AEROSPACE REPORT NO. 

 ATR-2006(5266)-1 

Study of the Liability Risk-Sharing Regime in 

the United States for Commercial Space 

Transportation 

1 August 2006 

Prepared by 

J. A. VEDDA 

Center for Space Policy and Strategy 

National Space Systems Engineering 

 

Prepared for 

VOLPE NATIONAL TRANSPORTATION SYSTEMS CENTER 

U.S. DEPARTMENT OF TRANSPORTATION 

Cambridge, MA 02142 

Contract No. DTRT57-05-D-30103, Tasks 3 & 8 

Space Launch Operations 

PUBLIC RELEASE IS AUTHORIZED 

El Segundo, California 
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PLEASE DO NOT RETURN YOUR FORM TO THE ABOVE ORGANIZATION. 

1. REPORT DATE (DD-MM-YYYY) 

01-08-2006

2. REPORT TYPE 

Contractor Final Report

3. DATES COVERED (FROM - TO) 

January 21, 2005 – August 1, 2006

5A. CONTRACT NUMBER

DTRT57-05-D-30103

5B. GRANT NUMBER 

4. TITLE AND SUBTITLE 

Study of the Liability Risk Sharing Regime in the United 

States for Commercial Space Transportation

5C. PROGRAM ELEMENT NUMBER

5D. PROJECT NUMBER 

FA2R CL411 

5E. TASK NUMBER 

Task Orders #3 and #8 

6. AUTHOR(S) 

J. A. VEDDA* 

5F. WORK UNIT NUMBER

FA2R CL411 

7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES)

U.S. Department of Transportation 

Research and Innovative Technology Administration 

Volpe National Transportation Systems Center 

Safety Information Systems Division 

Cambridge, MA 02142-1093

8. PERFORMING ORGANIZATION REPORT 

NUMBER 

DOT-VNTSC-FAA-06 

10. SPONSOR/MONITOR'S ACRONYM(S) 

AST-3 

9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 

U.S. Department of Transportation 

Federal Aviation Administration 

Office of the Assoc. Administrator for Commercial Space Transportation 

Washington, DC 20591

11. SPONSOR/MONITOR'S REPORT 

NUMBER(S) 

12. DISTRIBUTION/AVAILABILITY STATEMENT 

PUBLIC RELEASE IS AUTHORIZED

13. SUPPLEMENTARY NOTES 

*The Aerospace Corporation, El Segundo, CA 90245-4691 

14. ABSTRACT 

 The Aerospace Corporation was tasked to perform an independent and comprehensive study of the liability risk-sharing regime in the 

United States for commercial space transportation under section 70113 of Title 49, United States Code. 

 The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a study on the U.S. government’s risk 

sharing of third-party liability for commercial space launch providers licensed by the Federal Aviation Administration (FAA). This risksharing regime, as described in Title 49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued 

in April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. Commercial Space Transportation: 

Study and Analysis.” The current study updates this report for congressional decision-makers who are considering the next steps beyond the 

current risk-sharing statute, which expires at the end of 2009. Specifically, this report provides the following: 

• An objective assessment of methods by which the current liability risk-sharing regime could be eliminated or modified, including 

alternative steps needed to maintain a viable and internationally competitive U.S. commercial space transportation industry.

• An evaluation of the direct and indirect impacts that elimination or modification of the regime would have on U.S. competitiveness in 

the world launch market, and on U.S. assured access to space.

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, including comparisons to the current 

liability risk-sharing regime in the U.S.

15. SUBJECT TERMS 

Commercial Space Transportation, Liability, Indemnification, Regulation, Risk-Sharing Regime 

16. SECURITY CLASSIFICATION OF: 19A. NAME OF RESPONSIBLE 

PERSON 

James N. Hallock, Ph.D. 

A. REPORT 

U 

B. ABSTRACT 

U 

C. THIS PAGE 

U 

17. LIMITATION 

OF ABSTRACT 

UU 

18. NUMBER 

OF PAGES 

73 

19B. TELEPHONE NUMBER 

(INCLUDE AREA CODE) 

(617) 494-2199 
AEROSPACE REPORT NO. 

ATR-2006(5266)-1 

STUDY OF THE LIABILITY RISK SHARING REGIME IN THE UNITED 

STATES FOR COMMERCIAL SPACE TRANSPORTATION 

Prepared by 

J. A. VEDDA 

Center for Space Policy and Strategy 

National Space Systems Engineering 

1 August 2006 

Space Launch Operations 

THE AEROSPACE CORPORATION 

El Segundo, CA 90245-4691 

Prepared for 

VOLPE NATIONAL TRANSPORTATION SYSTEMS CENTER 

U.S. DEPARTMENT OF TRANSPORTATION 

RESEARCH AND INNOVATIVE TECHNOLOGY ADMINISTRATION 

Cambridge, MA 02142 

Contract No. DTRT57-05-D-30103, Tasks 3 & 8 

PUBLIC RELEASE IS AUTHORIZED 
ii
iii

AEROSPACE REPORT NO. 

ATR-2006(5266)-1 

STUDY OF THE LIABILITY RISK SHARING REGIME IN THE 

UNITED STATES FOR COMMERCIAL SPACE TRANSPORTATION 

Prepared by: 

J. A. VEDDA 

Center for Space Policy and Strategy 

National Space Systems Engineering 

Approved by: 

J. P. SKRATT, Principal Director 

Space Launch Projects 

Launch Systems Division 

C. J. STEELE, General Manager 

National Space Systems Engineering 

Systems Planning and Engineering Group 
iv
v

Contents 

Acknowledgements ........................................................................................................................................ vii 

Executive Summary ........................................................................................................................................ ix 

1. Introduction .............................................................................................................................................. 1 

 1.1 Purpose of the Study.................................................................................................................... 1 

 1.2 Current Risk-Sharing Regime ..................................................................................................... 1 

 1.3 U.S. Treaty Obligation for Third-Party Liability ........................................................................ 2

 1.4 Evolution of Third-Party Liability Coverage for Space Launch ................................................. 3 

 1.4.1 Emergence of the U.S. Commercial Launch Industry...................................................... 3 

 1.4.2 Amending the CSLA ........................................................................................................ 5 

 1.4.3 Industry View of U.S. Government Risk-Sharing............................................................ 6 

 1.5 Identifying Policy Objectives...................................................................................................... 7 

2. The Current Market and U.S. Government Risk-Sharing ........................................................................ 11 

 2.1 A Mature Industry? ..................................................................................................................... 11 

 2.2 International Competitiveness..................................................................................................... 12 

 2.2.1 Measuring Competitiveness ............................................................................................. 13 

 2.2.2 Is Competitiveness an Appropriate Measure? .................................................................. 18 

 2.3 Possible Concerns for National Security..................................................................................... 19 

 2.4 Additional Considerations........................................................................................................... 19 

 2.5 Relevant Experience in Other Federal Government Indemnification Programs......................... 20 

 2.6 Observations for Commercial Space Launch Indemnification.................................................... 23 

 2.7 Elimination of Risk Sharing and “Betting the Company” – 

 Perspectives from Other Large Loss Events ............................................................................... 25 

 2.8 Summary of Observations on the Commercial Space Transportation Market 

 and the Risk-Sharing Program .................................................................................................... 28 

3. Elimination of U.S. Government Risk-Sharing and Possible Consequences........................................... 31 

 3.1 Alternatives ................................................................................................................................. 31 

 3.2 Possible Steps Toward Elimination............................................................................................. 33 

 3.3 Launch Providers’ Perspective.................................................................................................... 36 

 3.4 Launch Customers’ Perspective .................................................................................................. 39 

 3.5 Space Insurance Industry Perspective ......................................................................................... 39 

 3.5.1 Maturity of the Launch Liability Insurance Market ......................................................... 39 

 3.5.2 Insurance Industry Concerns ............................................................................................ 42 

 3.5.3 New Demands on the Insurance Pool............................................................................... 42 

 3.5.4 Potential Effects of Unrelated Events or a Depressed Insurance Market......................... 44 

 3.5.5 The Continuing Role of Indemnification.......................................................................... 44 

4. Risk-Sharing Regimes of Foreign Competitors........................................................................................ 45 

 4.1 Background ................................................................................................................................. 45 

 4.2 Methodology ............................................................................................................................... 46 

 4.3 Liability Indemnification in Commercial Launching States....................................................... 46 

 4.3.1 Australia ........................................................................................................................... 46 

 4.3.2 Brazil ................................................................................................................................ 46 

 4.3.3 China ................................................................................................................................ 48 

 4.3.4 Europe .............................................................................................................................. 48 

 4.3.4.1 Arianespace ......................................................................................................... 48 

 4.3.4.2 Other Launchers at the Guiana Space Center ...................................................... 48 
vi

 4.3.4.3 Starsem ................................................................................................................ 49 

 4.3.4.4 Eurockot .............................................................................................................. 49 

 4.3.4.5 United Kingdom .................................................................................................. 49

 4.3.4.6 Sweden ................................................................................................................ 50 

 4.3.5 India ................................................................................................................................. 50 

 4.3.6 Japan................................................................................................................................. 50 

 4.3.7 Russia ............................................................................................................................... 51 

 4.4 Summary of Findings from Interviews and Questionnaires........................................................ 52 

5. Analysis and Options................................................................................................................................ 55 

 5.1 Assure Adequate Liability Coverage for Catastrophic Launch-Related Events ......................... 56 

 5.2 Minimize U.S. Government Risk Exposure and Annual Outlays/Subsidies............................... 56 

 5.3 Improve Economic Benefits and Strengthen the U.S. Industrial Base 

 in Space Launch Capabilities ...................................................................................................... 57 

 5.4 Options for Consideration .......................................................................................................... 59 

Appendix A: Acronyms and Abbreviations.................................................................................................... 63 

Appendix B: Statutory Language.................................................................................................................... 65 

Appendix C: Participants ................................................................................................................................ 67 

Figures 

Figure 2.1. Herfindahl Index: Worldwide Commercial Launches 1989-2005 .......................................... 14 

Figure 2.2. Herfindahl Index: Worldwide Commercial Launch Revenues 1989-2005 ............................. 15 

Figure 2.3. Commercial Launch Events by Country 1998-2005 ............................................................... 17 

Figure 2.4. Launch Revenues for Commercial Launch Events by Country 1998-2005............................ 17 

Figure 5.1 Possible Phase-Out Strategy.................................................................................................... 60 

Tables 

Table 2.1. U.S. Federal Disaster Aid........................................................................................................ 26 

Table 2.2 The 10 Most Costly Terrorist Attacks in Terms of Insured Property Losses.......................... 27 

Table 2.3 Composition of 9/11 Insured Loss Estimates as of July 2004................................................. 27 

Table 2.4 Cash Flow and Total Equity of Publicly Held Manufacturing Aerospace Companies ........... 28 

Table 3.1. Third-Party Launch Liability Insurance Market 2005-2014 ................................................... 41 

Table 4.1 Summary of Indemnification Regimes of Spacefaring Nations.............................................. 52 

Table 4.2 Summary of Interview Responses........................................................................................... 53 
vii

Acknowledgements 

The Aerospace Corporation was tasked by the DOT Volpe National Transportation Systems Center to 

provide technical support to the Federal Aviation Administration, Office of the Associate Administrator 

for Commercial Space Transportation (FAA/AST), in performing this independent and comprehensive 

study of the liability risk-sharing regime in the United States for commercial space transportation under 

section 70113 of title 49, United States code. Aerospace is pleased to submit this final report, in 

accordance with the requirements delineated in Section F, Deliveries or Performance, of Volpe Center 

Contract No. DTRT57-05-D-30103. 

The author is grateful to FAA/AST and the Volpe Center for the opportunity to work on this project. 

Specifically, gratitude is extended to Mr. Kelvin Coleman, Special Assistant for Programs and Planning at 

FAA/AST, and to Dr. James N. Hallock and Ms. Ann R. DiMare, who served as the Contracting Officer’s 

Technical Representatives (COTRs) at the Volpe Center. Gratitude is extended to Mr. Robert W. Seibold 

for his support and guidance as the Aerospace Corporation program manager. 

Dr. Molly K. Macauley of Resources for the Future contributed substantially to Chapters 2 and 3, and Dr. 

Walter A. R. Peeters of the International Space University contributed Chapter 4. The author also wishes 

to acknowledge the support provided to Dr. Peeters by Dr. Michael Simpson and Ms. Macha Ejova. 

The Aerospace Corporation is responsible for the findings and analysis contained in this report, which do 

not necessarily reflect the positions of its customers or the contributors to this report. 
viii
ix

Executive Summary 

Purpose of the study 

 The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a 

study of the U.S. government’s risk sharing of third-party liability for commercial space launch providers 

licensed by the Federal Aviation Administration (FAA). This risk-sharing regime, as described in Title 

49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued in 

April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. 

Commercial Space Transportation: Study and Analysis” (hereafter referred to as DOT/FAA 2002). The 

current study updates this report for congressional decision-makers who are considering the next steps 

beyond the current risk-sharing statute, which expires at the end of 2009. 

 Specifically, this report provides the following: 

• An objective assessment of methods by which the current liability risk-sharing regime could be 

eliminated or modified, including alternative steps needed to maintain a viable and internationally 

competitive U.S. commercial space transportation industry. 

• An evaluation of the direct and indirect impacts that elimination or modification of the regime 

would have on U.S. competitiveness in the world launch market, and on U.S. assured access to 

space. 

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, 

including comparisons to the current liability risk-sharing regime in the U.S. 

Approach 

 For purposes of this study, U.S. commercial space launches are defined as those licensed by the 

FAA and conducted by a competitively selected private-sector launch provider. A large percentage of the 

world’s annual space launches involve payloads that are captives of a particular nation’s or region’s 

launch vehicles (nearly 70% in 2005),1

 and therefore are not included in this discussion. 

 To gather a wide perspective on the influence of insurance issues on the future of commercial 

space transportation, this study 1) conducted interviews with representatives of the commercial space 

transportation and insurance industries, and 2) collected information from studies, reports, and forecasts 

of industry advisory groups, trade associations, academic research, and the trade press, including reports 

and peer-reviewed research of other industries in which government indemnification has played a role, 

such as the commercial nuclear power industry. 

 The current third-party liability indemnification regime remains in force until the end of 2009. As 

a result, this study’s analysis considers not only current circumstances but also the business environment 

that the U.S. launch industry may face in the next decade. Many factors that would affect a decision on 

the future of government indemnification could change: 

• International competition could continue to increase. 

• The number and characteristics of domestic launch providers could change significantly. 

• Domestic launch providers could expand their operations through new technologies (e.g., 

reusable launch vehicles), new markets (e.g., space tourism), or new government policies (e.g., 

 

1

 FAA/AST, “Commercial Space Transportation: 2005 Year in Review,” February 2006. 
x

loosening of export controls, “buy American” laws, or privatization of International Space Station 

operations). 

• A major launch accident or Katrina-like natural disaster could disrupt the liability insurance 

market. 

 This study notes the enduring themes in U.S. public policy for the commercial space 

transportation industry: the long-held position of the executive and legislative branches that the success of 

the U.S. commercial launch industry is in the national interest, and that it is appropriate for the 

government to encourage and facilitate a healthy, internationally competitive industry. This study 

assumes that this view of the industry will continue for the foreseeable future. Indeed, it is likely to 

strengthen as the industry develops new markets, becomes a key player in NASA’s space exploration 

efforts, faces increasing competition from overseas, and wrestles with industrial base issues that affect 

government space programs across the board. 

 This study is intended to assist policy-makers as they judge which course of action better serves 

the national interest: 

Maintenance of a policy/legal environment favoring the U.S. commercial space launch industry 

through government sharing of low-probability but potentially high-consequence thirdparty liability risk. 

or 

Phase-out of U.S. government (taxpayer) risk exposure for this hazardous private-sector activity. 

This choice is the first step Congress must take to settle the indemnification issue. Each course of action 

brings with it a different set of implementation requirements and consequences. This study is designed to 

assist the Congress in determining which course of action best satisfies the following policy objectives, 

which collectively support the national interest in this area: 

• Assure adequate liability coverage for catastrophic launch-related events. 

• Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies. 

• Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities 

by: 

o Enhancing international competitiveness of the U.S. space transportation industry. 

o Maintaining continuity in the business environment for U.S. launch providers. 

o Encouraging new U.S. entrants to the commercial launch market. 

Findings and policy options 

 Nearly two decades after enactment of the Commercial Space Launch Act (CSLA) Amendments 

of 1988, private insurance markets still are not able to provide full liability (maximum possible loss) 

coverage to the commercial launch industry. Private liability insurance capacity remains fragile and far 

below what would be needed to compensate for government indemnification if it were eliminated. 

Foreign competition has increased, and all credible international competitors have risk-sharing schemes 

rivaling or surpassing that of the U.S. 

 Research and interviews have revealed the following regarding the current liability 

indemnification regime and proposed alternatives to it: 
xi

• The government has participated in liability risk-sharing in other areas, such as the nuclear power 

industry, floods, and terrorism. All of these areas have involved a gradual ramping down of 

government risk exposure. However, the space launch industry is not directly comparable in size, 

resources, or experience. Nor is it likely to evolve at a predictable rate, as demonstrated by the 

fact that insurance capacity in this business line is little changed from 1988. 

• The current regime has become the industry standard. Its elimination could send the wrong signal 

(i.e., that the U.S. government has lost confidence in the commercial launch industry) to 

international customers and competitors and would be a negative factor in the competition for 

global launch business. 

• Any alternative that involves government subsidies or increased oversight would cost more than 

the current regime. 

• The launch and insurance industries are uncomfortable with trusts and insurance pools because 

they believe the number of participants would be too small to build reserves in a reasonable time. 

In addition to being small in number, many participants are small in size and do not have the 

resources to make a substantial contribution. 

• The indemnification regime, originally envisioned as supplementary coverage in the event of a 

catastrophic accident, can also serve as a backup in case a large third-party liability claim 

anywhere in the world curtails the availability of private-sector insurance. Without this backup, 

the U.S. commercial launch industry could be forced to suspend launch activity for an indefinite 

period, possibly causing some participants to exit the business permanently. Under these 

circumstances, foreign competitors can be expected to use their government indemnification 

regimes to keep their launch providers active. 

• Changes in foreign competitors’ risk-sharing regimes are not on the horizon. Other launching 

states do not plan to react to U.S. changes in any way. 

 By some measures (continued investment, technological evolution, ongoing partnerships, 

consolidation, new entrants) the U.S. commercial launch industry is mature. At some point in its 

development, the U.S. commercial launch industry may be able to shoulder more (and maybe all) of its 

liability risk. But that point is not on the immediate horizon. Stability and profitability are lacking, and the 

industry is still shaping itself into something that may look very different from the launch industry of the 

1980s and 1990s. The robustness of the insurance market and private operators’ ability to meet 

obligations in a secondary fund both appear to be lacking. While the pace of the industry’s development is 

impossible to predict, it is likely that it will be more than a decade before both the launch and insurance 

industries reach the point where risk can be accommodated without government help. 

 Entrepreneurial launch firms are likely to dramatically change the domestic market landscape 

over the next two decades. As of August 2006, small launch companies held only three active FAA 

licenses, and had yet to demonstrate their longevity and profitability. Several more companies with 

similar goals hope to prove themselves in the near future. In contrast to the large aerospace companies, 

whose portfolios include substantial government business in a variety of areas, commercial launch is a 

primary function of the entrepreneurial firms. Ultimately, the successful ones may account for the 

majority of U.S. commercial launch revenues. But to reach that point, this new wave of launch providers 

needs many more years to mature. The post-2009 indemnification regime will affect them much more 

than it does today, and its effect on their business plans may be more significant than it is for the plans of 

large launch companies today. 

