OCST-RD-RES09-95

FINANCIAL RESPONSIBILITY FOR REENTRY

VEHICLE OPERATIONS

MAY 1995

_____________________________________________

U.S. DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

OFFICE OF COMMERCIAL SPACE TRANSPORTATION

WASHINGTON, D.C. 20590
NOTICE

This document has been prepared under Contract for the Department of Transportation, Office

of Commercial Space Transportation. The United States Government assumes no liability for

its contents or the use thereof.

The United States Government does not endorse manufacturers or products. Trade names

appear in the document only because they are essential to the content of the paper.
i

ABSTRACT

The Department of Transportation's Office of Commercial Space Transportation is in the

process of assessing the safety of a reentry vehicle and its operation and is developing

an associated regulatory framework for ensuring public safety while minimizing regulatory

burdens, delays, or uncertainties that could hamper or prevent development of

commercial space transportation and reentry capabilities.

As part of this overall activity, the existing statutory ceilings on third-party liability and

government property insurance requirements were examined to establish their

appropriateness for licensed reentry operations. Specifically, the Commercial Space

Launch Act's existing ceilings and risk-based determination of the maximum probable

loss that would result from licensed reentries were examined to establish their

appropriateness to licensed reentry operations.

It was found that the current statutory requirements are more than adequate for ensuring

third-party and government property against the risks likely to be encountered from

licensed reentry operations. It was concluded that the current methods employed for the

setting of financial responsibility, i.e., the determination and use of maximum probable

loss, is also appropriate for reentry operations. It was determined, based upon extensive

conversations with the space insurance industry, that insurance industry capacity for

providing third-party and government property coverage at a reasonable price is

adequate and is not likely to pose a problem, at least in the near-term. The

recommendation was therefore made that the existing ceilings and method for setting

financial responsibility requirements for launches be used for setting financial

requirements for reentry operations.
ii

TABLE OF CONTENTS

LIST OF FIGURES

Page No.

Abstracti

Table of Contentsii

List of Figuresii

1.Introduction1

2.Background2

3.Existing Statutory Ceilings for Launch Operations6

4.Methodology for Setting Financial Responsibility

Requirements16

5.Appropriateness of Statutory Measures and MPL

Methodology24

6.Summary32

7.Recommendations36

FigurePage No.

1Government Facility Damage (Function of Launch

Vehicle and Range)5

2Third-Party Damage (Function of Launch Vehicle and Range)5

3Insurance Payout and Government Cost as a Function of Required

Level of Insurance: Property Damage19

4Insurance Payout and Government Cost as a Function of

Required Level of Insurance: Third-Party Damage20

5Typical Launch Failure Event Tree23

6Potential Damage Outcomes from Reentry Operations26
 The Commercial Space Launch Act of 1984, 49 U.S.C. App. §§ 2601-2623, as recodified at 49 1

U.S.C. Subtitle IX, ch. 701--Commercial Space Launch Activities, 49 U.S.C. §§ 70101-70119 (1994).

1

FINANCIAL RESPONSIBILITY FOR REENTRY

VEHICLE OPERATIONS

1. Introduction

The Department of Transportation's (DOT's) Office of Commercial Space Transportation

(OCST) has been in the process of assessing the safety of a reentry vehicle and its

operation. The vehicle was designed with the intent to reenter from orbit after

approximately 30 days in space and land at a designated landing site within the United

States. Although there were some questions regarding the authority of the Office to

review and approve such vehicles/operations, Congress indicated that the Office should

proceed with the review process, but it was not appropriate to issue a license as was

planned. The Secretary of Transportation subsequently submitted to Congress in a

re-authorization request the specific inclusion of reentry vehicles within DOT's licensing

authority. The proposed amendments were to create a regulatory framework for

ensuring public safety while minimizing regulatory burdens, delays, or uncertainties that

could hamper or prevent development of these commercial space transportation and

reentry capabilities.

As part of this effort the Secretary indicated the intent to examine whether existing

statutory ceilings on third-party liability and government property insurance requirements

are appropriate for licensed reentries. Methodologies for setting financial responsibility

requirements for these activities would also be evaluated. The Commercial Space

Launch Act's existing ceilings and risk-based determination of the maximum probable 1

loss that would result from licensed reentries would apply, pending the results of the

evaluation and any DOT recommendations for change.

The purpose of this report is to document the findings of a study to carry out these

examinations and evaluations leading to the establishment of financial responsibility for

reentry operations. Princeton Synergetics, Inc. (PSI) examined the existing statutory

ceilings on third-party liability and government property insurance requirements by

reviewing the associated legislation, hearings, and Congressional reports and by talking

with individuals in the insurance industry and in government who were familiar with the

history of the current statutory ceilings. The appropriateness of these ceilings for

licensed reentry operations were assessed by considering the risks associated with

reentry operations, reviewing the report language associated with Congressional actions

relating to financial responsibility requirements for licensed commercial launches and by

talking with representatives of the insurance industry to acquire insight into the status of

the industry and the availability of coverage at a reasonable cost.

The methodologies for setting financial responsibility requirements for licensed

commercial launch operations were also examined and the appropriateness of these
 Launch Licenses define this term to include launch and launch site operations associated with the 2

commercial launch operation(s).

2

methodologies assessed for application to licensed reentry operations. It is concluded

that the current statutory requirements are more than adequate for insuring third-party

and government property against the risks likely to be encountered from the type of

licensed reentry operations currently being contemplated. It is also concluded that the

current methods employed for the setting of financial responsibility, i.e., the determination

and use of maximum probable loss, is also appropriate for reentry operations. It was

determined, based upon extensive conversations with the space insurance industry, that

insurance industry capacity for providing third-party liability and government property

cover at a reasonable price is adequate and is not likely to pose a problem, at least in the

near-term.

This report first examines the history behind the requirement that providers of

commercial space transportation services be responsible for a designated level of liability

coverage and the government's position on indemnifying losses beyond that level (to a

specified upper limit subject to approval of a compensation plan and an appropriation Act

of Congress). Background from NASA's practice of requiring third-party liability insurance

and the international treaties that induced that practice are discussed in Section 3. The

rationale behind the statutory ceilings manifested in the Commercial Space Launch Act

Amendments of 1988 are also discussed in Section 3 as are the space insurance

industry capacity and pricing. The risks associated with reentry operations are

addressed in Section 4. Section 4 also describes the maximum probable loss (MPL)

methodology. Section 5 discusses the appropriateness of the existing statutory

requirements and MPL methodology that have been used for launch operations for

setting financial responsibility requirements for reentry operations. A summary of

findings relative to the appropriateness of the current statutory requirements and MPL

methodology for reentry operations is presented in Section 6 and specific

recommendations are presented in Section 7.

2. Background

Throughout the study a number of terms are employed which, for the purposes of this

study, have specific definitions. These definitions are presented below.

Third-Party - is defined in section 70102 of 49 U.S.C. Subtitle IX, ch. 701, Commercial

Space Launch Activities as "any person or entity other than the United States, its

agencies, or its contractors or subcontractors involved in launch services; the licensee or

transferee; the licensee's or transferee's contractors, subcontractors, or customers

involved in launch service; or, any such customer's contractors or subcontractors

involved in launch services." It appears that this definition, by not listing the employees

of the U.S. government with those excluded from the list of third-parties, defines

government employees involved in providing launch services as third-parties.

For the purposes of calculating maximum probable loss, third-party includes any person

other than on-range employees of an entity involved in the licensed commercial launch

activities under consideration. The term also includes on-range government and 2

government contractor employees; although these persons may be involved in the

licensed activities, they are considered third-parties.
 For Launch Specific Licenses, the requirements are set based on the MPL values for third-parties 3

and government property across both activities. For Launch Operators Licenses, the third-party and

government property insurance requirements are set separately for the launch site operations and the

launch operations.

3

Other on-range third-parties include the personnel of commercial launch firms not

involved in the activities under consideration, and any other persons or entities that are

not private party launch participants (where private party launch participants includes

contractors and subcontractors) in the licensed activities.

NOTE: Range policies generally prohibit the exposure of such third-parties to significant

support and launch risks.

All persons off the launch range are considered to be third-parties.

Third-Party Liability Claims: refer to claims by a third-party for death, bodily injury, or loss

of or damage to property resulting from activities carried out under the license in

connection with any particular launch.

Maximum Probable Loss (MPL): Maximum magnitude of loss such that there is less than

a specified probability (i.e., the threshold probability) of exceeding this level, as illustrated

in Figure 1 and 2. This is also referred to as the threshold accident.

Threshold Probability: Represents the probability that loss or damage will exceed a

specified dollar value. The threshold probability is a quantitative measure selected by

DOT as representing the probability of occurrence associated with "unlikely" events of

levels of damage due to launch and launch related activities. The values currently in use

by DOT are 10 for government property and 10 for third-party damage. This is -5 -7

illustrated in Figures 1 and 2 as the cross-hatched areas under the loss probability

density function.

Licensed Activities: The term licensed activities as used in this study refers to the

activities on a launch range by a commercial firm which are covered by a Department of

Transportation license. Such activities may include launch activities, support activities in

preparation for a specific launch or the commercial activities of a company with a

permanent facility on a launch range. Licensed activities may also include the disposition

of launch vehicle components and payloads following a launch (see Launch Activities). 

For example, at federal launch ranges, DOT's licenses address launch activities which

include two different operations, the launch operation and the launch site operations. 

Both types of operations are examined in the determination of the MPL values and the

resultant requirements implemented through License Orders. 

3

Finally, licensed activities are not necessarily limited to a launch range; for example,

airborne launch activities may include as licensed activities the preparation and takeoff of

the associated aircraft (for the purposes of releasing the attached launch vehicle for

flight) from an air field not generally used for space launches.

With respect to reentry activities, proposed licensed activities would include the reentry of

the reentry vehicle system through impact and removal of hazardous materials (if any). 
4

Launch Activities : Activities occurring during the launch period for a specific launch. The

launch period generally begins at ignition, and continues through flight of the launch

vehicle and delivery (release) of the spacecraft on orbit. For orbital missions, launch

activities are considered to be completed after spacecraft separation and any subsequent

flight operations taken by the launch vehicle, however, insurance requirements remain in

place for 30 days after the launch in most cases in order to allow time to assess any

flight anomalies that might affect the exposure to liabilities. For sub-orbital launches,

launch activities are considered to be completed when the launch vehicle returns to

Earth, or when the payload is recovered, whichever occurs later.

