[Federal Register Volume 67, Number 129 (Friday, July 5, 2002)]
[Rules and Regulations]
[Pages 44774-44776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16756]



[[Page 44774]]

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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: Final rule.

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SUMMARY: The Federal Maritime Commission (``Commission'') is amending 
its rules on passenger vessel financial responsibility for 
nonperformance of transportation, by eliminating the availability of 
self-insurance, limiting guarantees to those Protection and Indemnity 
Associations approved by the Commission, and discontinuing the existing 
sliding scale formula for determining the amount of coverage required.

DATES: This rule is effective August 5, 2002.

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: On April 23, 2002, the Commission published 
in the Federal Register a notice of proposed rulemaking, 67 FR 19730, 
to amend 46 CFR part 540, the implementing regulations for section 3, 
Pub. L. 89-777, 46 U.S.C. app. 817e, (``section 3'').\1\ Section 3 
requires that passenger vessel operators (``PVOs'') establish financial 
responsibility to indemnify passengers for nonperformance of 
transportation. The amendments would eliminate self-insurance as a 
means of evidencing required financial responsibility, limit guarantors 
of financial responsibility to those Protection and Indemnity 
Associations approved by the Commission, and eliminate the availability 
of a sliding scale that, for some passenger vessel operators,\2\ 
reduced the amount of coverage required.
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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 
accomodations 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 
provide passage on a vessel having berth or stateroom accomodations 
for fifty or more passengers and which embarks passengers at U.S. 
ports.
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    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, under current regulations, those PVOs not 
qualifying by self-insurance may elect to use a sliding scale formula 
to compute a reduced 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 currently must establish net worth equal to at least 110% 
of UPR.
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    \3\ UPR means ``passenger revenue recieved for water 
transportation and all other accomodations, services, and facilities 
relating thereto not yet performed.'' (46 CFR 540.2(i)).
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    In determining to amend its regulations, the Commission cited 
recent bankruptcies of several PVOs, coupled with the experience of 
passengers in receiving payment in satisfaction of claims, as causing 
the Commission to re-evaluate its rules governing PVO coverage for 
nonperformance. Also, the Commission referred to the lapse of time 
before the Commission becomes aware of substantial changes in financial 
and economic conditions, the greater risk to passengers posed by self-
insurers under the Commission's program, the current economic 
uncertainty and its effect on sales of cruises, and the impending 
substantial increase in cruise ship capacity.

Comments

    Comments on the proposed rule were filed by American West Steamboat 
Company, LLC (``American West''), Carnival Corporation 
(``Carnival''),\4\ West Travel, Inc. d/b/a Cruise West and Alaska 
Sightseeing Tours (``Cruise West''), Glacier Bay Park Concessions, Inc. 
d/b/a Glacier Bay Cruiseline (``Glacier Bay''), Goldbelt, Incorporated 
(``Goldbelt''), International Group of P&I Clubs (``P&I Clubs''), and 
the Passenger Vessel Association (``PVA''). Goldbelt is the sole 
shareholder of Glacier Bay. The P&I Clubs is an organization of 
Protection and Indemnity Associations, some of which have provided 
section 3 guarantees under the Commission's program. PVA is an 
association of U.S.-flag passenger vessels of all types, including 
overnight cruise vessels. The remaining commenters are PVOs that 
participate in the Commission's program.
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    \4\ Carnival's comments were submitted on behalf of Carnival 
Cruise Lines, Holland America Line, Cunard Line, Seabourn Cruise 
Line, Costa Cruises and Windstar Cruises, all of which are owned by 
Carnival.
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    American West, a U.S. flag PVO, is the only commenter to state that 
it fully supports the proposed changes. However, American West also 
supports an in-depth review by the Commission of all of its financial 
responsibility regulations. In particular, American West supports 
lifting of the current $15 million maximum coverage requirement, 
supports reducing the required coverage from 110% of UPR to 100%, and 
believes the Commission should consider the role of credit cards and 
third-party travel insurance in determining the amount of coverage 
required. None of those suggestions is within the scope of this 
proposed rule.
    Carnival, one of the larger PVOs, states that the increase in the 
fleets of the larger PVOs in recent years has increased the shortfall 
in coverage between the current $15 million maximum coverage 
requirement and the actual amount of unearned passenger revenues. 
Carnival believes that eliminating self-insurance while maintaining the 
current $15 million cap does little to provide the necessary financial 
security to passengers. Carnival suggests that the Commission's rules 
should be drawn so as to be ``self-adjusting'' as cruise lines increase 
in size. Moreover, Carnival reiterates its comments to proposed rules 
in 1994 and 1996, namely that the Commission's rules should allow 
foreign and U.S. companies with investment grade credit ratings and 
strong balance sheets to qualify for self-insurance and increase the 
current $15 million cap. In addition, Carnival recommends that the 
Commission support a change in Public Law 89-777 to extend the 
financial responsibility requirements to voyages embarking U.S. 
passengers in foreign ports.
    Cruise West, a U.S. flag PVO, believes the Commission should allow 
itself the flexibility to evaluate particular operators and determine 
appropriate evidence of financial responsibility as