 This analysis does not endorse the option of simply allowing government indemnification to 

expire at the end of 2009 with nothing to take its place. Such an abrupt change would be too disruptive of 

existing business plans, leaving the U.S. commercial launch industry with little time to implement 

alternatives. 
xii

 Other than simply allowing government indemnification to expire, the Congress has two courses 

of action available. The first option is maintenance of the indemnification regime to ensure that the 

U.S. commercial launch industry will be able to match the liability coverage of its global competitors. 

Should the Congress choose this path, the following modifications to the current indemnification regime 

should be considered when addressing its renewal in 2009: 

• Make indemnification permanent. The sunset provision introduces uncertainty in the business 

environment and provides ammunition for the marketing efforts of foreign competitors. Future 

changes to the risk-sharing regime should be dependent on dramatic growth in the U.S. 

commercial launch industry, substantially increased capacity in the liability insurance market, 

and/or other changes in the business environment that may make other options viable and 

desirable. This will not happen on a predictable schedule. The FAA should continue to monitor 

indicators of industry maturity, stability, and financial strength and alert the Congress when the 

landscape has evolved sufficiently to warrant changes. 

• Remove the $1.5 billion (1988 dollars) cap on government indemnification. Since the 

payment of a catastrophic claim is subject to the congressional appropriations process, a cap is 

unnecessary. The Congress has complete control over the size of any payment. 

 The Congress has a second option, which is to phase-out U.S. government risk-sharing. In this 

case, the following steps could be taken:2

• Direct the FAA to initiate a plan that gradually changes, and eventually reverses, responsibility 

for Tiers II and III. (Currently, the U.S. government is responsible for Tier II and the launch 

industry is responsible for Tiers I and III.) Modifications to Tier I maximum probable loss are not 

required. 

• Upon expiration of the current indemnification statute, the FAA would initiate a requirement for 

industry to cover its Tier III risk exposure by creating a pool or trust. The government's Tier II 

commitment would remain unchanged initially. When the industry pool reaches a value of $500 

million, or after 5 years – whichever comes first – the government's Tier II commitment would be 

reduced to $1 billion. 

• When the pool reaches $1 billion or 10 years, the government's Tier II commitment reduces to 

$500 million. 

• When the pool reaches $1.5 billion or 15 years, the roles reverse. The industry pool (with a 

regulatory requirement to maintain a minimum value of $1.5 billion) becomes Tier II. 

Government indemnification becomes Tier III, with no cap and no sunset provision, but retaining 

the requirement for an appropriations bill in the event of a claim. 

• At this stage and at regular intervals thereafter, the FAA would assess the appropriate minimum 

required value of the industry pool, and recommend to Congress any changes in that requirement, 

if necessary. 

 If the Congress pursues this second option, there are several difficult issues that must be 

addressed: 

 

2

 All dollar amounts in this description are in 1988 dollars to conform to the convention used in the CSLA 

Amendments. The conversion factor to 2006 dollars is approximately 1.71. In other words, $1.5 billion in 1988 

dollars is equivalent to slightly more than $2.5 billion in 2006 dollars. 
xiii

• Five years may not be a long enough interval between the stages described above. This pace 

would require industry to increase the pool's value an average of $100 million per year (about 

$171 million in 2006 dollars) to match the government indemnification withdrawn at each stage. 

• Companies that leave the industry would rightfully expect their contributions to the pool, plus 

interest, to be returned. If the industry experiences high turnover during the process, this will 

hinder the effort to reach and maintain the pool's targets. This problem will be particularly 

troublesome if one or more of the larger players exits the commercial launch business. 

• The U.S. commercial launch industry is diverse. Companies vary widely in size, financial 

resources, and experience. A determination would need to be made as to how these differences 

should be taken into account for the industry pool’s contribution scheme. Should all companies 

contribute equally? Or should contributions vary based on a formula that accounts for financial 

resources, size of launch vehicles, frequency of launches, location of launch site, or other 

parameters? Would such a formula allow achievement of funding targets? 

• A new requirement to make regular contributions to an industry pool may not, by itself, drive 

entrepreneurial launch providers out of the business, but it could become the proverbial “straw 

that breaks the camel's back.” For small companies, the added cost and risk could discourage 

investors or become the tipping point for decisions about going offshore or going out of business. 

For large companies, management may seize on this issue in considerations of whether to stay in 

the commercial launch business. 

These issues require further study and must consider the continuing evolution of the domestic launch 

industry and the global business environment. 
xiv
1

1. Introduction 

1.1 Purpose of the Study 

 The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a 

study of the U.S. government’s risk sharing of third-party liability for commercial space launch providers 

licensed by the Federal Aviation Administration (FAA). This risk-sharing regime, as described in Title 

49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued in 

April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. 

Commercial Space Transportation: Study and Analysis” (DOT/FAA 2002).3

 The current study updates 

this report for congressional decision-makers who are considering the next steps beyond the current risksharing statute, which expires at the end of 2009. 

 Specifically, this report provides the following: 

• An objective assessment of methods by which the current liability risk-sharing regime could be 

eliminated or modified, including alternative steps needed to maintain a viable and internationally 

competitive U.S. commercial space transportation industry. 

• An evaluation of the direct and indirect impacts that elimination or modification of the regime 

would have on U.S. competitiveness in the world launch market, and on U.S. assured access to 

space. 

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, 

including comparisons to the current liability risk-sharing regime in the U.S. 

1.2 Current Risk-Sharing Regime 

 Since November 1988, the U.S. liability risk-sharing regime for commercial space transportation 

has been comprised of three tiers: 

Tier I: Maximum Probable Loss (MPL)-Based Financial Responsibility Requirements. 

Third-party liability insurance requirements are set based on the FAA’s determination of the MPL 

that would result from licensed launch or reentry activities. The insured parties must include the 

licensee, its customer, the U.S. government and its agencies, and the contractors and 

subcontractors. The insurance arrangement covers third parties, including government personnel, 

for injury, loss, or damage, up to a statutory ceiling of $500 million or the maximum available on 

the world market at reasonable cost. (However, the government may pay claims from the first 

dollar of loss in the event of an insurance policy exclusion that is determined to be “usual.”) 

Insurance against damage to U.S. government property is also required, with a statutory limit of 

$100 million or the maximum available on the world market at reasonable cost. To date, the MPL 

insurance requirements specified by FAA for particular launch vehicles have been well within the 

statutory limits.4

 

3

 The April 2002 study can be found at http://ast.faa.gov/files/pdf/FAALiabilityRiskSharing4-02.pdf. 4

 With regard to the largest launchers: The Delta 4-M or M+ is required to carry flight insurance of $261 million 

for third-party liability and $37 million for government property damage. For the Atlas 5-521 configuration the 

respective requirements are $193.5 million and $100 million – the latter being equal to the statutory limit. 

Source: FAA Office of the Associate Administrator for Commercial Space Transportation, “Financial 

Responsibility Requirements as Determined by the Maximum Probable Loss (MPL) Process,” October 20, 

2004. 
2

Launch participants also enter into no-fault, no subrogation reciprocal or cross-waivers of claims 

under which each participant accepts its own risk of property damage or loss and agrees to be 

responsible for injury, damage, or loss suffered by its employees. 

Tier II: Catastrophic Loss Protection (Government Payment of Excess Claims, Known as 

“Indemnification”). The U.S. government may pay successful third-party liability claims in 

excess of required MPL-based insurance, up to an additional $1.5 billion (adjusted for post-1988 

inflation – approximately $2 billion today). Such claims must be presented to the Congress by the 

President, upon the recommendation of the Secretary of Transportation, and the Congress must 

appropriate funds to pay the claim. For damage to government property, the U.S. government 

waives claims for property damage above the required insurance. However, the government does 

not indemnify a party's willful misconduct. 

Tier III: Above MPL-Based Insurance plus Indemnification. If a claim exceeds the combined 

amount of the licensee’s MPL insurance and the government’s indemnification, financial 

responsibility remains with the licensee or legally liable party. 

1.3 U.S. Treaty Obligation for Third-Party Liability 

 The Commercial Space Launch Act provisions for third-party liability indemnification do not 

limit U.S. government responsibility in the case of claims arising from damage to persons or property 

outside the United States. Such a case would be bound by the provisions of the Outer Space Treaty of 

19675

 and the Liability Convention of 1972.6 Relevant language in the Outer Space Treaty is as follows: 

Each State Party to the Treaty that launches or procures the launching of an object into 

outer space, including the moon and other celestial bodies, and each State Party from 

whose territory or facility an object is launched, is internationally liable for damage to 

another State Party to the Treaty or to its natural or juridical persons by such object or 

its component parts on the Earth, in air space or in outer space, including the moon and 

other celestial bodies. (Article VII) 

The Liability Convention reinforces these points, assigning absolute liability for damages and requiring 

payment of compensation: 

A launching State shall be absolutely liable to pay compensation for damage caused by 

its space object on the surface of the Earth or to aircraft in flight. (Article II) 

Whenever two or more States jointly launch a space object, they shall be jointly and 

severally liable for any damage caused... A State from whose territory or facility a space 

object is launched shall be regarded as a participant in a joint launching. (Article V) 

 If a U.S. launch mishap resulted in damage internationally, and successful claims exceeded the 

MPL insurance requirement, the U.S. government would be obliged to settle the claim using mechanisms 

specified in the Liability Convention, which do not impose limits on such claims. The U.S. government 

could then attempt to recover the amount of its settlement from the participants in the launch campaign 

responsible for the damage. 

 

5

 Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the 

Moon and other Celestial Bodies (Outer Space Treaty, 1967). 6

 Convention on International Liability for Damage Caused by Space Objects (Liability Convention, 1972). 
3

 The U.S. is also a signatory to the Registration Convention,7 which requires that objects launched 

into space be listed in a central registry maintained by the Secretary General of the United Nations. The 

registry is intended to be a means to identify space objects, in part to assist in liability claims. 

1.4 Evolution of Third-Party Liability Coverage for Space Launch 

1.4.1 Emergence of the U.S. Commercial Launch Industry 

 Prior to the 1980s, launch services were a government function. The government self-insured its 

property and assumed liability risk for itself and its contractors. Statutory authority for indemnification of 

private-sector contractors was provided to the Air Force8

 and the National Aeronautics and Space 

Administration (NASA).9

 Insurance available on the market at that time was costly and did not provide 

adequate coverage. 

 As the commercial space launch industry began to take shape in the early 1980s, established 

launch providers and entrepreneurs alike sought an environment that would allow them to conduct 

profitable business without undue regulatory burdens or financial risk. Industry representatives expressed 

the need for a liability risk-sharing arrangement similar to the traditional arrangement for government 

launches. Their primary competitor at the time, the European Arianespace consortium, modeled its risksharing scheme on the precedent set by NASA for commercial payloads on the space shuttle. NASA 

required shuttle payload customers to obtain the maximum liability insurance available at a reasonable 

premium, and NASA provided indemnification for any amount in excess of that coverage. Typically, 

$500 million was required for a single payload, and multiple payload customers could combine their 

contributions to reach $750 million in coverage. 

 The Reagan Administration set the stage for the emerging space launch industry in May 16, 1983 

with National Security Decision Directive (NSDD-94), “Commercialization of Expendable Launch 

Vehicles” (ELVs). The policy endorsed commercialization and authorized commercial use of national 

launch ranges, but it also left the entire burden of liability to industry. Commercial launch operators were 

required to: 

• provide adequate insurance to cover the loss of or damage to U.S. government-owned systems, 

equipment, facilities used by the private sector ELV operators; 

• provide adequate insurance and agreements to indemnify and hold harmless the U.S. government 

against liabilities for damage to both domestic and foreign persons and property. 

This liability risk responsibility was codified in the Commercial Space Launch Act (CSLA) of 1984.10

U.S. launch providers saw this level of risk as equivalent to “betting the company” on every launch. 

Regardless of the liability insurance requirement specified in their license by the DOT, they would 

ultimately be responsible for the maximum possible loss. In their view, adequate insurance coverage was 

not available to them, and even if it were, it would be prohibitively expensive. Meanwhile, foreign 

competitor Arianespace had put a cap on the liability insurance required of its customers, and had 

arranged for government indemnification of any claims above that cap. (Emerging foreign competitors, 

such as Russia and China, eventually did the same.) 

 

7

 Convention on Registration of Objects Launched into Outer Space (Registration Convention, 1975). 8

 Public Law 85-804. 

9

 Section 308 of the National Aeronautics and Space Act of 1958, as amended. 10 Public Law 98-575. 
4

Timeline: Policy and Legislation on Commercial Space Transportation 

November 1983: President designates the Department of Transportation (DOT) as the federal government’s lead 

agency for commercial launch activities. 

February 1984: Executive Order 12465 directs DOT to act as focal point within the federal government for private 

sector launch contacts and to facilitate for commercial launch operators the process of identifying and satisfying the 

related requirements and regulations of other federal agencies concerning commercial space activities. 

October 1984: Commercial Space Launch Act (P.L. 98-575) expresses congressional support for the commercial 

expendable launch vehicle (ELV) industry and gives Congress a direct role in the formulation and implementation of a 

commercial ELV policy and regulatory regime. The Secretary of DOT, in consultation with other appropriate agencies, 

is directed to establish insurance requirements as a condition of the ELV license it issues to commercial ELV operators 

to protect against risk to U.S. government property and against damages to third parties that might occur from 

commercial launches; the requirements must be consistent with existing tort law and with the international obligations 

of the U.S. including the Convention on International Liability for Damages Caused by Space Objects in Outer Space 

(in which the U.S. is held strictly responsible for any damage caused by a launch from the U.S.). No provision is 

included for government indemnification. 

Early to mid-1980s: ELV services and operations are largely a government-sponsored activity. The National 

Aeronautics and Space Administration (NASA) launched commercial satellites either on the shuttle or on ELVs; the 

government required the maximum amount of third-party liability insurance available at a “reasonable” cost from the 

owners of the payloads and provided indemnification for losses above those requirements. (The U.S. government had 

not required any first-party property insurance since the government – primarily NASA or the Air Force – was 

conducting all of the launch operations.) 

 Principal non-U.S. ELV supplier is Europe’s Ariane; export controls limit use of China’s Long March; 

prohibitions preclude U.S. use of the Soviet Union’s Proton. Foreign governments’ support of national launch systems 

includes preferential tax treatment, below-market interest rates on the financing of vehicle production or launch 

activities, and charging less than full-cost or not at all for insurance. 

December 1986: National Security Decision Directive 254 states that NASA will no longer provide launch services 

for commercial and foreign payloads unless they have unique, specific reasons for being launched aboard the shuttle. 

November 1988: Commercial Space Launch Act Amendments (P.L. 100-657) establishes liability and insurance 

regime including provision for U.S. government indemnification until December 1993. 

1989: First DOT-licensed commercial space launch. 

November 1992: NASA Authorization Act for Fiscal Year 1993 extends the five-year sunset provision for 

indemnification from December 1993 through December 1999. 

October 1998: The Commercial Space Act of 1998 (P.L. 105-303) extends the Secretary of Transportation’s licensing 

authority to reentry vehicles and operation of reentry sites by non-federal entities; also extends requirements and 

provisions of the financial responsibility and risk-sharing regime to operators of reentry vehicles. 

April 1999: The Departments of Veterans Affairs and Housing and Urban Development and Independent Agencies 

Appropriations Act of 2000 extends indemnification just one year, until December 2000. The next year, the 

Commercial Space Transportation Competitiveness Act of 2000 extended indemnification to December 2004. 

December 2004: Commercial Space Launch Amendments Act of 2004 (P.L. 108-492) extends liability and insurance 

regime until 2009 and requests an independent comprehensive study of the regime. 

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

Sources: Senate Report 100-583, 6 October 1988, 100th Congress 2nd Session, “Commercial Space Launch Amendments Act of 

1988;” Senate Report 106-135, 4 August 1999, 106th Congress, 1st Session “Commercial Space Launch Industry Indemnification 

Extension;” U.S. Congress, Office of Technology Assessment, Launch Options for the Future, Special Report, OTA-ISC-383, 

Washington, DC, July 1988; U.S. Congressional Budget Office, Setting Space Transportation Policy for the 1990s: A Special Study,

October 1986; DOT/FAA 2002 (Chapter 3), and Office of Commercial Space Transportation, Federal Aviation Administration. 
5

 The situation remained this way for four years, slowing the development of the U.S. commercial 

launch industry. The U.S. Air Force Model Expendable Launch Vehicle Commercialization Agreement 

issued in January 1988 did not alleviate the liability risk concerns, since it continued the practice of 

placing the full burden on the commercial launch provider. By this time, Arianespace had gained a 

dominant market share, especially after the failures of the space shuttle and other U.S. launch vehicles in 

the mid-1980s. 

1.4.2 Amending the CSLA 

 Uncomfortable with the uneven playing field in the global launch market and eager to reduce risk 

exposure, the U.S. launch industry sought relief and found it in the CSLA Amendments of 1988.11 The 

solution was less comprehensive than the industry desired, since it included a cap on government 

indemnification and a requirement to fund liability claims through the congressional appropriations 

process, but it was welcomed nonetheless. In the months that followed, the Air Force modified its model 

launch agreement to reflect the new law. 

 The 1988 Amendments also codified the standard practice in which participants in a launch 

campaign enter into cross-waivers of claims against each other. The cross-waivers relieve participants 

from the need to buy liability insurance to protect against claims for damage to each other’s property, 

which would place additional burden on the insurance market and drive up costs for payload customers. 

 When the 1988 Amendments were being formulated in Congress, the House Committee on 

Science, Space, and Technology expressed the view that 

... the government must play an active role in bringing about a commercial launch 

industry as a partner with the U.S. launch industry. This partnership role is fully justified 

in view of clearly established government obligations and responsibilities... The 

Committee views this [third-party liability] risk burden on the emerging commercial 

launch industry as an intolerable risk that poses a major threat to the emergence of an 

internationally competitive launch industry. The absence of any government role in 

sharing this risk is also inconsistent with recent government policies to foster the U.S. 

industry...12

As a result, the House did not propose a cap on government indemnification, nor did it include a sunset 

provision in its version of the bill. The only indication that the Committee may have seen indemnification 

as a temporary commitment is this sentence in its report on the bill: 

The Committee fully anticipates that the increased planned activities of the U.S. 

commercial launch industry will mobilize required insurance to fully cover launch 

activities. 

 The Senate Commerce, Science, and Transportation Committee concurred with its House 

counterpart on the importance of encouraging the U.S. commercial launch industry. The Senate 

Committee also agreed with the need for 

... an adequate risk-sharing arrangement between industry and Government to enable the 

emerging launch industry to compete on a more equal footing with foreign launch 

concerns... Some limitations on the amount of liability insurance required must be 

 

11 Public Law 100-657. 

12 House Report 100-639 on H.R. 4399, Commercial Space Launch Act Amendments of 1988, May 19, 1988. 
6

established if a domestic commercial industry is to establish itself in the world. No other 

competing launch organization bears the costs and risks of unlimited liability.13

 However, the Committee clearly did not envision an unlimited duration for indemnification. 

Under the Senate bill, risk sharing would end after 10 years (later changed to a five-year sunset 

provision), after which “the ELV [expendable launch vehicle] industry will be dependent upon existing 

insurance capacity in the marketplace. Therefore, it is in the best interests of the industry to work to 

increase total insurance capacity over the life of this legislation.” The Committee’s rationale for the 10-

year limitation was that it is 

... necessary to ensure that this risk to the Government is restricted. This is both a 

protection of the public treasury and a means to foster and enhance the growth of private 

insurance markets over the life of this legislation. 

 The Senate Committee expected the Secretary of Transportation to use the launch license review 

process to monitor and encourage the growth of private liability insurance markets to meet the future 

needs of the commercial launch industry. The Committee anticipated that in a decade, private insurance 

markets would provide full liability coverage, not just for U.S. commercial launchers, but for all 

commercial launch providers around the world, thus leveling the playing field for this aspect of the 

business. 

