Technology, the definition of ``third 
party'' in H.R. 4399 included United States personnel involved in 
launch services as part of the definition thereby excluding them from 
``third party'' status. The Senate Report accompanying the 1988 
Amendments indicates generally that the definition of the term ``third 
party'' is ``intended to be any person not associated directly with 
commercial launch operations.'' S. Rep. No. 100-593, 100 Cong., 2d 
Sess. at p. 8 (1988). Yet, the report language expressly reserves third 
party status for Government personnel directly associated with 
commercial launch operations and reference to Government personnel was 
removed from the definition of ``third party'' in the bill. Public Law 
100-657, known as the ``Commercial Space Launch Act Amendments of 
1988'' also makes no reference to Government personnel in the 
definition of ``third party.'' Thus, the FAA concludes that a 
deliberate decision was made to reclassify Government employees as 
third parties. Despite the lack of clarity in the statutory definition, 
ample basis exists to include Government employees in the universe of 
potential third-party claimants.
    The agency has also been advised by aerospace insurance brokers 
that the special circumstances of Government appropriations law was 
understood within the insurance community at the time the 1988 
Amendments were enacted and that accommodation for covering Government 
employee claims could be made. This is accomplished by ensuring that 
Government employees are regarded as third parties for purposes of 
ensuring that the launch licensee's liability policy will respond to 
their claims for injury, damage or loss.
    The agency does not find the same indications that the launch 
licensee's liability policy was intended to respond to claims of 
employees of PPLPs involved in a launch. Even if these

[[Page 45605]]

employees are ``third parties'' within the statutory definition of the 
term, the agency concludes that the mandatory agreement by each PPLP to 
be responsible for its employees' losses is a substantive requirement 
which supersedes the need to address their claims through the required 
liability policy. According to the insurance community, this 
interpretation is consistent with the universe of risks underwriters 
have agreed to accept by insuring launch liability. The agency is 
advised that underwriters have agreed to provide coverage for an 
unorthodox breadth of risks, as required by the CSLA--a single 
liability policy covering all launch participants as additional 
insureds--with the understanding that the claims having the highest 
risk of occurrence (claims for injury by individuals involved in 
licensed launch activities) would be addressed through other means, 
specifically, the waiver of claims and assumption of responsibility 
obligations of the CSLA. It is unclear whether the launch insurance 
market could or would respond to the imposition of additional risks 
from PPLP employee claims. Including coverage for GLP employee claims 
has been accommodated, but evidently not without some resistance. The 
agency does not find it necessary to further strain insurance capacity 
by considering all employees as third parties whose claims must be 
covered by the liability policy when we believe the assumption of 
responsibility provides the appropriate response, and the final rule 
reflects this view.
    The agency concludes that Government employees, but not PPLP 
employees, must be considered third parties whose claims against other 
launch participants will be responded to by the licensee's liability 
policy. Ensuring that the liability policy is available to cover claims 
of Government employees provides financial protection to all launch 
participants from Government employee claims. The following scenario 
and alternative results illustrate the financial risks that would 
confront all launch participants if Government employee claims were not 
eligible for coverage under the liability policy:
    Scenario: Government employee ``A'' is injured at Cape Canaveral 
Air Station while monitoring licensed launch activities. The injury to 
``A'' results from the launch licensee's negligence in performing the 
hazardous licensed operation of integrating the payload with the launch 
vehicle. The launch licensee's customer also performed in a negligent 
manner contributing to ``A's'' injuries. ``A'' files a claim under the 
Federal Employee Compensation Act (FECA), and receives prompt 
notification of his entitlement to compensation from the Government for 
his injury. FECA provides employee ``A'' an exclusive remedy against 
the Government for job-related injuries. Whether or not the 
Government's subrogated rights are waived under the CSLA, ``A'' may 
elect to sue the launch licensee and its customer, alleging that their 
negligence caused his injury. The launch licensee is a well-known 
launch services provider with considerable financial assets. Its 
customer is a not-for-profit research institution. ``A'' determines to 
sue the launch licensee alleging that its negligence caused his 
injuries and does not name the customer in the lawsuit. Assume that 
``A'' will be successful and obtain a judgment of $1 million against 
the launch licensee.
    Alt. 1: Under the view expressed by the agency in this final rule, 
the launch licensee has obtained a launch liability policy covering its 
liability to ``A.'' The liability policy responds to ``A's'' claim. 
Under the final rule, the licensee's insurer waives all rights of 
subrogation against the other insureds covered by the policy. Even if 
``A'' had named the customer in his suit, the claim would be covered by 
the launch licensee's liability policy because the customer as well as 
other PPLPs and GLPs are named as additional insureds under the policy.
    Alt. 2: The launch licensee's liability policy does not respond to 
``A's'' claim because it excludes coverage for claims of any insured's 
employees against any other insured under the policy. The launch 
licensee presents the reciprocal waiver of claims agreement to the 
Government and argues that the Government has agreed to be financially 
responsible for its employees. Although FECA provides to ``A'' an 
exclusive remedy against the Government, the licensee's action is not 
barred if it can establish either a substantive right to indemnity 
under the Federal Tort Claims Act or a contractual right to indemnity 
under the reciprocal waiver agreement dictated by the CSLA. Assuming 
that ``A'' did not perform in a negligent manner and that the 
Government was not negligent in its supervision of ``A,'' and the 
licensee cannot establish any other duty owed to it by the Government, 
the launch licensee will not be successful under the Federal Tort 
Claims Act and must establish a contractual obligation on the part of 
the United States to indemnify it for ``A's'' recovery. The agency has 
long held the view that the Anti-Deficiency Act precludes the 
Government from accepting an unfunded contingent liability and does not 
find in the CSLA language a clear, unequivocal removal of this 
restriction. Moreover, even if a special appropriation were requested 
to cover the launch licensee's liability to ``A,'' Congress may refuse 
to appropriate the funds, leaving ``A'' with a $1 million judgment 
against the launch licensee.
    Alt. 3: The launch licensee's liability policy does not respond to 
``A's'' claim because it excludes coverage for claims of any insured's 
employees against any other insured under the policy and the licensee 
impleads its customer as a third-party defendant thereby defeating the 
CSLA objective of avoiding inter-party litigation. As a practical 
matter, the launch licensee has deeper pockets than the customer who 
may or may not have sufficient insurance or assets to cover its 
liability, leaving the licensee potentially responsible for satisfying 
the entire judgment from other general liability insurance coverage or 
corporate assets.
    The first alternative described above provides the best outcome by: 
(i) relieving each participant of the need to obtain separate liability 
insurance to cover Government employee claims; (ii) providing 
reasonable assurance of financial protection to Government employees 
exposed to risk of loss in supporting commercial launch activities; and 
(iii) avoiding inter-party litigation.
    In the final rule, the definition of ``third party'' is revised to 
remove the express exclusion of employees of private party launch 
participants. As revised, the regulation does not preclude coverage by 
a licensee's launch liability policy for claims by employees of PPLPs. 
A licensee may obtain additional liability coverage in excess of 
amounts required under the terms of a launch license to cover claims of 
other parties' employees. However, the amount of insurance required by 
the agency does not reflect this additional source of claims nor can 
claims of other parties' employees dilute or diminish the amount of 
insurance that must remain available to respond to the intended class 
of third-party claimants, that is, persons uninvolved in the launch as 
well as claims of GLP employees. As long as those claims are satisfied, 
the Government would have no say as to whether a licensee's liability 
policy may respond to satisfy claims of other launch participants' 
employees if such coverage is available under the terms of the policy, 
either as a liability claim or to cover the contractual indemnification 
obligation of an insured. However, in the event the liability insurance 
is exhausted, claims

[[Page 45606]]

of employees of PPLPs would be the responsibility of their employer 
under the reciprocal waiver agreement and not eligible for Government 
payment under 49 U.S.C. 70113. Because providing additional coverage 
for losses sustained by employees of PPLPs may result in some 
additional expense, the agency leaves it to the parties to negotiate 
appropriate cost-sharing arrangements if they elect to pursue this 
route.
    To summarize briefly, the preceding discussion of risk allocation 
under the 1988 Amendments began by characterizing sources of claims for 
injury, damage or loss as falling within two groups: 1) those entities 
and individuals involved in licensed launch activities, and 2) those 
entities and individuals not involved in licensed launch activities. 
Those involved in licensed launch activities include PPLPs, GLPs, and 
their employees. Financial responsibility for claims of either group is 
provided as follows: Whereas PPLPs are required to waive claims for 
their own property damage or loss and obligate themselves contractually 
to cover or indemnify another launch participant in the event of losses 
sustained by one's own employee, the Government accepts a more limited 
responsibility. Through its participation in the reciprocal waiver of 
claims scheme, the Government agrees to waive claims for its own and 
its contractors' and subcontractors' property damage at a Federal range 
facility in excess of the amount of Government property insurance 
required under the license. The Government also accepts responsibility 
for losses of its employees and its contractors' and subcontractors' 
employees only to the extent they are not covered by required liability 
insurance, either because of a ``usual'' policy exclusion or because 
the policy limits have been exhausted. Claims of entities and 
individuals not involved in licensed launch activities would be 
addressed by the single liability policy obtained by the launch 
licensee to cover claims by any third party, as defined in this 
rulemaking, against any PPLP or GLP. Claims in excess of the required 
amount of liability insurance become the responsibility of the 
Government, subject to appropriation of funds, up to $1.5 billion (as 
adjusted for inflation occurring after January 1, 1989) above the 
amount of insurance that the agency requires.

Section-by-Section Analysis

    Summarized in this section are specific comments addressing 
particular provisions of the proposed rule or responding to the 
agency's request for views on matters not covered above, followed by 
the agency's response to the comments. The agency has also identified 
certain provisions in the NPRM that would benefit from additional 
elaboration. Each is discussed below in numerical order. Nonsubstantive 
changes in the regulatory text of the final rule are not specifically 
identified or discussed.

Section 440.1--Scope; Basis

    Section 440.1 as proposed indicates that the financial 
responsibility and allocation of risk requirements of this rulemaking 
apply to all licensed launch activities. There are no changes to this 
section in the final rule.
    Kistler submitted comments and recommendations for the agency's 
consideration to the extent these rules would apply to launches of 
reusable launch vehicles (RLVs). Legislation under consideration in 
Congress would authorize the agency to license separately the reentry 
of an RLV and impose financial responsibility requirements to cover 
risks associated with the reentry event. Currently, launch, but not 
reentry, of an RLV would be covered by existing statutory requirements 
for financial responsibility. Accordingly, the agency intends for these 
rules to apply to licensed RLV launch activities, as defined in a 
license, and will develop rules for reentry financial responsibility 
once specific licensing authority over reentry is enacted.