Reentry Activities: The reentry of the reentry vehicle system through impact and removal

of hazardous materials (if any). Those related reentry vehicle activities that, for example,

occur during pre-launch operations, such as mating of the reentry vehicle propulsion

system, and those on-orbit reentry preparation activities that may affect the performance

and safety of reentry operations are assessed and monitored in order to ensure public

health and safety. 

Support Activities: Support activities begin with the arrival of a firm (its vehicle

components, payload, or personnel) on the launch (or reentry) range in preparation for

commercial launch or reentry operations. Support activities end when the licensed entity

leaves the launch range or reentry operations have been completed.

Government Property: Fixed property, such as buildings and launch pads, and non-fixed

property such as equipment and launch vehicle and spacecraft components, which are

owned by the government or government contractors on the launch or reentry range are

considered to be government property for the purposes of determining maximum

probable loss. No property off the launch range is included, except for the special case

of airborne space launches. In this case, the aircraft used to launch the space vehicle (if

the aircraft is owned by the government) is to be considered government property (for the

purposes of MPL) throughout the launch, even when the aircraft is not on the launch

range. In addition, transient property (e.g., payload and/or launch vehicle on an adjacent

pad) is not considered in the determination of maximum probable loss since the risk to

the transient property is a government choice and also would depend on whether, on any

particular date, the property is exposed to potential damage or loss. This is unknown as

of the time OCST determines MPL values. 

Casualty: A casualty is a person suffering death or serious injury as the result of an

accident associated with licensed activities. The value of life is estimated as $3 million

for the purposes of determining MPL.
5
 The Price-Anderson Act, 42 U.S.C., 1957. 4

 "Hearings Before the Joint Committee on Atomic Energy on Governmental Indemnity for Private 5

Licensee and AEC Contractors Against Reactor Hazards," 84th Congress, 2nd Session, May 15, 16, 17,

18, 21, and June 14, 1956.

6

Property Damage: For government property, property damage is defined as damage to

fixed and non-fixed property owned by the government or its contractors. For property

owned by third-parties, property damage is defined as any damage to any property. The

cost of property damage is calculated when possible based on the replacement value of

the property. As in the above definition of government property, transient property is not

considered in determining the MPL value and insurance requirement.

Also, when used throughout this report, the term Secretary will refer to the Secretary of

Transportation.

3. Existing Statutory Ceilings for Launch Operations

Background of Government Involvement in Liability Insurance:

To provide background on the Government's control of liability, a brief review is

presented of the Price-Anderson Act , the U.S. obligations with regard to liability under 4

international treaties, and the NASA's history of requiring a limited amount of liability

protection for commercial users of its launch vehicles. The Price-Anderson Act is

important since it deals with the indemnification of an industry with attributes similar to

those of the space launch industry: very low probability of potentially very damaging

events and little data to indicate likelihood and magnitude of damages. U.S. obligations

with regard to liability under United Nations (Outer Space Treaties) international treaties

is of concern because the U.S. would be expected to pay for damages caused by its

space objects, as stated in the Treaty, and this provided motivation to ensure the funds

are available. 

The Price-Anderson Act

As with the possibility of an accident causing liability damages from a space launch, the

probability of occurrence and maximum possible magnitude of damages from a nuclear

power accident are both unknown. In the 1950's the Nuclear Regulatory Commission

concluded that property damage from a nuclear incident might range from half a million

dollars to a worse case limit of $7 billion (which would be due mostly to contamination of

land with fissionable products). Later studies estimated far greater damages. The

NRC's Reactor Safety Study [1975] estimated damages from a major accident could

reach $17 billion. Although the probability of a catastrophic nuclear incident is extremely 5

low, it is desirable that insurance be available to provide for such a possibility.

The Price-Anderson Act of 1957 was enacted to overcome industry reluctance to

participate in nuclear power generation due to fear of the possibility of catastrophic,

uninsured claims from a nuclear accident, and to avoid delay or failure to provide

compensation to the public in the event of a nuclear incident.
 When the Act was first enacted this level was $60 million per reactor. Later it increased to $160 6

million per reactor.

 This was increased from $5 million in the 1988 Amendments to the Act. 7

 "The Price-Anderson System," Office of Nuclear Reactor Regulation, U.S. Nuclear Regulatory 8

Commission

 "AIF, Background Info, Public Affairs and Information Program, The Price-Anderson Act: Questions 9

and Answers," Atomic Industrial Forum, Inc., September 1983.

 "Nuclear Power and Insurance," Marguerite Shea, Chicago Bar Association Young Lawyers 10

Journal, Vol. 13, No. 4, January 1984.

 Analysis of the Price-Anderson Act, General Accounting Office, August 18, 1980. 11

7

The Price-Anderson Act, involves a two tier system for liability payments. The first

consists of primary nuclear liability insurance available on the private market for which

each nuclear reactor owner now pays a premium annually for $200 million worth of

coverage for each large power reactor site. The second tier, which applies only to 6

operators of large licensed reactors, would come into play in the event of an accident

causing damages in excess of $200 million. Each operator would be assessed a

prorated share of damages in excess of the primary insurance coverage of up to $63

million per reactor per accident. With 115 commercial reactors under the system, the 7

secondary level would total $7.245 billion. When the original version of the Act was 8

passed in 1957, liability insurance in the private market was $60 million and the

government agreed to be liable for $500 million. The rationale behind the $500 million 9,10

limitation on government indemnification was that $500 million would not significantly

disturb the Federal budget. For many years the limit of liability was the sum of private 11

insurance coverage plus government indemnity and totaled $560 million. In 1982, when

the primary and secondary layers for large reactors reached $560 million, the

government's indemnity was basically eliminated.8

International Treaties Relating to Liability

Both the 1967 Outer Space Treaty and the Liability Convention require that a launching

country be liable for any damages caused by an object that is launched from that

country. These treaties provided some of the impetus for NASA's requirement that

commercial users of the shuttle and ELV's procure liability insurance.

Treaty on Principles Governing the Activities of States in the Exploration and Use of

Outer Space, Including the Moon and Other Celestial Bodies

The so-called "Moon Treaty" states that each State party to the Treaty that launches

or procures the launch of an object into outer space, or from whose territory or facility

an object is launched, is internationally liable for damage caused by the launched

object (or its component parts) on the Earth, in air space or in outer space, to another

State party to the Treaty or to its citizens.
 Discussion with Robert Wojtal, Office of the Counsel, NASA, September 25, 1994. 12

 Mossinghoff, Gerald J., "Managing Tort Liability Risks in the Era of the Space Shuttle," Journal of 13

Space Law, Vol. 7, No. 2, 1979.

 "Commercial Space Launch Act Amendments of 1988," Report of the Senate Committee on 14

Commerce, Science, and Transportation on H.R. 4399, Report 100-593, October 7, 1988.

8

Convention on International Liability for Damage Caused by Space Objects, United

Nations, October 9, 1973.

The Liability Convention allocates liability for damage caused by space objects. It

states that a launching State is absolutely liable for damages caused by its space

objects on the surface of the Earth or to aircraft in flight. In the event of damage

being caused elsewhere, the launching State is liable if fault can be shown. The

Convention also provides for the establishment of a claims commission to regulate

and decide these claims. This treaty formed the basis for consequent NASA action

regarding third-party liability insurance requirements.

NASA History Related to Third-Party Liability Insurance and Indemnification

It had been NASA's policy since the late 1970's to require commercial users of launch 12

vehicles to obtain third-party liability insurance to protect the user and the U.S.

government. NASA usually specified in the launch services agreement that its customers

obtain the maximum liability insurance available on the market at a reasonable cost. No 13

first-party property insurance was required since the Government conducted all of the

launch operations.14

Section 308 of the 1980 NASA Authorization Act directed NASA to use appropriations for

third-party liability insurance to cover space vehicle users and to seek reimbursement by

the user to the maximum extent possible. Section 308 also authorized the U.S.

government to indemnify successful claims above the user's liability insurance. 

Specifically, Section 308 of the 1980 NASA Authorization Act (Public Law 96-48) 

authorized the Administration to use appropriations to provide liability insurance to any

user of a space vehicle to compensate third-party claims arising from activities connected

with the launch, operations or recovery of the space vehicle but stipulated that such

appropriations had to be reimbursed by the users to the maximum extent practicable

under reimbursement policies established in the Space Act. Section 308 also allows that

the U.S. government may indemnify the user against third-party liability claims that are

not compensated by the user's liability insurance (such indemnification may be limited to

claims resulting from other than the actual negligence or willful misconduct of the user).

Because $500 million was the amount that was commercially available at the time of the

first commercial launches on the shuttle (Lloyd's of London told NASA's General Counsel

at the time that they'd have no trouble finding $500 million per launch coverage) and

because this level was believed to be more than sufficient to cover potential third-party

damages from flights that were headed over the ocean (in other 
 Conversation with Neil Hosenball, David, Grahams and Stubbs, November, 1994. 15

 Public Law 98-575, 98th Congress, (The Commercial Space Launch Act) October 30, 1984. 16

 Maximum Probable Loss: Rationale and Supporting Information, prepared by Princeton 17

Synergetics, Inc. for the Office of Commercial Space Transportation, U.S. Department of Transportation,

April 29, 1991.

 "Commercial Space Launch Act Amendments of 1988," Public Law 100-657, November 15, 1988. 18

9

words, because of the trajectory of the shuttle flights, the risk of damages was felt to be

extremely low), $500 million was normally required to cover one payload ($750 million 15

for a multiple payload launch ). 14

Legislative Background on the Financial Responsibility Requirements for

Commercial ELV's

The financial responsibility requirements governing commercial launches were enacted

into law by the Commercial Space Launch Act of 1984 and by the 1988 Amendments to

the Act. 

The Commercial Space Launch Act of 1984 (Public Law 98-575), October 30, 198416

The Commercial Space Launch Act of 1984 required licensees (or transferees)

licensed under the Act to be covered by liability insurance, but left it to the Secretary

of Transportation to determine the amount of insurance considering the international

obligations of the U.S. It also allowed the Secretary to establish requirements for

liability insurance, hold harmless agreements, proof of financial responsibility and

other necessary assurances to protect the United States (and its agencies and

personnel) from liability, loss, or injury resulting from a launch or launch site operation

involving Government facilities or personnel.