 Nearly two decades later, private insurance markets still have not achieved this goal. Worldwide, 

launch providers share the same insurance pool that the aviation industry uses for third-party liability 

coverage. Launch liability capacity remains fragile and far below what would be needed to replace 

government indemnification. Foreign competition has increased, and all credible competitors have risksharing schemes rivaling or surpassing that of the U.S. In other words, government indemnification 

regimes, rather than private insurance markets, have become the levelers of the playing field. 

1.4.3 Industry View of U.S. Government Risk-Sharing 

 To properly assess industry’s position on third-party liability indemnification, it is important to 

consider an underlying assumption about the policy’s original rationale: Was the indemnification regime 

intended to provide temporary assistance to a nascent industry to help it get established? Or was it 

intended to be a permanent fixture in the business environment to give ongoing support to an inherently 

hazardous activity having economic value to the nation? 

 The U.S. launch industry believes that the “nascent industry” rationale is incorrect – the 

indemnification regime was not created with the notion that the industry would outgrow the need for it. 

As mentioned earlier, launch providers had established a procedure for accommodating third-party 

liability during their years of exclusively serving government launch customers. In the 1980s, they made 

the case that a similar arrangement would be needed to manage catastrophic risk in the new era of 

commercial launch services. The industry sees the indemnification regime as a key part of a system for 

managing everyone’s risk through a combination of insurance requirements that cover the launch 

provider, the payload owner, and the government; indemnification for catastrophic claims; and crosswaivers of liability for all participants in the launch campaign. As one respondent noted, space launch will 

always be a hazardous activity, and unbounded liability is a non-starter for businesses. 

 In contrast to the industry position, some policy-makers and analysts believe that government 

indemnification was intended as temporary help for the emerging launch industry. In this view, the 

 

13 Senate Report 100-593 on H.R. 4399, Commercial Space Launch Act Amendments of 1988, October 7, 1988. 
7

regime was initiated because the space insurance market of the late-1980s was not up to the task of 

adequately covering third-party liability at a reasonable price, but was expected to eventually take over 

full responsibility as the insurance pool became more robust. As a result, the statutory language 

establishing the indemnification regime included a sunset provision to ensure periodic reconsideration of 

the continuing need for government risk-sharing. 

 Clearly, at the inception of the indemnification regime there were differences between industry 

and policy-maker (particularly Senate committee) perceptions of the problem and its long-term resolution. 

These differing viewpoints persist today. A number of lawmakers see indemnification as an unnecessary 

subsidy to the launch industry, particularly its largest corporations. Industry representatives note that no 

federal funds, tax breaks, or other financial favors have been granted to them under the indemnification 

regime thus far, so it can hardly be considered a subsidy. They see it as an appropriate government role to 

share catastrophic risk (as in the nuclear power industry and flood insurance) and to level the international 

playing field. 

 Whatever their view on the original justification for indemnification, some analysts and space 

insurers point out that the context has changed since the risk-sharing regime began in 1988. The insurers 

have gained experience, but the market remains fragile. Foreign competition has increased, and 

competitors’ governments are providing third-party indemnification as good as or better than that 

provided by the U.S. There is broad agreement among launch providers and payload customers that 

government risk-sharing for third-party liability has become an industry standard. 

1.5 Identifying Policy Objectives 

 Determination of a course of action hinges on the establishment and prioritization of policy goals. 

Revision, or elimination of government indemnification for third-party liability could have potentially 

adverse consequences for the U.S. commercial launch industry and for national interests. Current national 

policy on space transportation14 states the following goal: 

Encourage and facilitate the U.S. commercial space transportation industry to enhance 

the achievement of national security and civil space transportation objectives, benefit the 

U.S. economy, and increase the industry’s international competitiveness. 

This goal mirrors previous national policy statements.15 Toward that end, U.S. government departments 

and agencies shall: 

Maintain, subject to periodic review and the competitiveness of U.S. industry, the 

liability risk sharing regime for U.S. commercial space transportation activities set forth 

in the Commercial Space Launch Act, as amended (49 USC, Subtitle IX, Chapter 701), 

including provisions for indemnification by the United States Government. 

 The inclusion of this statement in the national space transportation policy indicates that the 

current risk-sharing regime is viewed as contributing to national objectives, the economy, and U.S. 

competitiveness. It also recognizes the need for periodic review. 

 

14 National Security Presidential Directive 40, “U.S. Space Transportation Policy,” December 21, 2004. 15 Presidential Decision Directive 4, “National Space Transportation Policy,” August 5, 1994; White House Fact 

Sheet, “Commercial Space Launch Policy,” September 5, 1990; National Security Decision Directive 94, 

“Commercialization of Expendable Launch Vehicles,” May 16, 1983. 
8

 For the past two decades, the White House and Congress have been in close agreement on this 

issue. When the House Committee on Science, Space, and Technology amended the Commercial Space 

Launch Act in 1988, the stated rationale for doing so was as follows: 

(1) a United States commercial space launch industry is an essential component of national efforts to 

assure access to space for government and commercial users; 

(2) the Federal Government should encourage, facilitate, and promote the use of the United States 

commercial space launch industry in order to continue United States aerospace preeminence; 

(3) the United States commercial space launch industry must be competitive in the international 

marketplace; 

(4) Federal Government policies should recognize the responsibility of the United States under 

international treaty for activities conducted by United States citizens in space; and 

(5) the United States must maintain a competitive edge in international commercial space 

transportation by ensuring continued research and development in launch vehicle component 

technology.16

 The CSLA, which the Congress revisited in 2004, includes the following among its findings: 

• The development of commercial launch vehicles, reentry vehicles, and associated services would 

enable the United States to retain its competitive position internationally, contributing to the 

national interest and economic well-being of the United States. 

• Providing launch services and reentry services by the private sector is consistent with the national 

security and foreign policy interests of the United States. 

• The United States should encourage private sector launches, reentries, and associated services. 

• Space transportation ... is an important element of the transportation system of the United States, 

and in connection with the commerce of the United States there is a need to develop a strong 

space transportation infrastructure with significant private sector involvement. 17

 From this current and historical evidence, it is clear that the executive and legislative branches 

have consistently viewed the success of the U.S. commercial launch industry as beneficial to national 

interests. This view of the industry presumably will continue for the foreseeable future, and may 

strengthen as the industry develops new markets (such as space tourism), becomes a key player in 

NASA’s space exploration efforts, faces increasing competition from overseas, and wrestles with 

industrial base issues that affect government space programs across the board. 

 This study is intended to assist policy-makers as they judge which course of action better serves 

the national interest: 

Maintenance of a policy/legal environment favoring the U.S. commercial space launch industry 

through government sharing of low-probability but potentially high-consequence thirdparty liability risk. 

or 

Phase-out of U.S. government (taxpayer) risk exposure for this hazardous private-sector activity. 

This choice is the first step Congress must take to settle the indemnification issue. Each course of action 

brings with it a different set of implementation requirements and consequences. This study is designed to 

 

16 House Report 100-639 on H.R. 4399, Commercial Space Launch Act Amendments of 1988, May 19, 1988. 17 49 USC §70101(a)(5)-(8). 
9

assist the Congress in determining which course of action best satisfies the following policy objectives, 

which collectively support the national interest in this area: 

• Assure adequate liability coverage for catastrophic launch-related events. 

• Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies. 

• Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities 

by: 

o Enhancing international competitiveness of the U.S. space transportation industry. 

o Maintaining continuity in the business environment for U.S. launch providers. 

o Encouraging new U.S. entrants to the commercial launch market. 

* * * 

 Chapter 2 analyzes the current competitive environment and discusses U.S. government 

experience in risk sharing with other industries. Chapter 3 assesses options for eliminating the current 

indemnification regime, summarizes the views of industry, and discusses possible consequences of 

elimination. Chapter 4 presents the results of a survey on the current status and plans for government 

indemnification in other spacefaring nations. Chapter 5 presents analysis of the policy implications of the 

two courses of action identified above. 
10
11

2. The Current Market and U.S. Government Risk-Sharing 

 The success of the U.S. commercial launch industry in delivering a host of new and expanded 

voice, video, navigation, and Earth observation services in the past two decades reflects in part the 

heritage of supportive U.S. national public policy. Beginning with the 1983 designation of the 

Department of Transportation as the federal government’s lead agency for commercial space 

transportation, subsequent policy initiatives have sought to assist and nurture the industry in its evolution 

from government domination to commercial orientation. 

 Advocates of the indemnification provisions of the CSLA amendments argue that risk sharing has 

been and will continue to be an essential component of effective U.S. policy and that in their absence, the 

competitiveness of U.S. commercial launch services would be severely undermined. Another school of 

thought takes the opposite view, finding inadequate justification for continuing indemnification for a 

number of reasons and in some cases, expressing strong reluctance about government involvement in a 

commercial industry. 

 This chapter first presents the arguments on both sides, then discusses the data and analyses that 

are available to quantify the role of indemnification in supporting the industry as well as the policy 

objectives in the 1988 CSLA amendments. The analysis finds that publicly available quantitative data 

provides no direct evidence that indemnification is essential for competitiveness or that it otherwise 

accomplishes policy goals. Much of the information that could best inform this study is held as 

proprietary by industry. Even so, there are possibly compelling arguments for maintaining at least some 

degree of indemnification or, if eliminating it, doing so only gradually. Discussion of these findings paves 

the way for the options presented in the next chapter. 

2.1 A Mature Industry? 

 By including the sunset provision, the original legislative intent of government risk-sharing 

clearly expected eventual elimination of indemnification. The record of debate shows nearly unanimous 

concern about the need to nurture a “nascent” commercial space transportation industry. The sunset 

provision was a compromise, however, as it was marked by sharp disagreement among the Senate, the 

House of Representatives, and the Reagan Administration. 

 The Senate had proposed a sunset to take place ten years after passage of the amendments. 

Expectations were that after ten years, (1) the fledgling launch industry would have gone through a “full 

cycle” of customer service (from taking a launch request of a payload owner/operator, to preparing the 

launch vehicle and integrating the payload, to scheduling and conducting the launch) and (2) the 

insurance industry would be able to provide coverage. 

 Discussion in the House was largely silent on any sunset provision, and its version of the 

amendments made no provision for elimination of the indemnification policy. At the other extreme, the 

Reagan Administration generally opposed any role for government in commercial space launch insurance, 

envisioning a fully private sector launch industry with little government intervention. In addition, the late 

1980s were a time of large cyclical disruption in most major property and casualty insurance markets and 

the Administration was arguing for major tort reform throughout the entire insurance industry. 

 As a compromise, the final version of the amendments provided a five-year sunset provision. 

Indemnification would be available only for launches conducted pursuant to an application submitted to 

the Department of Transportation by the end of 1993. As noted previously, Congress has since extended 

indemnification four times. 
12

 Has a mature industry evolved along with the extensions of the risk-sharing regime? By all 

generally accepted measures of industry maturity, the conventional U.S. ELV industry is fully mature. 

The industry completed 161 successful launches by mid-2006.18 Also indicative of maturity, the industry 

has engaged in R&D on modifications to the existing fleet and the addition of new vehicles. These efforts 

have led to a new generation of expendable vehicles (modified versions of Delta and Atlas; Pegasus, 

Taurus, Athena, Falcon) and new practices such as sea-based (Sea Launch) and air-launched (Pegasustype) approaches. 

 Another maturity measure is industry growth, acquisition, and reorganization. The launch 

industry has seen entry of newcomers (Orbital Sciences, SpaceX), consolidation among incumbent 

suppliers (for example, McDonnell Douglas and Boeing), and partnerships such as International Launch 

Services19 and Sea Launch.20 Recently, companies have created partnerships to provide “integrated 

schedule assurance,” by which customers can turn to another company’s (as well as country’s) vehicle in 

the event of a problem with the original vehicle.21 In 1996, the FAA granted the first license for spaceport 

operation (to California Spaceport) and has since issued five more licenses for launch site operators (in 

Florida, Virginia, Alaska, Oklahoma, and Mojave Airport, California). These are measures of a mature 

industry; hence at least one of the concerns expressed by the Congress in 1988 has been satisfied. 

2.2 International Competitiveness 

 During nearly two decades of deliberations on extension, it can be argued that public debate has 

come to confuse the maturity of an industry with its competitive or financial success. To be sure, both 

characteristics were important to policymakers in 1988. In fact, a statutory objective of the CSLA is that 

“the United States commercial space launch industry must be competitive in the international 

marketplace.” But a public policy dilemma often arises when an industry evolves to maturity but then 

struggles competitively and financially, particularly in international markets (the situations of the steel, 

auto, and electronics industries are examples). At that point, the role for government intervention 

typically becomes particularly contentious. The distinction is important because the appropriate public 

policy for maturity may differ markedly from the appropriate policy for competitive or financial success. 

 The space transportation industry representatives interviewed for this report are adamant that 

indemnification is essential for their international competitiveness (their comments are reported in 

Chapter 3). International competitiveness can be measured to some extent, but identifying the 

contribution of indemnification is impossible to discern in the absence of good data. The publicly 

available data show that U.S. companies have a very small share of the commercial market, but the role 

indemnification may play in improving this situation cannot be conclusively demonstrated. For this 

reason, if the goal of maintaining or increasing market share in the international commercial market is a 

desired policy objective, then other steps (such as price supports) may be necessary. This course of action 

is not addressed by this report, but the point is relevant to this policy debate. 

 

18 Department of Transportation, FAA/AST, “Historical Launch Activity” at 

http://ast.faa.gov/linfo_vsite/historical_la.cfm (accessed July 2006). An additional 17 launches were attempted 

but unsuccessful for a variety of reasons. 

19 Lockheed Martin (50%) and Khrunichev State Research & Production Space Center of Russia (50%). 20 Boeing (40%), RSC-Energia of Russia (25%), Kvaerner ASA of Norway (20%), SDO Yuzhnoye/PO Yuzhmash 

of Ukraine (15%). 21 If Sea Launch encounters a problem and is unable to launch a payload, the customer can turn to the Ariane 5, 

Zenit 3SL, and H-IIA launch vehicles under the Launch Service Alliance formed by Arianespace, Boeing 

Launch Services, and Mitsubishi Heavy Industries. International Launch Services offers customers Altas or 

Proton vehicles as back-up. (2006 Forecast, p. 23). 
13

2.2.1 Measuring Competitiveness 

 There are two sources of competition in commercial markets: competition among existing 

companies and the competitive threat posed by potential new companies (this mere “threat” can serve to 

keep prices low). Analytically, the data which demonstrate competitiveness are market shares, which 

reflect a mix of both quantity and price – that is, number of launches and the revenue they bring in. The 

most effective ways to gain market share in a competitive market are to lower prices or to offer a unique 

product that is in high demand. 

 Unfortunately, price (revenue) information for commercial launches is not publicly available. The 

FAA reports prices for commercial launches but emphasizes that these are at best a rough approximation, 

stating in footnotes to its Quarterly Launch Reports that price data “vary for each commercial launch.” 

Reported prices are widely known to be highly imprecise for several reasons. A contracted price may 

differ from the reported price because it includes individually negotiated customer concessions, 

differences in launch facility pricing policies, and a host of other factors. One of the concerns emphasized 

by U.S. industry in commenting on the need for continued indemnification is the price concessions that 

U.S. companies must continue to make to attract customers. The trade press reports that launch providers 

are offering prices that are so greatly reduced that vehicles are marketed at a loss.22 The difficulty in 

evaluating this argument is that the nature and size of these concessions is not public record. The FAA 

data show no price trends, either up or down, even with the market entry of foreign vehicles during the 

last decades. Reported launch prices have remained roughly unchanged during this period. 

 The data problem is not unique, however, and the federal government endorses alternative 

methods for assessing competition. Industries are typically reluctant to report price information, and the 

launch industry is no exception. A proxy measure, the H index, has come to be routinely used by the U.S. 

Department of Justice and other analysts as an indication of competitiveness. (The index is named for its 

developers, O.C. Herfindahl and A.O. Hirschman). The index is not a perfect measure of competition 

(and economists and other analysts have long expressed concern about its biases and interpretation) but 

does shed some light on the degree to which existing companies face and meet competition. The index 

uses a weighted average of market shares and indirectly measures companies’ ability to exercise power by 

setting prices above the prices that would prevail in a competitive market. 

 The H index combines data about the number of existing companies and the size of their share of 

the market.23 Because a market could have many companies but one or a few companies may dominate, 

the formula of the index attempts to combine these data in a statistically acceptable way. An index close 

to zero indicates a competitive market – no company’s market share is very large. As the index 

approaches 1, a single entity dominates the market. If the market has just one seller, the index is at its 

maximum value of 1 – that seller is a monopolist. The index declines with an increasing number of 

companies. 

 The H index calculated for the share of the market represented by the commercial launching 

states of the U.S., Russia, Europe, and China is one guide for observing the extent of competition faced 

by U.S. companies. Data on the number of launches by launch vehicle and launch revenue are available 

for 1989-1998 from Isakowitz (1999) and for 1999-2004 from FAA/AST.24 As both of these data sources 

 

22 John Edwards, “ELV Market on the Up,” Aviation Week and Space Technology 2005 Aerospace Source Book

(McGraw Hill), January 17, 2005, 135-136. 23 The index is defined as H = (s1 )2

 + (s 2 ) 2 +.... + (sn ) 2 where s is a firm’s percentage of total sales (market 

share) and n is the number of firms. 24 Steven J. Isakowitz, Joseph P. Hopkins Jr., and Joshua B. Hopkins, International Reference Guide to Space 

Launch Systems (Reston, VA: American Institute of Aeronautics and Astronautics), 1999; Federal Aviation 
14

emphasize, revenue information is approximate because of the poor quality of price data. Following 

FAA/AST practice, launches of Sea Launch are treated separately as “multinational launches” rather than 

classifying them as launches by one country. (If launches by Sea Launch are classified as U.S. launches, 

or if a “fraction” of a Sea Launch is so classified, to reflect the U.S. ownership share, the H values for the 

launch market are larger, reflecting the relatively large share of the market increasingly represented by 

Sea Launch.) 

The usefulness of reviewing both number of launches and launch revenue is that launch quantities

are often referenced in public debate about competitiveness, but launch revenues more directly impact the 

bottom line. For example, a more competitive market in terms of shares of launches could mean that each 

individual company supplies fewer launches. A less competitive market in terms of revenue may mean 

that a few companies supply a few expensive launches, taking larger revenue shares and causing 

competition in terms of revenue to fall. 

Figure 2.1: Herfindahl Index

Worldwide Commercial Launches 1989-2005_ 

Lower values indicate greater competition

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1989-

1993

1994-

1998

1999 2000 2001 2002 2003 2004 2005

Year

Index

NGSO

GEO

Source: Data for 1989-98 from Isakowitz et al. (1999); for 1999-2005 from FAA/AST 

Commercial Space Transportation Year in Review report for each year.

 Figures 2.1 and 2.2 show the H indices for worldwide number of commercial launches and launch 

revenues for non-geostationary Earth orbit (NGSO) and geostationary Earth orbit (GEO) launch markets 

from the 1980s to the present. By measures of both launches and revenues, the GEO market has become 

more competitive over time. 

 Administration, Administrator for Commercial Space Transportation, Year in Review, each year, 1999 – 2004. 