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warranted by the particular operator's circumstances. Cruise West 
states that the proposed rule could jeopardize smaller U.S. operators 
by putting them at a competitive disadvantage with respect to larger 
foreign operators. Cruise West points out that, because of the current 
$15 million ceiling, a major cruise line with hundreds of millions of 
dollars in UPR would be required to cover only a small fraction of its 
UPR, whereas a smaller operator with a total UPR of only $15 million, 
would have to cover 100% of its UPR. Cruise West asserts this places 
smaller companies at a significant competitive disadvantage, and 
believes that the sliding scale was intended to partially alleviate 
that disadvantage. Moreover, Cruise West states that self-insurance is 
one of the few advantages to maintaining a U.S. based cruise line, 
because self-insurance is expressly tied to ownership of U.S. based 
assets, an important factor considered in enacting Public Law 89-777. 
Cruise West suggests that closer scrutiny of self-insured cruise lines, 
requiring additional coverage as appropriate, is better than 
eliminating self-insurance. Cruise West therefore believes that the 
Commission should retain the option to accept self-insurance and 
sliding scale coverage on a case-by-case basis. Lastly, Cruise West 
indicates that an immediate and complete transition to the new rule 
would have significant, potentially devastating, effects on Cruise 
West. Cruise West asks that sufficient time for transition to the new 
rules be provided, and that the Commission give itself the latitude to 
handle this transition on a case-by-case basis.
    Glacier Bay and its owner, Goldbelt, indicate that the proposed 
rule would cause Glacier Bay considerable financial hardship, which 
could force Glacier Bay to discontinue operations. Goldbelt states that 
escrowing deposits is not an acceptable alternative, since Glacier Bay 
begins selling cruises up to nine months before its May through 
September operating season, and needs those deposits as working capital 
to prepare for the operating season. Goldbelt states that preliminary 
quotes from its insurance broker indicate that a bond will cost 
anywhere from $150,000 to $200,000. Glacier Bay indicates that its 
prices for next year are in the process of being set, and Goldbelt 
states that prices are already set for this year, with no way to 
recapture the additional costs that will be caused by this rule. 
Goldbelt asks that, should the rule be made final, it be phased in over 
a period of two years.
    PVA claims to be the ``national voice'' of U.S. flag passenger 
vessels. PVA acknowledges that recent circumstances warrant review of 
the Commission's current rules. However, PVA states that the proposed 
rule (1) puts smaller vessels at a disadvantage, because the $15 
million ceiling allows larger vessel operators to cover only a fraction 
of the UPR, (2) discriminates against U.S. flag operators because the 
statute's requirements only apply to a vessel embarking passengers at 
United States ports (the Alaska trade is cited as an example, with most 
foreign flag operators allegedly embarking passengers at Vancouver, 
British Columbia), and (3) does not provide affected operators with 
sufficient time to comply.
    P&I Clubs is concerned that many vessel operators that have become 
self-insurers in recent years will look to the P&I Clubs to provide the 
necessary security. P&I Clubs makes clear that its members would not be 
willing to increase their current involvement, and asks that the rule 
be reconsidered or postponed in order to provide more detailed 
consultation with the cruise industry.

