[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Proposed Rules]
[Pages 19730-19732]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9796]


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FEDERAL MARITIME COMMISSION

46 CFR Part 540

[Docket No. 02-07]


Financial Responsibility Requirements for Nonperformance of 
Transportation--Discontinuance of Self-Insurance and the Sliding Scale, 
and Guarantor Limitations

AGENCY: Federal Maritime Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Maritime Commission proposes to amend its 
procedures for establishing passenger vessel financial responsibility 
for nonperformance of transportation. The proposed rule eliminates the 
availability of self-insurance, limits those who can provide a 
guaranty, and discontinues the use of a sliding scale for required 
coverage of unearned passenger revenue (``UPR'').

DATES: Submit an original and 15 copies of comments (paper), or e-mail 
comments as an attachment in WordPerfect 8, Microsoft Word 97, or 
earlier versions of these applications, no later than May 23, 2002.

ADDRESSES: Address all comments concerning this proposed rule to: 
Bryant L. VanBrakle, Secretary, Federal Maritime Commission, 800 North 
Capitol Street, NW, Room 1046, Washington, DC 20573-0001, E-mail: 
[email protected].

FOR FURTHER INFORMATION CONTACT: Sandra L. Kusumoto, Director, Bureau 
of Consumer Complaints and Licensing, Federal Maritime Commission, 800 
North Capitol Street, NW, Room 970, Washington, DC 20573-0001, 202-523-
5787. E-mail: [email protected].

SUPPLEMENTARY INFORMATION: Section 3, Pub. L. 89-777, 46 U.S.C. app. 
817e, (``section 3'') \1\ requires passenger vessel

[[Page 19731]]