Because the earlier data are collected by slightly different collection methods, data for 1989 – 1998 are 

represented as two five-year averages (1989-1993 and 1994-1998). 
15

 The NGSO market has been consistently more concentrated than the GEO market and, in terms of 

launches, has become less competitive over time.25 In 2005, this market was completely supplied by 

Russia. FAA projections for 2006 also show that the NGSO commercial market will be completely 

supplied by Russia.26

Figure 2.2: Herfindahl Index

Worldwide Commercial Launch Revenues 1989-2005__

Lower values indicate greater competition

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1989-

1993

1994-

1998

1999 2000 2001 2002 2003 2004 2005

Year

Index

NGSO

GEO

Source: Data for 1989-98 from Isakowitz et al. (1999); for 1999-2005 from FAA/AST Commercial Space 

Transportation Year in Review report for each year.

 The potential and actual market entry of new launch vehicles and suppliers is another source of 

market competitiveness. The history of the commercial launch industry reflects competition from 

additional foreign vehicles (new versions of existing vehicles or altogether new vehicles, such as India’s 

Geosynchronous Satellite Launch Vehicle) as well as new launch practices that reconfigure existing 

technology (for instance, Sea Launch). In figures 2.1 and 2.2, the increase in GEO competition (lower H 

values) beginning in 2001 are due to the relatively large number of launches by Sea Launch. 

 Figures 2.3 and 2.4 disaggregate the data underlying the H-index. These figures show launches 

and revenues by country during 1998-2005 for both NGSO and GEO. The absolute size of market shares 

based on number of launches have been largest for the U.S. in two years (2001, 2002); for Europe in two 

years (2000, 2005); and for Russia in two years (1998, 2004). Market shares in terms of revenue have 

been dominated by Europe during 1999 to 2003 and again in 2005. The U.S. share has been on par with 

or exceeded Russia’s share in recent years (2001-2004) but dipped in 2005. 

 

25 The H indices in DOT/FAA 2002 were calculated as five-year averages for 1989 to 2001 and showed increasing 

competition in both LEO and GEO markets. The indices above if calculated as five-year averages are consistent 

with this trend towards increasing competition. 26 FAA/AST, Quarterly Launch Report: 2nd Quarter 2006 (includes 2006 forecasts; no commercial NGSO 

launches occurred during the first quarter 2006). 
16

 The position of U.S. industry in the global market appears markedly different depending on 

whether Sea Launch is considered a U.S. company. The FAA designates Sea Launch as “multinational” 

(as represented in Figures 2.3 and 2.4). Since Sea Launch is 40% U.S. owned and operates under a U.S. 

launch license, it can also be viewed at least in part as included in the U.S. market. Inclusion of Sea 

Launch flights strengthens the U.S. position markedly on the bases of launches and revenue, although 

how to statistically represent the contribution is unclear. In any case, with the significant exception of Sea 

Launch, the general trend since the late 1990s in both number of launches and revenue is downward for 

U.S. firms.. 

 Preliminary data27 not shown in the figures offer some outlook for the near term and farther into 

the next decade: 

• For the first half of 2006, a total of eight commercial GEO launches and four commercial NGSO 

launches took place. Two of the GEO launches were U.S. commercial launches (with one 

involving a U.S. government payload, GOES N). There were also three launches by Sea Launch. 

The remaining launches were by Russia and India. 

• For the third quarter 2006, projections show six commercial GEO and two commercial NGSO 

launches, with none of these by U.S. launch companies. Two of the projected launches are 

expected to be Sea Launch. 

• For 2007, projections are for 20 GEO and 14 NGSO commercial launches. Of these, two GEO 

and two NGSO launches are expected to be by U.S. companies. Nine are anticipated to be Sea 

Launch and Land Launch, the land-based version of the Boeing-Ukraine-Russia-Norway joint 

venture. The source of these projections acknowledges a “realization factor” by which only some 

60% to 80% of projected launches actually take place in the year anticipated. On this basis, the 

GEO and NGSO launch forecasts may actually represent 12 to 16 GEO and 8 to 11 NGSO 

launches for 2007 (the distribution of potentially realized launches among Sea Launch, Land 

Launch, and other vehicles is not reported). 

• Through 2017, the FAA/AST COMSTAC report projects total annual launch demand, although 

not on a per-country or per-vehicle basis. Total annual forecasted demand averages about 16 

GEO launches (10 to 13 launches per year on a realized basis) and about seven NGSO launches 

(four to six launches per year, realized). The projections show a decline of about 20% in GEO 

demand during 2008-2011and then an increase to 2006 levels, and a 30% decline in NGSO 

demand beginning in 2008. 

By way of summary of the quantitative evidence on competitiveness, the worldwide launch 

market since 1998 has become slightly more competitive for GEO and markedly less competitive for 

NGSO. U.S. companies are not “holding their own” in the market. If future projections are correct, 

the near-term relative U.S. performance in the GEO commercial market (with the exception of Sea 

Launch/Land Launch) worsens on the basis of number of launches. Data on forecasted revenue are 

unavailable, but the worldwide launch forecast does nothing to suggest reasons for a resurgence of 

U.S. performance.

 

27 FAA/AST, 2nd Quarter 2006 Launch Report; FAA/AST Commercial Space Transportation Advisory 

Committee (COMSTAC), 2006 Commercial Space Transportation Forecasts, May 2006; Jonathan’s Space 

Report, http://www.planet4589.org (accessed July 2006). 
17

Figure 2.3: Commercial Launch Events by Country 1998-2005

0

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005

United States

Russia

Europe

Multinational

Source: FAA/AST Commercial Space Transportation Year In Review reports for 1998-2005, tables on Worldwide Orbital 

Launch Events. Launches by China in 1998-99 and Ukraine in 1998 not shown.

Figure 2.4: Launch Revenues for Commercial Launch Events by 

Country 1998-2005 (approximate in $U.S. millions)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1998 1999 2000 2001 2002 2003 2004 2005

United States

Russia

Europe

Multinational

Source: FAA/AST Commercial Space Transportation Year In Review reports 1998-2005, tables on Launch Revenues 

for Commercial Launch Events. Revenue from launches by China in 1998-99 and Ukraine in 1998 not shown.
18

2.2.2 Is Competitiveness an Appropriate Measure? 

 The statutory language in the 1988 CSLA refers to competitiveness but the public policies 

enacted since then have not allowed competitive market forces to operate. (The same is less true of the 

newly emerging RLV market, however – more on this below). Moreover, various policies and practices 

on the part of all launching countries have sheltered their domestic launch companies, protecting them 

from market forces. A recent report by the Congressional Research Service (CRS) 28 describes these and 

other practices in detail. They include: 

• Launch quotas. In the decade following the 1988 CSLA Amendments, the U.S. negotiated 

bilateral trade agreements with China, Russia, and Ukraine on “rules of the road” (including 

launch quotas) for participating in the market to ensure that these countries did not offer unfair 

competition because of their non-market economies. Although the quotas on foreign launches 

expired in 2000 (Russia, Ukraine) and 2001 (China), their strictness provided shelter to the U.S. 

commercial launch industry in its early years and partly explains the trends in launch market 

shares discussed earlier. 

• Buy domestic. Government policies induce payload owners to “buy domestic.” For example, 

member governments of the European Space Agency (ESA) had long agreed to pay a surcharge 

of as much as 15-20% to use Ariane in order to financially support Arianespace. The surcharge 

led some governments to buy from U.S. suppliers; the surcharge was reduced in 1995. Pressure to 

buy domestic, along with proximity to the launch site and ease of doing business in a home 

country, can also influence the choice of launch vehicle. For instance, in 2003, ESA agreed to a 

European Guaranteed Access to Space (EGAS) program that would provide 960 million euros for 

Arianespace to return the larger Ariane 5 to flight and procure the vehicles through 2009. More 

recently, European ministers reaffirmed that ESA should give preference to European vehicles to 

prevent them from being undermined by lower-cost alternatives.29

• Export controls. Satellites made by U.S. companies or containing U.S. components require 

export licenses. The U.S. will currently not issue export licenses for satellites or components for 

Chinese launches; accordingly, the Chinese commercial launch program will seek customers 

whose payloads incorporate substitutes for U.S. components until U.S. export control regulations 

become more favorable. 

• Treaty provisions. A host of requirements contained in various treaties and other bilateral 

agreements also significantly affect the launch market. For example, the START Treaty requires 

Soviet-era SS-18s to be converted into civilian launch vehicles by 2020. 

 Taken together, these policies establish an environment determined by a complex mix of 

government policies that may or may not be mutually consistent in intent or outcome. It is likely that 

these policies have much more substantially influenced the U.S. commercial space transportation industry 

than the indemnification practices. But measuring the contribution of indemnification itself – which is 

critical to considering amendments to eliminate it or, at the other extreme, altering it to reallocate more 

risk to government – is impossible. The identical conclusion was reached in the DOT/FAA 2002 study of 

indemnification. However, it is essential to note that regardless of the role of indemnification, the 

 

28 Marcia S. Smith, “Space Launch Vehicles: Government Activities, Commercial Competition, and Satellite 

Exports,” Congressional Research Issue Brief for Congress, Order Code IB93062, May 27, 2005. 

29 Peter B. deSelding, “ESA Ministers Reject ‘Buy European’ Launch Proposal,” Space News, December 12, 

2005, p. 4. The article’s title refers to rejection of a stronger measure – probably unenforceable – that would 

have forced all European nations and organizations (e.g., the European Union and Eumetsat) to rely on Ariane 

and Vega for their space launch requirements. 
19

statutory goal of an internationally competitive U.S. industry, with the exception of international 

partnerships such as Sea Launch, is not being met. 

2.3 Possible Concerns for National Security 

 Another of the findings in the 1988 CSLA amendments is that the commercial space launch 

industry is “an essential component of national efforts to assure access to space for government and 

commercial users.” An argument among advocates of maintaining indemnification is that a robust U.S. 

commercial industry supports military launch vehicle supply, thus enhancing national security. 

Government space officials tend to believe that a healthy U.S. commercial launch industry helps sustain 

the space industrial base and keep costs down for government customers. 

 A 2005 annual industry overview implies that this support is cyclical, and support in recent years 

may go in the direction of military business supporting commercial business. The overview concludes, 

“In the U.S., the military satellite market is booming and there is a seemingly never-ending list of 

programs for which launches are planned during this decade and the next.”30 In addition, there is some 

evidence that civil space payloads follow a similarly cyclical pattern in their share of launches. The 

“commercial” payloads listed in the yearly FAA Launch Reports show a sizeable number of U.S. 

government civil space payloads rather than commercially owned payloads. The continued weak demand 

for U.S. commercial Evolved ELV launches has led Boeing and Lockheed Martin to propose a joint 

venture, United Launch Alliance, to serve the U.S. government market.31 Looking towards the future for 

commercial launch capability, recent comments on the direction of government policy give mixed signals 

for commercial and government markets. The NASA Administrator reminded the space science 

community, “I would also like to note for the science community that, if you advocate large missions 

exceeding the capabilities of the current EELV fleet, you should consider taking advantage of new heavylift capabilities currently under development for human exploration.”32

 Empirically measuring what role, if any, commercial activity plays in assuring access to space, 

and the extent to which indemnification contributes to any possible role, is difficult in the absence of 

production cost data. If a production advantage arises from commercial activity, then exploiting that 

advantage may not be directly aided by indemnification. Other, more direct public policies would go 

farther in achieving such an objective. 

2.4 Additional Considerations 

 There are some additional arguments for consideration of the role and efficacy of risk sharing. 

These arguments center on (1) the large and direct role of government in its responsibility for third-party 

safety, and (2) a more convoluted but arguably real link between the costs borne by the industry of 

restrictive government policy and the implicit “compensation” offered to industry by indemnification. 

Government itself is in charge of the physical launch activity and hence, government should 

bear responsibility for third party risk. A strong argument for maintaining indemnification, at least at 

federal ranges, is based on the appropriateness of linking responsibility for risk directly to the party in 

charge of safety. At federal ranges, the government, by way of the Air Force and the Department of 

 

30 Edwards, note 22, p. 135. 

31 In October 2005, Space Exploration Technology filed an antitrust complaint opposing the venture. The 

Department of Defense has given provisional approval. The U.S. Federal Trade Commission has yet to render a 

decision. 32 Remarks by NASA Administrator Michael Griffin to the NASA Advisory Council Science Subcommittee, 6 

July 2006, at http://www/spaceref.com/news/viewsr.nl.html?pid_21438 (accessed July 2006). 
20

Transportation, is largely in control of third-party safety. The government approves flight termination 

systems (FTS) (to destroy a vehicle traveling beyond approved limits), gives the final go-ahead for each 

launch, and has its “finger on the trigger” to deploy the FTS if the government deems it necessary. Timely 

activation of an FTS assures that vehicle debris will impact within a designated area so as to reduce the 

probability of public injury. This practice transfers the bulk of the third-party risk associated with the 

actual launch activity to the government. It is fully appropriate, then, for government to share in this risk. 

 In acknowledging this responsibility, a 1988 Senate committee report noted the argument that 

because the government is so closely involved in (1) evaluating the degree of risk in each launch, (2) 

setting the insurance requirements, and (3) controlling range safety, it “should also accept some of the risk 

and provide indemnification above the insurance requirements.”33 The report went on to point out that 

even without government indemnification, a domestic third party could sue both the commercial launch 

company and the government for damages, with the question of government liability resolved in the 

courts based on the Federal Tort Claims Act.34

 At commercial spaceports where the Air Force and the DOT are not involved in the actual launch 

(and reentry, in the case of RLVs), government still assumes some third-party risk responsibility because 

the DOT licenses these launches and establishes the requirements for the first tier of insurance. However, 

this relationship alone does not justify risk-sharing for vehicles using spaceports. Government licenses or 

regulates a variety of risky aspects of all types of commercial activity in the United States and in many 

cases, requires licenses to demonstrate financial assurance. In most cases, government itself is not 

physically involved in the activity.35 For this reason, the rationale for third-party indemnification of 

launches at U.S. commercial space transportation facilities solely on the basis of government being 

somewhat responsible for third-party risk is much weaker. (Existing FAA policy requires all vehicle 

licensees to insure third-party risk but does not require spaceport operators to have this insurance. The 

FAA requires licensees to demonstrate the same level of safety at spaceports as at federal ranges. Staterun or sponsored spaceports may even choose a higher level of safety. For example, California, Alaska, 

and Washington state have more stringent requirements than federal rules for potential oil spills from 

terminals and pipelines (see this and additional examples in DOT/FAA 2002)). 

Indemnification as a benefit could offset some costs of other restrictions on the commercial 

launch industry. A second justification for indemnification is that it can function to partly offset the 

costs of other government policy borne by the industry. As noted earlier, export controls restrict the 

international market for U.S. launch vehicles and impose direct costs on the commercial launch industry 

and its customers. As a means of alleviating these costs, indemnification could be considered 

compensatory. Just how compensatory is a matter of speculation. However, at present there is no credible 

way to compare the benefits and costs of indemnification with those of export controls, making 

indemnification a highly imperfect approach to balancing costs and benefits of other government 

intervention. 

2.5 Relevant Experience in Other Federal Government Indemnification Programs 

 A “default” strategy in analysis of programs for which key data and information is lacking is 

reasoning by analogy with other programs. Another federal indemnification program, the Price-Anderson 

 

33 Committee on Commerce, Science, and Transportation, United States Senate, “Insurance and the U.S. 

Commercial Space Launch Industry,” 100th Congress, 2nd Session, S. Print 100-112, July 1988, p. 12. 34 See the report above, p. 13. 

35 An analogy is that the licensing role of state agencies in issuing drivers’ licenses is not a basis for government 

indemnification of third-party damages associated with motor vehicle operation. 
21

Act for the nuclear power industry, served as a model for the 1988 CSLA risk-sharing approach.36 The 

federal government has assumed financial risk in backing many other private sector activities. For 

instance, the Overseas Private Investment Corporation (OPIC) offers protection to U.S. investors in 

developing countries and countries with emerging markets. The National Flood Insurance Program 

(NFIP) makes federal flood insurance available to property owners in communities that are accepted into 

the program. The Terrorism Risk Insurance Act (TRIA), passed by Congress after the September 11, 2001 

attacks, establishes a temporary federal program of some backing for most lines of commercial property 

and casualty insurance for catastrophic losses from terrorism. 

 These programs offer some guidance for risk-sharing policy in the commercial space 

transportation industry. However, it should also be noted that none of these programs combines all 

elements of the CSLA provisions. Only Price-Anderson addresses third-party risk, and none of the 

programs have among their rationale the additional goals of an internationally competitive industry or 

assured access to a market on the basis of dual use of assets to support national security. In these regards, 

the CSLA provisions are unique. Their uniqueness in seeking to support goals such as these limits the 

generalizability of analogous experiences. 

With this caveat, elements of these programs that overlap with the CSLA provisions and their 

possible modification include: 

• Program financing. OPIC operates as a self-financing agency in that its income is largely 

derived from premiums and fees, but the program has $100 million in borrowing authority from 

the U.S. Treasury. Over the life of the program, the government has made money from the 

Corporation. Although not intended to be self-financing, TRIA requires a portion of any federal 

compensation to be recouped through surcharges on policyholder premiums. NFIP derives 

income from premiums and fees but is not actuarially sound. Congress typically appropriates 

funds to finance the program in the aftermath of large-scale damages from flooding. 

• Actuarial determination. Officials with OPIC and the U.S. Department of Treasury, which is 

responsible for administering TRIA, admit that no actuarial models exist to quantify risks in these 

programs. Actuarial modeling for commercial nuclear power risk is similarly difficult because, as 

in the launch industry, accidents have been rare and the technology has changed markedly over 

time, complicating the relevance of past experience for actuarial determination. 

• Sunset provisions. TRIA and Price-Anderson have sunset provisions establishing expiration 

dates for the programs although both have been extended. In recently extending TRIA to 

December 2007, the Congress reiterated that the Act is still intended as a temporary measure. 

• Shifting the burden to the private sector as industries mature. TRIA and Price-Anderson 

explicitly provide that over time, government backing should decrease and private sector liability 

should increase. Federal financial backing under Price-Anderson has decreased significantly, 

commensurate with evidence of the adequacy of the insurance market and private operators’ 

ability to meet obligations in the secondary fund. This reallocation is consistent with the original 

intent of the Act to serve as temporary support for the industry as it matured. In a similar spirit, 

the provisions for terrorism insurance under the TRIA are expected to be temporary as property 

and casualty insurance and reinsurance markets establish coverage and pricing policy. Congress 

increased private sector deductibles and co-payments in renewing TRIA (but also increased the 

maximum liability for which the government would assume responsibility).37

 

36 See discussion in the Congressional Record, October 14, 1988, p. 31128. 37 In a 2005 report to the Congress assessing TRIA, the Treasury Department noted that during the period 2002 to 

2005, the property and casualty insurance market had demonstrated capacity to underwrite a greater share of 

terrorism risk. See U.S. Department of Treasury, Office of Economic Policy, “Assessment: The Terrorism Risk 

Insurance Act of 2002 – Report to Congress,” June 30. See also Testimony of Ben S. Bernanke, Chairman of 
22

 Because the CSLA was premised on Price-Anderson, some discussion of how that Act has 

evolved with maturation of the commercial nuclear power industry is illustrative.38

 The original Act, a 1957 amendment to the Atomic Energy Act, limited liability for any single 

nuclear accident to $500 million in government funds, plus the maximum amount of liability insurance 

available in the private market – at that time, $60 million – for a total of $560 million. The Act was to be 

effective for ten years. Congress has periodically renewed the Act with a variety of alterations. The most 

recent renewal of the Act, by way of the Energy Policy Act of 2005 (P.L. 109-58), extended PriceAnderson through 2025. The extended version significantly differs from the original in reallocating risk 

from the government to industry. 

 In 1979, the federal government’s statutory role in indemnity was phased out because the total 

level of private coverage had reached $560 million, a limit set in the 1957 Act. In 1988, congressional 

revisions to the Act included a provision stipulating that if this limit were reached, Congress would 

determine whether additional compensation should be awarded, and who should provide the 

compensation. The version of the Act currently in effect does not explicitly require Congress to fund 

damages that exceed the private amount, but commits the Congress to investigate the accident and to take 

whatever action it deems necessary. This action could include, among other things, appropriating funds or 

requiring the nuclear industry to provide additional funding to satisfy remaining claims. 