Section 440.3--Definitions

    The term ``contractors and subcontractors'' as defined in 
Sec. 440.3(a)(2) of the NPRM prompted two comments. The proposed 
definition would encompass entities involved directly or indirectly in 
licensed launch activities, including suppliers of property and 
services and component manufacturers. McDonnell Douglas and Orbital 
Sciences expressed concern that broadening the definition from that 
contained in the form of Agreement for Waiver of Claims and Assumption 
of Responsibility (Cross-Waiver Agreement) currently in use by the 
agency would impose additional burdens on the licensee and its 
customers to implement the reciprocal waiver of claims requirements of 
Sec. 440.17, in the following ways. Long-term contracts with 
subcontractors at every tier would have to be amended at significant 
burden and expense. By corollary, the licensee (and its customer) would 
be required to accept greater responsibility under the proposed form of 
reciprocal waiver of claims agreement set forth in Appendix II to the 
NPRM in the event it failed to pass on, or flow down, the cross-waiver 
requirements to all of its contractors and subcontractors. Commenters 
were also concerned that the expanded definition would remove the 
licensee's prerogative of either obtaining waiver of claims agreements 
from its contractors or indemnifying other parties for failure to 
implement properly the waiver of claims agreements. McDonnell Douglas 
clarified its comment by noting that the proposed definition would be 
acceptable if the indemnification option were preserved.
    The agency believes these concerns are misplaced. The proposed 
definition has been broadly crafted in order to ensure that the 
liability insurance protection required of a launch licensee under the 
CSLA is available to cover third-party claims against any contractor or 
subcontractor involved directly or indirectly in licensed launch 
activities. Consistent with the CSLA scheme, the definition would 
include any contractor or subcontractor that has potential liability 
exposure to third parties as a result of licensed launch activities. 
However, in the section-by-section discussion of proposed Sec. 440.17--
Reciprocal Waiver of Claims Requirements, the NPRM explains that not 
all of those entities are expected or required to participate in the 
reciprocal waiver of claims scheme in order to carry out its purpose. 
Only those participants, including contractors and subcontractors, 
whose personnel or property are at risk in the conduct of licensed 
launch activities and who therefore could pursue claims against other 
participants in the event of injury, damage or loss need enter into the 
reciprocal waiver of claims agreement. (61 FR at 39012, July 25, 1996).
    The indemnification provisions referred to by the commenters appear 
in paragraph 5 of the proposed form of reciprocal waiver of claims 
agreement in Appendix II of the NPRM. These provisions continue the 
agency's current practice of providing a contractual remedy to launch 
participants who must defend against claims brought by other launch 
participants' contractors or subcontractors because of the latter 
party's failure to implement properly the extension, or flow down, 
provisions of the agreement with its contractors and subcontractors. 
The indemnification and hold harmless provisions in paragraph 5 of the 
proposed form of agreement at Appendix II are not intended to relieve a 
launch participant of its responsibility to implement waivers of claims 
with its contractors and subcontractors by allowing the launch 
participant to elect

[[Page 45607]]

whether or not to comply. The reciprocal waiver of claims scheme works 
best when PPLPs implement the waiver of claims requirements fully and 
properly because failure to do so will result in additional costs and 
burdens to a party that must defend against a claim. (Commenters raised 
the very same arguments in opposition to the Government's view that it 
need not flow down the waiver requirements to its contractors and 
subcontractors. However, because the Government would be responsible 
for uncovered property losses sustained by those entities, the agency 
believes that the approach proposed in the NPRM wherein the Government 
would waive claims on behalf of its contractors and subcontractors 
should not be objectionable.)
    The revised form of reciprocal waiver of claims agreement appearing 
in this final rule at Appendix II continues the current practice of 
requiring a three-party agreement to be executed by the licensee, its 
customer and the agency on behalf of the Government and imposing an 
express indemnification obligation on signatories to the agreement for 
failure to implement properly the flow down provisions of the agreement 
to contractors and subcontractors. Consistent with current practice, 
the agency leaves implementation of these provisions to launch 
participants and does not intend to monitor compliance with the flow-
down requirements.
    Two comments were submitted regarding the proposed definition of 
``customer'' in section 440.3(a)(3). Hughes Electronics, a 
communications satellite manufacturer, endorsed the proposed 
definition, in that it would include any person to whom the procurer of 
launch services conditionally sells, leases, assigns or otherwise 
transfers its rights in the payload. Sea Launch suggested broadening 
the definition to include not just any person to whom the procurer of 
launch services has transferred a right in the payload, but also any 
person to whom the procurer of launch services has transferred a right 
to the launch services but remains in privity of contract with the 
launch services provider, such as when the procuring party transfers or 
brokers those rights to another party. The agency agrees with the 
comment and has revised the definition accordingly in the final rule 
and Appendix II agreement.
    Through the broad definition of the term ``customer,'' the agency 
intends that the financial responsibility and risk allocation 
provisions of the CSLA, including rights to liability insurance 
coverage and eligibility for Government payment of excess liability 
claims, as well as the responsibility to participate in the reciprocal 
waiver of claims scheme, apply not just to the procurer (or transferee) 
of launch services, but also to any person having any rights in the 
payload to be launched. A question arises as to whether a person who 
places property on board a payload to obtain launch or payload 
services, or who has rights in the payload, should properly be viewed 
as a customer (or customer of the customer) or a contractor in that it 
is supplying property. The question is raised in the context of 
determining whether, and in what capacity, the person whose property is 
on the payload is expected to accede to the reciprocal waiver of claims 
scheme. The more traditional view of this person as a customer is 
correct and his or her rights and responsibilities under the cross-
waiver agreement are equivalent to those of the customer who signs the 
three-party agreement with the licensee and the agency on behalf of the 
Government. Thus, it must be clearly understood that the customer who 
executes the three-party reciprocal waiver of claims agreement required 
as a condition of the license does so on behalf of all of its 
customers. It is incumbent upon that party to implement the extension, 
or flow down, provisions of the agreement to its customers and the same 
indemnification protections would be afforded the other launch 
participants in the event of the signatory customer's failure to do so. 
In essence, while the customer's customer becomes a third-party 
beneficiary of the three-party waiver of claims agreement, it is also 
expected to sign a waiver agreement and assume the burdens of a 
customer that signs the reciprocal waiver agreement with DOT and the 
licensee. The definition of ``customer'' is further modified in the 
final rule to include any person who places property on board a payload 
for the purpose of obtaining launch or payload services and the form of 
reciprocal waiver of claims agreement in Appendix II of the final rule 
is also revised to reflect the additional indemnification obligations 
of the customer.
    The term ``Government personnel'' remains unchanged in the final 
rule and is used to facilitate the distinction between employees of 
Government launch participants (GLPs) whose claims must be addressed by 
the launch licensee's liability policy and employees of private party 
launch participants (PPLPs) whose claims are the responsibility of 
their employer, as discussed above. The agency considers FAA personnel 
who carry out inspections or compliance monitoring activities at the 
launch site to be Government personnel.
    No comments were received on the proposed definition of 
``liability'' contained in Sec. 440.3(a)(8). However, the agency wishes 
to clarify that legal liability of the United States under 
international law may include treaty obligations of the United States 
and the liability insurance policies obtained by licensees must cover 
those obligations. No change in the proposed definition is required.
    For reasons explained above in the supplementary information, the 
proposed definition of the term ``third party'' is revised in the final 
rule by removing the following sentence: ``For purposes of these 
regulations, employees of other launch participants identified in 
paragraphs (a)(15)(i)(B) and (C) of this section are not third 
parties.'' The licensee's liability policy may respond to losses 
sustained by employees of PPLPs either as a third-party or contractual 
liability and the agency is not foreclosing that possibility. However, 
the public is advised that the agency does not consider potential 
losses of PPLP employees in determining the required amount of 
liability insurance and does not find in the statute congressional 
intent to address those losses through the excess claims provisions of 
49 U.S.C. 70113.
    Definitions of other terms not specifically addressed herein remain 
as proposed in the NPRM.

Section 440.5--General

    Section 440.5 as proposed sets forth the basic requirement that 
launch licensees must comply with financial responsibility and 
allocation of risk requirements established by the agency. Once 
established, the prescribed financial responsibility requirements 
become the exclusive requirements of the Government for financial 
responsibility, allocation of risk and related matters covered by 49 
U.S.C. 70112 and 70113. Other agencies may impose requirements to 
address matters that are not covered by the financial responsibility 
provisions of 49 U.S.C. 70112, such as unemployment insurance or 
comprehensive automobile liability, and licensees are not relieved of 
the obligation to comply with them.
    Proposed Sec. 440.5(b) provides that the agency will prescribe in a 
license order the amount of financial responsibility a licensee must 
obtain. Similarly, any modifications of that amount would also be 
established through license orders.
    Lockheed Martin, McDonnell Douglas and Orbital Sciences registered 
concern

[[Page 45608]]

over the agency's assertion of continuing authority to revise 
requirements based upon changes in exposed property or risks, 
indicating that such revisions create uncertainty and could impact cost 
and availability of insurance.
    Operator licenses are currently issued for a two-year period, and 
may be renewed upon application by a licensee. It is reasonable to 
expect that some change will occur in the property or number of third 
parties exposed to risk of loss over the course of several years and 
the agency must be able to respond appropriately to those changes. 
Changes may result from actions of the licensee, such as a change in 
launch plans, the Government, or third parties. For example, a change 
in launch trajectory may heighten or reduce risks to third parties or 
Government property. Similarly, a person uninvolved in a licensee's 
activities may establish facilities on a launch site, possibly 
increasing risk to third-party property and increasing the value of the 
maximum probable loss (MPL) determination associated with licensed 
launch activities. A change in the MPL, in either direction, should 
properly be reflected in the mandated amount of insurance coverage.
    The FAA does not anticipate frequent or rapid fluctuations in 
required levels of insurance. As indicated in the NPRM, transient 
Government property is not included as part of the MPL analysis. 
Although it must be covered by the licensee's insurance, the amount of 
insurance coverage required would not depend upon the presence or 
absence of transient Government property on any given day and it is not 
the Government's intent to alter this approach in retaining discretion 
to revise requirements. No change to this provision is required in the 
final rule to address the commenters' concern.
    A number of comments were directed at Sec. 440.5(c), which states 
the fundamental principle that a demonstration by a licensee of 
financial responsibility for liability, loss or damage suffered by the 
United States as a result of licensed launch activities is not a 
substitute for actual financial responsibility. Section 440.5 of the 
NPRM further provides the only circumstances under which the licensee 
would be relieved of this responsibility, as follows: (1) when 
liability, loss or damage sustained by the United States results from 
willful misconduct of the United States or its agents, including 
Government personnel; (2) third-party claims for bodily injury or 
property damage covered by the licensee's liability insurance exceed 
the amount of financial responsibility established by the agency under 
the regulations up to $1.5 billion (as adjusted for inflation occurring 
after January 1, 1989) above that amount and are payable under the 
payment of excess claims provision of the CSLA (49 U.S.C. 70113); (3) 
claims for loss or damage to property of the U.S. Government, its 
agencies, contractors and subcontractors exceed the required amount of 
Government property insurance; and (4) in the event the licensee has no 
liability for third-party claims arising out of any particular launch 
that exceed $1.5 billion (as adjusted for inflation occurring after 
January 1, 1989).
    Lockheed Martin requested that the agency reconcile various 
statements regarding the Government's responsibility in the event of 
its own willful misconduct with other provisions in the proposed 
regulations concerning waiver of claims and assumption of 
responsibility.
    Section 70112(e) of the CSLA directs the Secretary of 
Transportation to establish financial responsibility requirements and 
other assurances necessary to protect the Government and its agencies 
and personnel from liability, death, bodily injury, or property damage 
or loss as a result of licensed activities involving Government 
facilities or personnel. 49 U.S.C. 70112(e). Significantly, 49 U.S.C. 
70112(e) does not relieve the licensee's obligation to cover claims for 
damage to Government property or personnel that result from willful 
misconduct of the Government or its agents. However, it does provide 
that the Secretary may not relieve the Government of liability under 
this subsection for death, bodily injury, or property damage or loss 
resulting from the willful misconduct of the Government or its agents. 
As a matter of public policy, the Government ought not be able to 
assert claims against the licensee or any other person for property 
damage that it suffers as a result of its own willful misconduct or 
that of its agents. In the limited circumstances in which willful 
misconduct by the Government or its agents results in property damage 
or loss to Government property, the licensee is relieved of ultimate 
responsibility for the claim under Sec. 440.5(c)(1) of the final rule. 
Consistent with current practice, the Agreement for Waiver of Claims 
and Assumption of Responsibility presented in Appendix II of the final 
rule also requires that the licensee hold the Government and its 
agencies, servants, agents, employees and assignees harmless from 
liability for property damage or injury except where, among other 
things, the claim results from willful misconduct of the Government or 
its agents. Because Government contractors and their employees are not 
typically considered agents of the Government in most circumstances, 
the final rule is revised to remove reference to Government personnel 
in Sec. 440.5(c)(1); paragraph 7(b) of the form of agreement presented 
in Appendix II of the final rule is similarly revised.
    Two additional revisions appear in Sec. 440.5(c) of the final rule. 
First, section 440.5(c)(3) effectively provides that the licensee is 
relieved of ultimate responsibility for damage to or loss of GLP 
property in excess of Government property insurance required under 
Sec. 440.9(d). As a matter of public policy and consistent with current 
practice, licensees are not relieved of financial responsibility for 
excess Government property damage where the Government's claims result 
from the licensee's willful misconduct and this policy is now reflected 
in Sec. 440.5(c)(3) of the final rule. No change is necessary in the 
Agreement for Waiver of Claims and Assumption of Responsibility in 
Appendix II of the rule because, consistent with current practice, it 
provides that waivers of claims shall not apply where the claims result 
from willful misconduct of any of the parties.
    Second, several commenters pointed out an inadvertent omission in 
Sec. 440.5(c)(4), as proposed. This exception to the licensee's 
ultimate responsibility for liability or losses sustained by the United 
States from licensed launch activities is intended to refer to claims 
in excess of $1.5 billion above the amount of required insurance, and 
is corrected in the final rule. The Agreement for Waiver of Claims and 
Assumption of Responsibility appearing in Appendix II of this final 
rule is also corrected.
    Lockheed Martin further objected to Sec. 440.5(c)(4), as corrected. 
It believes the practical effect would be to make the licensee jointly 
and severally liable with other launch participants for damages in 
excess of the required amount of insurance plus the $1.5 billion 
payable under 49 U.S.C. 70113, unless the licensee could prove no 
liability whatsoever. Lockheed Martin objected that limiting this 
provision to those instances in which the licensee proves it has no 
liability would be unduly burdensome to launch licensees. Lockheed 
Martin also noted that requiring a licensee to be solely responsible 
for these claims could even be uninsurable if the exposure were viewed 
by insurers as an unlimited indemnification, presumably of the

[[Page 45609]]

other launch participants, regardless of fault.
    The intent of this provision is to ensure that the Government's 
liability will be covered as directed by 49 U.S.C. 70112(e) and the 
agency has retained the proposed approach in the final rule. However, 
nothing in this rule prevents a licensee from contractually allocating 
this risk with other PPLPs so that the cost of the liability would be 
shared among responsible PPLPs.