It was DOT practice to set a third-party liability requirement based on maximum

probable loss while considering the insurance available on the world market.17

The Commercial Space Launch Act Amendments of 1988 (Public Law 100-657)

November 15, 1988.18

The Act was amended in 1988 to mandate that insurance (or other demonstration of

financial responsibility) to compensate third-party liability claims be of a sufficient

amount to compensate maximum probable loss (as would be determined by the

Secretary for each license) for claims resulting from activities carried out under a

license in connection with any particular launch. Liability insurance could not be

required in excess of the lesser of $500 million or the maximum liability insurance

available on the world market at a reasonable cost. Furthermore, the licensee (or

transferee) would be required to obtain insurance (or otherwise demonstrate financial

responsibility) to compensate maximum probable loss from claims against 
 "Commercial Space Launch Act Amendments of 1988," Report 100-639, 100th Congress 2nd 19

Session, May 19, 1988.

 "Commercial Space Launch Act Amendments of 1988," Report of the Senate Committee on 20

Commerce, Science, and Transportation on H.R. 4399, Report 100-593, October 7, 1988.

10

any person by the U.S. for loss of or damage to U.S. property resulting from licensed

activities, but not in excess of the lesser of $100 million or the maximum liability

insurance available on the world market at a reasonable cost.

In addition, the Amendments stated that to the extent that payment of claims is either

provided for in advance in appropriations Acts or by additional legislative authority,

subject to approval of a compensation plan, the Secretary shall provide for the

payment of successful third-party liability claims against the licensee or transferee (or

its contractors, subcontractors, or customers, or the contractors or subcontractors of

such customers) to the extent that the aggregate of such claims arising out of a

particular launch exceeds the required amount of insurance (or demonstrated

financial responsibility) and is not in excess of $1,500,000,000 (adjusted for inflation)

above such amount, except for those third-party damages that result from the willful

misconduct by the licensee or transferee.

The Amendments also added the interparty waiver of claims provisions whereby "the

Secretary, on behalf of the United States, its agencies involved in launch services,

and contractors and subcontractors involved in launch services, shall enter into

reciprocal waivers of claims with the licensee or transferee, its contractors,

subcontractors, and customers, and the contractors and subcontractors of such

customers, involved in launch services, under which each party to each such waiver

agrees to be responsible for any property damage or loss it sustains or for any

personal injury to, death of, or property damage or loss sustained by its own

employees resulting from activities carried out under the license" to the extent that

claims exceed the required amount of insurance or demonstration of financial

responsibility.

Provisions also require the licensee or transferee to make a reciprocal waiver of

claims with its contractors, subcontractors, and customers, and contractors and

subcontractors of the customers, involved in launch services under which 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.

Congress' Intentions behind the Financial Responsibility Requirements of the

Commercial Space Launch Act Amendments:

According to the House and Senate reports accompanying H.R. 4399 issued in 19 20

association with the 1988 Amendments, the amendments concerning financial

responsibility requirements supported government policies to:

recognize the commercial space launch industry as an essential component of

the nation's efforts to assure access to space for government and commercial

users;

regulate launches and services to protect the public health and safety of property

and national security and foreign policy interests of the U.S. (Commercial Space
11

Significant Administration and Legislative Actions

May 1983 - In the National Security Decision Directive 94, the President

announced Government support for facilitating and encouraging commercial

launch activities of ELV's by the private sector.

November 1983 the Department of Transportation was designated as the lead

agency for commercial launch activities.

February 1984 - Executive Order 12465 was signed directing DOT to act as the

focal point within the Federal Government for private sector launch contracts.

October 1984 - The Commercial Space Launch Act (Public Law 99-575) was

signed into law.

Summer of 1986 - National Security Decision Directive 254 stated that

commercial and foreign payloads no longer would be launched by the shuttle.

September 15 and 17, 1987, the Subcommittee on Space Science and

Applications held hearings on the state of the commercial launch industry. 

Testimony received during the hearings led to the drafting and introduction on

December 15, 1987 of H.R. 3765 (the predecessor to H.R. 4399).

February 16 and 17, 1988 - a second set of hearings focusing on H.R. 3765 was

conducted by the Subcommittee on Space Science and Applications.

April 14, 1988 the Subcommittee marked up H.R. 3765 during which a refined

text incorporating comments received from the Administration and industry

witnesses was adopted. 

April 18, 1988 - a clean bill, H.R. 4399 was introduced incorporating the

amendments adopted by the Subcommittee.

April 21, 1988 - H.R. 4399 was thereupon approved by the full Committee on

Science, Space and Technology and ordered reported.

May 13, 1988 Senate bill 2395, "The Commercial Space Launch Act

Amendments of 1988" were introduced as a companion measure to H.R. 4399.

May 17, 1988 the Senate Science, Technology and Space Subcommittee held a

hearing to obtain testimony on both House and Senate legislation.

May 24, 1988 - H.R.4399 passed the House under a suspension of the rules by

the House.

September 20, 1988 - the Senate Committee ordered reported with

amendments in the nature of a substitute, H.R. 4399. The language of the

substitute is that of S. 2395 with some amendments agreed to by the

Committee.

October 7, 1988 - Full Senate Committee reported (Senate report 100-593) it

out with recommended changes.

October 14, 1988 - Laid before the Senate, H.R. 4399 passed with changes.

October 21, 1988 - House agreed to Senate amendments.

Nov. 15, 1988 - Amendments signed into law (Public Law 100-657)

Launch Act of 1984) and allow the Nation to fulfill its obligations under

international treaties;

limit liability of commercial launch operators for damage to Government property

resulting from a commercial launch accident to the level of insurance required by

DOT (President's Commercial Space Initiative of February 11, 1988).
 Arianespace required liability insurance of 400 million French francs, or $63 million at the time, with 21

full indemnification above that level and did not require launch property insurance.

 "Commercial Space Launch Act Amendments of 1988," Report 100-639, 100th Congress 2nd 22

Session, May 19, 1988.

 "Commercial Space Launch Act Amendments of 1988," Report of the Senate Committee on 23

Commerce, Science, and Transportation on H.R. 4399, Report 100-593, October 7, 1988.

12

The burden that the launch industry faced, of exposure to unknown risks of a launch

accident, especially given that the policy at the time required the industry to assume all

risks, and the uncertainty of insurance availability, was viewed as an intolerable risk that

posed "a major threat to the emergence of an internationally competitive launch industry"

and was therefore in contradiction to government policies to foster the development of

the commercial launch industry. In light of foreign competition, where foreign

government supports of national launch providers included charging less than full cost or

not at all for insurance, the Senate report stated that it was compelled to address launch

property and liability issues associated with implementation of the Commercial Space

Launch Act. Foreign launch providers, like Arianespace, allocated risk between the 21

provider and the customer. It was hoped that the bill would provide an adequate risksharing arrangement between industry and Government to enable the emerging launch

industry to better compete with foreign launch providers.

Also the method of determining property and liability insurance requirements based on

maximum probable loss that could result from the launch activities to be licensed,

allowed individual risk determinations to be made on the basis of launch vehicle size and

type; launch site and trajectory; and payload characteristics. This would be consistent

with the CSLA's declaration that the public health and safety, safety of property and

national security and foreign policy interests of the U.S. be protected.

Rationale Behind the Statutory Ceilings:

The statutory ceilings of $500,000,000 (or the maximum amount available on the market

at a reasonable cost) represented "the upper limits of liability insurance capacity available

in the market today" according to the House Committee on Science, Space and

Technology report accompanying the Commercial Space Launch Act Amendments of 22

1988 (at the time estimates of launch liability insurance ranged from $300 - $500 million

per launch and it was noted that no launch accident had resulted in successful third-party

liability claims). In the event that insurance capacity was insufficient to cover the

maximum probable loss, the Committee would consider that a "severe" situation existed

and directed the Secretary of Transportation to report such an event to the relevant

House and Senate Committees.

The Senate Committee on Commerce, Science and Transportation also noted in its

report on the Commercial Space Launch Act Amendments of 1988, that NASA required 23

$500 million in liability insurance for a payload on the shuttle (and $750 million for

multiple payloads). The Senate Committee also pointed out that liability insurance in the

amount of $500 million is routinely available to airlines and that there had never been an

incident resulting in claims in excess of $500 million. Therefore given no "precise

methodology available to assess risks in ELV operations, a limitation must be established

that reflects analogous experience in other industries and practical considerations in the

world insurance markets." The Committee concluded that "$500 million is a reasonable
 Based on conversations with representatives of the insurance industry familiar with third-party and 24

government property insurance for licensed activities. 

 Based on conversations with representatives of the insurance industry. 25

13

initial limitation on the total amount of liability insurance that might be required," but that

this might be increased as the world insurance market grows.

The statutory ceiling of $100,000,000 for damage to government property was viewed by

the House Committee as more than adequate based on its review of historical damage to

government ranges resulting from launch failures. The 1986 failure of a Titan 34D at

Vandenberg Air Force Base caused $58.1 million in damages and closed the launch pad

for 9 months. The Senate Committee noted that although the Air Force testified that

damage to government property could reach $300 million, they also received testimony

that property insurance to protect government facilities would not likely be available in

excess of $120 million because it had never been required before as a condition of

launch. The Committee concluded that $100 million would protect the government from

the most probable losses that might occur and was an amount that the world insurance

markets could provide at a reasonable rate.

Current Status of the Insurance Industry - Rates and Availability:

24

Capacity to insure for $500 million per launch for third-party liability insurance should be

readily available and some mention has even been made of up to $1 billion of capacity

being available. Rates of under 1% of the value of insurance were cited. The following 25

is a summary of insurance rates.

Insurance Level Cost

$300M - $500M $175K - $400K

$500M - $750M $400K - $550K

$750M - $1B $500K - $750K
 H.R. 2200 In the Senate of the U.S., 103rd Congress, 1st Session, August 2, 1993. 26

 H.R. 4489 In the Senate of the U.S., 103rd Congress, 2nd Session, August 9, 1994. 27

 1993 Legislation that never passed but reflects the thoughts of the 103rd Congress (House). 28

14

The larger launch companies usually cover the government facilities under their general

property insurance for which they are charged annually. Smaller companies like Orbital

Sciences, EER, and Lockheed usually include government property insurance with their

third-party liability coverage. For instance there might be a policy covering a launch on a

smaller vehicle for $100 million third-party liability and $20 million government property

and the total cost might be $50,000 to $75,000. Overall the space insurance market has

become strong and agile in spite of losses.