operators (``PVOs'') \2\ to establish their financial responsibility to 
indemnify passengers for nonperformance of transportation. The 
Commission's implementing regulations at 46 CFR part 540, subpart A, 
currently require PVOs to evidence financial responsibility by means of 
self-insurance, guaranty, escrow arrangement, surety bond, insurance 
policy, or combination thereof. Financial responsibility must be 
established in the amount of at least 110% of the PVO's highest 
unearned passenger revenue (``UPR'') \3\ over the most recent two-year 
period, subject to a $15 million maximum for those PVOs establishing 
financial responsibility by means other than self-insurance or escrow 
agreement. However, those PVOs not qualifying by self-insurance may 
elect to use a sliding scale formula to compute the amount of financial 
responsibility required, if they can establish five years operational 
experience in the U.S. trades with a satisfactory explanation of any 
claim for nonperformance. Self-insuring PVOs must establish net worth 
equal to at least 110% of UPR.
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    \1\ Section 3 provides, in pertinent part:
    (a) No person in the United States shall arrange, offer, 
advertise, or provide passage on a vessel having berth or stateroom 
accommodations for fifty or more passengers and which is to embark 
passengers at United States ports without there first having been 
filed with the Federal Maritime Commission such information as the 
Commission may deem necessary to establish the financial 
responsibility of the person arranging, offering, advertising, or 
providing such transportation, or, in lieu thereof, a copy of a bond 
or other security, in such form as the Commission, by rule or 
regulation, may require and accept, for indemnification of 
passengers for nonperformance of the transportation.
    \2\ For the purposes of section 3, a PVO is considered to be any 
person in the United States that arranges, offers, advertises or 
provides passage on a vessel having berth or stateroom 
accommodations for fifty or more passengers and which embarks 
passengers at U.S. ports.
    \3\ UPR means ``passenger revenue received for water 
transportation and all other accommodations, services, and 
facilities relating thereto not yet performed.'' (46 CFR 
Sec. 540.2(i)).
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    Recent bankruptcies of several PVOs, coupled with the experience of 
passengers in receiving payment in satisfaction of claims, have caused 
the Commission to re-evaluate its rules governing PVO coverage for 
nonperformance. During the past fifteen months, the following cruise 
lines embarking passengers from U.S. ports ceased operations: Premier 
Cruise Operations Ltd., Commodore/Crown Cruise Lines, Cape Canaveral 
Cruise Lines, Inc., and American Classic Voyages Company (``AMCV'') 
\4\. All but Cape Canaveral filed for bankruptcy. After ceasing 
operations, Cape Canaveral provided reimbursement to passengers.
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    \4\ Currently, the Delta Queen Steamboat Co. does provide 
limited service via the operations of the DELTA QUEEN and the 
MISSISSIPPI QUEEN. This service is covered by an approved escrow 
agreement.
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    Even though passengers with tickets on Premier and Commodore 
experienced delays in being reimbursed,\5\ they ultimately were 
protected by surety bonds under the Commission's PVO program. AMCV, 
however, had evidenced its financial responsibility by means of the 
self-insurance provisions of the Commission's rules (46 CFR 540.5(d)). 
Its passengers were limited to reimbursement by credit card companies, 
third party travel insurance the passenger had purchased,\6\ or by 
filing a proof of claim with the appropriate bankruptcy court. 
Unfortunately, it appears that many of AMCV's passengers will receive 
little reimbursement.
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    \5\ Premier's surety began payments late in the summer of 2001, 
almost a year after its bankruptcy, and Commodore's began paying 
claims the first week of January 2002, slightly more than a year 
after its bankruptcy.
    \6\ Often cancellation insurance is offered by both the cruise 
line itself and by various third party insurers. Not all policies 
include coverage in the event of bankruptcy.
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    Although self-insurers currently are required to submit quarterly 
and annual balance sheets and income statements, by the time such data 
are received, financial and economic conditions could change 
substantially.\7\ Historically, self-insurers under the Commission's 
program typically are those with the greatest financial 
vulnerability.\8\ Consequently, self-insurance presents significantly 
greater risk to passengers than other methods available to PVOs to 
demonstrate the required evidence of financial responsibility.
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    \7\ The financial information submitted by AMCV for the quarter 
ending June 30, 2001, was submitted on August 30, 2001. This data 
showed AMCV's net worth clearly exceeding that required by 
Commission rules for self-insurers. Data for the quarter ending 
September 30, 2001 had not been submitted by the time AMCV filed for 
bankruptcy on October 19, 2001.
    \8\ Financial data for the two private PVOs presently 
establishing coverage under the Commission's self-insurance criteria 
show both companies operating with substantially less than positive 
net working capital. The Commission currently is working with each 
of these PVOs to establish a more acceptable form of financial 
coverage.
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    During the 1990s, the Commission raised the question of continuing 
to allow PVO self-insurance on a number of occasions.\9\ Prior to 1993, 
the Commission required that a self-insuring PVO maintain both net 
worth and working capital in an amount exceeding their UPR by 110%. 
Effective February 1, 1993, the Commission eliminated the working 
capital requirement, instead requiring at least five years of operation 
in the U.S. trades with a satisfactory explanation of any claims for 
nonperformance of transportation, along with the necessary net 
worth.\10\ The Commission's recent experiences, particularly with AMCV, 
indicate that length of operations and net worth are not sufficient 
criteria to insure the necessary protection to the passenger public.
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    \9\ Docket No. 90-1, Security for the Protection of the Public, 
Maximum Required Performance Amount; Proposed Rule, 55 FR 1850 
(January 19, 1990); Final Rule, 55 FR 34564 (August 23, 1990); 
Correction, 55 FR 35983 (September 4, 1990).
    Fact Finding Investigation No. 19, Passenger Vessel Financial 
Responsibility Requirements, Order of Investigation, 55 FR 34610 
(August 23, 1990).
    Docket No. 91-32, Passenger Vessel Financial Responsibility 
Requirements for Indemnification of Passengers for Nonperformance of 
Transportation--Advance Notice of Proposed Rulemaking and Notice of 
Inquiry, 56 FR 40586 (August 15, 1991).
    Docket No. 92-19, Revision of Financial Responsibility 
Requirements for Nonperformance of Transportation; Proposed Rule, 57 
FR 19097 (May 4, 1992); Final Rule, 57 FR 41887 (September 14, 
1992).
    Docket No. 92-50, Financial Responsibility Requirements for 
Nonperformance of Transportation--Revision of Self-Insurance 
Qualification Standards; Proposed Rule, 57 FR 47830 (October 20, 
1992); Final Rule, 57 FR 62479 (December 31, 1992).
    Docket No. 94-06, Financial Responsibility Requirements for 
Nonperformance of Transportation; Proposed Rule, 59 FR 15149 (March 
31, 1994); Further Proposed Rule, 61 33059 (June 26, 1996).
    Docket No. 94-21, Inquiry into Alternative Forms of Financial 
Responsibility for Nonperformance of Transportation. 59 FR 52133 
(October 26, 1994).
    \10\ Docket No. 92-50, supra.
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    One of the more serious criticisms of self-insurance is the virtual 
impossibility of protecting passengers when an operator begins to show 
financial problems. Once its financial situation begins to deteriorate, 
a self-insuring PVO may not be able to obtain a surety bond or a 
guaranty. Typically, to provide coverage in such a situation a bond 
issuer would require, in addition to the bond premium, secure, liquid 
collateral in an amount close to, if not equal to, the face amount of 
the bond. Providing such collateral, or even depositing UPR into an 
escrow agreement, could cause the demise of a PVO that is experiencing 
financial problems. Similarly, for the Commission to revoke the PVO's 
self-insurance certificate under such circumstances increases the risk 
that the PVO would be forced into bankruptcy, thus causing the very 
nonperformance the Commission seeks to prevent.
    The Commission also has considered recent developments impacting 
its passenger vessel operator financial responsibility program. Those