Discussion

    A number of comments deal with issues outside the scope of this 
rulemaking. Several comments indicate a desire that the Commission lift 
its current $15 million ceiling. American West supports lifting the 
ceiling, and believes this should be part of a comprehensive review of 
Commission regulations. PVA and Cruise West indicate that the ceiling 
creates a competitive disadvantage for smaller U.S. flag operators, as 
compared to their larger, foreign flag competitors. Interestingly, one 
of the larger, foreign flag operators, Carnival, also believes that the 
ceiling should be lifted, and should automatically adjust in line with 
increasing UPR. The Commission is mindful that the $15 million ceiling 
is only a fraction of the UPR potentially at risk for some PVOs, and 
shares the concerns of these commenters. Accordingly, the Commission 
has directed its staff to undertake a comprehensive review of the 
Commission's rules, including whether to change the ceiling. Based on 
that review, the Commission may institute a future rulemaking 
proceeding. Since the ceiling was not addressed in this proposed rule, 
however, the Commission is unable to effect any changes through this 
proceeding.
    Another matter beyond the scope of this proceeding is the concern 
about the lack of protection available to those passengers on cruises 
not embarking passengers at U.S. ports. Carnival and PVA indicate a 
desire that the statute be amended to impose financial responsibility 
requirements on voyages embarking U.S. passengers from foreign ports. 
We know about the failures of three PVOs within the past two years 
which affected U.S. passengers embarking from foreign ports. Two of 
those PVOs participated in the Commission's program by having coverage 
for certain vessels embarking passengers at U.S. ports (but not for 
U.S. passengers embarking at foreign ports). Accordingly, those 
passengers who were to embark from U.S. ports were protected under the 
Commission's program, while other U.S. passengers had no protection. No 
passengers of the third PVO were protected by the Commission's program. 
The Commission has previously supported legislation to require coverage 
for ticket contracts sold in the United States, even for passengers 
embarking from foreign ports. The Commission intends to reiterate its 
concerns to Congress.
    The concern of P&I Clubs that many current self-insurers will look 
to its members for required coverage appears to be unwarranted. 
Contrary to P&I Clubs' assertion, the elimination of self-insurance and 
limitation of guarantors will affect only two PVOs currently in the 
Commission's program. Preliminary indications are that neither of those 
PVOs would look to Protection and Indemnity Associations for coverage.
    Cruise West, Glacier Bay (and Goldbelt) and PVA oppose the proposed 
rule, expressing concern about its impact on smaller, U.S. flag PVOs, 
which they claim will be disadvantaged. Cruise West suggests that the 
Commission maintain the flexibility to approve self-insurance and 
sliding scale treatment on a case-by-case basis. Should the Commission 
finalize the proposed rules, all ask for time to phase in their 
compliance.
    The Commission is concerned about the financial protection provided 
to passengers under its program, and believes that self-insurance is a 
matter requiring immediate protection. The bankruptcy of a self-insurer 
leaves many passengers devoid of protection. Cruise West argues that 
rather than eliminate self-insurance, the Commission should scrutinize 
more closely the financial condition of self-insurers and require 
additional coverage as appropriate. While such an approach may appear 
to have merit in theory, experience has shown that requiring additional 
coverage is virtually impossible once a PVO's financial condition has 
deteriorated. Even now, Cruise West and Glacier Bay argue that the 
Commission should not impose greater

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requirements because of the financial impact. Once a self-insurer's 
financial situation has deteriorated, imposition of additional coverage 
requirements would increase the likelihood of the PVO's failure and 
expose passengers to the very losses the Commission's program is 
designed to prevent. Also, experience demonstrates that the lag time in 
receiving financial data may prevent the Commission from knowing about 
a PVO's financial deterioration until well after it is too late to 
remedy the lack of coverage.
    In support of self-insurance, Cruise West, Glacier Bay (and 
Goldbelt) and PVA indicate that its elimination would disadvantage 
small U.S. flag operators, since the qualifying assets currently must 
be maintained in the United States. This requirement has so far 
resulted in only U.S. flag PVOs requesting approval as a self-insurers. 
Yet one small U.S. flag operator, American West, fully supports the 
changes. Most U.S. flag PVOs do not utilize the self-insurance option. 
Instead, they provide evidence of financial responsibility with a bond 
or escrow agreement. Some of these U.S. flag PVOs compete with Cruise 
West and Glacier Bay, who argue that the costs of a bond or escrow 
agreement are competitively disadvantageous. However, finalizing the 
rule as proposed would put all of these operators on equal footing in 
this regard.
    The Commission is sensitive to the impact of an abrupt change to 
its rules. For this reason, at its meeting of January 30, 2002, the 
Commission directed its staff to begin discussions with affected PVOs 
about alternative means of coverage. All affected PVOs were apprised of 
the Commission's intentions during the first week of February 2002. 
Currently, the introductory paragraph to 46 CFR 540.5 provides:

    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, 
unless the applicant qualifies for consideration under 
Sec. 540.5(e). 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. * * * (Emphasis added)

    Thus, Commission rules already provide for case-by-case 
consideration of differing circumstances. The Commission will give 
consideration to special circumstances caused by issuance of this 
amendment to its rules, and allow some flexibility during a transition 
period. Accordingly, it is not necessary to modify the proposed rule to 
provide for such a transition period.
    Commission staff have contacted those affected by this rule and 
will continue to be available to discuss an effective transition. 
However, this should not be seen as a willingness on the part of the 
Commission to allow continuation of self-insurance, even for a short 
time period. All affected parties have been on notice of the 
Commission's intention in this regard since at least early February. 
The Commission has determined that self-insurance provides inadequate 
coverage, and that it must undertake to make sure that passengers 
achieve the protections contemplated by the governing statute. 
Accordingly, while some flexibility in timing may be allowed, affected 
parties will be expected immediately to begin the transition with 
adequate safeguards in place to protect passengers. The Commission's 
staff will be available to discuss means of doing so.
    The rule contains no additional information collection or 
recordkeeping requirements and need not be submitted to OMB for 
approval under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.
    The Chairman has certified, pursuant to 5 U.S.C. 605, that the rule 
will 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 amends 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;
    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:
    [ballot] Insurance (item 11).
    [ballot] Escrow (item 12).
    [ballot] Surety bond (item 13).
    [ballot] Guaranty (item 14).
* * * * *
    15. [Removed]

    By the Commission.
Bryant L. VanBrakle,
Secretary.
[FR Doc. 02-16756 Filed 7-3-02; 8:45 am]
BILLING CODE 6730-01-P