An insurance industry source indicated that about $300 million - $400 million liability

coverage per launch is expected to be available for reentry vehicles at a cost of about

.075% of the value of the policy. Other insurance industry sources thought the same

capacity and rates might be available for reentry as is available for launch (liability

insurance). Another broker estimated the cost to cover liability during LEO and the

reentry phase of the proposed COMET at $50K-$75K for $25 million.

Legislative Initiatives Pertaining to Reentry Vehicles:

Amendments to the Commercial Space Launch Act were proposed by the House in H.R.

2200 (National Aeronautics and Space Administration Authorization Act, Fiscal Years

1994 and 1995) and in H.R. 4489 (National Aeronautics and Space Administration

Authorization and Space Policy Act, Fiscal Year 1995). H.R. 2200 passed the House on

July 29, 1993. H.R. 4489 passed the House on August 8, 1994, and an amended

version passed the Senate on October 5, 1994. These initiatives were not passed by

Congress for reasons not related to the proposed amendments to the Commercial Space

Launch Act. These proposed amendments defined reenter, reentry and reentry vehicle,

clarified the definition of launch and would give the Secretary the same authority with

regard to regulation and licensing of reentry and reentry vehicles as the existing law

gives the Secretary with regard to launches and launch vehicles. (Amendments 26,27

covering similar changes with respect to reentry operations of reentry vehicles are

currently being proposed to Congress for consideration by DOT.)

A review of Congressional language associated with licensing launches and reentry

vehicles from these bills, the associated reports and earlier proposed legislation reveals 28

the intentions of 103rd Congress. When the Commercial Space Launch Act was passed

(1984) and amended (1988), Congress did not consider commercial space activities

using reentry vehicles that returned to Earth from orbit. It has since become apparent to

Congress that commercial reentry services may emerge in the future and therefore an

appropriate regulatory and licensing framework needs to be established. Also, in light of

potential commercial reentry services, the definition of the term "launch" needs to be

clarified, as does the extent to which activities before reentry must be regulated or

licensed and the applicability of the third-party liability provisions of the Act to reentry

activities.

The proposed amendments would have clarified many of these issues by including

reentry as a licensable activity that must conform to certain requirements (including
 Letter to Al Gore from Federico Peña regarding OCST. 29

 Public Law 98-575, 98th Congress, (The Commercial Space Launch Act) October 30, 1984. 30

 1993 Legislation that never passed but reflects the thoughts of the 103rd Congress (House). 31

 NASA Authorization Act, Fiscal Years 1995, and 1996, Report 103-654, 103rd Congress, 2nd 32

Session, August 3, 1994.

 NASA Authorization Act, Fiscal Years 1995, and 1996, Report 103-654, 103rd Congress, 2nd 33

Session, August 3, 1994.

15

payload compliance and financial responsibility), as must launches; by adding definitions

concerning reentry, and by clarifying the definition of launch.

For the most part, these amendments insert the terms "reentry vehicles" after "launch

vehicles"; "reentry" after "launch" and define terms such as : 25,26,29

reenter or reentry - "to return purposefully, or attempt to return, a reentry vehicle

and payload, if any, from Earth orbit or outer space to Earth;"

reentry vehicle - "any vehicle designed to return from Earth orbit or outer space

to Earth substantially intact."

The Committee intended to clarify the definition of launch (which is defined in the Act as 30

"to place, or attempt to place, a launch vehicle and payload, if any, in a suborbital

trajectory, in Earth orbit in outer space, or otherwise in outer space") by adding the

phrase "from Earth" after "and any payload" so there was no doubt that launches take

place from Earth and not from Earth orbit. This stemmed from concern that DOT would

license reentries as though they were a launch by maintaining that the placing of a

vehicle in a suborbital trajectory "from Earth orbit" might be included under the definition

of launch.31

The Committee intended commercial suborbital launches to continue to be licensed as

launches and not as launches and reentries. For this reason the definitions of reentry

and reentry vehicle only included "the return to Earth from Earth orbit or from outer

space" and specifically excluded return from suborbital trajectories. 

32

The Committee intended the term "reentry" to consist of the "discrete phase of the overall

space mission during which the reentry vehicle is intentionally reentered." That is, the

Committee intended that reentry would begin when the vehicle is prepared specifically for

reentry, though this may vary slightly from vehicle system to vehicle system (such as

when the reentry vehicle's attitude is oriented for the propulsion firing that places the

vehicle on a reentry trajectory). The Committee also indicated that pre-reentry

procedures, such as when an applicant for a license demonstrates capability to safely

carry out reentry and the Department examines the applicant's procedures and activities

preceding initiation of reentry, do not require a license.33

For launches, given different preparatory processes associated with individual launch

vehicle systems, the Committee recognized that it may be difficult to pinpoint the same

commencement of launch for all proposals, but was concerned about DOT's attempt to
 Unless there is a clear causal nexus between the loss and the behavior of the launch or reentry 34

vehicle.

16

use a license to cover indiscriminately all activities of a licensee at a launch facility "from

the gate" (before, during and after a launch).

Also the Committee intended, that the Secretary have no authority to regulate or license

activities such as maneuvers between two Earth orbits or other non-reentry operations in

Earth orbit, that take place between the end of the launch phase and the beginning of the

reentry phase, or after the end of the launch phase in the case of missions that don't

include a reentry vehicle. However, just as in the launch of an ELV from earth, where

certain pre launch activities are critical to the public health and safety of the launch event,

DOT intends to consider certain on-orbit preparatory activities and the effect they have

on the safety of the licensed reentry because of the importance to the safety of the

reentry event. 

Proposed amendments to other sections of the Act would give the Secretary the same

authorities with respect to regulation and licensing of reentry of reentry vehicles as

existing law gives the Secretary with regard to launches of launch vehicles. With regard

to payloads, the proposed amendments to Section 70104 would provide that the

Secretary only regulate payloads of reentry vehicles to the extent that they affect the

safety of the reentry, as the Secretary may only regulate the payloads of launch vehicles

to the extent that the payloads affect the safety of the launch.

Sections 70112 and 70113 (in 49 U.S.C., Chapter 701) which concerns the financial

responsibility requirement and allocation of risk would be amended to cover reentry in the

same way launches are covered and would not apply to activities before launch, between

launch and reentry, or after reentry, which is consistent with the current handling of the

launch alone, whereby once the launch is completed there is no liability protection for the

launch under the Act.34

4. Methodology for Setting Financial Responsibility

Requirements

The methodology for setting financial responsibility requirements for commercial launch

activities was developed to protect launch participants from maximum probable loss due

to claims by third-parties and loss of government property exposed to potential damage

or loss during commercial launch activities. The goals were to provide protection against

such losses that might occur from the launch activities, establish conditions that make it

very unlikely that the government would be called upon to augment the financial

requirements imposed by the government upon industry, and to provide financial

responsibility requirements upon industry that are not unreasonable and within which

industry can comfortably operate.

These goals were achieved for the commercial launch activities through OCST's

implementation of legislation (the Commercial Space Launch Act of 1984, as Amended in

1988). The 1988 Amendments to the Act replaced very general insurance requirements

with a financial responsibility and allocation of risk regime for commercial space
 Prior to the passage of the Amendments in 1988, OCST had already determined that insurance 35

requirements should appropriately reflect the risk involved in the operation and the licenses issued by

OCST prior to the Amendments set requirements based on the ability to cover all but the most unlikely

losses.

 "Threshold probability" represents a specified probability (likelihood) that includes the possibility of 36

all but the most improbable (unlikely) events among all possible events. The threshold probability is a

quantitative measure selected by DOT as representing the probability of occurrence associated with

"unlikely" events or levels of damage due to launch activities. For example, there may be only on the

order of a 1 in 100,000 chance (threshold probability) that losses will exceed $10 Million.

 Maximum Probable Loss: Assessment of Conservatism, Prepared by Princeton Synergetics, Inc. 37

for DOT's Office of Commercial Space Transportation, April 29, 1991.

 Because of the stringent safety requirements used at Government ranges, launch exposure to the 38

public is typically limited to less than 1 in a million. Therefore, the likelihood for significant 3rd party

losses is below 10 . By their nature, launch facilities are routinely exposed to hazardous activities and -6

the expectation that such facilities will suffer some damage is higher. Also such facilities are not covered

at all for government conducted launches. Therefore, a threshold probability on the order of 1 in 100,000

(10 ) is considered appropriate for government property. -5

17

transportation activities at federal and other facilities. These requirements 35

encompassed financial responsibility to cover both damage to government facilities and

third-parties (persons and property) resulting from the licensed activities. The insurance

requirements were to be based upon: the determination of maximum probable loss (MPL)

(the maximum magnitude of loss such that there is less than a specified probability,

referred to as the threshold probability, of losses exceeding this level); consideration of 36

the maximum available insurance at reasonable prices; and the maximum insurance

required as stated in the enabling legislation. A typical relationship between MPL,

required insurance (based upon MPL), maximum available insurance at reasonable

prices, and maximum insurance requirements and maximum level of government

payment of excess 3rd party claims (i.e., so-called indemnification) are illustrated in

Figures 1 and 2. The relative position of these are determined by many factors including

the characteristics of the launch vehicle, mission, launch facility and range, and the host

of market factors that affect insurance availability and price.

Figure 1 illustrates the probability of government facility damage as a function of the level

of damage. This probability distribution indicates the chance that different levels of

damage will result to the government launch facilities from a licensed activity. This

probability distribution is conceptual (i.e., insufficient data are available to establish the

specific shape for each launch vehicle) and is presented only to serve as the basis for

illustrating general concepts. The damage probability distribution is independent of MPL,

threshold probability, required level of insurance, etc. and is a function of many factors

relating to the specific activity (e.g., characteristics of the launch vehicle, mission, and

launch facility and range). The calculation of the maximum probable loss establishes the

level of damage that, on average, will be exceeded with a stated probability. This level of

probability, or risk, is referred to as the "threshold probability." The threshold probability

was conservatively selected by DOT as 10 for government property damage and 10 37 -5 -7

for third-party damage and is illustrated as the cross-hatched area to the right of the MPL

level of damage. The threshold probability represents the level of risk, i.e., the chance 38
 Gress, R.K., "Derivation of Maximum Probable Losses for Commercial Launch Operations," DOT's 39

Office of Commercial Space Transportation.

 Maximum Probable Loss: Rationale and Supporting Information, Prepared by Princeton 40

Synergetics, Inc. for DOT's Office of Commercial Space Transportation, April 29, 1991.