 Under the current Act, operators of reactors must obtain insurance in an amount up to the 

maximum of private insurance available to an operator. This amount is currently about $200 million per 

reactor per accident. In addition, in the event of an accident at a single reactor that resulted in losses 

exceeding the amount of private liability, all operators of the 104 commercial nuclear power reactors in 

the United States would be required to provide additional coverage by paying into a secondary insurance 

fund. Depending on the amount of these claims, these contributions could be as high as $88.1 million per 

reactor per accident. Following an incident, the operators of commercial power reactors would be 

required to pay as much as $10 million annually for nine years to fill the secondary insurance fund. The 

nuclear industry’s current exposure to third party liability claims would be approximately $9.5 billion 

before the Congress intervenes. In the event of an accident for which damages exceed this amount, the 

Congress is required to investigate the accident and, as noted above, to take whatever action it deems 

necessary. 

 The U.S. Government Accountability Office notes that nuclear accidents since Price-Anderson 

have been fully covered by the available private insurance. As a result, the industry has never had to pay 

into the secondary insurance fund, and (as in the case of the launch industry) Congress has not been 

required to take action on excessive losses.39

 the Council of Economic Advisors, before the Committee on Banking, Housing, and Urban Affairs, U.S. 

Senate, “On the Terrorism Risk Insurance Act of 2002,” July 14, 2005. 38 See discussion of the modifications to Price-Anderson in U.S. General Accounting Office, “Terrorism 

Insurance: Alternative Programs for Protecting Insurance Consumers,” statement of Richard J. Hillman before 

the House Committee on Financial Services, October 24, 2001, GAO-02-175T; and information provided by the 

Nuclear Energy Institute at http://www.nei.org/index.asp?catnum=4&catid=319 (accessed November 2005). 

39 U.S. General Accounting Office, previous note. 
23

 Much like the influence of CSLA in inducing other launching countries to provide government 

indemnification, the Price-Anderson Act has become model legislation for nuclear industry 

indemnification policies throughout much of the world. A large number of countries with nuclear power 

facilities are signatories to international conventions limiting liability and providing for government 

financial backing if damages are large. In countries where there may be insufficient industry funds 

available to compensate all claims, compensation may be reduced proportionately (Canada, Sweden) or 

may be funded after a vote by Parliament (Canada, United Kingdom). In other countries, the government 

(Japan, Switzerland) or the operator (Switzerland) is required to pay the difference.40 In some countries, 

operators participate in insurance pools. For example, British Nuclear Insurers is one of several insurance 

pools around the world. It comprises 13 commercial insurance companies and 40 Lloyds Syndicates. 41

2.6 Observations for Commercial Space Launch Indemnification 

 The federal programs discussed above illustrate some general guidelines for modifications to the 

current space launch indemnification system. By and large, these modifications move gradually towards a 

larger role for the private sector, but include government as a backstop. Key aspects include the 

following: 

• Shifting of the potential government burden to private industry over time is a policy objective that 

has shaped other programs. This outcome may argue for downward adjustment in the potential 

federal liability for launch coverage given the maturity of the industry. The self-financing 

 

40 Organization for Economic Cooperation and Development, Nuclear Energy Agency (OECD/NEA), 

Indemnification of Damage in the Event of a Nuclear Accident, Workshop Proceedings, 26-28 November 2001, 

at http://www.nea.fr/html/pub/ret.cgi?div=LEG. 41 See information provided by the Nuclear Industry Association of the U.K. at 

http://www.niauk.org/printer_56.shtml (accessed November 2005). 

International Agreements on Nuclear Power Liability 

 The primary international conventions on nuclear power liability include the 1960 Paris Convention on 

Third Party Liability in the Field of Nuclear Energy, the 1963 Vienna Convention on Civil Liability for Nuclear 

Damage, the 1974 Brussels Convention Supplementary to the Paris Convention on Third Party Liability in the 

Field of Nuclear Energy, and the 1988 Joint Protocol Relating to the Application of the Vienna Convention on 

Civil Liability for Nuclear Damage and the Paris Convention on Third Party Liability in the Field of Nuclear 

Energy. 

 The Paris Convention has 15 signatories: Belgium, Denmark, Finland, France, Germany, Greece, Italy, 

the Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, Turkey, and the United-Kingdom. In parallel with 

the development of the Paris Convention for Western European countries, the International Atomic Energy 

Agency adopted its own nuclear liability regime in 1963 through the Vienna Convention on Civil Liability for 

Nuclear Damage. Stating similar principals to those laid down in the Paris Convention, some 30 non-OECD 

countries mainly from Eastern Europe, South America, Africa and the Pacific ratified the Vienna agreement in 

1974. The Paris and Vienna Conventions limit liability of operators and require that operators secure insurance 

or other financial guarantees up to a stipulated amount. Amendments proposed in 2004 (but not yet ratified) to 

both conventions include an increase in the amount of operator liability. 

 The Brussels Supplementary Convention (BSC) to the Paris Convention created an additional financing 

mechanism for compensation available to victims of nuclear damage to supplement that already provided for 

under the Paris Convention. This supplementary compensation would be paid from public money provided by 

the signatories between them. Taken together, the Paris and Brussels conventions create three tiers: liability is 

covered by the operator for a first tier of insurance; by the accident state in the second tier, and by the 

contracting parties to the BSC on a prorated basis with respect to their respective contributions for the third tier. 
24

provision of OPIC is a possible approach in this direction; for example, a portion of premiums 

paid by the space transportation industry could be directed to an insurance pool. The pool could 

be federally maintained, as with OPIC, or it could be mandated by government but privately 

maintained, as under Price-Anderson. The amount could be smaller in the early years to ease the 

transition, and increase over time. A private pool could be comprised of U.S. launch operators or 

it could include operators in other countries. 

• Borrowing authority from the U.S. Treasury, following provisions in OPIC, could be an 

additional provision if the indemnification program moves towards self-financing. 

• Following the Price-Anderson Act, industry could establish a phased-in, self-funded secondary 

insurance pool from which each licensee could pay a prorated share of damages in excess of 

required primary insurance. 

• As programs evolve, monitoring any possible disincentives for insured parties to take 

precautionary actions is essential for program efficacy. When government bears some risk, 

insured parties may not invest in the optimal amount of safety, including R&D directed towards 

reducing risk. This concern has figured prominently in other risk sharing programs. Review of the 

incentives provided to industry by the indemnification regime, whereby so much of the thirdparty risk is controlled by the Air Force and Department of Transportation at the federal ranges, is 

necessary for fully evaluating this (unintended) possible cost of indemnification. Industry may 

not face adequate incentives to pursue as much safety-related R&D as it would in the absence of 

government sharing of the risk. 

 In assessing TRIA, the Treasury Department found an overall but slight increase in the amount 

spent on terrorism coverage once that market began to emerge (an outcome of two opposing trends: an 

increasing share of policyholders paying for coverage and declining prices among those who reported 

paying for coverage).42 The Treasury Department acknowledged that it was not possible to discern if 

government backing had facilitated the ability of the private insurance market to accept risk or whether 

the market would have evolved in the absence of the Act. The Treasury report concluded that TRIA had 

succeeded in providing a transition period for insurers and those insurers had been able to cope with 

increased exposure to risks as the federal provision of reinsurance diminished. In congressional 

testimony, the Chairman of the Council of Economic Advisors, Ben Bernanke, stated that TRIA provided 

an appropriate “temporary federal backstop in terrorism risk insurance and allowed the insurance industry 

a transition period to adjust to post-9/11 realities.”43 Bernanke also noted that “We cannot observe the 

counterfactual of what would have happened to the pricing and availability of terrorism risk insurance had 

TRIA not been enacted.” 

 The absence of the counterfactual limits the ability to discern any potential disincentives faced by 

industry in light of government financial assurance. For instance, studies of the commercial nuclear power 

industry under Price-Anderson have questioned whether the cushion provided by the Act reduced the 

industry’s willingness to invest in safety research and development or to implement safety-related 

improvements in operations or plant infrastructure.44 A study by the Congressional Budget Office of 

federal reinsurance for disasters raises a similar question in concluding that such reinsurance “... weakens 

 

42 Terrorism coverage in property and casualty markets prior to 2001 was typically unclear as an explicit provision 

of many policies; in addition, when it was provided, no premium or fee was charged. 43 Ben S. Bernanke, Testimony before the Committee on Banking, Housing, and Urban Affairs, United States 

Senate, “On the Terrorism Risk Insurance Act of 2002,” July 14, 2005. 44 Jeffrey A. Dubin and Geoffrey S. Rothwell, “Preparing for the Improbable: Safety Incentives and the PriceAnderson Act,” Social Science Working Paper 642, California Institute of Technology, Pasadena, CA, May 

1987. 
25

people’s incentives to take actions that would reduce the cost of future natural disasters.”45 In a 

comprehensive review of TRIA, insurance experts expressed concern that the insurance not conflict with 

incentives for investment by individuals and businesses in security and related risk-mitigation. 46It is 

reasonable to question (but difficult to answer) whether similar disincentives arise in the commercial 

launch industry as a result of government indemnification. As long as indemnification remains in place, it 

may not be possible to disentangle its effects (if any) on incentives to invest in safety innovation. To date, 

there is no evidence that indemnification has hindered safety measures in the U.S. commercial launch 

industry, given its outstanding safety record., Conjecturing about an answer is difficult in the absence of 

experience with major changes in the current regime, but insurance policy analysts have long recognized 

the potential danger of “moral hazard” – that is, when insured entities take more risk because “someone 

else” pays. 

2.7 Elimination of Risk Sharing and “Betting the Company” – Perspectives from Other 

Large Loss Events 

 Another key issue in evaluating the indemnification regime is the empirical question of how large 

might the actual financial risk be. Again, the tendency is to look to analogous experience in other 

industries, particularly where losses have been large. 

 The FAA’s MPL calculation ranges from about $250,000 to $261 million. It is important to 

understand the basis of the risk assessment process underlying determination of the MPL. FAA uses the 

threshold probability of occurrence of one in ten million, based on the government experience in launch 

activities at federal ranges. The FAA emphasizes that because of the stringent safety requirements used at 

these facilities, the general public in the vicinity of the range has little chance of being adversely affected 

by a launch event. As stated by the FAA in its advisory circular giving details for expected casualty 

calculations for commercial space launch and reentry missions, commercial space operations are to be 

carried out such that the risk to the public is several orders of magnitude less than the risk of fatality from 

non-space accidents.47

 But even if unlikely, what if a “catastrophic” event occurred? It is important to note first that it is 

far from clear what would constitute catastrophic. Such an accident might involve large numbers of 

casualties, significant property damage or loss, or damages to the environment and ecosystems (such as 

those from the Exxon Valdez oil spill). Even if such losses were quite low, an accident can threaten public 

acceptance of a technology (for example, no new U.S. commercial nuclear power plants were licensed for 

thirty years after the 1979 Three Mile Island accident). 

 

45 Congressional Budget Office, “Federal Reinsurance for Disasters,” 2002. Such concern is also expressed in 

Robert Litan, “Sharing and Reducing the Financial Risks of Future Mega-Catastrophes,” Issues in Economic 

Policy, Brookings Institution, March 2006. 46 The Wharton Risk Management and Decision Processes Center, the Wharton School, University of 

Pennsylvania, TRIA and Beyond: Terrorism Risk Financing in the U.S, August 2005, available at 

http://knowledge.wharton.upenn.edu/papers/1299.pdf (accessed July 2006). 47 FAA/AST Advisory Circular 431.35-1, “Expected Casualty Calculations for Commercial Space Launch and 

Reentry Missions,” 30 August 2000. 
26

Examples of third-party financial responsibility requirements under the MPL 

Vehicle (Company) Amount ($ millions) 

 Delta IV M or M+ (McDonnell Douglas) $264.0 

 Atlas V 521 (Lockheed Martin) 196.5 

 Zenit 3 SL (Sea Launch) 20.0 

 Tachyon (Interorbital Systems) 0.25 

Source: FAA/AST “Financial Responsibility Requirements as Determined by the Maximum Probably Loss (MPL) 

Process,” 20 July 2005.

 Tables 2.1 through 2.3 offer perspective on the high end of some types of catastrophic losses for a 

range of actual events. These illustrations are NOT intended to approximate in any manner the possible 

size of space transportation third-party damages. The tables are merely offered for perspective on the 

kinds and amounts of extreme losses and how insurance markets have accommodated these losses. 

Table 2.1 – U.S. Federal Disaster Aid (Billions of 2005 dollars)

Year Event Amount 

2005 Hurricane Katrina 50+ 

1992 Hurricane Andrew 21 

2001 9/11 terrorist attacks 20 

1994 Northridge earthquake 16 

2004 Hurricane Charley 8 

2005 Hurricane Wilma 4-10 

2004 Hurricane Ivan 7 

1989 Hurricane Hugo 6 

2004 Hurricane Frances 5 

2004 Hurricane Jeanne 4 

2005 Hurricane Rita 3-6 

Source: Robert E. Litan, “Sharing and Reducing the Financial Risks of Future Mega-Catastrophes,” Issues in Economic 

Policy, Brookings Institution, March 2006. The Hurricane Katrina amount is expected to exceed $100 billion sometime in 

2006. 

 Table 2.1 shows the largest amounts of U.S. federal disaster aid. These range from more than 

$100 billion for Hurricane Katrina to about $6 billion for Hurricane Hugo. Table 2.2 gives the ten most 

costly terrorist attacks in terms of insured property losses during 1970-2001. These range from $145 

million in insured property damages from the Oklahoma City truck bomb in 1995 to the $22 billion 

insured property loss due to the 9/11 attacks. Table 2.3 shows the composition of 9/11 insured loss 

estimates by lines of insurance, illustrating an important observation that insured losses can extend 

beyond property and life to involve business interruption and workers’ compensation. The FAA MPL 

calculation expressly excludes workers compensation, environmental liability, business loss interruption, 

and other insurance requirements (although licensees are not relieved of any federal, state, or local 

requirements to comply with them). 
27

Table 2.2 – The 10 Most Costly Terrorist Attacks 

in Terms of Insured Property Losses, 1970-2001

Insured 

Property* 

Event Injured Fatalities Date Location 

22,100 Terror attacks against World Trade 

Center, Pentagon, and 

Pennsylvania by hijacked airliners 

2,250 3,000 11 Sep 01 U.S. (NYC, 

Wash. DC, PA) 

907 Bomb explodes near NatWest 

tower (City) 

54 1 24 Apr 93 UK (London) 

744 Irish Republican Army car bomb 

near shopping mall 

228 0 15 Jun. 96 UK 

725 Bomb explodes in garage of World 

Trade Center 

1,000 6 26 Feb. 93 USA (New 

York) 

671 Bomb explodes in financial district 91 3 10 Apr 92 UK (London) 

398 Rebels destroy 3 airliners, 8 

military aircraft and heavily 

damage 3 civilian aircraft 

15 20 24 Jul. 01 Sri Lanka 

(Colombo 

Airport) 

259 IRA bomb attack in South Key 

Docklands 

100 2 9 Feb 96 UK (London) 

145 Truck bomb attack on government 

building in Oklahoma City 

467 166 19 Apr 95 U.S. 

(Oklahoma 

City) 

138 PanAm Boeing 747 crashes due to 

bomb 

0 270 21 Dec 88 UK 

(Lockerbie) 

127 Hijacked Swissair DC-8, TWA 

Boeing 707 and BOAC VC-10 

dynamited 

0 0 6 Sep 70 Jordan (Zerqa) 

* U.S. $ million, indexed to 2001; excludes liability and life. 

Source: Wharton Risk Management and Decision Processes Center, “TRIA and Beyond,” 2005 (Chapter 3 

(based on data from Swiss Re and Insurance Information Institute) 

Table 2.3 – Composition of 9/11 Insured Loss Estimates as of July 2004 

by Insurance Business Line ($ billion)

Line of insurance coverage Loss Estimates ($ billion) Loss Estimates (% of total) 

Business Interruption 11.0 33.8 

Property – Other 6.0 19.5 

Other Liability 4.0 12.3 

Property – World Trade Center 3.6 11.1 

Aviation Liability 3.5 10.8 

Workers Compensation 1.8 5.8 

Life 1.0 3.1 

Event Cancellation 1.0 3.1 

Aviation Hull 0.5 1.5 

Total 32.4 

Sources: Wharton Risk Management and Decision Processes Center, “TRIA and Beyond,” 2005, Chapter 3 

(based on data from Insurance Information Institute). 

 If the FAA’s assertion that its MPL calculation is extremely conservative is correct, and the 

procedures practiced by the Air Force and FAA at federal ranges are likely to maintain the impeccable 

third-party safety record, then the likelihood of third-party losses approaching the amounts in these tables 

is slim. And, under Tier III of the risk-sharing program, the commercial space transportation industry is 

liable for losses exceeding about $2 billion dollars in any case. The willingness of the industry to operate 
28

and assume risk for $2 billion or more implies that the industry conceives of such losses as sufficiently 

unlikely. In the absence of Tier II risk sharing, companies would need additional commercial insurance or 

other means of demonstrating financial capacity for an accident with a probability of damages on the 

order of $300 million to $2 billion. 

 Would companies be “betting the farm” to assume all or part of the responsibility for Tier II 

under these assumptions? Table 2.4 presents annual cash flow from operating activities and total equity 

for aerospace manufacturing companies for 2000. Three companies have a monetary value of $2 billion or 

more. Their willingness to allocate part of these funds to self-insure their commercial space transportation 

activities would be a decision made in tandem with their own assessment of likely third-party risk, the 

price of commercial insurance, and the attractiveness of other means of finance (for example, the 

possibility of pooling risk in group “captive insurance” arrangements, or the purchase of catastrophe 

bonds as a primary purchaser or through intermediaries). The availability of commercial insurance and 

possible other risk management arrangements are described further below. 

Table 2.4 – Cash Flow and Total Equity of Publicly Held 

Manufacturing Aerospace Companies (Calendar Year 2000)

Company Cash from Operating 

Activities ($ million) 

Total Equity ($ million) 

Alliant Techsystems Inc. 110 115 

B.F. Goodrich 297 1,500 

Boeing 5,900 11,000 

GenCorp 23 195 

Lockheed Martin 2,000 30,300 

Orbital Science Corp. 30 44 

United Technologies Pratt & Whitney 2,500 8,100 

Source: DOT/FAA 2002 

2.8 Summary of Observations on the Commercial Space Transportation Market and the 

Risk-Sharing Program 

 Proponents of a fully commercial space transportation industry have argued that at some point, 

perhaps sooner rather than later, the industry should operate without government support in the form of 

third-party insurance. This was the intent of the original 1988 CSLA establishing the risk-sharing 

program. By conventional measures of industry “maturity,” a space transportation industry deemed 

“nascent” nearly two decades ago is now mature. 

 Maturity is not synonymous with “successfully competitive,” however. Mature industries often 

struggle financially to capture and maintain market share – the auto, steel, and electronics manufacturing 

industries illustrate the point. Government is typically implored to help. The data brought to bear in this 

chapter show that with the exception of the partly U.S.-held Sea Launch company, the U.S. commercial 

space transportation industry has a small share of the international market in terms of numbers of 

launches and revenue. Worse, the forecast for the next decade is not much brighter. 