Section 440.7--Determination of Maximum Probable Loss

    This section of the final rule sets forth the agency's procedure 
for issuing maximum probable loss (MPL) determinations that form the 
basis for financial responsibility requirements contained in license 
orders. Lockheed Martin commented on this section of the NPRM by 
indicating that it is difficult to understand how actual determinations 
are made and what the impact of the NPRM would be on existing MPL 
determinations.
    It has not been the agency's intent to announce changes to its MPL 
methodology through this rulemaking. Rather, the agency has attempted 
to shed some light on the methodology employed in setting insurance 
requirements pending completion and issuance of a comprehensive report 
on MPL. In doing so, the agency learned that its inclusion of certain 
risks in the MPL analysis, such as risks to Government personnel, was 
not clearly understood within the commercial launch industry. To avoid 
additional misunderstandings and to facilitate industry's ability to 
obtain financial protection from launch risks, the agency agrees with 
the comment recommendation to make its analytical documentation 
available to licensees upon request. In fact, this is the agency's 
current practice although few licensees have made such requests.
    Two launch licensees, Orbital Sciences and McDonnell Douglas, 
commented on the 90-day period in which the agency issues its MPL 
determination following receipt of all required information. Section 
440.7(b) provides for notification to a licensee if issuance of the MPL 
determination will be delayed due to statutorily-mandated interagency 
consultations. The commenters expressed concern that an open-ended 
review period is contrary to the CSLA's intent to protect launch 
licensees by limiting and clearly defining the review period. The 
agency understands the industry's need to receive MPL determinations in 
order to obtain required insurance in a timely manner. Moreover, until 
the agency establishes its financial responsibility requirements, 
insurance requirements imposed by the Federal range facility remain in 
place and are not preempted or superceded by the agency's risk-based 
requirements under the CSLA. The agency commits to facilitating as 
efficient and expedited an interagency review as practicable but hopes 
the industry will understand those infrequent occasions when the 
process is not as fluid as intended.
    Kistler also expressed reservations that the 90-day provision for 
issuing an MPL determination would compromise the fast turn-around 
anticipated for RLV operations. Kistler suggested that MPL 
determinations could be issued for a class of launches and payloads at 
the time a license is issued, and that the determination could 
``stand'' unless a proposed launch or payload falls outside of 
specified parameters. In that event, only the changed information 
should be required of the licensee for purposes of recalculating the 
MPL determination using the initial determination as a baseline. The 
agency agrees with Kistler and, in practice, already implements the 
approach proposed in Kistler's recommendations. The agency notes that 
Kistler is not yet licensed to conduct launch activities and therefore 
may not be familiar with the agency's approach to establishing 
insurance requirements that cover a range of authorized launch 
activities within identified parameters.
    Section 440.7(d) provides that the agency amends an MPL 
determination, if warranted, before completion of licensed launch 
activities when new information requires an adjustment in insurance 
requirements. Lockheed Martin, Orbital Sciences, and McDonnell Douglas 
expressed concern that the ability to amend insurance requirements 
would create uncertainty for the industry and add unpredictability to 
the industry's ability to manage risks. Marsh & McLennan offered its 
concerns that licensees and their brokers be allowed sufficient time--
at least 30 to 60 days--to work with underwriters to increase policy 
limits and noted that doing so may be impossible if insurance market 
capacity is insufficient to provide increased limits at a reasonable 
price.
    As indicated above in the discussion of comments to Sec. 440.5, the 
agency is apprised of new information from time to time in the life of 
a license, currently a two-year renewable term for operator licenses, 
that affects the MPL determination. In some cases, the MPL may even be 
reduced on the basis of this information. It would be irresponsible to 
ignore changes in the risks that attend launch activities; however, the 
FAA intends to provide licensees a sufficient period of time in which 
to comply with revised insurance requirements.
    Kistler objected to increasing insurance requirements mid-flight. 
Section 440.7(d), as proposed, was intended to allow the agency 
flexibility to address longer term changes in risk that would affect 
insurance determinations for the remaining life of a launch license. 
The need to do so is driven, generally, by the agency's practice of 
issuing licenses that cover a multitude of launches or that remain 
effective for a multi-year, renewable term. It was not intended to 
alter risk allocation arrangements between the launch participants and 
the Government in mid-flight by revising required levels of insurance 
after ignition. The agency does not agree that any change to this 
provision is required in the final rule.
    Appendix I of the final rule contains information requirements 
relevant to establishing MPL. Information concerning post-flight 
processing operations may become unnecessary if the agency defines 
licensed launch activities as ending, for purposes of ground 
operations, upon successful lift-off of a launch vehicle. In that 
event, the agency would amend its requirements by removing post-flight 
processing operations from Appendix I.

Section 440.9--Insurance Requirements for Licensed Launch Activities

    Section 440.9 presents in a regulation the requirement for launch 
licensees to obtain two types of insurance coverage--one for third-
party liability and one for damage or loss to Government property at a 
Federal range facility. Section 440.9(b) requires that the third-party 
liability policy protect Government personnel as additional insureds. 
Sea Launch indicated its belief that employees of the PPLPs should also 
be identified as additional insureds. Lockheed Martin queried why 
Government personnel would be treated differently than other employees.
    The agency agrees with the commenters and currently requires that 
all launch participant employees be protected from third-party 
liability. This coverage is routinely provided in liability policies 
that name, among the additional insureds, employees of the various 
launch participants acting within the scope of their employment. The 
CSLA singles out personnel employed by Government agencies in the 
statutory requirement set forth in 49 U.S.C. 70112(a)(4), and for this 
reason so did Sec. 440.9(b), as proposed. The final rule is revised to 
require liability coverage for third-party claims against

[[Page 45610]]

employees of all launch participants involved in licensed launch 
activities.
    The CSLA specifically mandates protection for the Government, its 
executive agencies and personnel from liability, death, bodily injury 
or property damage or loss as a result of a launch or operation of a 
launch site involving a facility or personnel of the Government. 49 
U.S.C. 70112(e). Thus, the agency concludes that it is reasonable and 
necessary that employees of the Government be classified as both 
additional insureds and third parties. And, for reasons detailed above 
in the discussion of risk allocation, passes on similar status and 
benefits to employees of Government contractors and subcontractors 
involved in licensed launch activities. Some of the comments received 
point out that employees are viewed, for insurance purposes, as part of 
the entity that employs them and therefore it would be unusual, and not 
customary, to also view them as claimants against the policy. 
Accordingly, the approach adopted in the final rule with respect to 
Government personnel is the exception.
    Section 440.9(c) provides that the agency will prescribe liability 
insurance requirements not to exceed the lesser of $500 million or the 
maximum available on the world market at a reasonable cost, as 
determined by the agency. Marsh & McLennan offered, as a caveat to this 
provision, that insurers of weak or questionable solvency that provide 
coverage at reasonable cost may not be financially able to cover claims 
and that care should be taken in determining what is available at 
reasonable cost. The agency appreciates this caution and hopes to avoid 
this situation by requiring that policies be placed with insurers of 
recognized reputation and responsibility, as provided in 
Sec. 440.13(a)(8) of the final rule. A future rulemaking may be 
necessary to provide criteria for assessing an insurer's acceptability 
to the agency.
    Section 440.9(d) sets forth the requirement for Government property 
insurance and requires coverage for property of Government contractors 
and subcontractors at a Federal range facility. In its comments, 
Lockheed Martin observed that doing so relieves the Government from the 
obligation to pass on to its contractors and subcontractors the waiver 
of claims provisions of Sec. 440.17, as reflected in the form of 
agreement in Appendix II to the NPRM, and relieves those contractors 
and subcontractors from the obligation to assume responsibility for 
their property damage or loss. The comment stated that the rationale 
for disparate treatment of Government contractors and subcontractors as 
compared to PPLPs' contractors and subcontractors is unclear.
    The agency's rationale for treating Government contractors and 
subcontractors differently than PPLPs is based on statutory language. 
Whereas 49 U.S.C. 70112(b)(1) directs the licensee to make a reciprocal 
waiver of claims with its contractors, subcontractors, and customers, 
and the contractors and subcontractors of its customers, involved in 
launch services, 49 U.S.C. 70112(b)(2) directs the Secretary of 
Transportation to make, for the Government, executive agencies of the 
Government involved in launch services, and contractors and 
subcontractors involved in launch services, a reciprocal waiver of 
claims with the licensee and other PPLPs. (Emphasis added.) This 
difference in language is meaningful. As stated in the NPRM, the agency 
views Government contractors and subcontractors as third-party 
beneficiaries of the reciprocal waiver agreement and the Government is 
responsible for protecting their interests. In addition, by waiving 
claims for property damage in excess of required insurance on behalf of 
its contractors and subcontractors, the Government accepts the 
additional risk of their property damage. The additional risk to the 
Government is managed in two ways. First, the licensee is required to 
obtain property insurance covering damage or loss to property of 
Government contractors and subcontractors involved in licensed launch 
activities, in addition to Government-owned property. Second, 
Government contractors and subcontractors must also maintain insurance 
for their property, the cost of which is charged to the Government as 
an allowable cost. In the event Government contractor property is 
damaged, the Government would look first to the licensee's property 
policy for coverage in order to relieve financial risks to the 
Government. The contractor's insurance would cover the second tier of 
risk up to policy limits. In both instances, the risk of loss above 
statutorily-required insurance is borne by the Government.
    A technical correction is added to Sec. 440.9(d) to more accurately 
reflect Government contractor and subcontractor property that must be 
covered under this insurance requirement as that belonging to 
contractors and subcontractors involved in licensed launch activities. 
As stated in the NPRM, other Government contractor and subcontractor 
property would be covered by a licensee's launch liability policy (61 
FR 39000-39001).
    An inadvertent omission is corrected in Sec. 440.9(e) of the final 
rule by providing that the maximum amount of property insurance that 
would be required under this provision is the lesser of $100 million or 
the maximum amount available on the world market at a reasonable cost, 
as determined by the agency.
    Two commenters, Orbital Sciences and McDonnell Douglas, objected to 
the agency's view that all Government property located on the Federal 
range facility must be covered by insurance, wherever located. The 
commenters viewed this requirement as excessive and offered, as an 
alternative, that only Government property located in the launch hazard 
corridor as defined by the National Range Safety Office should be 
covered. In clarifying remarks, McDonnell Douglas suggested that 
perhaps Government property outside this corridor should be self-
insured by the Government and that reclassifying it as third-party 
property may simply shift the risk (and therefore the cost of 
insurance) to different insurance rather than limiting industry's risk 
exposure for damage to Government property. Orbital Sciences submitted 
supplemental comments in which it narrowed further the scope of 
Government property that it believes should be covered by insurance as 
that within the care, custody and control of the licensee. Orbital 
Sciences asserted that the cost of insuring other Government property, 
even that within the launch hazard corridor, could be prohibitive and 
that a requirement to insure such property does not account for 
differences in liability and property insurance.
    The agency considered defining the specific property at a Federal 
range facility that must be covered by property insurance and found 
this approach cumbersome and unnecessarily limiting and risky for the 
Government. Although accident scenarios can be used to identify the 
property most exposed to risk, they may not cover the full range of 
accidents which, by definition, are unpredictable events. Also, this 
alternative approach would eliminate from coverage any transient 
property not identified by the Government in its insurance requirements 
but that was on the site at the time of a launch accident and therefore 
must be covered by insurance.
    The agency's approach to assuring coverage for Government range 
assets exposed to risk from commercial launch activities is necessarily 
comprehensive. The CSLA is clear that financial responsibility and 
other assurances are necessary to protect the Government