 It is possible that MPL and required insurance levels may differ and are illustrated in this manner in 41

Figures 1 and 2. Under normal circumstances it is anticipated that the MPL and required insurance levels

will be the same.

 In the case of the licensee, "cost" is used to refer to the licensee's uninsured liability exposure. For 42

government property, the "cost" refers to the government's exposure to loss without benefit of insurance

protection. 

18

that damage will occur that is in excess of the computed MPL (discussed in following 39,40

paragraphs), that has been chosen as being acceptable.

Still referring to Figure 1, a required level of insurance is established that is based upon

the MPL but less than the maximum available insurance at a reasonable price as

established by the Secretary of Transportation. At no time can the amount of insurance

exceed the maximum amount as stipulated in the enabling legislation (i.e., for

government property - $100,000,000). It should be noted that setting the required level

of insurance in excess of the computed MPL is tantamount to changing the acceptable

threshold probability.41

In a similar manner, the probability distribution of third-party damage is illustrated in

Figure 2. The relationship between MPL, required level of insurance (based upon MPL),

maximum available insurance at a reasonable price, and the limit placed upon maximum

insurance required by the enabling legislation ($500,000,000) is illustrated. In addition,

the maximum level of government indemnification ($1,500,000,000 above the insurance

requirement) is also indicated. Figures 3 and 4 illustrate the general framework of the

payouts and level of risk associated with (assumed by) insurers, providers of launch

services and the government for government property and third-party damage,

respectively.

Figure 3 disaggregates the probability of government facility damage into probability

distributions of costs (e.g., claims, but not including payment of premiums) from the

points of view of the licensee, the insurance company and the government. (Note: This

is not intended to be a legal argument on how costs would be allocated.) Figure 3A is a

restatement of the probability distribution of level of damage as indicated in Figure 1. 

Figure 3B illustrates the probability distribution of insurance company payout. This

probability distribution is truncated at the level of required insurance. This is equivalent

to the point where the probability of all events occurring with losses in excess of the

required amount is equal to the threshold probability (i.e., if a loss occurs in excess of the

required level of insurance, the insurance company payout will be equal to the level of

required insurance). 

Figure 3C illustrates the probability distribution of licensee's cost42 that may result from

damage to government facilities. Since the licensee is held harmless, through a waiver

of claims agreement, by the government for facility damage in excess of the level of

required insurance, there is no chance that the licensee will incur a cost that results from

the damage. Since there is a chance, albeit very small (i.e., the threshold probability),

that damage will exceed the level of required insurance, the government is also at risk. 
19

The probability distribution of government cost is illustrated conceptually in Figure 3D

where there is a high probability that the government will incur no cost (i.e., 1 - threshold

probability) and a very small chance of incurring costs above the insurance level.

Figure 4 disaggregates the probability of level of third-party damage into probability

distributions of cost from the points of view of the licensee, the insurance industry and

the government. Figure 4A is a restatement of the probability distribution of level of thirdparty damage as indicated in Figure 2, Figure 4B illustrates the probability distribution of

insurance company payout. This probability distribution is truncated at the level of

required insurance with this occurring with a probability equal to the threshold probability

(i.e., if a loss occurs in excess of the required level of insurance, the insurance company

payout will be equal to the level of required insurance).

Figure 4C illustrates the probability distribution of licensee's cost that may result from

third-party damage. Since the licensee is covered by insurance up to the required level

of insurance and the government then indemnifies, subject to an appropriation Act of

Congress, (in actuality, for losses in excess of the MPL value, the government will make

payment if appropriations are available) to a maximum level of $1.5 Billion above this,

only claims in excess of the government's level will be passed on to the licensee. The

probability that the licensee will incur a cost is extremely small and unknown and likely to

be significantly less than the threshold probability. Since there is a chance, albeit very

small (i.e., the threshold probability), that damage will exceed the level of required

insurance, the government is also at risk. The probability distribution of government cost

is illustrated in Figure 4D where there is a high probability that the government will incur

no cost (i.e., 1 - threshold probability) and a very small chance of incurring costs above

the insured level but not exceeding the indemnification level.
20
 Details of the methodology can be found in the following references: 43

Maximum Probable Loss: Rationale and Supporting Information, prepared by Princeton

Synergetics, Inc. for DOT's Office of Commercial Space Transportation, April 29, 1991.

Guidelines for Determining Maximum Probable Loss, prepared by Princeton Synergetics, Inc.

for DOT's Office of Commercial Space Transportation, April 29, 1991.

Gress, R.K., "Derivation of Maximum Probable Losses for Commercial Launch Operations,"

DOT, Office of Commercial Space Transportation, February 1991.

21

Given DOT's premise that insurance requirements should be based on the risks, there

are a number of different approaches that can be used to determine the insurance

coverage necessary to ensure that losses in excess of that dollar amount are likely to

occur with a probability equal to or less than the threshold probability. Because thirdparty losses are extremely rare events, there is not really a preferred approach. The

specific approach depends on the data available and the complexity of the specific

mission and OCST tries to use the most efficient approach without being unduly

conservative (i.e., an insurance requirement that greatly exceeds the true dollar value

associated with the threshold probability). Some of these approaches are briefly

described in the following paragraphs: (Much of the descriptive material that follows 43

has been abstracted from the referenced paper by R.K. Gress.)

Maximum probable loss is the maximum magnitude of loss at which there is less than a

specified probability (i.e., the threshold probability) of exceeding this level. Exposure of

government property during launch support and launch activities is routinely accepted by

the government launch range as part of doing business. In determining the maximum

probable loss for government property, focus of evaluation is on those highest cost

facilities exposed at or just below the threshold level. The replacement costs of each

facility are listed in descending order and the individual probabilities of loss accumulated

until the probability threshold level (i.e., 10 ) is reached. The facility loss at this level is -5

determined to be the maximum probable loss. Losses of lesser amounts, no matter what

their likelihood of occurrence, will be covered and the likelihood of losses exceeding the

MPL level is the threshold probability. Given a commercial launch rate of 10 per year,

the losses are expected to exceed the maximum probable loss on the average

somewhere between once every 1,000 and 10,000 years. This is a very conservative

interpretation of the concept of maximum probable loss.

In looking at the fatalities that might occur, various forms of the following equation are

often used for expected casualties:

Ec = Pi * LA * Pd

where P is the probability of impact in a specific area, i

LA is the lethal area of the impacting debris, and

P is the population density. d

Given the correct inputs (for example, areas containing different population density and

different probability of impact must be considered separately with results being additive),

the approach provides a fairly reasonable estimation of the "expected number" of

casualties. To obtain conservative results, the highest population density region may be

used for the entire exposed region. (It should be noted that this approximation requires

some care since in theory it can lead to unrealistically high insurance requirements with

accompanying higher insurance costs with little or no added value.) When the

complexity of the operation requires more detailed analyses, complex simulation models
 Such approaches require more data to be submitted by the applicant and collected from the range 44

and the analysis is considerably more time consuming. Some models provide expected loss estimates

while others directly provide probabilities of specific losses (e.g., the probability of a facility suffering a

50% loss).

22

are used which reflect the flight dynamics of the vehicle in question, failure probabilities

and modes over the flight profiles and the vehicle's debris characteristics.44

Expected (average) loss, however, does not directly provide the information necessary to

determine the probability of a particular loss level being exceeded. However,

conservative estimates of the likelihoods of different numbers of fatalities can be derived

from the expected loss using the definition of expected value,

 n=

Ec = n * Pn

 n=1

where P is the probability of n casualties occurring. Conservative estimates of the upper n

bounds of probabilities of an event or range of events (e.g., 3 casualties) can be made

by assuming the probability of all other events are zero (zero values in other terms only

serves to increase the probability term in question). By doing this each set of events

(e.g., 1, 2, 3, .... casualties), the resultant estimated probabilities for each is greater than

would be the case given some non-zero probability of each event occurring.

In developing the maximum probable loss values for launch support activities, the

information about the hazardous activities that are performed, the policies and

procedures followed, and the number of personnel and facilities (including replacement

costs) that will be exposed are considered. For example, on government ranges, the

siting of facilities is based on a quantity/distance relationship to ensure that a pre-launch

accident in one facility will not affect another. There are various policies in place that

correct past deficiencies and limitations on the number of people that may be present

during the performance of certain hazardous activities.

Estimates of the likelihood of major accidents occurring during various phases of

pre-launch activities have been made by range safety experts. These estimates are

based on their years of experience and the refinement over the years of the policies and

procedures in response to accidents or near accidents that have occurred.

For the flight of a launch vehicle, a more complex analytic approach is used to derive

maximum probable losses for third-parties and government property. An approach is to

use a failure event tree like that indicated in Figure 5. Over the years safety systems and

procedures have been developed which assume that every vehicle launched is going to

fail. For these reasons, systems like the flight termination system (FTS), the purpose of

which is to stop a vehicle before it or its debris could reach a populated area, are

designed and acceptance tested to have very high reliabilities (failure rates on the order

of 10 or less). In performing the analyses for maximum probable loss, the reliability -3

figure used for the FTS is the lesser of the historically demonstrated reliability and the

design requirement. The failure event tree is used to estimate the probability of each of

the possible outcomes and the consequences of each of the outcomes is then estimated.
23
 In part because of the risk aversion attitudes of the U.S. space transportation industry and in part 45

because Ariane provided indemnification. This latter fact, though of probably minor financial importance,

was considered to have an effect on the international competitiveness of the U.S. space transportation

industry.

24

In summary, several different approaches may be appropriate for the determination of

MPL requirements with the selected approach dependant upon the circumstances

involved. In general, as uncertainty increases and/or the stakes get higher, the more

rigorous techniques (as described above) apply that employ formal methods, procedures

and models. The approach used may depend on the information available, the sensitivity

of the situation (e.g., one or more very high valued facilities that might be exposed or

affect MPL amounts, highly concentrated population centers versus low density widely

distributed population, etc.) and may employ a range of analytic techniques that include

complex models and data analysis or direct approaches that rely more upon judgement,

experience and estimation (e.g., if one or more facilities are exposed and it is obvious

that they each are exposed to risks that exceed the threshold probability, then it is

appropriate to just select the largest loss as being the value of MPL if the loss of each is

independent of the others). The overall objective is to identify the largest loss that could

occur within a reasonably remote likelihood (the threshold probability) and to accomplish

this in a conservative manner (i.e., when assumptions or estimates are made,

conservatism is the rule) by utilizing the tools and techniques that are appropriate for

analyzing the specific situation at hand. 