 The industry argues that weak performance underscores the critical importance of 

indemnification. This chapter has demonstrated that the difficulties in evaluating this argument are 

threefold. One problem arises because the evidence of the contribution of indemnification to the bottom 

line has never been revealed by industry, so a decision to maintain – or even increase – indemnification is 

completely uninformed. A second problem is that if the national goal is international competitiveness, 

public policy targeted directly towards price supports or other intervention may be a more effective means 
29

of boosting the poor performance of U.S. companies in the market. Such intervention lies outside the 

scope of this study. 

 The third difficulty is somewhat unique to the commercial space industry in contrast with autos or 

steel or electronics. A complex set of public policies is at work in space transportation, including but not 

limited to: the legacy of extensive government involvement in and control of the industry; the continuing 

role of government as the customer for a relatively large share of the market; international agreements 

governing the disposition of excess missiles in other countries; “buy domestic” policies in other countries; 

and export controls which restrict both suppliers and payload customers. The 1988 CSLA also 

emphasized the dual-use aspect of space transportation in serving military as well as civilian purposes – 

although as this chapter notes, good data are unavailable to evaluate the importance of this assertion. The 

interplay of these policies is such that some support, others undermine the industry. Identifying the 

relative influence of indemnification – again, is it the right size? too big? too small? – is far from easy. 

The link between the insurance regime and spillover effects facilitating cost effective dual use is 

particularly tenuous. 

 Related to the uniqueness of commercial space transportation is another factor, and this is perhaps 

the one factor which offers an easily defensible argument for government risk-sharing at federal ranges: 

the particular responsibility of the federal government (the Air Force and the FAA) as the decision-maker 

of last resort – having its “finger on the trigger” in the decision to abort a launch and thus the critical link 

between the launch and third-party safety. Risk-sharing at commercial spaceports is less defensible on the 

basis of this argument. 

 The chapter also draws from the experience of government indemnification in other sectors but 

notes again that characteristics of space transportation limit generalization. A common theme in all risksharing programs is that indemnification is a temporary measure. The fundamental conviction is that 

commercial markets eventually should and will be able to operate on their own. Other experiences also 

involve gradual rather than immediate termination of risk-sharing. They also include the need to guard 

against moral hazard if risk-sharing blunts incentives for companies to take safety measures or engage in 

safety-related R&D. If they operate without risk-sharing, the extent to which space companies would be 

“betting the company” by assuming responsibility for Tier II losses (as well as the responsibility the 

industry already bears for losses exceeding the inflation adjusted statutory limit on Tier II) depends on the 

companies’ financial capacity, the willingness of commercial insurers and insured companies to exploit 

risk-spreading financial instruments (which have evolved since the 1988 CSLA), and perhaps most 

importantly, the willingness of industry to avail itself of other opportunities. Chapter 3 turns to these 

options. 
30
31

3. Elimination of U.S. Government Risk-Sharing and Possible Consequences 

 In this chapter we first outline a set of general options for modifying the risk-sharing regime. The 

list of options highlights new types of financial instruments which have evolved in the insurance industry 

in recent years and which, even if not presently used by the commercial space industry, illustrate the 

range of approaches that are available in the event of modifications to indemnification. The chapter then 

suggests possible steps toward elimination. 

3.1 Alternatives 

 Alternatives to the current indemnification policy could include trust funds, self- and captive 

(pooled or group) insurance, and public tax subsidies for the costs of insurance. Different alternatives can 

be paired (a trust fund with a subsidy, for example). All of these are described in detail in the previous 

study of indemnification (DOT/FAA 2002, Chapter 9). 

Self Insurance. Under self-insurance, companies would reserve their own funds for third-party 

compensation greater than the MPL amount. The company would provide regulators overseeing their 

insurance with a demonstration of profitability and stability; regulators would monitor asset ratios, 

profitability indicators, and bond ratings. A parent corporation may choose to provide a financial 

guarantee or indemnity agreement. Self-insurance is common in workers’ compensation, general liability, 

and product and property liability. Self-insurance affords a company control over financial assets, but the 

reserve funds may represent a sizable commitment of resources. Small businesses often combine selfinsurance with commercial insurance. 

Trust funds would be financed by an individual company or multiple companies in the industry; 

involve an independent trustee, and when used to demonstrate financial assurance, would be under the 

approval of a regulator. Many liability regimes use trust funds to which parties contribute based on a fee 

per barrel, passenger mile, and so forth. A space transportation trust fund could be established by 

legislation, financed by fees based on risk calculations, and used to compensate property and third-party 

damages. The government or the private sector could serve as manager. Spaceports could also establish 

trust funds for third-party damages much like states fund underground storage tank assurances (set up by 

Congress in 1986 by an amendment to the Resource Conservation and Recovery Act). An advantage to 

the companies is that interest on the fund is returned to the companies. A firm that decided to exit the 

industry could receive a portion of the fund’s assets. Firms can have a say in how the fund is managed 

and its assets invested. Perhaps the largest difficulty in a trust fund approach is the degree to which risk is 

correlated across companies, such as the extent to which the value of the assets are correlated with the 

value of a particular firm. It is unlikely that a systemic problem would occur that is common to all launch 

vehicles at the same time. 

Captive Insurance. In this arrangement, insurance among two or more companies is pooled and 

then jointly owned and controlled. A single-parent captive involved ownership and control by one 

company and its subsidiaries. A group captive involves two or more companies. Contributions reflect 

each member’s relative risk – a company operating a new space vehicle may need to pay more until a 

safety record is established, or a company operating a vehicle overflying a highly populated area may 

need to pay more. Any surplus in the captive is returned to members after each accounting period. In the 

U.S., group captives are licensed by a domiciliary state and use a fronting carrier, or they operate under 

the Federal Risk Retention Act. At least two insurance experts have proposed use of group captives for 
32

space transportation and one suggested that they be used together with other forms of insurance.48 A 

captive could include not only space vehicle providers but satellite manufacturers and operators as well. 

Regulatory oversight would probably include the federal government and state regulators in which the 

captive is licensed or in which the suppliers operate. 

 Group captives are used by commercial aviation. Amendments to the Price-Anderson Act 

required establishment of self-funded secondary insurance pools by the commercial nuclear power 

industry. 

Catastrophe Bonds. In 1997, a wholly new financial instrument, catastrophe (CAT) bonds, was 

developed for managing the risks of relatively rare natural events (earthquakes, floods). Investors in CAT 

bonds assume that the risk associated with a rare event can be widely spread (a hurricane may hit the U.S. 

but not in the same year that an earthquake occurs overseas). Returns to investors are typically higher than 

market rates (bonds offered by Tokyo Marine and Fire Insurance for earthquake risk in Japan paid 4 to 

4.5 percentage points above the London InterBank Offered Rate). CAT bonds involve investors who 

purchase the bonds, a reinsurance company, and an insurance company purchasing the reinsurance (which 

could be a company or another reinsurer). Interest on the CAT bonds goes to the investors; if no 

catastrophic event occurs prior to the maturity of the bonds (often about 10 years), investors receive their 

interest payments plus a full return of principal. If an event occurs, the investor may lose all of their 

investment. The risks are hedged by reinsurers who mix lines of business covered and the geographic 

spread of business to build a portfolio. 

 The U.S. Department of Treasury, in a 2001 interview conducted for the previous assessment of 

the indemnification regime (see DOT/FAA 2002, p. 9-6), brought the option of CAT bonds to the table 

for space vehicle indemnification. The CAT market was initially slow to develop beyond a few 

applications. An impediment to these bonds is that catastrophic risks require insurers to hold large 

amounts of liquid capital, but institutional factors (accounting and tax law and regulation, together with 

takeover risk) make insurers reluctant to do this.49 Experts in insurance market research as of 2006 find 

CAT bonds becoming more attractive for diversifying extreme risks. Recently, Swiss Re has reported that 

the CAT bond market has grown much larger, reaching some $3 billion as of 2003. Swiss Re also notes 

that the methodology for structuring the bonds is now well established, and that experience is showing 

that there is almost zero correlation between extreme risks and other financial risks, making the bonds 

attractive to investors managing portfolios of different risks.50 Specific new instruments such as “Act of 

God” bonds, catastrophe futures, and CAT options contracts are also being developed. 51

Publicly Subsidized Insurance. Tax-based policies in the form of tax credits or deductions 

could be offered to space vehicle companies to underwrite their purchase of launch insurance. If the goal 

were to support the commercial launch industry but remove government from the insurance business, this 

approach has an advantage. However, it is arguable whether space transportation merits preferential 

treatment (the question arises as well with indemnification of the industry) in the absence of broad 

agreement on the policy goals and whether their attainment justifies the cost of favored tax policies. 

 

48 Neil Doherty, “Insurance, Risk Sharing, and Incentives for Commercial Use of Space,” in Molly K. Macauley, 

ed., Economics and Technology in U.S. Space Policy, Washington, DC, Resources for the Future, 1986; Jerome 

Simonoff, 1985, testimony before the Subcommittee on Science, Technology, and Space, Committee on 

Commerce, Science, and Transportation, U.S. Senate, 99th Congress, First Session, on “Satellite Insurance and 

Space Commercialization,” November 7. 

49 See Dwight M. Jaffee and Thomas Russell, “Catastrophe Insurance, Capital Markets, and Uninsurable Risks,” 

Journal of Risk and Insurance, 1997, 64(2), 205-240 and “TRIA and Beyond: Terrorism Risk Financing in the 

United States,” Wharton Risk Management and Decision Processes Center, August 2005. 50 “A Growing Market for Catastrophe Bonds” at http://www.swissre.com (accessed July 2006) 51 Jaffee and Russell, note 49. 
33

Because the current regime has not imposed costs on the taxpayer, it is hard to argue that tax subsidies are 

cost-effective. However, if new vehicles and spaceports come on line, and if third-party risk exposure 

increases, then a tax-based approach to redistribute the full costs of financial assurance, without 

government indemnification, could be seen as desirable by policymakers. Tax treatment could also be 

limited only to launch pools or cooperatives formed by space transportation companies and collectively 

represented in bargaining with insurers for price and policy conditions. 

3.2 Possible Steps Toward Elimination 

 In an overview of a wide range of federal insurance programs, the General Accounting Office 

(now the Government Accountability Office) stated guiding principles: safeguard interests of the 

government and taxpayer, ensure that industry is assuming a fair share of risk, avoid displacing the 

private insurance market, and encourage private market incentives “for prudent and efficient behavior that 

are not replaced by an attitude that says ‘Don’t worry about it, the government is paying.’”52 

 Despite such an admonition, some analysts surmise that government is likely to step up to the 

plate under any risk allocation scheme. In a study undertaken in 2005 on government’s role in insurance 

after events such as Hurricane Katrina, an analyst at the Brookings Institution, Robert Litan, has 

articulated this well: 

History has demonstrated time after time that when disaster strikes, especially megadisasters, governments will not sit idly by and let injured people suffer. Government has 

provided disaster aid and always will do so in the future. The issue for policymakers is 

how to pay for that aid: wait until the disasters happen, and then borrow or print money; 

to impose higher taxes or cut back other programs; or to pre-fund, to the extent possible, 

the costs of future mega-catastrophes by charging insurance premiums (through private 

insurers) to those most exposed to those losses.53

 The pre-funding program Litan proposes in his study is a formal federal reinsurance program 

open to primary insurers and re-insurers and administered by a quasi-independent arm of the Treasury 

Department. Litan argues that risk-sharing achieved through such an approach provides correct incentives 

for insured parties to identify and develop risk mitigation activities. In the case of the launch industry, 

these could include R&D for safer vehicles and launch procedures. The existing CSLA indemnification 

approach may or may not be encouraging the socially optimal amount of safety R&D, but amendments to 

reallocate at least some of the burden from government to industry may induce greater effort in mitigating 

third-party losses. 

 In this approach, the transition from the current regime to a reinsurance program could be phased 

in over time – say, a decade or so. An advisory group of insurance experts, including individuals from 

industry as well as neutral parties (such as leading university-based analysts in insurance and finance 

markets), representatives of industry, and FAA/AST could be set up to explore program design and 

implementation. The response of the insurance industry may involve increasing the use of private 

 

52 Richard J. Hillman, “Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers,” U.S. 

General Accounting Office, Testimony before the Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises, Committee on Financial Services, U.S. House of Representatives, October 

24, 2001. 53 Robert E. Litan, “Sharing and Reducing the Financial Risks of Future Mega-Catastrophes,” Issues in Economic 

Policy, Brookings Institution, March 2006. Litan defines a “mega-catastrophe” as a single natural disaster or a 

combination of lesser disasters in a year with financial impacts on insurers such that going forward the potential 

events become uninsurable or excluded in standard policies – that is, the events cause insurance markets to fail. 
34

reinsurance, building surplus by tapping into capital markets, and raising premiums or placing exclusions 

on some policies. Such adjustments are likely to involve both short-term and longer-term changes in 

coverage and pricing. 

 An approach of this type for the commercial launch industry could be structured as follows: 

(1) The first layer of losses would be paid by the private sector. This would be a continuation of the 

current Tier I practice. 

(2) Primary insurers, reinsurers, and catastrophe-linked securities would pay for the next layer of 

losses up to some large amount. This step would reassign liability for Tier II from government to 

insurers.54

(3) Federal government insurance is triggered beyond this large amount. Litan discusses ways to 

determine this third-tier amount and proposes that the government retain independent experts in 

risk assessment to play an objective role in defining the amount. 

 This model offers a framework for evolving launch indemnification policy. It suggests a path for 

increasing the role of the private sector in recognition of industry maturity and the capacity of the 

insurance market to creatively respond to a new market opportunity. At the same time, the role of 

government as a backstop is maintained, securing responsibility for treaty provisions (as discussed in 

Chapter 1) and recognizing the dual role of space transportation in commercial and government markets. 

 The closest precedent underpinning this model of gradual allocation of risk from government to 

the private sector is the amended Price-Anderson Act governing the commercial nuclear power industry. 

That industry, like space transportation, involves inherently hazardous technology-driven activities with a 

low probability of high-consequence accidents. Both industries have also benefited from government risksharing programs since their inception as commercial activities and in neither industry has there been an 

accident in which the Congress has been required to take action on excessive losses. The risk sharing 

practices in both industries have become emulated in the public policy of nearly if not all countries having 

these technologies – thereby influencing the playing field for commercial industry sales of both nuclear 

plants and space vehicles. Both risk-sharing programs were originally designed for limited duration, are 

keyed to the availability of liability insurance in the private sector market, and have been extended several 

times, although unlike indemnification for commercial space transportation, extensions of Price-Anderson 

have included increasing reallocation of risk to the private sector. The Price-Anderson Act, as amended, 

has placed U.S. government financial support in a third tier, while the industry must cover the first 

(insurance policy) and second (industry pool) tiers. 

 Is this model appropriate for the commercial space transportation industry? One concern might be 

the relative size of the industries. In commercial nuclear power, 12 large utilities plus the Tennessee 

Valley Authority, each with multi-billion dollar annual revenues, own and operate 75% of total capacity 

and about two-thirds of the nation’s 100 nuclear power plants.55 The industry pool which funds the second 

tier thus has a larger number of entities making contributions and over which to spread risk. In contrast, 

the commercial launch services market at present is made up of a small number of buyers and sellers. 

 

54 Litan envisions a role for state catastrophe funds at this tier. In his focus on natural disasters, he argues for state 

involvement on the basis of fairness, linking liability to those states in which the economic activity takes place 

and generates jobs and revenue. States with populations most at risk from launch accidents, such as Florida and 

California, could be included at this second tier. 55 U.S. Department of Energy, “Nuclear Reactors Built, Being Built, or Planned in the United States: 2003,” 

DOE/NE-0118, December 2003; Scully Capital, “Business Case for New Nuclear Power Plants,” Report to the 

Department of Energy, July 2002 (http://www.ne.doe.gov/home/bc/businesscase.html). 
35

Seven companies have active FAA launch licenses.56 For the largest U.S. launch providers (Boeing, 

Lockheed Martin, and Orbital Sciences Corporation), commercial space launch is a very small part of 

their business portfolio.57 But comparisons based on these numbers do not tell the whole story. Because 

the commercial nuclear power industry is much larger than the commercial space transportation industry 

and the nature of third-party risk is quite different, the absolute dollar amounts that trigger each tier are 

not comparable. For example, government backing is now triggered at losses of about $9.5 billion under 

Price-Anderson. 

 Even so, if the model of gradual risk reallocation to the private sector were employed, it could 

take years to build up an adequate funding pool. In the case of Price-Anderson, government backing was 

drastically cut back and third-party risk was increasingly redistributed to industry but only as the industry 

grew in terms of both number of owners and industry revenue. There were fewer than 10 plants and even 

fewer owners until 1971; until that time, many plants were experimental, joint programs with 

government, or pilot plants. The number of plants doubled by 1974, however, and the number of plants 

and owners grew rapidly. This pace of successful risk reallocation from government to industry suggests 

that timing matters, hence the proposal for the phased approach outlined above. 

 It is also the case that although contributions ideally would be keyed to the relative third-party 

risk associated with each member’s transportation technology and operations, contributions could 

increase the cost of entry to new players in the space transportation market. Failed ventures, or established 

providers who choose to leave the commercial market, would seek refunds of contributions they had 

made to the pool, creating uncertainty regarding the pool’s capacity and stability. It is also worth noting 

that this approach – as any approach that involves government as partner and involves compliance with 

the FAA licensing rules – would require management by a federal bureaucracy, so the government would 

incur routine administrative costs even if no liability claims were made. 

 Chapter 2 noted that operating an industry liability pool that was open to participation by foreign 

launch companies was one way of making up for the small number of domestic participants. However, it 

is not clear whether foreign companies would see a benefit in participating. In the case of commercial 

aviation, insurance pools and other arrangements are international. The multinational joint venture of Sea 

Launch and the “integrated schedule insurance” by which companies based in different countries pool 

their vehicle availability to provide backup capacity for customers (see Chapter 2) are recent 

developments which bode well for willingness to pool resources internationally. However, as noted in 

Chapter 4, foreign launching states already have indemnification arrangements in place, and no plans to 

eliminate them. For this reason, participating in a pool to support second-tier coverage may be 

unattractive to launch providers in these states. Additionally, they may not wish to join a fund that is 

managed or regulated by the U.S. government, established for the purpose of aiding their U.S. 

competitors. 

 

56 The companies are Boeing, Lockheed Martin, Orbital Sciences Corporation, Sea Launch, Interorbital Systems, 

SpaceX, and XCOR Aerospace. See http://ast.faa.gov/lrra/current_licenses.cfm (accessed January 2006). 

Currently, commercial marketing of Boeing’s Delta is on hold, so Boeing’s participation in the commercial 

launch market is limited to its 40% stake in Sea Launch. 57 Boeing’s 2005 revenue was $54.8 billion (http://www.boeing.com/companyoffices/aboutus/brief.html), a tiny 

fraction of which came from the company’s 40% interest in Sea Launch’s four commercial launches. Lockheed 

Martin had 2005 sales of $37.2 billion (http://www.lockheedmartin.com/), which included commercial launch 

revenues from its 50% share of five ILS launches (one Atlas, four Russian Protons). Orbital Sciences 

Corporation had approximately $700 million in revenue in 2005, about 10% of which was for space launch 

vehicles (Orbital Sciences Corporation Investor Fact Sheet, December 2005). Its three launches for the year 

included two for DoD and one for NASA (http://www.orbital.com/SpaceLaunch/). 
36

 Some concluding observations about differences between commercial nuclear power and 

commercial space transportation highlight the policy implications of any changes in the indemnification 

program. To a greater degree than in commercial nuclear power, commercial space has long been and 

remains an industry supported in part as a means of demonstrating international technological prowess. 

Commercial space, and space transportation in particular, have also long been thought to be a market in 

which the U.S. would like international dominance. And to a lesser extent than in commercial nuclear 

power (with the significant exception of control of nuclear waste disposal and associated proliferation 

issues), the relationship between national security and commercial activities in space (for example, dual 

use of assets, control of missile technology) remains a dominant concern. 