[[Page 45611]]

from the risk of damage or loss when its property or personnel are 
exposed to risk from licensed activities. The agency views as 
significant the distinction in the CSLA between liability insurance for 
third-party claims and Government property insurance protection that 
must respond to Government claims against any person. The purpose of 
the Government property insurance requirement is to ensure funds are 
immediately available to restore valuable range assets and property 
damaged by a commercial launch effort. This requirement is not limited 
to the space launch complex within the immediate care, custody and 
control of the licensee. An errant launch vehicle may expose other 
range property to risk. For example, an Athena-2 launch from Launch 
Complex 46, operated by Spaceport Florida Authority under an FAA 
license, at CCAS exposes both Launch Complex-36A and 36B, utilized for 
Atlas launches, to risk of damage or loss within the MPL threshold for 
quantifying Government property risks. Accordingly, coverage for all 
range assets, as well as Government contractor property involved in a 
licensed launch, is consistent with CSLA objectives and risk allocation 
principles. Furthermore, the agency does not regard the Government's 
waiver of claims for excess property damage as extending beyond the 
Federal range facility at which a launch takes place and any adjacent 
or nearby range assets. As explained in the NPRM, no greater risk or 
cost to licensees should result from considering off-site, non-launch 
related Government property as equivalent to any other third-party 
property for purposes of liability coverage. Section 440.9(c), as 
revised in the final rule, makes clear that claims for such property 
damage or loss are covered by the licensee's launch liability policy. 
This provision reflects the FAA's existing practice in establishing 
financial responsibility requirements for third-party liability and 
should not be construed as requiring excess insurance for waived 
Government property damage claims.
    The agency currently affords a fair amount of latitude to the 
commercial launch industry in providing coverage for Government 
property. For example, the agency has allowed the licensee's property 
policy to cover only that Government property which is in the 
licensee's care, custody and control, and risks to all other Government 
range property to be addressed through the licensee's liability policy, 
as long as doing so does not reduce the amount of coverage that must be 
available to cover third-party liability. The agency accepts this 
approach based on its understanding that it relieves a burden on the 
launch industry and conforms with certain insurance industry practices 
for insuring property. Also, because all launch participants are 
insureds, the liability policy is expected to respond to Government 
claims for damage or loss to range assets, regardless of fault, absent 
willful misconduct by the Government or its agents. The agency will 
continue to allow certain Government property to be addressed through 
the liability policy as long as doing so does not defeat the statutory 
objective of ensuring funds are quickly made available to restore or 
replace damaged Government assets. However, the agency is not willing 
to compromise the effectiveness or breadth of coverage it requires for 
Government range assets and property.

Section 440.11--Duration of Coverage

    Section 440.11(a) provides that insurance coverage must attach upon 
commencement of licensed launch activities and remain in effect for the 
time period specified in the license order. The time period is intended 
to extend up to the point when risk to third parties and Government 
property is sufficiently small, as determined through the agency's risk 
analysis, such that insurance is no longer necessary. As proposed, 
Sec. 440.11(a) would allow the agency to amend the required duration in 
the event of a launch anomaly to ensure that insurance remains in place 
until the resultant risks are considered to be sufficiently small. As 
explained in the section-by-section analysis of the NPRM, the period of 
time required for orbital launch insurance is typically 30 days 
measured generally from payload insertion. Thirty days is considered to 
be sufficient time to assess the possible consequences of a launch 
anomaly, such as delivery to a wrong orbit or failure of a payload to 
separate from the vehicle's second stage such that reentry is likely, 
and determine whether extended insurance coverage appears to be 
necessary.
    The agency's current practice is to require that insurance remain 
in place for 30 days following flight of the launch vehicle. As 
explained in the NPRM, the agency has viewed 30 days as an appropriate 
length of time in which to determine whether an anomalous situation has 
occurred, the consequences of which are yet unknown. The agency also 
has taken the position in the past that in the event such a situation 
arises, the agency can require the licensee to maintain its insurance 
for more than 30 days, until risks to third parties or the Government 
can be determined to be sufficiently small such that insurance is no 
longer needed. This approach was utilized early in the agency's 
licensing program when an Intelsat payload failed to separate from the 
second stage of a Titan launch vehicle. The agency considered that the 
second stage and payload would reenter the earth's atmosphere, with the 
possibility of reentry impacts and resultant damage, and advised the 
licensee that if reentry did not occur within the 30-day period 
specified in the license for insurance duration, the agency would 
require the licensee to extend its policy coverage. (This eventuality 
was considered by the agency in assessing MPL. At issue was the 
required duration of insurance, not the sufficiency of amount.) The 
agency's authority to dictate this extension and the licensee's ability 
to respond were never tested because reentry took place within three 
weeks of the launch event.
    Lockheed Martin, Orbital Sciences, and McDonnell Douglas objected 
to the proposal that would allow the agency to extend the required 
duration of insurance coverage in the event of a launch anomaly. All 
three licensees stated that this requirement was not in conformance 
with insurance practices and would be difficult and costly, if not 
impossible, to fulfill. McDonnell Douglas objected on the grounds that 
doing so places unrealistic and open-ended liability on the commercial 
launch industry and therefore undermines the National Space Policy and 
CSLA goals of promoting the growth and international competitiveness of 
the industry. Lockheed Martin pointed to this proposal as a clear 
instance of the Government's efforts to reallocate risks from the 
Government to the licensee. Lockheed Martin opined that if risk 
analysis is the basis for the agency's determination of the appropriate 
duration of insurance, then the anomaly should be viewed as foreseeable 
and addressed in the MPL analysis and determination. In the event the 
anomaly was so improbable that it would not be a factor in determining 
MPL, under the CSLA the Government assumes the risk either by waiving 
property damage claims or providing indemnification for third-party 
losses. Marsh & McLennan cautioned that uncertainties in the insurance 
market make it difficult to know whether coverage available and 
provided one year will be available the next and these market factors 
should be taken into account in determining the required duration of 
insurance requirements.

[[Page 45612]]

    Based on these comments, the agency has reconsidered its views on 
the appropriate duration of insurance coverage, keeping in mind that 
Arianespace provides customers with a 3-year indemnification for 
liability. The difficulty in establishing appropriate time limits on 
insurance stems from the statutory language and the Government's 
continuing prospect of fault-based liability under the Outer Space 
Treaties long after the launch is concluded. The Government's exposure 
under the Liability Convention, in particular, suggests that insurance 
should be required to remain in place for as long a time as 
practicable. However, absent the quid pro quo notion underlying the 
allocation of risk provisions of the CSLA, that is, if there will be no 
Government payment of excess claims (or ``indemnification'') for damage 
not proximately caused by the launch event, the agency would feel 
reluctant in requiring long-term insurance.
    In reevaluating its position on the appropriate duration of 
insurance, the agency considered an event test, a time test, and a 
combination of the two.
    Under an event test, the duration of insurance coverage could be 
tied to a specific event for a nominal launch, such as payload 
separation or safing of the vehicle's upper stage, as explained in the 
NPRM. However, if an anomalous event occurred, it would be difficult to 
identify a particular point in time at which insurance coverage could 
terminate. Forecasting a range of anomalous on-orbit scenarios could be 
extremely time-consuming, yield great uncertainty and result in 
extremely long timeframes (up to hundreds of years, perhaps) associated 
with measurable risk.
    Alternatively, a time test could be fashioned to capture only near-
term anomalous events that could result in third-party losses or damage 
to Government property, such as anomalous payload delivery or 
separation that results in an unplanned reentry or collision. However, 
it could also result in an extremely long-term insurance requirement 
because anomalous situations could result in adverse conditions 
remaining long after launch vehicle flight is concluded. These 
situations are difficult to predict, because the space environment is 
constantly changing with additional placement of objects on orbit and 
the effects of orbital decay.
    The agency has determined that a combination of event and time 
tests should be utilized in setting the required duration of insurance 
for licensed launch activities. The result is similar to the current 
requirement of the agency that insurance remain in place for 30 days 
following launch, measured generally from the time of payload 
separation. However, the revised requirement in the final rule limits 
the duration of insurance to 30 days following launch and removes the 
agency's discretion to impose extended insurance requirements on 
licensees during the 30-day period.
    Accordingly, for risks associated with orbital launches, the agency 
believes the appropriate insurance duration is 30 days following 
launch, measured from payload separation for nominal launches or 
attempted separation in the event an anomaly results in unsuccessful 
payload separation. For other launch anomalies or failures, the 30-day 
requirement runs from initiation of launch vehicle flight. For 
suborbital launches, insurance duration is at least through motor 
impact and payload recovery; however, the agency may prescribe a 
different duration in a license order depending upon the results of its 
risk analysis. Suborbital launches may, in the foreseeable future, 
include reusable launch vehicle activities that must be evaluated on a 
case-by-case basis. The agency reserves discretion to conclude that a 
different duration of required insurance is appropriate for such 
activities based on its case-by-case evaluation of suborbital reusable 
launch vehicle missions and their attendant risks.
    For purposes of ground operations the licensee is required to 
maintain insurance at all times during occupancy of a Federal range 
facility under a launch license.
    Despite limitations on the duration of required insurance, the 
space industry should be cognizant of its liability in the event its 
space object damages another on-orbit space object or reenters at any 
time, and manage risks appropriately. The industry should also be aware 
of views previously expressed by congressional staff that a sufficient 
causal nexus does not exist between a launch and a planned payload 
reentry that causes third-party damage or loss to invoke the 
Government's responsibilities under 49 U.S.C. 70113.
    In the NPRM, the agency requested views on the appropriate causal 
nexus that must exist between a launch event and a third-party claim in 
order for the payment of excess claims provisions of the CSLA to be 
applicable. Under 49 U.S.C. 70113(a), the Government provides for the 
payment of successful claims against a launch participant ``resulting 
from an activity carried out under the license.* * * '' (emphasis 
added) As pointed out in the Supplementary Information accompanying the 
NPRM, the Government's responsibilities under 49 U.S.C. 70113 apply 
from the first dollar of loss when the licensee is no longer required 
to maintain insurance under the license if the claim results from the 
licensed activity. However, events associated with a launch may result 
in damage years after the launch is concluded and it is not clear at 
what point events become too attenuated from the launch to be 
considered eligible for consideration under 49 U.S.C. 70113.
    Only Sea Launch responded and questioned the wisdom or practicality 
of attempting to characterize this nexus beyond the statutory language 
of ``resulting from an activity carried out under the license.'' In 
doing so, the comment noted that a proximate cause analysis would be 
required and would depend on the unique facts of the situation. The 
agency agrees that determining eligibility for payment of excess third-
party claims is necessarily a fact-based inquiry and will depend on the 
particular circumstances giving rise to the claim and does not propose 
to issue rules of general applicability to determine eligibility 
requirements.
    Section 440.11(b) provides that financial responsibility shall not 
expire by its own terms prior to the time specified in a license order. 
Many licenses are issued for a multi-year period and may be renewed 
upon application of the licensee; however, the agency understands that 
certificates evidencing insurance coverage are typically valid for one 
year. This has not been a problem as long as evidence of policy renewal 
is provided to the agency sufficiently in advance of the certificate 
expiration date to allow the agency ample review time. Accordingly, the 
final rule is revised to provide that a renewal certificate must be 
provided at least 30 days in advance of the expiration date of the 
current certificate. A licensee may petition the agency for a waiver or 
extension of this or any time requirement in the final rule if it is 
unable to comply.

Environmental and Clean-Up Costs

    The agency's current practice of determining maximum probable loss 
from claims resulting from licensed launch activities does not include 
assessment of the environmental consequences associated with licensed 
launch activities. These risks are difficult to quantify and, to the 
extent coverage is not available, assigning a dollar value to these 
risks could increase required amounts of insurance without assuring 
coverage.