[[Page 19732]]

developments include recent cruise line bankruptcies; the aftermath of 
the events of September 11, 2001; the current economic uncertainty and 
its effect on sales of cruises; and the impending deployment of a 
substantial increase in cruise ship capacity. These developments, 
combined with the financial condition of current self-insurers, 
inevitably lead to the conclusion that self-insurance is an inadequate 
method of protecting passengers for non-performance.
    Additionally, the Commission occasionally has approved guarantors 
using the same financial standards as for self-insurers, i.e. net 
worth. As with self-insurers, the Commission finds those requirements 
inadequate for guarantors, and proposes to modify its guaranty 
requirements to limit guarantors to Protection and Indemnity 
Associations with substantial assets, reserves and reinsurance to 
protect covered PVOs.
    Further, the current sliding scale formula provides for reduced 
coverage, the amount of which is not based on financial criteria. There 
is no requirement for a fixed amount under the sliding scale 
provisions. As a result, the current formula reduces the required 
financial coverage to levels the Commission now believes are 
inadequate, in light of recent developments.
    Accordingly, the Commission is proposing to amend its rules to 
eliminate self-insurance as an acceptable method of evidencing 
financial responsibility under section 3 of Pub. L. 89-777. In 
addition, the proposed rule would eliminate the reduced coverage 
requirements under the Commission's sliding scale formula. If made 
final, all PVOs who are self-insurers or who use the sliding scale 
would be required to obtain coverage that comports with the 
Commission's new rules.
    The proposed rule contains no additional information collection or 
record keeping requirements and need not be submitted to OMB for 
approval under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.
    The Chairman certifies, pursuant to 5 U.S.C. 605, that the proposed 
rule would not have a significant impact on a substantial number of 
small entities.

List of Subjects in 46 CFR Part 540

    Insurance, Maritime carriers, Penalties, Reporting and record 
keeping requirements, Surety bonds, Transportation.

    Therefore, pursuant to 5 U.S. C. 553; section 3 Pub. L. 89-777, 80 
Stat. 1356-1358 (46 U.S.C. app. 817e); and section 17(a) of the 
Shipping Act of 1984, as amended (46 U.S.C. app. 1716(a), and for the 
reasons stated above, the Federal Maritime Commission proposes to amend 
46 CFR part 540 as follows:

PART 540--PASSENGER VESSEL FINANCIAL RESPONSIBILITY

    1. The authority citation to Part 540 continues to read:

    Authority: 5 U.S.C. 552, 553; secs. 2 and 3, Pub. L. 89-777, 80 
Stat.1356-1358 (46 U.S.C. app. 317(e, 817d); sec. 17(a) of the 
Shipping Act of 1984 (46 U.S.C. app. 1716(a)).
    2. Section 540.5 is amended as follows:
    a. Revise the heading and introductory text;
    b. Revise paragraph (c);
    c. Remove paragraphs (d) and (e).
    d. Redesignate paragraph (f) as paragraph (d).
    The revisions read as follows:


Sec. 540.5  Insurance, guaranties, and escrow accounts.

    Except as provided in Sec. 540.9(j), the amount of coverage 
required under this section and Sec. 540.6(b) shall be in an amount 
determined by the Commission to be no less than 110 percent of the 
unearned passenger revenue of the applicant on the date within the two 
fiscal years immediately prior to the filing of the application which 
reflects the greatest amount of unearned passenger revenue. The 
Commission, for good cause shown, may consider a time period other than 
the previous two-fiscal-year requirement in this section or other 
methods acceptable to the Commission to determine the amount of 
coverage required. Evidence of adequate financial responsibility for 
the purposes of this subpart may be established by one or a combination 
(including Sec. 540.6 Surety Bonds) of the following methods:
* * * * *
    (c) Filing with the Commission a guaranty on Form FMC-133A, by a 
Protection and Indemnity Association with established assets, reserves 
and reinsurance acceptable to the Commission, for indemnification of 
passengers in the event of nonperformance of water transportation. The 
requirements of Form FMC-133A, however, may be amended by the 
Commission in a particular case for good cause.
* * * * *
    3. Amend Form FMC-131, Part II, as follows:
    a. Revise Item 10. to read:
    b. Remove Item 15.
    The revision reads as follows:

Part II--Performance

* * * * *
    10. Items 11--14 are optional methods; answer only the one item 
which is applicable to this application. Check the appropriate box 
below:
    [    ] Insurance (item 11).
    [    ] Escrow (item 12).
    [    ] Surety bond (item 13).
    [    ] Guaranty (item 14).
* * * * *
    15. [Removed]

    By the Commission.
Bryant L. VanBrakle,
Secretary.
[FR Doc. 02-9796 Filed 4-22-02; 8:45 am]
BILLING CODE 6730-01-P