 The Price-Anderson Act continues to specify the third-party liability risk-sharing regime for the 

nuclear power industry, with the potential for government backing, a half-century after it was introduced. 

Its recent extension to 2025 – nearly seven decades after it was put in place – would seem to indicate that 

very long timelines are required for a complete transition to privately managed liability risk. For the 

foreseeable future, it will continue to be a hazardous industry with a low probability of high-consequence 

accidents, making it a candidate for government oversight and possible risk-sharing. U.S. launch 

providers would argue that the same is true for the commercial space launch industry 18 years after the 

CSLA Amendments. 

3.3 Launch Providers’ Perspective 

 The FAA’s Tier I third-party liability insurance requirement is designed to let private-sector 

parties (i.e., launch providers and insurers) absorb full responsibility for non-catastrophic accidents. Tier 

II (government) indemnification would come into play only if damage claims were made that exceeded 

Tier I insurance, a circumstance that, by FAA’s determination, has a one in ten million chance of 

occurring. An opponent of government indemnification likely would assess this situation by saying, “If 

the probability of catastrophic loss is so miniscule, why does industry need the government to help share 

the risk?” A proponent of government indemnification likely would respond, “If the probability is so 

miniscule, why should the government be concerned about accepting some risk?” Indeed, the 

government’s risk is further mitigated by the requirement for claims to be paid through the congressional 

appropriations process. Since the indemnification regime does not provide for automatic payment of 

claims, it can be viewed as merely a procedure established to allow industry to request government help – 

with no guarantee that it will be forthcoming. 

 Launch industry players surveyed for this report cite market factors that they believe argue for 

government retention of third-party liability risk sharing. All of them add up to a belief that elimination or 

significant reduction of the U.S. indemnification regime would tilt the playing field in favor of foreign 

competitors. According to the U.S. launch industry: 

• Indemnification has become a worldwide industry standard and is a factor in contract 

negotiations. Removing it would be a “market killer” because foreign competitors could then 

offer customers a level of insurance coverage that U.S. firms could not match. 

• The U.S. regime’s shortcomings – a cap on government support and the requirement for a lengthy 

approval process that includes congressional appropriation – already are used against U.S. 

companies by foreign competitors. Customers of U.S. companies generally understand how the 

U.S. system works, but often ask about shortcomings that the competition has highlighted. 

Elimination of the current regime would only prompt further marketing attacks. 

• Elimination of indemnification would send yet another signal to the world that the U.S. 

government does not support its commercial space industry. Currently, the industry is fighting the 

negative consequences of export control limitations that go beyond those faced by foreign 

competitors. Also, the use of Air Force launch facilities involves additional limitations and 
37

requirements, prompting foreign competitors to scare potential customers away from U.S. 

companies by saying, “The Air Force could bump your payload!” 

 Even though there has never been a claim under the risk-sharing regime, and even though the 

current regime has its shortcomings, industry respondents indicated that its elimination would have a 

negative effect on their business calculus. Here are consequences of elimination that were enumerated by 

launch providers: 

• Corporate decision-makers would rethink the benefits and risks of staying in the commercial 

launch business. All respondents believed elimination of indemnification would be a further step 

toward making U.S. companies non-competitive in the global launch services market. 

• Most respondents would feel compelled to purchase additional insurance, but would not make 

any guesses as to how much would be enough. Lack of information on the additional cost 

contributes to the undesirability of this solution. Higher insurance costs would be passed along to 

customers, further eroding competitiveness. 

• Foreign vehicles could become the commercial launchers of choice for U.S.-affiliated companies 

offering both U.S. and non-U.S. vehicles. If a foreign government is providing risk-sharing while 

the U.S. government is not, this will make the foreign launcher more attractive to customers and 

less risk for the launch provider. 

• The space industrial base supporting national security could be undermined if launch providers 

for U.S. government missions lose market share, increasing their per-unit costs and possibly 

driving them out of the commercial launch business. Similarly, a catastrophic damage claim that 

is not adequately covered by insurance could drive a company out of the launch business or into 

bankruptcy. 

 When asked about possible revisions to the indemnification regime, agreement among launch 

providers was not universal. Most feel that all licensed launch providers should be treated equally in the 

indemnification process, regardless of size or historical success rate. But some believe that Tier II 

coverage should take into consideration the historical performance of the launch vehicle. Others suggest 

varying indemnification based on the size of the rocket and the location of the launch. One suggestion to 

account for the size variance was to categorize launchers into three groups, to be indemnified at different 

levels: 

• Big launchers, which can do more damage over greater distances, and are operated by companies 

with deep pockets. 

• Small launchers, which are likely to do less damage, and are typically operated by companies that 

do not have deep pockets. 

• Sub-orbital rockets, which are small and have localized flight paths. 

This approach raises several questions. It may not be possible to assign specific levels of coverage to each 

category that will satisfy all the players. Should big launchers get more coverage because they can cause 

more damage, or less because big companies have deeper pockets and operate evolved versions of U.S. 

government legacy systems? How should the FAA quantify the difference between “more” damage and 

“less” damage for low-probability catastrophic events? How should the FAA categorize small launchers 

from large companies, like Lockheed Martin’s Athena or Orbital Sciences’ Taurus? Although these 

complexities weigh against the approach, the FAA MPL determination in practice accounts for most of 

these differences, and results in a wide range of MPL requirements by type of vehicle, launch site, and 

other factors. 
38

 Current U.S. policy and law encourage entrepreneurial companies to enter the space launch 

market. Most respondents – including some U.S. and foreign payload customers – believe elimination of 

indemnification would discourage entrepreneurial launch efforts. One representative of a large launch 

company suggested that launch entrepreneurs who haven’t flown yet aren’t showing much interest in the 

indemnification issue yet, but they will eventually. However, it’s clear that some smaller companies are 

already thinking about this. They insist that elimination of indemnification by itself would not keep them 

from entering the market, but they would alter their business and operational plans. As with the big 

players, they may seek to buy additional insurance coverage, but fear that the buying power of their big 

competitors would absorb all of the coverage available at a reasonable price. An alternative approach 

would be to move launch operations away from population centers – out to sea or to a remote location 

such as Wake Island or Kwajalein Atoll. Entrepreneurial firms would pass the costs of either approach to 

customers, contributing to a market price disadvantage. 

 In sum, all launch providers in the survey strongly believe the current risk-sharing regime for 

third-party liability should be retained, and even strengthened – whatever it takes to maintain a level 

playing field with global competitors. The majority of respondents also feel that all licensed launch 

providers should be treated equally, regardless of vehicle size or history. 

 Industry’s position is perhaps best summarized by the following recommendations, expressing the 

consensus of the membership of the Aerospace Industries Association (AIA): 

• Make the current third party liability risk-sharing regime permanent by eliminating the 

sunset clause. 

• Eliminate the current cap on the U.S. government's commitment to pay successful third 

party claims. The cap creates an arbitrary barrier that, among other things, unnecessarily limits 

the U.S. government's flexibility with respect to paying claims in excess of the cap should it be 

deemed appropriate to do so. 

• Streamline the process for reviewing and approving claims. The complexity and potential 

duration of this process creates uncertainty. Currently, before a payment is made, notice of a 

claim must be given to the U.S. government, which must be given an opportunity to participate or 

assist in the defense of the claim. Once it is determined that liabilities exceed the requisite amount 

of purchased insurance, the Secretary of Transportation must review the causes and extent of 

damages, approve the settlement, and then submit a report to the Congress. Additionally, on the 

recommendation of the Secretary, the President must submit a compensation plan to the Congress 

requesting appropriations or legislative authority, and Congress must take appropriate action. 

 The AIA contends that since its inception, the current risk-sharing regime has afforded the U.S. 

space transportation industry predictability and stability. Launch providers know that third-party liability 

is covered up to a certain limit. Satellite customers know that risk sharing is provided regardless of the 

launch vehicle and the launch site. New entrants to the launch market are covered by the same set of 

conditions for third-party liability as existing providers. 

 If the current third-party liability risk-sharing regime is allowed to expire or is phased out over 

time, the U.S. launch industry expects three major impacts: 

• A tilt in the playing field in favor of foreign launch competitors. The long-time practice of 

protection provided to U.S. launch providers by the United States would disappear, leading the 

global customer base to question how risk will be addressed by U.S. companies. The current 

third-party liability risk-sharing regime helps to level the playing field by incorporating rules and 
39

conditions into the FAA licensing process that are known and relied upon by all players in the 

industry. 

• Introduction of unpredictability and instability in the market. The insurance market is 

already uncertain. The pool of insurance available at any time fluctuates from year to year. But 

the current risk-sharing regime provides a self-adjusting mechanism linked to the amount of 

insurance that is available on the open market. If the U.S. government role were removed, one 

may expect potential customers to demand higher and more liberal insurance protection in their 

launch contracts, resulting in higher costs that either squeeze the U.S. providers' margins or 

adversely impact competitiveness. Satellite customers may not want to risk flying on a U.S. 

launch vehicle if the third-party liability risk management regime becomes uncertain. 

• Additional barriers to entry for new competitors in the market. Smaller companies would 

have less access to insurance because of their inability to compete with the buying power of 

larger, more established companies. Smaller companies may be forced to “bet the company” that 

their available liability insurance coverage is sufficient to cover potential claims. 

3.4 Launch Customers’ Perspective 

 Like the launch providers, payload customers surveyed for this study view government thirdparty liability indemnification as an industry standard. It is a prerequisite for choosing and doing business 

with any launch services provider. While liability indemnification coverage varies among the launch 

service providers of different nations, it is generally understood that each launch company maintains 

sufficient amounts of coverage to provide adequate compensation in the event of a launch mishap. In one 

case, a satellite operator noted that his nation’s law requires companies to demonstrate sufficient 

insurance protection for third-party liability as a condition of the operator’s license. Both foreign and U.S. 

payload customers indicated that elimination of government indemnification would discourage their use 

of U.S. launchers. 

 As an example of the seriousness with which satellite operators treat third-party liability issues, 

one operator of a global constellation carries liability insurance for the life of its satellites to cover the 

various governments whose slots are being used, at a total annual cost of about $700,000. This operator 

would need to reconsider reliance on U.S. launchers if their use would increase risk exposure or prompt 

the purchase of large additional amounts of insurance. 

 Some respondents see the prospect of elimination of indemnification as a second major blow to 

U.S. competitiveness in space commerce in recent years, the first being the export control restrictions put 

in place in 1999, which have discouraged potential foreign customers and resulted in marketing 

advantages for foreign competitors. In the words of a foreign payload customer, “If the government wants 

a dynamic, viable satellite launch business to be in place it needs to ensure that it foster the correct 

environment.” 

3.5 Space Insurance Industry Perspective 

3.5.1 Maturity of the Launch Liability Insurance Market 

 In addition to nurturing a commercial launch industry, the indemnification regime was also 

intended to tide the industry over until the space launch insurance market demonstrated adequate 

capacity. Developing capacity of the launch insurance market is not a statutory goal of the CSLA 

amendments but congressional concerns about the ability of the market to meet requirements of 

commercial launch companies are prominent in accompanying report language. A number of hearings 

were held specifically to focus on the insurance issue. Two concerns were dominant in these discussions. 

One was a concern that commercial launch insurance would be a new market and it would take some time 
40

for insurers to structure and build the market (the market for payload insurance was well developed but 

the market for launch insurance was less developed). Another concern was the financial capacity of 

launch insurers. On one hand, proponents of indemnification noted that “the volatility of premiums even 

in the absence of losses suggests that any third-party liability claim could send premiums exorbitantly 

high.” On the other hand, some experts concluded that the current (1988) capacity of the insurance market 

was very high, up to $1 billion.58

 The historic availability of government indemnification likely influences the size of the private 

insurance market that is observed today. In the absence of indemnification, the observed capacity of the 

market may be greater and insurers may have exploited the increasingly large array of evolved and new 

financial instruments (as discussed earlier, these include the greater use of an evolved reinsurance 

industry, as well as CAT bonds and insurance pools), although it is not clear that this would have been 

sufficient to replace the entire amount currently covered by indemnification. 

 Insurance markets for all types of commodities and activities generally follow an industry cycle 

of soft and hard market conditions; these include increases and decreases in premiums, profits, and 

coverage. Premiums are a major but typically not the only source of revenue for insurers. They also have 

investment portfolios, policyholders’ surpluses in the form of retained earnings, and capital raised from 

outside. Primary insurance companies typically purchase reinsurance to spread the primary insurer’s risk; 

reinsurance enables the primary insurer to manage their overall risk exposure and to underwrite more 

policy coverage. Reinsurers themselves may purchase reinsurance and hold surplus. Taken together, these 

characteristics of insurance markets give insurers significant flexibility in responding to market 

conditions. 

 Total annual third-party launch liability insurance premiums worldwide were estimated to be 

between $2 million and $10 million in the DOT/FAA 2002 report (Appendix D) and now, as then, are 

part of an aerospace insurance market that includes commercial airlines, general aviation, satellites, 

aviation product liability, government space launch range facility property liability, and space launch 

third-party liability. According to the 2002 study, premiums collected for third-party liability represent 

only about 0.1 percent of all aerospace premiums, from a total aerospace insurance market with annual 

premiums between $3 billion and $5 billion. Claims that might exceed third-party premiums would be 

paid from capacity built from other insurance industry capacity, although insurance markets are not 

typically cross-utilized to cover losses in other markets. 

 Insurance industry representatives interviewed for the DOT/FAA 2002 study either favored 

continuation of the existing risk-sharing regime or modifications that eliminate the stipulation that 

Congress has to appropriate funds for the indemnification provision. Even though elimination could result 

in more business for insurers, they were concerned that elimination could reduce the competitiveness of 

U.S. launch companies and in turn, offset insurers’ potential business gains. 

 In discussions with insurers for the present study, the most frequent adjective used to describe the 

insurance market conditions for commercial launch third-party liability was “fragile.” According to 

insurers today, not much has changed since 1988. 

 As noted, third-party liability for commercial launch is a very minor subset of the Aviation 

Products and General Liability portfolio. As a result, the availability and cost are subject to all the 

influences that govern this wider portfolio rather than being limited to factors affecting only commercial 

space launch. Launch liability insurers currently are willing to risk $300-500 million per event. But this 

 

58 U.S. Senate Committee on Commerce, Science, and Transportation, “Insurance and the U.S. Commercial Space 

Launch Industry,” 100th Congress, 2nd Session, S. Print 100-112, July 1988, p. 12. 
41

amount fluctuates widely, and one big claim against this pool would change the situation dramatically. 

The launch industry has an impressive safety record in this area, but insurers express the concern that the 

annual number of commercial space launches hasn't increased enough since 1988 to enable the insurance 

industry’s earning capability to support a catastrophe loss. In fact, Table 3.1, from the International Space 

Brokers Group, illustrates that the industry lacks the robustness to recover quickly even from a single 

maximum probable loss claim. 

 Based on expected launches for a 10-year period through 2014, the analysis shows that decades of 

future premiums would be required to replenish the loss from just one maximum probable loss claim, 

regardless of the size of the rocket. According to insurers, even a modest claim would be enough to drive 

prices up, if not diminish available capacity. So far, the industry has been fortunate that no such claims 

have been made. But eventually, at a launch site somewhere in the world, stringent standards, hard work, 

and luck could fail to prevent a catastrophic accident, and the launch liability insurance system will face 

its first real test. 

Table 3.1: Third-Party Launch Liability Insurance Market, 2005-2014 

NUMBER OF LAUNCHES 

SEEKING LIABILITY 

INSURANCE 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total 

Annual

Average

 

GSO – Medium to Heavy LV 19 16 15 14 14 15 17 17 17 20 164 16.4

Non-GSO – Medium to Heavy 

LV 1 8 7 2 1 1 1 1 2 1 25 2.5

Non-GSO Small LV 5 5 5 4 4 4 3 3 4 2 39 3.9

10-YR. PROJECTED INSURANCE 

PROCEEDS Amount Insured

Premium Per 

Launch 

Total Premium 

Anticipated 

Average Annual 

Premium 

 

GSO – Medium to Heavy LV $140M-165M $150,000 $24,600,000 $2,460,000 

Non-GSO – Medium to Heavy LV $100M-140M $100,000 $2,500,000 $250,000 

Non-GSO Small LV $25M-75M $50,000 $1,950,000 $195,000 

 

 Total $29,050,000 $2,905,000 

 

REQUIRED PREMIUM TO COVER 

ONE MAXIMUM PROBABLE LOSS Assumed Value Accrued Premium to Pay 

 One Maximum Probable Loss Claim 

GSO - Medium to Heavy LV $165,000,000 56.80 years 

Non-GSO – Medium to Heavy LV $140,000,000 48.19 years 

NGSO Small LV $75,000,000 25.82 years 

Source: International Space Brokers Group 

 Based on this assessment, a maximum loss would wipe out historic profitability in this class of 

coverage and would force insurers to rethink their investment in this area. As one insurer put it, “the 

larger the loss, the more likely the availability of this insurance will cease to exist.” It is highly likely 

capacity would be unavailable for some time after an MPL payout, which means no new premiums would 

be collected and therefore recovery would be delayed further. Since third-party liability coverage for 

space launch is not a dedicated market, but rather a derivative of the aviation liability market, major 
42

claims in the aviation arena (and, in some cases, catastrophic loss liability insurance in general) could 

have similar negative effects on insurance availability for space launches. 

 Given the current fragility of the insurance pool available for Tier I requirements, space insurers 

are in agreement that if Tier II coverage were eliminated, the additional coverage they could offer to 

launch providers would not constitute a significant fraction of what can be accommodated under the U.S. 

government’s indemnification regime. 

3.5.2 Insurance Industry Concerns 

 In most ways, the space insurance community, launch providers, and payload customers 

participating in this study are in agreement regarding the market environment and the potential 

consequences of elimination of third-party liability indemnification. Insurers agree that government 

indemnification has become an industry standard and should continue to be provided equally to all U.S. 

launch providers regardless of size or launch history. Insurers do not necessarily see indemnification as 

having been an issue to date in choosing a launch vehicle, but they believe it will become an issue if it is 

terminated. There was no consensus among insurers on whether termination would discourage new U.S. 

launch providers from entering the market. 

 One of the difficulties in assessing the implications of eliminating indemnification is that 

empirical data is insufficient to quantify how much additional insurance U.S. launch providers would buy 

under such circumstances, and how much they would be willing to pay for it. According to space insurers, 

marginal additional coverage likely would be available at reasonable cost, but if insurance buyers begin to 

demand substantially more than the coverage currently required (i.e., a significant fraction of today’s Tier 

II indemnification), market capacity would fall short, the price would go up, and larger companies may 

choose to use their financial muscle to ensure their insurance needs are filled at the expense of smaller 

companies. 

 Another concern is the effect on the launch providers’ subcontractors. Today, FAA regulations 

mandate that subcontractors be covered under the Tier I insurance policies of the prime contractors, and 

all relevant parties operate under cross-waivers of liability. But if the liability coverage commercially 

available to the prime contractors is unable to handle all probable claims in the absence of government 

indemnification, the primes may seek to reallocate financial risk to their subcontractors. If a reallocation 

scheme were to be approved by the FAA to accommodate the primes, third-party claimants would not 

hesitate to go after subcontractors (especially those with deep pockets), sending a chill throughout the 

industry that could undermine the supply chain. Subcontractors could see their risks increase and their 

profit margins eroded by requirements to purchase new liability insurance. Increased insurance demand 

from subcontractors would become another factor driving up premiums and absorbing limited capacity. 