[[Page 45613]]

    As part of the NPRM discussion on the appropriate duration of 
required insurance, the agency requested comments on a number of 
related issues having to do with environmental consequences of launch 
activities. First, to what extent should insurance be required to 
compensate claims of third parties and the Government for short-term, 
or immediate, environmental damage or, alternatively, whether the costs 
of cleaning up hazardous waste or removing this type of damage should 
be paid by the launch licensee to the Government as part of launch 
services which are charged as a direct cost under the CSLA. Second, to 
what extent should insurance be required to protect against claims for 
long-term environmental or property damage. As part of this request for 
views, the agency asked commenters to address the implications on MPL 
determinations of requiring insurance coverage for these potential 
claims and the adequacy of existing insurance ceilings under the CSLA 
($100 million for Government property coverage and $500 million for 
third-party liability insurance, or the maximum available on the world 
market at a reasonable cost if insurance up to those amounts is not 
available). Third, whether and to what extent insurance to protect 
against property damage resulting from orbital debris long after the 
launch is completed should be required. The damage contemplated by the 
question could be to other on orbit or airborne objects or to property 
on the ground in the event of reentering debris.
    Only Lockheed Martin offered a view with respect to the immediate 
environmental consequences associated with a launch event. Lockheed 
Martin indicated that this type of immediate consequence should not be 
treated as a matter for ``direct cost'' charges to the launch licensee, 
but should be addressed in terms of an appropriate allocation of 
financial responsibility for the risk.
    In clarifying its view, Lockheed Martin distinguished between 
environmental consequences and the usual activities involved in 
readying a launch pad or complex for future use. Typically, Lockheed 
Martin would clean up the launch complex from which its launch has 
taken place in anticipation of the next launch campaign. For example, 
it would remove any ground debris and restore the complex to its prior 
condition, as required under the terms of its agreement with the 
Federal range facility. If it failed to do so, the Federal range could 
provide this service and under these circumstances could charge the 
direct cost of doing so.
    Lockheed Martin pointed to the legislative history accompanying the 
1988 Amendments to the CSLA which lists the types of Government support 
that were envisioned to be provided under direct costing principles as: 
operations and maintenance services and range support costs. Operations 
and maintenance services include facilities engineering support, 
vehicle and equipment support, launch complex support, power system 
support, and roads and ground support. Range support costs include 
logistics, ordinance support, radar support, communications support, 
tracking support, documentation, fire services, range safety, work 
control (administration), security services and meteorological 
services. S. Rep. 100-593, 100th Cong., 2d Sess., at p. 24. It appears 
that launch complex maintenance and range services are appropriate for 
direct cost charging. In the commenter's view, the notion of 
environmental damage falls outside these categories and was not 
intended to be subject to the direct cost pricing provisions of the 
CSLA for launch property and services provided by the Government to the 
private sector.
    Lockheed Martin indicated that the consequences of a particular 
launch, like any other damage, should be part of the financial 
responsibility and risk allocation scheme provided in the CSLA. 
However, Lockheed Martin's comments further indicated that the issue of 
how to allocate financial responsibility for risks associated with 
environmental damage, both short-term and long-term, is extremely 
complex and merits further study and analysis before the agency 
proceeds to rulemaking.
    McDonnell Douglas noted that long-term environmental damage 
insurance is generally unavailable, and to the extent it is obtainable 
would be narrow and limited in coverage, not to mention cost 
prohibitive. McDonnell Douglas felt strongly that claims of this nature 
should not be included in the MPL determination for a licensed launch 
activity.
    The issue of environmental damage before the agency in this 
rulemaking can be reframed as follows: whether the consequences of a 
launch event to which CSLA-based insurance and waivers of claims are 
intended to apply should be limited to immediate impacts and 
destructive risks, such as collision of a launch vehicle with ground, 
airborne or space objects or the consequences of explosion. (Even an 
explosion or collision could result in the types of short-term 
environmental consequences under consideration.) By short-term or 
immediate risks, the agency intends to refer generally to the sudden, 
immediate, and identifiable and foreseeable, though unintended, 
consequences of a launch. These consequences could include fuel spills, 
toxic release, and ground contamination resulting from a particular 
launch. Whether or not insurance coverage is available for these risks, 
they are comprehended by the terms ``bodily injury'' and ``property 
damage'' for which the CSLA requires insurance and they are reasonably 
intended to be addressed by CSLA financial responsibility and risk 
allocation provisions. This is also consistent with an early Air Force 
commercialization agreement which defines ``damage'' as including 
``that caused by a release of or exposure to a hazardous substance, as 
that term is defined in [CERCLA]'' and the current Air Force definition 
of ``damage.'' These risks are properly addressed through the CSLA and 
should be comprehended by the statute's risk allocation scheme. A 
future rulemaking may be necessary to better define the types of 
immediate environmental consequences intended to be included under the 
CSLA scheme for risk management.
    The agency views long-term environmental consequences, sometimes 
referred to as long-tail liability, as more problematic for a number of 
reasons. First, it would be difficult to prove that liability attaches 
to a particular launch event. It is probably impossible to ascertain 
whether damage results from a government or commercial launch when the 
same vehicles are used for both purposes, and perhaps an apportionment 
theory would be required. There is no indication that CSLA risk 
allocation mechanisms, with ceilings on insurance and statutory 
references to claims resulting from a particular launch, were intended 
to address long-term environmental consequences. Similarly, there is no 
indication that the so-called indemnification provisions of the CSLA 
were intended to cover claims other than those directly and proximately 
associated with a particular launch event. Accordingly, the agency 
takes the position that the consequences of a licensed launch that are 
reasonably foreseeable and proximately caused by a particular launch 
are covered by CSLA financial responsibility and risk allocation. Long-
term environmental consequences would not qualify for coverage under 
this characterization and, accordingly, the FAA concludes that their 
associated risks are not

[[Page 45614]]

intended to be addressed through CSLA risk-based insurance requirements 
and risk allocation.

Section 440.13--Standard Conditions of Insurance Coverage

    Section 440.13 provides the terms and conditions applicable to 
insurance policies licensees must obtain under existing licenses and 
the proposed regulations.
    Marsh & McLennan requested clarification of the requirement in 
Sec. 440.13(a)(2) that policy limits apply separately to each 
occurrence and to the total claims arising out of licensed launch 
activities in connection with any particular launch. The per-occurrence 
limit applies to the total of all claims arising from the same 
occurrence, and not for each claimant per occurrence, and this is made 
clear in Sec. 440.13(a)(6). It provides that all policy provisions, 
except the policy limits, must operate as if there were a separate 
policy with and covering the licensee and each additional insured. To 
remove any doubt, the final rule is revised to clarify that the policy 
limits apply for each occurrence and that for each occurrence the 
limits apply to the total of claims that arise out of licensed launch 
activities in connection with any particular launch.
    The three current launch licensees, Lockheed Martin, Orbital 
Sciences and McDonnell Douglas, cautioned that two of the required 
terms, breach of warranty coverage and a severability of interest 
clause are available under current conditions in the insurance market 
but may not be in the future. In clarifying remarks, one commenter 
indicated that a licensee's ability to obtain the required coverage may 
become an issue if coverage not currently provided, such as for claims 
of Government personnel, is required. Licensees may request a waiver of 
these terms or petition for rulemaking in the future if market 
conditions make it impossible to comply with them.

Section 440.15--Demonstration of Compliance

    Section 440.15(a)(1) of the final rule continues the agency's 
current practice of requiring that licensees submit an executed 
reciprocal waiver of claims agreement at least 30 days before 
commencement of licensed launch activities involving the customer(s) 
that is required to sign the agreement. This requirement appears in all 
currently effective financial responsibility license orders. Under this 
final rule, the term ``licensed launch activities'' would be defined in 
a launch license; however, the agency is in the process of 
standardizing the definition of ``launch'' in a related rulemaking 
addressing launch licensing requirements and standards.
    A question arises as to whether the agreement must be submitted 
before commencement of any licensed launch activities or whether timing 
of its submission should be tied to arrival of the customer's payload. 
Presumably, the customer would not have significant property at risk 
before arrival of its payload and therefore does not need to waive 
claims for damage or loss to its property until that event. However, as 
between the launch licensee and the Government, and the respective 
contractors and subcontractors of each, the agency views with concern 
the risk to which each participant is exposed in the event of damage to 
its property or injury to personnel in the absence of an executed 
waiver of claims agreement. Moreover, taken literally, until the 
Government executes the reciprocal waiver of claims agreement with the 
licensee and customer, the Government has not waived claims in excess 
of required Government property insurance for damage or loss to its 
property and PPLPs could face liability exposure for excess claims by 
the Government or its contractors and subcontractors.
    To avoid these unnecessary risks, the time requirement set forth in 
the final rule for submission of a reciprocal waiver agreement signed 
by the licensee and its customer is 30 days before the licensee intends 
to commence licensed launch activities involving that customer. 
Generally speaking, commencement of licensed launch activities 
involving a particular customer should coincide with arrival of the 
launch vehicle or its major components at the launch site. The agency 
is not aware of circumstances in which a launch services provider 
engages in a launch campaign, consisting of such hazardous activities 
as erecting the launch vehicle or processing vehicle components at the 
launch site, without a customer under contract for the launch event. 
However, because outstanding operator licenses utilize the agency's 
gate-to-gate approach to licensing commercial space launch activities, 
it is foreseeable that a launch vehicle operator will occupy a launch 
site under an FAA license before arrival of the launch vehicle and may 
perform preparatory activities other than vehicle processing. Because 
these activities are not typically ultra-hazardous in nature, the 
agency views their associated risks as limited in nature and therefore 
manageable without the benefit of the completed statutory risk 
allocation scheme dictated by the CSLA. The agency will not require 
that a reciprocal waiver of claims agreement be submitted 30 days prior 
to the licensee's occupancy at the site, but rather, 30 days before it 
intends to commence licensed launch activities involving a particular 
customer.
    Early submission of the agreement allows the agency sufficient time 
to complete its review, resolve any outstanding concerns surrounding a 
licensee's demonstration of financial responsibility, and fulfill the 
Government's responsibility to waive claims on behalf of its agencies 
and contractors and subcontractors involved in launch services. Issues 
may arise that require modification of an agreement to accommodate a 
Government agency customer, a reluctant customer, participation of 
multiple customers in the inter-party waiver scheme, or a licensee's 
request to modify the standard form of agreement that accompanies a 
launch license. On occasion, resolution of a party's concerns delays 
execution and submission of the agreement by the licensee or the 
agency's ability to complete execution of the agreement on behalf of 
the U.S. Government during the 30-day period preceding commencement of 
licensed launch activities involving a particular customer. The agency 
has demonstrated its willingness to work with licensees and customers 
to address their unique concerns. However, in the absence of an 
executed reciprocal waiver of claims agreement, launch participants may 
be assuming risks that are intended to be allocated through the 
reciprocal waiver scheme dictated by 49 U.S.C. 70112(b).
    To avoid this result and ensure that launch participants remain 
mindful of the time constraints imposed by these regulations and in 
license orders, the agency intends to enforce compliance with the time 
requirements codified in Sec. 440.15 of the final rule, absent good 
cause shown for waiving or extending them. Enforcement of these 
requirements may be accomplished through the imposition of civil 
penalties in accordance with the CSLA or suspension of the 
authorization granted in a launch license to perform licensed 
activities. Licensees are urged to keep the agency informed, in 
writing, of foreseeable difficulties in meeting these regulatory 
requirements so that the agency may determine whether an extension of 
the deadline for submission of an agreement is warranted. Of course, 
once the agreement is executed by all three parties, licensees need not 
wait an additional 30 days before commencing

[[Page 45615]]

licensed launch activities involving a particular customer.
    Evidence of insurance would be required at least 30 days before 
commencement of any licensed launch activities, and additional time is 
required if a form of financial responsibility other than insurance is 
used. The agency's experience has been that most licensees are able to 
comply with these time constraints and all have been extremely 
responsive to agency questions and concerns regarding evidence of 
insurance.
    Proposed Sec. 440.15 contains additional requirements for licensees 
in demonstrating compliance with financial responsibility requirements 
from those currently required in license orders. Specifically, the 
proposed regulations would require a signed opinion of the insurer 
stating that the insurance obtained by the licensee complies with 
regulatory requirements and license orders concerning insurance. The 
three launch services providers licensed by the agency, Lockheed 
Martin, Orbital Sciences, and McDonnell Douglas, objected to this 
requirement and stated that it would be difficult to obtain an 
insurer's opinion. Marsh & McLennan also asserted that insurers will 
not agree to provide an opinion letter because it could impose 
additional obligations on the insurers that are above and beyond the 
terms and conditions of policies. They prefer to provide certificates 
of insurance and let the certificates speak for themselves. Orbital 
Sciences and McDonnell Douglas suggested that requiring an opinion of 
the insurance broker should suffice.
    The agency will accede to the commenters' suggestion that a signed 
opinion of the insurance broker accompanying insurance certificates 
will be sufficient under the regulations. The agency's current practice 
is to accept insurance certificates in lieu of policies as evidence of 
compliance with insurance requirements. Doing so relieves a burden on 
licensees to supply policies in advance of licensed launch activities 
and we understand that complete policies may not be available for 
agency review sufficiently in advance of licensed launch activities 
even though the required coverage is in place. This practice also 
relieves the agency of the burden of reviewing policies.
    The agency continues to be satisfied with this approach but 
stresses the caveat stated in license orders and reflected in these 
regulations that demonstration of financial responsibility does not 
relieve the licensee of ultimate responsibility for liability, loss or 
damage sustained by the United States. The agency may need to 
reconsider its position if there is any indication that the coverages 
and exclusions are not sufficiently detailed in insurance certificates 
to assure the agency of the adequacy of licensees' compliance.