5. Appropriateness of Statutory Measures and

MPL Methodology for Reentries

For launch operations, the schema illustrated in Figures 1 and 2 together with the 

selected ceilings identified in the statute, the amounts of third-party and property damage

anticipated at the selected threshold levels, and the availability of reasonably priced

insurance, have achieved the goals of:

protecting through insurance the launch participants and the government against

large losses and potentially unlimited liability risks that might result from the

launch activities,

establishing conditions that make it very unlikely that the government would be

called upon to augment the financial responsibility requirements imposed by the

DOT upon industry, and

imposing financial responsibility requirements upon industry that are not onerous

and within which industry can comfortably operate and yet provide adequate

protection for the launch participants and government interests.

It is assumed that the same basic goals will apply for establishing financial responsibility

associated with reentry operations. However, one might question the importance of the

third goal with respect to reentry operations. The implementation of these goals for

launch operations included the "so-called" indemnification provisions. This was judged to

be important to ensure that there would continue to be a commercial space 45

transportation industry in the U.S. Assured access to space was deemed to be

extremely important; important enough to single out the industry to qualify for the

indemnification provisions of the Act. The questions is whether reentry operations can

be held to be as important to the Nation as is access to space. Yet when considering the
 The report entitled "Maximum Probable Loss Reentry and Recovery Activities Involving Commercial 46

Experiment Transporter (Comet)," (Application No. 91-SII-031) DOT Office of Commercial Space

Transportation, June 1994, has been used as a starting point to create a more general model that will be

applicable for assessing a broad range of reentry opportunities.

25

scope of future reentry operations, which extend well beyond activities such as COMET

to include commercial Single-Stage-To-Orbit (SSTO) reusable vehicles, such initiatives

would certainly be developed more eagerly with the so-called indemnification. Even for

reentry activities like COMET, the same "bet the company" rationale underlying the 1988

amendments still applies. 

With the general background provided in the previous pages and given that insurance

requirements should consider the risk of the activity, the appropriateness of the

overall schema (including the use of MPL),

specific selected threshold probabilities,

specific levels of government indemnification; and 

specifics of the MPL computations

are considered for the setting of insurance requirements for reentry operations.

Figure 6 illustrates the general risks associated with reentry operations. It is assumed

that licensed reentry operations cannot be initiated unless a satellite has been

successfully placed into orbit. It is assumed that this satellite (sometimes referred to as 46

a reentry vehicle system when a portion of the satellite is designed for reentry) consists

of a service module and a recovery system which contain a payload (P/L). The reentry

vehicle system will remain in low Earth orbit for an extended period of time. At a desired

point in time, ground personnel will cause the recovery system to separate from the

service module. In carrying out these ground commands, the service module will point

the recovery system in a selected inertially fixed attitude and may then spin the recovery

system and release it with a very low relative velocity. A retro-motor will fire one or more

times causing the reentry vehicle to be placed on a trajectory for its return to Earth. The

service module will remain in orbit, continuing possibly to support other activities. The

service module, while it remains in orbit, will be exposed to, and will expose other orbiting

objects and property and third-parties to, the same risks encountered and caused by

other satellites.

When a reentry vehicle system does not function properly and controlled reentry cannot

be initiated, an uncontrolled reentry will eventually occur as the result of normal orbital

decay. Under these circumstances there may be, however, a difference between the

risks caused by the reentry vehicle system and those created by a normal satellite or

vehicle stage reentry (due to orbit decay over time). Major portions, if not all, of other

satellites normally burn-up during uncontrolled reentry. Since a portion of the reentry

vehicle system is designed to survive reentry, the risks to property and third-parties on 

Earth may differ from those encountered from other satellite and vehicle stage reentries. 
 Current launch insurance required of commercial launch operators does not cover, for example, 47

normal decayed reentry of satellites. The U.S. Government is, therefore, exposed to risks resulting from

its space object (reentry vehicle), which designed to survive reentry. 

 This is analogous to the use of the flight termination system during launch to limit possible damage 48

from a failed flight.

26

The actual risk levels greatly depend on the size and content (e.g., hazardous

substances such as propellants) of the objects that survive to impact the earth's surface. 

Sinc

e uncontrolled satellite reentry occurs and is not regulated, even in the case where it is

unlikely that the entire satellite will burn-up prior to impact, the uncontrolled reentry of a

reentry vehicle situation is outside the scope of the setting of financial responsibility for

reentry vehicle operators. 

47

It is assumed that, in general, procedures will be initiated such that a reentry will not be

attempted unless there is at least a predetermined expectation (i.e., probability) that the

recovery system will land within a designated target area. If this criteria is not met 48
 Specific tools used to estimate the likelihood of occurrence of events and their consequences 49

depend on the data that is available and the unique circumstances of the particular situation. Therefore,

there is no fixed detailed procedure for basing insurance requirements on risk. Given that the

requirements should reflect the risk levels, what does remain to be determined (i.e., is an option), is what

level of risk is to be covered by insurance and what risk exposure is to remain.

 Hazard Analysis of Commercial Space Transportation (Volume 3), prepared by Transportation 50

Systems Center for DOT's Office of Commercial Space Transportation, May 1988.

27

reentry operations will not be attempted and the reentry vehicle system will remain in

orbit (i.e., it will remain a satellite).

Appropriateness of the MPL Methodology:

The Maximum Probable Loss (MPL) Methodology is based upon a risk analysis

framework. Risk analysis is the technical process and procedures for identifying,

characterizing, quantifying and evaluating hazards. This analysis process is widely used

in industry and federal agencies to support regulatory and resource allocation decisions. 

The analysis of risk, also called risk assessment, consists of a qualitative step of hazard

identification, characterization and ranking; and a quantitative risk evaluation entailing

estimation of the occurrence probabilities and the consequences of hazardous events,

including catastrophic events. Following the quantification of risk, appropriate risk 49

management options can be devised and considered, risk/benefit or cost analysis may

be undertaken and risk management policies may be formulated and implemented. The

main goals of risk management are to prevent the occurrence of accidents by reducing

the probability of their occurrence (e.g., practice risk avoidance), to reduce the impacts of

uncontrollable accidents (e.g., prepare and adopt emergency responses) and to transfer

risk (e.g., via insurance coverage and the establishment of financial responsibility

requirements). Most personnel safety and operational/handling precautions and

requirements at hazardous facilities are intended to prevent, reduce the frequency or

probability of occurrence of hazardous events and to minimize their potential impacts.

For reentry operations, specific safety criteria can be adopted and implemented during

the payload determination approval process (i.e., approval will not be granted unless it is

demonstrated that the safety criteria can be met). These criteria could be aimed at

reducing the probability of government property and third-party loss to acceptable levels -

small compared to the general background involuntary risks that are tolerated. Such 50

criteria could include, for example, specifying the probability that the reentry vehicle will

not land outside of the designated landing site (i.e., accuracy), and stipulate that the

reentry operation shall not create additional risks to the population higher than the normal

background risks (10 per year). Additionally, coordination could be maintained to -6

reduce, below specified levels, the probability during initiated reentry operations of

impacting orbiting vehicles and aircraft.

Both normal operations and unforeseen conditions can lead to accidents which cannot be

prevented or controlled. In such cases, the residual risk must be accepted and managed

by preparing emergency response procedures to lessen the consequences of such

accidents and the setting of financial responsibility requirements so as to ensure that

compensation is available should an accident occur. Risk management, in a regulatory

context, requires the evaluation of the impact and effectiveness of safety standards and

regulations to impose additional controls or relax existing ones.
28

As noted above, risk analysis is concerned with the identification of possible hazardous

events, the probability of occurrence, and the level of the likely consequences. The

setting of maximum probable loss utilizes this information together with the threshold

probability (i.e., what is "probable") to establish the appropriate level of financial

responsibility so that government property and third-party losses are adequately covered

by insurance should a hazardous event actually occur. The magnitude of the coverage

or compensation must be based upon the probable loss to be sustained and not the

expected (average) value of the loss per mission. This is specifically the role of the MPL

methodology which establishes the maximum probable loss that defines the required

level of insurance coverage.

The MPL general methodology described in the previous paragraphs and employed for

the setting of financial responsibility associated with launch operations is appropriate for

use in setting financial responsibility for reentry operations. The risk based methodology

aims to establish the maximum loss that is expected to occur at any threshold probability

level. This is the essence of what must be done to support a financial responsibility

scheme which is based on risk exposure which is fair and consistent in its application to

the industry. [The appropriateness of the threshold levels for reentry operations will be

addressed below.] As would be expected, there will be certain differences in the specific

methodology for estimating risk for reentry operations compared to launch operations. 

These differences appear to be minor because the "end product" (i.e., the distribution of

consequences and likelihoods described in Figure 2) are basically the same. For

example, the types and significance of failure modes are different and may require, in

part, different modelling techniques (e.g., for a ballistic reentry vehicle, the aerodynamic

stability may need to be modelled in detail because of its affect on landing dispersion) to

produce the estimated risk levels. 

Appropriateness of Overall Schema:

The current statutory requirements for launch operations have achieved the previously

stated goals through a combination of requirements. The basic requirement for

establishing a level of financial responsibility, coupled with a rational approach to

establishing the appropriate level of protection (i.e., the use of MPL), is aimed at

protecting the launch participants and the government against losses that might result

from licensed launch activities. Since licensed reentry operations also place people and

property at risk it is appropriate to impose a minimum level of financial responsibility on

those choosing to provide licensed reentry operations. The appropriateness of utilizing

the MPL methodology as a basis for the government establishment of required insurance

was discussed in previous paragraphs. In summary MPL is merely a characterization of

a risk based approach for establishing insurance requirements with the alternative being

a non-risk based approach such as maximum insurance available at a reasonable cost or

no insurance requirement which clearly appear to have been rejected in principal by

Congress. In fact, the selection of the MPL threshold probabilities (or what constitutes

"probable") can cause the results to range, in essence, from "maximum possible" to zero

insurance requirements and the exposure to the launch participants to vary accordingly. 