Section 440.17--Reciprocal waiver of claims requirement and Appendix II

    Comments received on Sec. 440.17 and the proposed form of waiver of 
claims agreement presented in Appendix II to the NPRM concern the 
third-party status accorded to Government personnel in the NPRM and the 
proposed method by which the Government waives claims for its 
contractors and subcontractors. Most of these comments have already 
been addressed and resolved by clarifying that, for purposes of 
establishing liability insurance requirements, employees of the 
Government and its contractors and subcontractors are considered third 
parties. Employees of all other launch participants are the 
responsibility of their employing entity. Through the reciprocal 
agreement required under this section, PPLPs agree to be responsible 
for their employees' losses and property damage. The agreement to be 
responsible for losses suffered by an employee amounts to a contractual 
obligation to hold harmless and indemnify other launch participants 
against whom an employee has made a claim and this obligation is now 
expressly stated in the form of agreement presented at Appendix II of 
the final rule. According to the comments received, insurance is 
available to cover this contractual obligation.
    Additional comments on the requirements of Sec. 440.17 and the 
proposed form of agreement are discussed below.
    Sea Launch suggested that launch participants should be required to 
waive claims against employees of the other launch participants. The 
agency agrees in principle with this comment because claims by PPLPs 
against employees would amount to an attempt to circumvent the inter-
party waiver of claims. The reciprocal waiver of claims agreement 
currently in use requires that a signatory to the agreement hold 
harmless and indemnify employees of the other signatories to the 
agreement from and against liability for claims against them by its 
contractors and subcontractors and the form of agreement that appears 
at Appendix II to the final rule continues this practice, absent 
willful misconduct by the individual employee. Therefore, claims 
against individual employees should be effectively precluded by the 
waiver of claims agreement, absent the employee's willful misconduct, 
and further changes to the rule are not necessary to address Sea 
Launch's suggestion.
    Intelsat, a public international organization which owns and 
operates a global commercial telecommunications network for its members 
and users, objected to the requirement that parties waive claims 
``regardless of fault.'' This language appears in the Agreement 
currently used by the agency and in the proposed form of agreement set 
forth in Appendix II to the NPRM to carry out the no-fault reciprocal 
waiver scheme. Intelsat objected that the language could relieve or 
insulate a party from its own gross negligence and that the CSLA and 
its legislative history do not support such an expansive view of the 
waiver requirement. The comment cites the Fourth Circuit's holding in 
Martin Marietta Corporation v. International Telecommunications 
Satellite Organization, 978 F.2d 140 (4th Cir. 1992); op. amended, 991 
F.2d 94 (1993), for support of its position. Moreover, Intelsat argued 
that there is no basis either in the CSLA or its legislative history to 
support waiving claims regardless of fault, presumably even if that 
phrase is limited to negligence-based claims.
    The agency is troubled by the comment and for the following reasons 
has determined to retain the ``regardless of fault'' language in the 
final rule. The FAA understands that the intent of the reciprocal 
waiver of claims requirement is to relieve launch participants of the 
threat of inter-party claims for damage or loss. If the waiver of 
claims did not apply to fault-based claims, and assuming it is not 
intended to relieve parties of contractual rights and responsibilities 
for which they have bargained in good faith, then the waiver would be 
of very little use. The only exception indicated to the statutory risk 
allocation scheme is for willful misconduct in that the Secretary is 
not required to provide for payment of excess third-party claims which 
result from willful misconduct by the licensee and the Government is 
not relieved of liability under 49 U.S.C. 70112(e) for damage or losses 
resulting from the Government's willful misconduct or that of its 
agents.
    The Fourth Circuit opinion is not fully dispositive in the agency's 
opinion. The dispute before the court involved a waiver provision in a 
launch services contract that pre-dated the 1988 Amendments to the 
CSLA. The court held that under Maryland state law, parties to a 
contract cannot waive

[[Page 45616]]

liability for gross negligence. The court further opined that even if 
the 1988 Amendments could apply retroactively to the contract, neither 
the statutory language nor its legislative history evidences 
Congressional intent to protect parties from liability for their own 
gross negligence. 991 F.2d at 100. The Fourth Circuit addressed the 
issue because the district court, in dismissing a counterclaim alleging 
gross negligence, had interpreted the waiver of claims requirement of 
the CSLA as evidence of the intent of the contractual waiver provision. 
Martin Marietta Corporation v. International Telecommunications 
Satellite Organization, 763 F. Supp. 1327 (D. Md. 1991). The Fourth 
Circuit reversed the district court's holding on the gross negligence 
counterclaim and remanded it to the district court. A settlement was 
reached in the latter half of 1993.
    Careful examination of the Fourth Circuit's reasoning reveals the 
following. In construing Maryland state law, the Fourth Circuit relied 
upon Boucher v. Riner, 68 Md. App. 539, 514 A.2d 485 (Md. Ct. Spec. 
App. 1986), which held that a waiver of a right to sue is ineffective 
to shift the risk of a party's own willful, wanton, reckless, or gross 
conduct. 514 A.2d at 488. (Emphasis added.) It appears from the court's 
holding that Maryland may be among those states that tend to blur the 
distinction between gross negligence and willful misconduct.
    The Court of Appeals for the District of Columbia defines the 
standard for finding willful misconduct differently than that for gross 
negligence. To prove willful misconduct, there must be a showing of 
intent, that is, that an act was intentionally performed with the 
knowledge that it was likely to result in injury, or with reckless and 
wanton disregard of the probable consequences of the act. Saba v. 
Compagnie Nationale Air France, 78 F.3d 664, 316 U.S. App. D.C. 303 
(D.C. Cir. 1996). In Saba, the court described a ``continuum that runs 
from simple negligence through gross negligence to intentional 
misconduct. Recklessness, or reckless disregard, lies between gross 
negligence and intentional harm,'' 78 F.3d at 668. According to the 
court's opinion, willful misconduct and reckless disregard are 
equivalent in that reckless disregard evidences the subjective 
knowledge of the likely consequences of an act and thereby fulfills the 
requirement to show the requisite intent.
    The issue before the court in Saba was whether the facts presented 
amounted to willful misconduct, thereby avoiding the limitation of 
liability provisions of the Warsaw Convention. In maintaining a higher 
standard for willful misconduct than for negligence, gross or 
otherwise, the court stated:

    It is not all that easy to avoid the Convention's limitations by 
establishing willful misconduct (or reckless disregard). But the 
signatories obviously thought the economics of air travel, and 
therefore the overall welfare of passengers, dictated those 
limitations. It simply will not do for courts to chip away at that 
liability limit out of a natural desire to remedy the negligence 
that can be all too apparent in any individual case.

78 F.3d at 671.

    Jurisdictions that equate the standard for gross negligence with 
that of willful misconduct could effectively undo the congressional 
intent underlying the reciprocal waiver of claims requirement and 
thereby have more far reaching consequences on the economics of launch 
services than Congress intended in enacting the comprehensive risk 
allocation provisions of the 1988 Amendments.
    That said, the question before the agency is whether it has the 
authority to resolve, as a matter of federal law, whether claims 
between a launch licensee and its customer for gross negligence are 
necessarily removed from the statutory inter-party waiver scheme when 
Congress has indicated its intended purpose is to limit the total 
universe of claims that might arise as a result of a launch and 
maximize the coverage of available insurance resources by avoiding the 
costs of duplicate litigation between the parties. S. Rep. No. 100-593, 
100th Cong., 2d Sess. 14 (1988). The FAA declines to presume this 
authority.
    Under the agency's current implementation of the statutory-based 
risk allocation scheme, the only exclusion expressly provided is for 
willful misconduct and this is consistent with views recently expressed 
by the Air Force in revising its commercialization agreement. Absent 
legislative clarification otherwise, and for the reasons expressed in 
the NPRM of July 25, 1996 (61 FR 39013), the final rule retains the 
regardless of fault language.
    Two commenters, Orbital Sciences and McDonnell Douglas, objected to 
the proposed form of agreement for waiver of claims in Appendix II to 
the NPRM in that it does not contain a provision requiring the 
Government to flow down, or extend, the waiver provisions to its 
contractors and subcontractors. The comment overlooks that the 
definition of ``United States Government'' in the proposed form of 
agreement includes Government contractors and subcontractors; hence 
there would be no need to flow down the waiver requirement. In this 
regard, the NPRM proposed a deviation from the agency's current 
practice. The form of reciprocal waiver agreement presented in Appendix 
II of the final rule reverts to the approach used in current practice 
whereby the FAA signs on behalf of the United States and its agencies 
involved in licensed launch activities and agrees to pass to its 
contractors and subcontractors the limited agreement and assumption of 
responsibility assumed by the Government in the reciprocal waiver 
agreement.
    Lockheed Martin expressed concern with the qualifying language 
appearing in Sec. 440.17(d) of the NPRM and reflected in paragraph 5(c) 
of the proposed form of agreement in Appendix II as to the need for 
additional legislation to support the indemnification agreement by the 
Government to other launch participants for failure to implement 
properly the waiver requirement.
    The CSLA directs the Government to waive claims in excess of 
Government property insurance on behalf of its contractors and 
subcontractors involved in launch services. In the agency's view, the 
effect of this waiver requirement is to make the Government responsible 
for the excess property damage claims of those contractors and 
subcontractors. Therefore, even if the Government fails to flow down 
the waiver of claims and assumption of responsibility provisions of the 
agreement to its contractors and subcontractors, PPLPs will be 
financially protected from Government contractor and subcontractor 
property damage claims. In addition, by entering into the reciprocal 
waiver agreement for its contractors and subcontractors, the Government 
takes on responsibility to cover losses sustained by employees of the 
Government's contractors and subcontractors that are not covered by the 
licensee's liability policy because they exceed the required amount of 
insurance or are subject to a policy exclusion deemed usual for that 
type of insurance. Although appropriations must be authorized for this 
purpose, the CSLA effectively obligates Congress to act to appropriate 
funds for this express purpose. The form of agreement that appears in 
Appendix II of this final rule reflects at paragraph 5(c) the hold 
harmless and indemnification obligation of the United States for claims 
of its contractors and subcontractors against PPLPs for property damage 
or loss and responsibility for their employees' losses in excess of 
required levels of insurance, respectively.

[[Page 45617]]

    McDonnell Douglas and Orbital Sciences further noted that the 
proposed form of reciprocal waiver of claims agreement restricts the 
Government's waiver to property damage claims, whereas the Agreement 
currently in use refers also to claims of Government employees. The 
agency's rationale for removing reference to employee claims from the 
proposed form of agreement presented in the NPRM was that their third-
party status removed the need for the Government to accept 
responsibility for their claims. Upon reconsideration, the FAA has 
restored to the form of agreement the Government's acceptance of 
responsibility for uncovered claims of its employees against the other 
launch participants.
    Orbital Sciences, in clarifying remarks, indicated that the 
approach utilized in the NPRM is particularly awkward where the same 
entity is both a contractor to the Government and to the launch 
licensee. The agency agrees and acknowledges that the ability of 
various entities to wear different hats, including the Government when 
it is both range services provider and launch customer, complicates the 
reciprocal waiver of claims scheme even further. In the agency's view, 
the capacity in which a party was functioning when the claim arose will 
determine the rights and responsibilities of the various parties to the 
waiver agreement.
    In discussions unrelated to this rulemaking, the agency has been 
asked whether cross-waivers of claims are required between a licensee 
or customer and its contractors and subcontractors given that the form 
of reciprocal waiver agreement currently in use does not appear to 
require them. The CSLA intends for parties to enter into such 
agreements with their contractors and subcontractors and this 
requirement appears in Sec. 440.17(b) of the final rule. However, the 
FAA leaves it to those entities to carry out the requirement as part of 
their contract negotiations. As a regulatory matter, the FAA has been 
primarily concerned with ensuring that parties not otherwise in 
contractual privity with a licensee or customer are protected from 
claims by those entities and their contractors and subcontractors. 
Accordingly, the form of agreement in Appendix II of the final rule 
does not address waivers between a licensee or customer with its 
respective contractors and subcontractors.
    Finally, reference to the special circumstances of a Government 
agency customer is removed from Sec. 440.17(c) of the final rule. As 
indicated previously in the Supplementary Information, necessary 
modifications to the form of reciprocal waiver of claims agreement 
utilized when a Government agency is a customer of commercial launch 
services will be addressed on an individual basis.

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

    Section 440.19 of the final rule provides in a regulation general 
procedures for implementing the statutory payment of excess claims 
provisions of 49 U.S.C. 70113. The issue that generated the most 
comments on this proposed section of the regulations concerns the 
determination of ``usual'' exclusions. Where an exclusion is considered 
usual for the type of insurance involved, the Secretary may provide for 
paying uncovered third-party claims from the first dollar of loss and 
will likewise waive claims for Government property damage from the 
first dollar of loss. In the section-by-section analysis of the NPRM, 
the agency explained that it does not make a final determination on 
what may be considered a usual exclusion upon submission of insurance 
certificates in advance of licensed launch activities. This 
determination would be made if and when the agency is required to 
prepare a compensation plan to cover excluded claims. The NPRM proposed 
a reasonable cost standard for determining whether an exclusion may be 
deemed ``usual.''
    Lockheed Martin, McDonnell Douglas and Orbital Sciences, as well as 
Sea Launch objected to the after-the-fact approach the agency utilizes 
in making the determination as to whether an exclusion is usual for the 
type of insurance, stating that the Government has an obligation to do 
so in advance of licensed launch activities in order to afford 
licensees some measure of certainty and predictability in their 
management of launch risks. Marsh & McLennan similarly stated that the 
government should not wait for a loss to occur before making its 
determination and should do so before commencement of launch 
activities. Lockheed Martin, McDonnell Douglas and Orbital Sciences 
objected to using a reasonable cost standard for determining whether 
insurance could have been provided to cover the excluded risk. The 
notion of ``buying out'' an exclusion is viewed by these commenters as 
objectionable because of the unpredictability and fluctuation of the 
insurance market. This approach does not comport with the CSLA, 
according to the commenters, which is intended to promote a predictable 
and stable environment in which the commercial launch industry can 
operate.
    The agency is troubled by the suggestion implicit in the 
commenters' views that the proposed requirement imposes additional 
burdens and uncertainty on the industry and that the Government should 
accept both this burden and uncertainty. As a practical matter, the 
industry is, or ought to be, in the best position to know whether 
insurance coverage is available to address the risks that attend its 
hazardous business. It is not unreasonable for the Government to expect 
the industry, as part of prudent risk management practices, to keep 
abreast of the insurance market, its capacity and the availability of 
insurance to cover the risks that confront this industry.
    When a launch licensee submits an insurance certificate evidencing 
various exclusions, in essence, the licensee is representing to the 
agency that the exclusion is usual for that type of insurance under 
prevailing market conditions, otherwise coverage for that risk would 
have been obtained. If the industry wants to obtain a formal finding 
from the agency it can submit factual data, such as cost information 
and market data, in support of an assertion that an exclusion should be 
deemed usual either because the coverage simply is not available or 
because it is cost prohibitive. Absent such proofs, the agency should 
not be required to insure or guarantee the industry's representation 
that insurance is not available at reasonable cost. The agency is 
considering whether a future rulemaking to better define ``usual'' 
exclusions would be desirable but is reluctant to effectively waive 
insurance coverage for certain risks thereby foreclosing the 
development of new insurance markets that might respond to those risks.
    The agency also wishes to stress that it currently does not make 
findings that an exclusion is usual upon submission of insurance 
certificates in advance of licensed launch activities even though the 
agency does question, and may request correction of, representations 
that do not appear to comply with license order requirements. 
Acceptance by the agency of a licensee's insurance certificate does not 
signify a finding by the agency as to the sufficiency of the coverage.
    Consistent with naming employees of PPLPs as additional insureds 
under Sec. 440.9(b), Sec. 440.19(a) is revised in this final rule to 
reflect that excess third-party claims against an employee of any 
launch participant that is an additional insured under the liability 
policy would also be eligible for payment by the Government under 49 
U.S.C. 70113,

[[Page 45618]]

absent willful misconduct by that employee.

Statutory Authority for This Proposed Rule

    This final rule is issued pursuant to 49 U.S.C. Subtitle IX, ch. 
701--Commercial Space Launch Activities, Secs. 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 private party launch participants agree to be 
responsible for claims of their employees for damage or loss.
    The agency has been implementing the 1988 Amendments on a case-by-
case basis, through license orders issued with each license authorizing 
commercial space launch activities. In this final rule, the agency 
standardizes financial responsibility requirements in rules of general 
applicability, wherever practicable.

Paperwork Reduction Act

    Information collection requirements in the new part 440 have been 
approved by the Office of Management and Budget (OMB) under the 
provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), 
and have been assigned OMB Control # 2120-0601.

Regulatory Evaluation Summary

    Issuance of Federal regulations is subject to 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 11034; February 26, 1979), this rule is considered significant 
because there is substantial public interest in the rulemaking. The FAA 
certifies that this rule will not have a significant impact on a 
substantial number of small entities and will not constitute a barrier 
to international trade. The FAA invited the public to provide comments, 
including supporting data on the assumptions made in the draft 
regulatory evaluation during the comment period. All comments received 
were considered in the final regulatory evaluation. This rule has been 
reviewed by OMB under Executive Order 12866.

Economic Impacts

    This final rule formalizes the procedures for implementing 
financial responsibility requirements imposed on commercial space 
launch licensees by the Commercial Space Launch Act of 1984, as amended 
in 1988. These requirements have essentially been implemented so this 
rule does not change present practice. The rule will provide launch 
licensees (i.e., commercial launch operators) with clear and reliable 
information on the financial responsibility requirements they must meet 
to carry out licensed activities. To provide some perspective, this 
evaluation estimates the financial responsibility costs on both the 
commercial space industry and the U.S. Government as a result of the 
1988 Amendments to the CSLA.
    The FAA estimates that, based in part upon an analysis by Princeton 
Synergetics Inc.1 (PSI), as a consequence of the U.S. 
Government's assumption of exposure up to $1.5 billion (as adjusted for 
inflation occurring after January 1, 1989) for third-party claims, the 
1988 Amendments will result in the maximum reallocation of costs from 
licensees to the Federal government in the range of $21,000 to $37,000 
undiscounted or $18,200 to $30,300 discounted over a five-year period. 
The actual economic impact on a licensee is small and not quantifiable 
because the increase in the risk of bearing the costs of injury or loss 
of life to third parties due to the ``redefinition'' of Government 
employees is estimated to be ``de minimus'' and could not be 
calculated. The administrative or paperwork cost to the Federal 
Government associated with FAA's responsibilities under the 1988 
Amendments is estimated at $884,000 undiscounted or $725,000 discounted 
over five years. The paperwork cost estimate is an upper bound and it 
is believed that the actual costs are substantially lower. Given 
current practice, these costs will be reduced to $606,000 undiscounted 
or $414,000 discounted. The additional paperwork costs incurred by the 
licensees in complying with the requirements for reciprocal waivers is 
expected to be negligible.
---------------------------------------------------------------------------

    \1\ The basis for this analysis is Contract DTOS-59-59 by 
Princeton Synergetics Inc. (PSI) entitled: Economic Impact 
Assessment of Financial Responsibility Requirements for Licensed 
Launch Activities (14 CFR Part 440). Princeton, New Jersey. March 
16, 1998.
---------------------------------------------------------------------------

    The final rule should result in a stronger, more stable, commercial 
space transportation industry. The reciprocal waiver provisions of the 
final rule should lower the costs of litigation among private party 
launch participants in licensed activities. The benefit of transferring 
expected costs of damage and loss or injury claims from the licensees 
to the government will aid the commercial space transportation industry 
by eliminating the need to insure for these claims and by showing 
support for the commercial space transportation industry by the U.S. 
Government. Also, limiting risk based on maximum probable loss (MPL) 
should result in greater certainty for potential costs (and resulting 
lower business risk) to commercial space transportation firms. Finally, 
the requirement for cross-waivers limits the risk of liability to 
others in licensed activities (other than the licensee) and results in 
a more certain business environment (or lower business risk) for these 
parties.

Regulatory Flexibility Analysis

    The Regulatory Flexibility Act of 1980 (RFA), as amended, was 
enacted by Congress to ensure that small entities are not unnecessarily 
and disproportionately burdened by Government regulations. The Act 
requires that whenever an agency publishes a general notice of proposed 
rulemaking, an initial regulatory flexibility analysis identifying the 
economic impact on small entities, and considering alternatives that 
may lessen those impacts must be conducted if the proposed rule would 
have a significant economic impact on a substantial number of small 
entities.
    The FAA issued a notice of proposed rulemaking on July 25, 1996 (61 
FR 38992) soliciting comments on its proposal for implementing 
financial responsibility and allocation of risk requirements. As a 
result, eight comments were submitted to the docket. Several events 
following the close of the comment period on December 2, 1996 resulted 
in a decision to reopen the

[[Page 45619]]

docket in order to allow industry another opportunity to offer views on 
the content of the proposed rule. There were no significant issues 
raised by public comments in response to the regulatory flexibility 
certification.
    The FAA has estimated that an average of four launch licenses per 
year will be issued. The vast majority of these licenses will be issued 
to companies like Lockheed Martin Corporation, Orbital Sciences 
Corporation, McDonnell Douglas Corporation, now The Boeing Company. 
There are a number of firms (probably fewer than 10) that are currently 
attempting to enter the space launch services business by developing 
both advanced expendable and reusable launch vehicles. Perhaps 50 to 75 
percent of these may be considered small business entities in that they 
are start-up situations though typically having large capitalizations. 
Thus, the universe of small entities that may be concerned with the 
provision of space launch services and that may be potentially affected 
by this financial responsibility rulemaking is on the order of 5 to 10.
    The regulatory evaluation states that over five years, the change 
in the expected cost of claims to licensees will be a cost savings of 
between $21,000 and $37,000 or between $17,200 and $30,300 discounted. 
The annualized cost savings to all of these firms will be between 
$4,200 and $7,400. If four licenses are issued annually, then the 
annualized cost savings per license would be less than $2,000 per 
license. As previously stated, the final rule results from the 
financial responsibility requirements imposed by the Commercial Space 
Launch Act of 1984, as amended. This final rule formalizes current 
practice. The FAA concludes that this regulation will impose little or 
no cost or cost savings on this industry, and certifies that it will 
not have a significant economic impact on a substantial number of small 
entities.

International Trade Impact Assessment

    This final rule is not expected to have any impact on trade 
opportunities for U.S. firms doing business overseas or foreign firms 
doing business in the United States.

Unfunded Mandates Assessment

    Title II of the Unfunded Mandates Reform Act of 1995 (the Act), 
enacted as Pub. L. 104-4 on March 22, 1995, requires each Federal 
agency, to the extent permitted by law, to prepare a written assessment 
of the effects of any Federal mandate in a proposed or final agency 
rule that may result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more (adjusted annually for inflation) in any one year. 
Section 204(a) of the Act, 2 U.S.C. 1534(a), requires the Federal 
agency to develop an effective process to permit timely input by 
elected officers (or their designees) of State, local, and tribal 
governments on a proposed ``significant intergovernmental mandate.'' A 
``significant intergovernmental mandate'' under the Act is any 
provision in a Federal agency regulation that will impose an 
enforceable duty upon State, local, and tribal governments, in the 
aggregate, of $100 million (adjusted annually for inflation) in any one 
year. Section 203 of the Act, 2 U.S.C. 1533, which supplements section 
204(a), provides that before establishing any regulatory requirements 
that might significantly or uniquely affect small governments, the 
agency shall have developed a plan that, among other things, provides 
for notice to potentially affected small governments, if any, and for a 
meaningful and timely opportunity to provide input in the development 
of regulatory proposals.
    This final rule does not contain a Federal intergovernmental or 
private sector mandate that exceeds $100 million a year. Therefore, the 
requirements of Title II of the Unfunded Mandates Reform Act of 1995 do 
not apply.

Federalism Implications

    This final regulation 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 this final regulation does not have 
sufficient federalism implications to warrant the preparation of a 
Federalism Assessment.