The setting of a statutory ceiling on the maximum insurance required by the provider of

launch services, coupled with the alternative limitation of maximum available insurance at

a reasonable price aims at imposing financial responsibility requirements upon industry

that are not onerous and within which industry can comfortably operate to provide access

to space. It is reasonable and appropriate to apply the same basic concept to reentry

operations if it is deemed that such operations are important to the Nation and would not

likely be performed in the absence of the statutory ceilings. The concept of government

providing "so-called" indemnification for losses that may occur in excess of the required
29

insurance level (less than or equal to the lessor of maximum available insurance at

reasonable prices and the statutory limitation of $100 million for government property

losses and $500 million for third-party damage) places a limit on industry liability and acts

to contain risk perceptions. In the case of third-party damage, a further statutory

constraint is placed that re-establishes industry risk above $1.5 billion above the required

level. This provision theoretically states that industry risk is unbounded while

government risk is limited. But the unboundedness occurs with such a small probability

that it is not onerous to industry; yet government exposure is limited. The relationship

between insurance payout and government and industry uninsured liability exposure is

illustrated in Figures 3 and 4 for government property and third-party liability,

respectively.

Appropriateness of Specific Selected Threshold Probabilities:

Threshold probability represents the probability that loss or damage will exceed a

specified level. As noted above, the threshold probability is a quantitative measure

selected by DOT and defines the likelihood that the insurance requirements will not be

sufficient to cover all the losses. Under such "improbable" circumstances, the

government might be expected to cover the third-party losses in excess of the insurance

amounts required. Should the government not appropriate the funds in this case, excess

losses would have to be recovered from the launch participants liable for the losses. 

Should the government not appropriate the funds and the losses exceed the financial

ability of the liable launch participants to cover such excess losses, the public might not

recover the losses in excess of the insurance requirements. 

From the general public's (third-party) perspective, the higher the imposed insurance

amounts (i.e., the lower the threshold probability), the more likely all losses will be

covered. Also, from the government's perspective, the higher the imposed insurance

amounts, the less likely the government will be asked to pay for losses (for third-party

claims or losses to government property). From the launch participant's perspective,

higher insurance requirements increase the cost of operation and high losses (in excess

of insurance and without so-called indemnification) can mean "betting the company" on

the operations. 

There does not, at this time, appear to be any rationale that would clearly indicate that

the risk levels should be dependent on the type of particular space operation: launches or

reentries. Variations in exposures and risks between different launch operations or

between launches and reentry operations that may occur still would result in the same

"improbability" that losses from claims would not be covered. 

For launch operations, threshold probabilities of 10 and 10 are utilized for establishing -5 -7

financial responsibility requirements for government property and third-party losses,

respectively. This implies that threshold levels for financial responsibility requirements

would be insufficient to cover 100 percent of losses with a likelihood on the order of 10-5

for government property and 10 for third-parties. The implication is that if the level of -7

required insurance is set equal to the maximum probable loss and the MPL is determined

based upon the threshold probability, there is a 10 chance that the U.S. government will -5

be required to absorb losses above this required insurance level for government

property. Similarly, there is a 10 chance that the U.S. government will be called upon to -7
 Starr, C., "Benefit-Cost Studies in Sociotechnical Systems," Perspectives on Benefit-Risk Decision 51

Making, National Academy of Engineering, 1972.

 Hazard Analysis of Commercial Space Transportation (Volumes 1, 2, and 3), prepared by 52

Transportation Systems Center for DOT"s Office of Commercial Space Transportation, May 1988.

30

cover third-party losses (in excess of the MPL) per launch. Both theory and practice 51 52

have indicated that the choice of threshold probabilities is very conservative. These

values are consistent with the design/operation safety goals based upon established ELV

launch practices at government ranges where every effort is made to keep the probability

of any accident of significant nature (e.g., potential for loss of life or loss of highly valued

property) below 10 to 10 . This means that when looking at the likelihoods of incurring -5 -6 52

significant losses (and consequently the likelihood that losses exceed significant values),

such likelihoods are lower than the probabilities reflected by the range safety goals. In

other words, reasonably large losses will not occur because of safety considerations with

likelihoods in excess of these probability levels. 

Appropriateness of Specific Levels of Government Indemnification:

With respect to reentry activities as with launches, the appropriateness of specific levels

of so-called government indemnification must be judged in part by the levels of maximum

probable loss, the flexibility desired in the setting of financial responsibility requirements

in terms of the relationship of MPL to the level of government indemnification, and the

need for providing indemnification to accomplish national objectives.

One question might be whether the characteristics of reentry operations are such that

they do or should present different potential levels of so-called indemnification compared

to launch operations. The lower the maximum probable loss dollar value, the greater the

potential (not probable) amount of indemnification or losses bourn by the government. 

This may be, for example, the difference between the MPL value and the maximum

possible loss. However, just as in launch operations where the exposures and risks vary

from situation to situation, one can expect the same to be the case for reentry activities. 

In launch operations MPL amounts have varied from $1 million to $80 million for

government property and from approximately $10 million to $215 million for third-parties. 

While the MPL values do vary, it is important to remember that the likelihood of the

losses exceeding the stated value are roughly the same - the threshold probability. 

In looking at the potential for future reentry operations it is difficult to estimate the range

of MPL values. Future reentry operations will likely involve vehicles larger than COMET,

some vehicles may have fuels on board and they will fly over populated areas (e.g.,

single-stage-to-orbit vehicles). Therefore, it is not unreasonable to expect the same type

of variance in values depending on the specific scenarios. One way to compare the

possible MPL values between launch operations and reentry operations is to look at a

few of the scenarios that could affect the levels of risk and the MPL values. The likely

upper limits on MPL for each of the potential damage outcomes from reentry operations

as indicated in Figure 6 may be estimated for each of the following impact scenarios. It

must be cautioned that this is not an attempt to develop the details of the MPL

computational procedures but an attempt to identify the possible upper bounds of MPL

so as to ascertain the appropriateness of the existing statutory requirements. Scenarios

to be considered are the recovery system:

colliding with manned orbiting systems (considered as third-party property and

third-parties),
31

colliding with another spacecraft (considered as third-party property),

producing orbital debris,

impacting airborne aircraft,

causing third-party damage on landing (casualty and property), and

causing government property damage on the reentry range.

Similar to launch operations, it is assumed that there will exist good coordination between

orbiting assets such as the space station and the space shuttle with respect to reentry

operations. This combined with the extremely low probability (less than 10 ) of an -6

uncontrolled reentry causing an impact with these assets makes this an extremely

unlikely event (beyond the 10 and 10 thresholds). It is further assumed that as a last -5 -7

resort, the space station and the space shuttle will have some maneuvering capability for

collision avoidance which should make even an uncontrolled reentry (which is the same

problem ultimately to be faced with all orbiting objects above the shuttle and space

station altitudes) impact an extremely unlikely event. Similar risks are posed by launch

operations and the uncontrolled reentry of upper stages. At this time for reentry

operations (controlled or uncontrolled), there is no reason to expect that these risks will

be significantly different. However, if such an event should take place during an

uncontrolled reentry, the maximum third-party casualty loss could be on the order of $30

million and the property loss could be measured in terms of billions of dollars. This

magnitude of property loss can not be covered by the existing capacity of the insurance

industry; in fact it is so large that insurance coverage should not be considered and

indemnification would come into play. While the upper bound of $100 million for

government property might be increased, there is no hard rationale for the number for

reentry operations being different from that for launch operations as they present the

same basic risk levels. 

Impacting airborne aircraft is an extremely unlikely event if it is assumed that air

traffic/launch coordination will be maintained as is currently accomplished for launch

operations. If the reentry vehicle system does not attempt a reentry then it will eventually

reenter as other satellites in an uncontrollable fashion. The only difference between this

vehicle and other satellites is that at least a part of the reentry vehicle is designed to

survive reentry. This however is outside of the licensed reentry considerations.

It is assumed that appropriate safety and design considerations of the recovery system

will result in similar probabilities as Expendable Launch Vehicles of producing orbital

debris (e.g., explosion during flight) during the conduct of reentry operations. The

consequences of orbital debris remaining in orbit cannot easily be judged because of the

uncertainty associated with knowledge of the overall debris environment and its effect on

long term operations and the implications of adding slightly to the overall debris situation. 

It is anticipated that the likelihood of causing orbital debris will be similar to that of other

satellites and upper stages of launch vehicles. The major difference may be with respect

to pieces surviving reentry. The consequences of this are likely to be less than the

damage caused by an errant reentry vehicle (discussed in a following paragraph).

An upper limit to government property damage (within the threshold probability) caused

by the recovery system may be estimated if it is assumed that the recovery system

impacts government property on the ground. The likelihood of this is only significant if

the landing site is located on government property, in which case it is not unreasonable

to assume that the same level of protection would be afforded to facilities as is afforded

during launch activities. In the past (e.g., the NASA Shuttle and the proposed landing of
 It should be noted that as of this date, COMET has been renamed METEOR and the proposed 53

landing site has been moved to the Atlantic Ocean. 

32

COMET at the Utah Test and Training Range ), such sites have had the designated 53

landing areas appropriately removed from high cost facilities. In launching, it is

noteworthy that the launch complex itself is often a high cost facility which is exposed

during launch. Overall, the risks do not appear to be all that different. It may be that

some reusable vehicle designs might fly over facilities just as, in some case, launch

vehicles do on ascent. If the complete building were to be destroyed, the damage would

be the cost of replacing the building. Thus the maximum level of damage to government

facilities is the cost of the most expensive facility on the reentry range. This cost is

expected to be well under the $100 million indemnification level set for launch operations

since it is unlikely that a reentry range would be selected that contains costly property

that is placed at risk.

An important area is the level of damage may be caused to third-parties. Conventional

expendable launch vehicles currently have MPL amounts up to approximately $215

million. In the future, the size and makeup of reentry vehicles can be very similar to

some of the present day launch vehicles. Such reentry operations, just as for launch

operations, will presumably only be approved if it can be demonstrated that the risks are

within some acceptable level. Such a public health and safety policy are likely to have

the same effect on limiting the MPL third-party amounts as was described for launch

operations (see Section 4). If there were extremely high MPL values (e.g., greater than

$500 million for third-parties), that could reflect conditions that exceed adequate safety

limits. 

Thus, indications are that there are no obvious reasons for using MPL ceilings different

from those used for launches ($100 million for government property and $500 million for

third-party damage) for reentry operations. In both cases, launches and reentry

operations, there is the potential for wide variations in MPL amounts for different

missions yet the overall exposure of the government and launch participants from losses

in excess of the MPL values are roughly the same. The same, obviously, holds for the

so-called indemnification. 