List of Subjects in 14 CFR Part 440

    Armed forces, Federal buildings and facilities, Government 
property, Indemnity payments, Insurance, Reporting and recordkeeping 
requirements, Space transportation and exploration.

The Amendment

    In consideration of the foregoing, the Associate Administrator for 
Commercial Space Transportation, Federal Aviation Administration amends 
the Commercial Space Transportation Licensing Regulations, 14 CFR Ch. 
III, as follows:
    1. Subchapter C of Chapter III, Title 14, Code of Federal 
Regulations, is 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 of part.
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.
Appendix A to Part 440--Information requirements for obtaining a 
maximum probable loss determination for licensed launch activities
Appendix B to Part 440--Assignment for waiver of claims and 
assumption of responsibility

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


Sec. 440.1  Scope of part.

    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.
    (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, 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, any person who has placed 
property on board the payload for launch or payload services, and any 
person to whom the customer has

[[Page 45620]]

transferred its rights to the launch services.
    (4) Federal range facility means a Government-owned installation at 
which launches take place.
    (5) Financial responsibility means statutorily required financial 
ability to satisfy 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 launch 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 and 
other launch participants' employees involved in licensed launch 
activities, 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 
involved in licensed launch activities 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.
    (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 concurrent 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;
    (2) Covered claims of 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. Claims of employees of 
entities listed in Sec. 440.3(a)(15)(i)(B) and (C) of this part for 
bodily injury or property damage are not covered claims;
    (3) Covered claims for property loss or damage exceed the amount of 
financial responsibility required under Sec. 440.9(e) of this part and 
do not result from willful misconduct of the licensee; or
    (4) The licensee has no liability for covered 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) above the amount of financial 
responsibility required under Sec. 440.9(c) of this part.
    (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 
covered 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 interagency 
consultation may delay issuance of the MPL determination.
    (c) Information requirements for obtaining a maximum probable loss 
determination are set forth in Appendix A of this part. Any person 
requesting a determination of maximum probable loss must 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 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

[[Page 45621]]

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 must comply 
with insurance requirements set forth in this section and in a license 
order issued by the Office, or otherwise demonstrate the required 
amount of financial responsibility.
    (b) The licensee must 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 covered 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, and the employees of each, involved in licensed 
launch activities;
    (2) The United States, its agencies, and its contractors and 
subcontractors involved in licensed launch activities; and
    (3) Government personnel.
    (c) The Office shall prescribe for each licensee the amount of 
insurance required to compensate the total of covered third-party 
claims for bodily injury or property damage resulting from licensed 
launch activities in connection with any particular launch. Covered 
third-party claims include claims by the United States, its agencies, 
and its contractors and subcontractors for damage or loss to property 
other than property for which insurance is required under paragraph (d) 
of this section. 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 must 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, 
its agencies, and its contractors and subcontractors involved in 
licensed launch activities for property damage or loss resulting from 
licensed launch activities. Property covered by this insurance must 
include all property owned, leased, or occupied by, or within the care, 
custody, or control of, the United States and its agencies, and its 
contractors and subcontractors involved in licensed launch activities, 
at a Federal range facility. Insurance must protect the United States 
and its agencies, and its contractors and subcontractors involved in 
licensed launch activities.
    (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 the lesser of:
    (1) $100 million; or
    (2) The maximum available on the world market at a reasonable cost, 
as determined by the Office.
    (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 must 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 as follows:
    (1) Until completion of licensed launch activities at the launch 
site; and
    (2) For orbital launches, until the later of--
    (i) Thirty days following payload separation, or attempted payload 
separation in the event of a payload separation anomaly; or
    (ii) Thirty days from ignition of the launch vehicle.
    (3) For suborbital launches, until the later of--
    (i) Motor impact and payload recovery; or
    (ii) The Office's determination that risk to third parties and 
Government property as a result of licensed launch activities is 
sufficiently small that financial responsibility is no longer 
necessary, as determined by the Office through the risk analysis 
conducted before the launch to determine MPL and specified in a license 
order.
    (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 at least 30 days 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 of any of its 
obligations under any policy.
    (2) Policy limits shall apply separately to each occurrence and, 
for each occurrence to the total of claims arising out of licensed 
launch activities in connection with any particular launch.
    (3) Except as provided herein, each policy must 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 be unobligated, unencumbered funds of the 
licensee, available to compensate claims at any time claims may arise.
    (4) Each policy 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 must 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 or 
violation by the licensee or an additional insured, and then only as 
against that licensee or additional insured).
    (5) Exclusions from coverage must 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.
    (7) Each policy must expressly provide that all of its provisions, 
except

[[Page 45622]]

the policy limits, operate in the same manner as if there were a 
separate policy with and covering the licensee and each additional 
insured.
    (8) Each policy must 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.
    (9) 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.]


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 license order specifies otherwise due to the 
proximity of the licensee's intended date for commencement of licensed 
launch activities:
    (1) The three-party reciprocal waiver of claims agreement required 
under Sec. 440.17(c) of this part must be submitted at least 30 days 
before commencement of licensed launch activities involving the 
customer that will sign the agreement;
    (2) Evidence of insurance must be submitted at least 30 days before 
commencement of licensed launch activities;
    (3) Evidence of financial responsibility in a form other than 
insurance, as provided under Sec. 440.9(f) of this part, must be 
submitted at least 60 days before commencement of licensed launch 
activities; and
    (4) Evidence of renewal of insurance or other form of financial 
responsibility must be submitted at least 30 days in advance of its 
expiration date.
    (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 must 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 49 U.S.C. 70112(b)(2), 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 waiver of claims and 
assumption of responsibility agreement required by Sec. 440.17(c) of 
this part, executed by the licensee and its customer.
    (2) Certifications required under this section must be signed by a 
duly authorized officer of the licensee.
    (d) Certificate(s) of insurance required under paragraph (c)(1)(ii) 
of this section must be signed by the insurer issuing the policy and 
accompanied by an opinion of the insurance broker 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 must 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 must 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 financial responsibility for property damage it sustains and for 
bodily injury or property damage sustained by its own employees, and to 
hold harmless and indemnify each other from bodily injury or property 
damage sustained by its 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 Federal Aviation Administration of 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 or that satisfies its 
requirements.
    (d) The licensee, its customer, and the Federal Aviation 
Administration of the Department of Transportation on behalf of the 
United States and its agencies but only to the extent provided in 
legislation, must agree in any waiver of claims agreement 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 pays successful covered 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 employees of 
each involved in licensed launch activities, and the contractors and 
subcontractors of the United States and its agencies, and their 
employees, 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 covered 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 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

[[Page 45623]]

bodily injury or 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 the 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:
    (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 it finds that the 
amount is unreasonable, unless it is the final order of a court that 
has jurisdiction over the matter.

Appendix A to Part 440--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 the 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 be 
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 Government personnel and individuals not 
involved in licensed launch activities 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 Government 
personnel, individuals not involved in licensed launch activities, 
and Government property, due to property damage or bodily injury. 
The estimation of risks for each scenario shall take into account 
the number of such individuals 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. Scenarios shall cover 
the range of launch trajectories, inclinations and orbits for which 
authorization is sought in the license application.
    C. On-orbit risk analysis assessing risks posed by a launch 
vehicle to operational satellites.
    D. Reentry risk analysis assessing risks to Government personnel 
and individuals not involved in licensed launch activities as a 
result of 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 (dot), y (dot), z (dot) 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 angles, 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

[[Page 45624]]

and exposed to risk, identified by name or number.
    3. Maximum number of Government personnel and individuals not 
involved in licensed launch activities 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 B to Part 440--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 Federal Aviation Administration of the 
Department of Transportation, on behalf of the United States 
Government (collectively, the ``Parties''), to implement the 
provisions of section 440.17(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, 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, any 
person who has placed property on board the payload for launch or 
payload services, and any person to whom the Customer has 
transferred its rights to the launch services.
    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 means the United States and its agencies 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 and the United States, and against their respective 
Contractors and Subcontractors, 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 and the United States, and against their respective 
Contractors and Subcontractors, 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 hereby waives and releases claims it may 
have against Licensee and Customer, and against their respective 
Contractors and Subcontractors, 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, to 
the extent that claims it would otherwise have for such damage or 
injury exceed the amount of insurance or demonstration of financial 
responsibility required under sections 440.9(c) and (e), 
respectively, of the Regulations, 14 CFR 440.9(c) and (e).

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. Licensee and Customer shall each 
hold harmless and indemnify each other, the United States, and the 
Contractors and Subcontractors of each Party, for Bodily Injury or 
Property Damage sustained by its own employees, resulting from 
Licensed Launch Activities, regardless of fault.
    (b) The United States shall 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, to the extent that claims it would otherwise 
have for such damage or injury exceed the amount of insurance or 
demonstration of financial responsibility required under section 
440.9(c) and (e), respectively, of the Regulations, 14 CFR 440.9(c) 
and (e).

4. Extension of Assumption of Responsibility and Waiver

    (a) Licensee shall extend the requirements of the waiver and 
release of claims, and the assumption of responsibility, hold 
harmless, and indemnification, 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 and the United States, and against the respective 
Contractors and Subcontractors of each, and to agree to be 
responsible, for Property Damage they sustain and to be responsible, 
hold harmless and indemnify Customer and the United States, and the 
respective Contractors and Subcontractors of each, for Bodily Injury 
or Property Damage sustained by their own employees, resulting from 
Licensed Launch Activities, regardless of fault.
    (b) Customer shall extend the requirements of the waiver and 
release of claims, and the assumption of responsibility, hold 
harmless, and indemnification, 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 and the United States, and against the respective 
Contractors and Subcontractors of each, and to agree to be 
responsible, for Property Damage they sustain and to be responsible, 
hold harmless and indemnify Licensee and the United States, and the 
respective Contractors and Subcontractors of each, for Bodily Injury 
or Property Damage sustained by their own employees, resulting from 
Licensed Launch Activities, regardless of fault.
    (c) The United States shall extend the requirements of the 
waiver and release of claims, and the assumption of responsibility 
as set forth in paragraphs 2(c) and 3(b), respectively, to its 
Contractors and Subcontractors by requiring them to waive and 
release all claims they may have against Licensee and Customer, and 
against the respective Contractors and Subcontractors of each, and 
to agree to be responsible, for any Property Damage they sustain and 
for any Bodily Injury or Property Damage sustained by their own 
employees, resulting from Licensed Launch Activities, regardless of 
fault, to the extent that claims they would otherwise have for such 
damage or injury exceed the amount of insurance or demonstration of 
financial responsibility required under section 440.9(c) and (e), 
respectively, of the Regulations, 14 CFR 440.9(c) and (e).

5. Indemnification

    (a) Licensee shall hold harmless and indemnify Customer and its 
directors, officers, servants, agents, subsidiaries, employees and 
assignees, or any or them, and the United States and its agencies, 
servants, agents, subsidiaries, employees and assignees, or any or 
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 or them, and the United States and its agencies, 
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 appropriations 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 Contractors and Subcontractors of 
the United States may have for Property Damage sustained by them, 
and for Bodily Injury or Property Damage sustained by their 
employees, resulting from Licensed Launch Activities, to the extent 
that claims they would otherwise have for such

[[Page 45625]]

damage or injury exceed the amount of insurance or demonstration of 
financial responsibility required under sections 440.9(c) and (e), 
respectively, of the Regulations, 14 CFR 440.9(c) and (e).

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 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 or its agents; (ii) claims 
for Property Damage sustained by the United States or its 
Contractors and Subcontractors exceed the amount of insurance or 
demonstration of financial responsibility required under section 
440.9(e) of the Regulations (14 CFR 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 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 440.19); or (iv) Licensee has no liability for claims 
exceeding $1,500,000,000 (as adjusted for inflation after January 1, 
1989) above the amount of insurance or demonstration of financial 
responsibility required under section 440.9(c) of the Regulations 
(14 CFR 440.9(c)).

7. Miscellaneous

    (a) Nothing contained herein shall be construed as a waiver or 
release by Licensee, Customer or the United States of any claim by 
an employee of the Licensee, Customer or the United States, 
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 hold harmless and 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 in the case of Licensee and Customer and 
the Contractors and Subcontractors of each of them, the directors, 
officers, agents and employees of any of the foregoing, and in the 
case of the United States, its agents.
    (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) This 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

    Issued in Washington, DC, on August 18, 1998.
Patricia Grace Smith,
Associate Administrator for Commercial Space Transportation, Federal 
Aviation Administration.
[FR Doc. 98-22728 Filed 8-25-98; 8:45 am]
BILLING CODE 4910-13-P