6. Summary

The use of a risk based approach to setting financial responsibility requirements for

reentry operations was examined and probability thresholds, the bases of any risk based

approach, were discussed. It was noted that the selection of extreme threshold

probabilities causes the requirements model to revert to either no requirements (i.e.,

where the threshold value is set very high) or to requirements based on maximum

possible requirements (i.e., where the threshold value is set very low). Regardless of the

issues of indemnification, it would appear that the Congress when passing the 1988

amendments to the Commercial Space Launch Act embraced the concept of a risk

based approach rather than some type of fixed insurance requirement (e.g., maximum

possible at a reasonable cost). 

The existing statutory ceilings on third-party liability and government property insurance

requirements for launch activities have been examined and an assessment completed of

the appropriateness of these established ceilings for licensed reentry operations. This

included an assessment of report language associated with Congressional actions

relating to financial responsibility requirements for licensed commercial launches, and the
33

status of the insurance industry and the availability of coverage at a reasonable cost. In

addition, the methodologies for setting financial responsibility requirements for

commercial launch operations were examined and an assessment completed of their

appropriateness for application to licensed reentry operations.

The following is a summary of the pertinent findings with respect to congressional intent,

the availability of insurance coverage at reasonable prices, and the appropriateness for

use in the setting of financial responsibility requirements for reentry operations of the

overall schema, MPL methodology, specific selected threshold probabilities, and specific

levels of government indemnification that are currently in place for licensed commercial

launch operations.

Congressional Intent

The methodology for setting financial responsibility requirements for commercial

launch activities was developed to protect launch participants from maximum

probable loss due to claims by third-parties and government property exposed to

potential damage or loss during commercial launch activities. The goals were to

protect the launch participants and government against losses that might occur from

the launch activities, establish conditions that make it very unlikely that the

government would be called upon to augment the financial requirements imposed by

the government upon industry, and to impose financial responsibility requirements

upon industry that were not onerous and within which industry could comfortably

operate.

These goals were achieved through the passage of legislation that specified that the

setting of insurance requirements would be based upon the computation of maximum

probable loss, (MPL) (the maximum magnitude of loss such that there is less than a

specified probability, referred to as the threshold probability, of losses exceeding the

amount), and that financial responsibility would be set based on the MPL amount but

less than the lesser of the maximum available insurance at reasonable prices and a

specified statutory limit ($100 million for government property damage and $500

million for third-party losses). The government would waive its property losses above

the dollar amount set for financial responsibility. The government would also

assume, if appropriations were authorized, responsibility for third-party losses above

the dollar amount set for financial responsibility but limited to $1.5 billion above this

level.

Legislation also affected the allocation of risks through interparty waiver of claims

provisions under which each party (launch participants and the government) to each

such waiver agrees to be responsible for any property damage or loss it sustains or

for any personal injury to, death of, or property damage or loss sustained by its own

employees resulting from activities carried out under the license to the extent that

claims exceed the required amount of insurance or demonstration of financial

responsibility.

Availability of Insurance at Reasonable Prices

It appears that sufficient capacity to insure launches for third-party liability damages is

available up to, and possibly exceeding, the statutory ceiling of $500 million. Rates

are on the order of 1 percent or less of coverage. Specifically for reentry operations,

approximately the same amount of capacity, or slightly less ($300 million to $400

million) appears to be available at a cost of less than 1 percent of coverage.
34

Overall Schema: Appropriateness for Licensed Reentry Operations

Assuming that the same basic goals apply for reentry operations as apply for the

setting of financial responsibility for launch operations, the overall schema (i.e., the

use of MPL combined with considerations of the availability of insurance at

reasonable prices and the statutory limits) developed for the setting of financial

responsibility for launch operations is, in general, appropriate for the setting of

financial responsibility for reentry operations. Indemnification was judged to be

important to ensure that there would continue to be a commercial space

transportation industry in the U.S. Assured access to space was deemed to be

extremely important; important enough to single out the industry to qualify for the socalled indemnification provisions of the Act. If such concern extends to future space

transportation systems and concepts, including vehicles that will routinely reenter

such as single-stage-to-orbit and reusable vehicles, then the prior concerns with

respect to access to space are warranted.

MPL Methodology: Appropriateness for Licensed Reentry Operations

The Maximum Probable Loss (MPL) Methodology is based upon a standard risk

analysis framework. Risk analysis is the technical process and procedures for

identifying, characterizing, quantifying and evaluating hazards. The analysis of risk

consists of a qualitative step of hazard identification, characterization and ranking,

and a quantitative risk evaluation entailing estimation of the occurrence probabilities

and the consequences of hazardous events, including catastrophic events. The

specific tools used vary depending on the unique circumstances of the mission at

hand. The main goals of risk management are to prevent the occurrence of

accidents by reducing the probability of their occurrence (e.g., practice risk

avoidance), to reduce or otherwise mitigate the impacts of uncontrollable accidents

(e.g., prepare and adopt emergency responses) and to transfer risk (e.g., via

insurance coverage and the establishment of financial responsibility requirements).

For reentry operations, specific safety criteria can be adopted and implemented

during the payload determination approval process (i.e., approval will not be granted

unless it is demonstrated that the criteria can be met). These criteria are aimed at

reducing the probability of government property and third-party loss to acceptable

levels; for example, not creating additional risks to the population higher than the

normal background risks (10 per year). -6

The MPL risk based methodology that is currently employed for the setting of

financial responsibility associated with launch operations is appropriate for use in

setting financial responsibility for reentry operations. The methodology aims to

establish the maximum loss that is expected to occur at the specified threshold

probability levels. As would be expected, there will be certain differences in the

specific methodology for estimating risk for reentry operations compared to launch

operations. These differences appear to be minor because the "end product" (i.e.,

the distribution of consequences and likelihoods described in Figure 2) are basically

the same. For example, the types and significance of failure modes are different and

may require, in part, different modelling techniques (e.g., for a ballistic reentry vehicle,

the aerodynamic stability may need to be modelled in detail because of its affect on

landing dispersion) to produce the estimated risk levels. These differences are minor

and can be accounted for in the detailed implementation of the MPL methodology.

 

Threshold Probability: Appropriateness for Licensed Reentry Operations
35

Threshold probability represents the probability that loss or damage will exceed a

specified dollar amount. The threshold probability is a quantitative measure selected

by DOT and used to represent the probability of occurrence associated with "unlikely"

events, third-party losses and/or degree of damage due to launch activities. The

MPL is established at the threshold probability. There does not, at this time, appear

to be any rationale that would clearly indicate that the risk levels should be dependent

type of particular space operation: launches or reentries. Variations in exposures

and risks between different launch operations or between launches and reentry

operations that may occur still would result in the same "improbability" that losses

from claims would not be covered. 

For launch operations, threshold probabilities of 10 and 10 are utilized for -5 -7

establishing financial responsibility requirements for government property and thirdparty losses, respectively. These probability levels were chosen so as to provide

coverage for government property and third-parties claims against low probability but

high value losses. In part, the selection of the threshold values for launch operations

was based on fact that potential losses reflect those that cannot be protected against

through the current safety requirements and programs. Generically, such programs

focus on eliminating or greatly reducing the likelihood of high consequence events. 

Significant losses are therefore likely to occur at probability levels that are less than

the safety standards are intended to ensure do not occur. For example, if a launch is

allowed to take place only if the probability of a casualty is equal to or less than 10 ,

-6

then the likelihood of one or more casualties (e.g., significant losses) will be less than

10 (e.g., 10 ). In one sense, selection of threshold values was basically -6 -7

independent of the type of operations taking place. If safety criteria for public health

and safety and safety of property similar to launches are used for reentry operations,

it is reasonable to expect the same thresholds to be appropriate. It is reasonable for

the public to expect the same level of safety be ensured for reentry operations as it is

accustomed to for launches. Thus these threshold values appear also to be

appropriate for use when considering reentry operations. 

Levels of Indemnification: Appropriateness for Licensed Reentry Operations

The point at which so-called indemnification kicks in can be affected by the MPL

value and the statutory ceilings imposed. Such points determine the potential amount

of so-called indemnification available to the licensee. The appropriateness of specific

levels of government so-called indemnification also must be judged in part by the

flexibility desired in the setting of financial responsibility requirements in terms of the

relationship of MPL and the level of government indemnification, and the need for

providing indemnification to accomplish national objectives. The current statutory

levels for launch operations are $100 million for government property and $500 million

(with an upper limit of $1.5 billion above the determined level of financial responsibility

that the U.S. government may have to indemnify) for third-party claims. Indications

are that the current statutory levels for launch operations are likely to be well in

excess of the MPL as established for reentry operations. Using these statutory levels

for reentry operations could provide significant flexibility for government policy

decision. Reentry operations, just as for launch operations, will presumably only be

approved if it can be demonstrated that the risks are within some acceptable level. 

Such a public health and safety policy are likely to have the same effect on limiting

the MPL third-party amounts as was described for launch operations. If there were

extremely high MPL values (e.g., greater than $500 million for third-parties), that

could reflect conditions that exceed adequate safety limits. Thus, indications are that

there is no obvious reasons for using MPL ceilings different from those used for

launches ($100 million for government property and $500 million for third-party
36

damage) for reentry operations. In both cases, launches and reentry operations,

there is the potential for wide variations in MPL amounts for different missions yet the

overall exposure of the government and launch participants from losses in excess of

the MPL values are roughly the same. The same, obviously, holds for the so-called

indemnification. 

7. Recommendations

It is recommended that :

The same schema (i.e., the use of MPL combined with considerations of the

availability of insurance at reasonable prices and the statutory limits) developed for

the setting of financial responsibility for launch operations be utilized for the setting of

financial responsibility for reentry operations.

The MPL methodology, in combination with threshold probabilities of 10 and 10 for -5 -7

government property and third-party losses, respectively, be utilized for the setting of

financial responsibility requirements for reentry operations. In keeping with the desire

to have government and third-party imposed risks independent of operations, the

threshold probabilities should be the same as those used for establishing MPL for

launch operations.

Statutory ceilings set for launch operations are expected to be considerably in excess

of financial requirements established through the use of MPL. Even though these

statutory levels could be reduced, it is recommended that they remain the same in

order to maintain additional flexibility with respect to the setting of the level of financial

responsibility. This is also in keeping with the use of the statutory levels set based

upon large launch vehicle operations when considering small launch vehicle

operations.