3.5.3 New Demands on the Insurance Pool 

 New space insurance customers must be considered as well, since they will increase demand on 

the insurance market. Because RLV and reentry vehicles come under FAA licensing, they must 

demonstrate financial responsibility for the MPL and are covered by risk-sharing once they are granted an 

operational license. Domestic entrepreneurs such as SpaceX and foreign programs in countries such as 

India and Brazil could become additional players seeking commercial third-party liability coverage. 

Looking past the expiration of the current U.S. indemnification regime in 2009, the likelihood increases 

that U.S. launchers will face more competitors for a finite pool of insurance. If the payload traffic at that 

time can sustain these new launch providers, the demand for liability insurance may result in higher 

premiums until the insurance market’s capacity and the relative safety of the new vehicles improve. 
43

 Another factor must be considered as new launch providers enter the global market: launch 

accidents involving new, unproven vehicles – which historically have experienced the most failures – 

could result in sizable liability claims. The cost and availability of insurance for U.S. companies is 

affected by the claims history of all space launch ventures around the world. To date, accidents affecting 

third parties have been few and claims have been minimal. FAA licensing requirements stipulate that new 

US vehicles must be operated to meet the same safety standards, but the practices of other countries’ 

launching authorities for new vehicles remain to be established. If traditional safety and reliability 

standards are not maintained as more players join the launch industry, then a catastrophic accident could 

drain the worldwide liability insurance pool for all commercial launch providers for a period of time. 

Public safety regulations for space launch are unique to each launching state, and the U.S. has no control 

over launch safety standards other than its own. 

 A different example of a new space industry player that could make demands on the liability 

insurance pool is the European consortium that will operate the Galileo constellation of positioning, 

navigation, and timing satellites. The Galileo consortium plans to guarantee the accuracy of its signals for 

commercial and government customers. A mishap (such as a plane crash) resulting from a faulty signal 

could leave the consortium liable for damages. The Galileo managers are addressing this issue, and have 

received proposals from space insurers who were among those consulted for this report.59 When queried 

for this study, insurers acknowledged that there will be some exposure to this new risk for the same pool 

of insurers that handle third-party launch liability. This greater risk of loss will put further demands on the 

launch liability insurance market. 

 The insurance needs of the Galileo consortium would differ from those of launch providers. In the 

case of the latter, the insurance coverage is associated with an event. Once a launch is successfully 

completed, insurance resources are freed up for use by another launch provider. Galileo, on the other 

hand, will require continuous coverage. If Galileo buys an insurance policy that draws on the launch 

liability pool for $X million in coverage, then the pool effectively shrinks by that amount for all other 

customers for the duration of Galileo’s insurance policy. 

 Similarly, reusable launch vehicles (RLVs) could tie up insurance funding for longer periods than 

ELVs. Insurance capacity is committed not just for the launch, but for the reentry as well. That could 

occur in minutes, hours, days, or longer. Over time, RLV flight durations can be expected to increase. In 

today’s market, insurers do not want to be committed to a single launch event for longer than a year. To 

allow for launch delays, policies typically are written three to six months prior to a scheduled launch. As 

RLVs mature, they may challenge the insurance industry’s tolerance for the duration of its commitment to 

a single event. 

 Taking a step further, a private company like Bigelow Aerospace may succeed in deploying large 

structures in low Earth orbit (LEO) to serve multiple purposes. Large structures cannot be counted on to 

burn up completely on reentry, and therefore would also be candidates for third-party liability insurance. 

This is another example of a need for continuous coverage that could increase the demand for insurance 

capacity. 

 There is always the possibility that the addition of successful new players in the market will 

entice more insurers to invest in it, enlarging the size of the pool. This cannot be predicted with 

confidence since it is driven by many variables, including insurers’ perceptions of growing profitability. 

However, it can be predicted that a major claim against the pool would discourage its growth, and 

probably cause it to shrink for a considerable time. 

 

59 Peter B. de Selding, “Galileo Completion Not Anticipated Until About 2011,” Space News, September 12, 

2005, p. 15. 
44

3.5.4 Potential Effects of Unrelated Events or a Depressed Insurance Market 

 Any assessment of the behavior of the launch liability insurance market must consider events 

unrelated to space launch that will have ripple effects throughout the greater liability insurance market. 

The obvious example is the recovery from the devastating 2005 hurricane season in the U.S., which could 

cause a tightening of capacity across all lines of the insurance business due to the enormity of the 

catastrophe. Additionally, as noted earlier, launch liability insurance is a very small portion of the aviation 

insurance pool, so a catastrophic airline accident resulting in third-party claims will absorb capacity at the 

expense of the space launch pool. 

 The Tier I insurance requirement is either a vehicle-specific amount specified by the FAA or the 

maximum available on the world market at reasonable cost. If market capacity is reduced and vehiclespecific targets cannot be met, the likelihood of needing Tier II coverage in the event of an accident is 

increased. In the wake of a large third-party claim anywhere in the world, the maximum available on the 

world market for some time afterwards may approach zero. In that case, government indemnification may 

be the only third-party liability coverage available to U.S. launch providers. 

 If U.S. launch companies found themselves in a situation where little or no third-party coverage 

was available for a significant period of time, the FAA would have limited options for dealing with this in 

the licensing process. Launch licenses could be denied unless launch providers found some other way of 

fulfilling their MPL requirement, or until the insurance market recovered. Alternatively, licenses could be 

granted despite insufficient market availability of MPL coverage with the knowledge that any 

catastrophic accident resulting in third-party claims would depend on Tier II indemnification, possibly 

from the first dollar. Of course, if Tier II indemnification were eliminated, the only option may be the first 

alternative – denial of licenses, possibly for an extended period – which could mean the end of the U.S. 

commercial launch industry. 

3.5.5 The Continuing Role of Indemnification 

 Over the years, other launching states have looked to the U.S. example and instituted their own 

similar indemnification regimes. The result is an industry standard that the U.S. initiated. 

 Since its inception in 1988, third-party launch liability indemnification has been viewed as a 

supplement that would be needed only in the event of a catastrophic accident exceeding available 

insurance coverage – a one-in-10 million event, by the FAA’s reckoning. Despite the time that has 

elapsed since the indemnification regime was put in place, the global insurance market cannot provide 

affordable coverage at a level that would make up for withdrawal of government indemnification, 

according to industry representatives. In their view, a government-backed supplement is still needed in 

the absence of launch industry resources sufficient to cover catastrophic risk. 

 The perceived fragility of the launch liability insurance market and the likelihood of increasing 

demands on the limited insurance pool suggest that the indemnification regime has a second major 

function in addition to its role as a supplement. It is a backup mechanism that can sustain the liability 

insurance needs of the U.S. launch industry in case the insurance industry is unable to do so on its own. 

Without such a backup, insurers feel that a single catastrophic event anywhere in the world could severely 

curtail availability of insurance for a significant period of time, effectively shutting down U.S. 

commercial launches. 
45

4. Risk-Sharing Regimes of Foreign Competitors 

4.1 Background 

 Space launch third-party liability indemnification remains a sensitive topic in this highly 

competitive global market. Although past experience has shown that the probability of incurring a 

liability obligation is very low, the amount of potential liability could be great enough to play a role in the 

choice of a launching state based on the provisions of its indemnification regime. 

 There are very few examples of commercial launches that have caused property damage and/or 

injury to third parties. The estimated amount of third-party damage to date is very modest when compared 

to the requirements imposed on U.S. launch providers for Tier I insurance and comparable requirements 

in other launching states. As a result, governments that have space launch risk exposure are dependent on 

analyses that are chiefly concerned with theoretical potential. 

 Two prominent cases illustrate the minimal financial impact of third-party liability cases to date. 

The first is the Soviet military satellite Cosmos 954, which made an uncontrolled reentry in northern 

Canada on January 24, 1978 carrying a nuclear power source, which spread radioactive debris over a wide 

area.60 There were no human casualties, but Canada suffered serious environmental consequences from 

the scattered debris. As an injured third party and signatory to the Liability Convention, Canada sought 

compensation of approximately six million Canadian dollars from the USSR for environmental cleanup.61

After three years of diplomatic negotiation, Canada obtained only half of the amount.62 

 A more recent case was the launch failure of a Chinese Long March 3B which took place at 

China’s Xichang Satellite Launch Center on February 15, 1996.63 The launch carried an Intelsat 708 

satellite, which was intended primarily for direct broadcast satellite services to Latin America. The failure

caused property damage to third parties in the immediate area. Six people were reported killed, and 

another 57 were reported injured. The third-party liability payout was approximately $2 million. 

 The lack of large liability claims tends to reduce the priority assigned to the issue by official 

sources. A large-scale incident could change this priority rapidly and lead many governments to review 

their liability policy. 

 In examining the launch liability risk-sharing of other spacefaring nations, this chapter includes 

country-specific descriptions which demonstrate that indemnification on the international scene remains 

essentially the same as it was reported in the DOT/FAA 2002 study. To assist in assessing the future of 

the U.S. regime, this study attempted to discover whether foreign launching states were contemplating 

any changes to their risk-sharing regime, and whether changes by the U.S. would elicit any reactions from 

these states. In general, responses indicate that foreign changes in risk-sharing are not on the horizon. If 

the U.S. alters its course, foreign nations do not plan to react in any way unless the actions would change 

U.S. obligations under the Liability Convention. 

 

60 M. Mateesco-Matte, “Cosmos 954,” Annals of Air and Space Law, Vol. 3, McGill University, 1978. 61 Department of External Affairs, Canada, “Claim Against the Union of Soviet Socialist Republics for Damage 

Caused by Cosmos 954,” No. FLA-268, January 23, 1979. 62 Department of External Affairs, Canada, “Settlement of Claim between Canada and the Union of Soviet 

Socialist Republics for Damage Caused by Cosmos 954,” Communique No. 27, April 2, 1981. 63 G. Abbey & N. Lane, “United States Space Policy – Challenges and Opportunities,” American Academy of 

Arts and Sciences, 2005 (http://www.amacad.org/publications/spacePolicy.pdf). 
46

4.2 Methodology 

 Seeking to forecast possible changes in national approaches and to uncover reactions to a possible 

change in U.S. policy, interviews were conducted using a questionnaire to facilitate and standardize the 

feedback. Questionnaires were sent to key representatives of launching states, and many were interviewed 

at locations in Europe and at the October 2005 International Astronautical Congress in Fukuoka, Japan. 

The persons contacted were selected on the basis of their familiarity with the topic. As expected, official

statements of government positions were not forthcoming due to the competitiveness of the launch market 

and the disinclination to reveal future strategies. Nonetheless, all persons interviewed gave well-informed 

personal opinions. Many of them are in legal advisory roles for this issue and would be contacted 

automatically in their country in case a change in liability policy were to be considered. This provides 

confidence that the opinions gathered are highly representative of the situation. 

 The countries reviewed here were selected based on their likely competitiveness in the launch 

market in the coming years. In alphabetical order, they are Australia, Brazil, China, Europe (with details 

on France, United Kingdom, and Sweden), India, Japan, and Russia. All of these countries have ratified 

the Outer Space Treaty and the Liability Convention, and all but Brazil have ratified the Registration 

Convention. 

4.3 Liability Indemnification in Commercial Launching States 

4.3.1 Australia 

 Australia enacted the Space Activities Act in 1998 to facilitate commercial space launch activities 

and launching of Australian payloads from overseas sites. Australia has launch facilities in Woomera. The 

Space Licensing and Safety Office (SLASO) administers the Space Activities Act.64

 Section 48 of the Space Activities Act requires a license to operate a launch facility in Australia 

in conjunction with a specific launch vehicle along particular flight paths. The Act further establishes the 

conditions for issuance of such licenses for the applicant, who has to demonstrate the competence to 

obtain all environmental approvals as well as to minimize the risk to public health and safety to the 

maximum extent feasible. 

 It is also necessary to have a permit for the launch of a space object from Australia and for any 

associated return of that object or part thereof. The Act requires third-party liability insurance coverage 

for up to 750 million Australian dollars (equivalent to approximately $565 million U.S.) or the maximum 

probable loss amount. In order to calculate the amount of maximum probable loss, one must take into 

account third-party casualty loss, property loss, environmental damage, and economic loss. The 

responsible party is not liable for damages in excess of the insured amount. 

 The liability period is defined to be within 30 days from launch, and from the beginning of a 

reentry maneuver to the time when the space object comes to rest on Earth. However, the Act does not 

address the liability of the launch operator or a responsible party for damage caused outside the liability 

period. 

4.3.2 Brazil 

 Brazil’s national space agency is Agencia Espacial Brasileira (AEB). The country has ratified the 

Outer Space Treaty and Liability Convention, but not the Registration Convention. 

 

64 Commonwealth of Australia, Space Activities Act 1998, No. 123, amended in 2001 and 2002. 
47

 Of particular interest in Brazilian space legislation is Administrative Edict N. 27 which approves 

the “Regulation of procedures and the definition of requirements necessary for request, evaluation, 

issuance, control and follow-up of licenses for carrying out space launching activities on Brazilian 

territory.”65 In 2002, Brazil issued a second and complementary act with the same focus, which approves 

the “Regulation of procedures for the authorization to carry out space launching operations on Brazilian 

territory.”66 These two pieces of space legislation were proposed by AEB and approved by its High 

Council and President. They oblige any private entity interested in carrying out launch activities in Brazil 

to obtain a license and an authorization for launch operations, providing the legal basis for governmental 

control over all the private launching activities in Brazil. 67

 Article 9 of the license regulation stipulates that one of the economic and financial conditions to 

obtain a license is the “purchase of insurance to cover possible damages to third parties, according to the 

degree of risk of the activities to be carried out by applicant, where appropriate, in the value previously 

established by the AEB.” Article 9 of the authorization regulation requires applicants to present proof of 

insurance related to the particular launch operation, and Article 4 states that “the Licensee is required to 

contract an insurance company to cover damages to third parties that might be involved in each space 

launching operation, and noting that AEB shall establish the insurance's value.” 

 Article 5 of the license regulation gives the definition of damage: “loss of life, personal injuries, 

or other damage to health, loss of State property or of natural or legal persons’ property, or damages 

inflicted to such property.” The terms used here are very similar to those in the Liability Convention 

(Article I). The definition of damage in the authorization regulation is broader than the equivalent 

definition in the Liability Convention, however, as it includes not only the damage to intergovernmental 

organizations’ property, but also damage to the environment. This may be explained by the fact that the 

Brazilian government and local public opinion consider it of paramount importance to safeguard the 

entire Alcantara region's environment. 

 According to the Article 4, of the authorization regulation, “the liability for damages due to space 

launching shall be settled in accordance with space treaties and conventions of which Brazil is signatory, 

as well as other applicable norms, without prejudice to any contract that might have been entered into 

between the parties that laid down rules for the accountability of financial obligations.” Thus, Brazil 

recognizes its international obligations as a “launching state” and is liable for every space object launched 

from Brazilian territory, including private launches. At the same time, Brazilian legislation indicates the 

possibility of contractually sharing with other involved parties the financial obligations derived from 

damage caused by launched space objects. 

 The license and authorization regulations consider the insurance contract to be mandatory. 

However, they only state that the value of insurance will be fixed by the AEB without indicating the fixed 

amount. These regulations do not enter into details concerning the insurance coverage, because the 

Administrative Edict has no competence to regulate questions involving governmental expenses. These 

issues are an exclusive domain of the National Congress. However, the AEB has stated that the Brazilian 

government would be responsible for claims exceeding liability insurance coverage. 

 

65 Brazilian Space Agency, Ministry of Science and Technology, Administrative Edict N. 27, June 20, 2001. 

66 Brazilian Space Agency, Ministry of Science and Technology, Administrative Edict N. 05, 2002. 

67 José Monserrat Filho, “Recent Developments of the Brazilian Space Law,” International Institute of Space Law, 

1998. 
48

4.3.3 China 

 China became a spacefaring nation in 1970 when the first Chinese satellite DHF-I was orbited by 

the Long March launch vehicle. The China National Space Administration is the agency that carries out 

the country’s space activities. At present, China does not have a specific national space law, but does 

recognize the importance of the topic.68 The risk-sharing regime in China is difficult to link to a specific 

piece of legislation, but there are some internal regulations, including the first administrative regulation 

on space activities in China.69

 All international commercial space launches performed by China are supplied by the China Great 

Wall Industry Corporation (CGWIC) which was founded in 1980 and authorized by the Chinese 

government. This commercial launch services company has to purchase third-party liability insurance 

protection in the amount of $100 million or the maximum coverage available on the world market. The 

insurance remains in effect for a period of two years following the launch. Full indemnification will be 

provided by the Chinese government for claims that exceed the third-party liability insurance coverage. 

There have been a number of requests to formalize the third-party liability regime in China. It is highly 

desirable that such regime be adopted in the near future, and that it follow closely the international 

practices already in place. 

4.3.4 Europe

4.3.4.1 Arianespace 

According to Article 3.8 of the Declaration70 signed on July 14, 1980 and revised on October 4, 

1990, Arianespace shall be required to reimburse the French government, up to a ceiling of 60 million 

euros (approximately $72 million) per launch in the case of damages caused by Ariane launches.

Arianespace typically purchases insurance to cover this amount. If the damages exceed this amount the 

French government is obliged to indemnify the difference. 

 The risks covered are the liabilities for property and bodily harm caused to a third party by the 

launch vehicle, the satellite or secondary payload, or their components. 

4.3.4.2 Other Launchers at the Guiana Space Center 

On November 7, 2003, France and Russia signed an agreement that addressed long-term 

cooperation on the development, implementation, and use of the Soyuz-ST and the installation of its 

launch facilities at the Guiana Space Center.71 Article 10.2 of the agreement, which deals with liability 

issues, establishes that liability for third-party damages will be borne by the operator of the launcher 

(Arianespace) with the ceiling of 60 million euros per launch, the same as noted above for Ariane 

launches. If damages exceed this amount, then the additional liability will be indemnified equally by the 

governments of France and Russia. For circumstances related to the use and custody of ESA-provided 

assets (facilities, equipment, hardware, tooling), Article 9 states that Arianespace shall bear unlimited 

 

68 Liu Xiaohong, Wang Xiaoqing, “The First Administrative Regulation on Space Activities in China,” United 

Nations/International Institute of Space Law (UN/IISL) Workshop on Capacity Building in Space Law, 2002. 69 Administrative Regulation on Registration of Space Objects, February 8, 2001. 70 European Space Agency, “Declaration by certain European governments relating to the Ariane Launcher 

Production Phase,” July 14, 1980. 71 Convention between the European Space Agency and Arianespace on the exploitation of the Soyuz Launcher 

from the CSG (Guiana Space Center), November 7, 2003. 
49

liability for damages caused to third parties. For this case Arianespace is obliged to take out third-party 

liability insurance. 

France will register as the launching state for Soyuz launches carried out from the Guiana Space 

Center, in accordance with Article II of the Registration Convention and Article 10 of the 

ESA/Arianespace Convention. 

 For Guiana Space Center launches of the Italian-led Vega small launch vehicle, France will 

indemnify one-third of any liability claims beyond the insured amount and the remaining two-thirds will 

be divided among ESA member nations participating in the Vega program.72

4.3.4.3 Starsem 

 Starsem is a space launch joint venture between European and Russian space industry. The 

company was created in August 1996 under French law in the context of a competing market fueled by a 

rapid growth of requests for launchers with new capacities. The alliance is a partnership between 

European Aeronautic, Defense, & Space Company (EADS) (35%), the Russian Space Agency (25%), 

Samara Space Center (TsSKB-Progress) (25%), and Arianespace (15%). 

 The company markets the Russian Soyuz rocket, currently operated from the Baikonur 

Cosmodrome and therefore subject to Russia’s liability regime. However, in the near future the Soyuz 

launch operations will be moved to the French Guiana Space Center. The first Soyuz launch from that 

location is scheduled for 2008. 

4.3.4.4 Eurockot 

 This joint venture between European and Russian space industry was created in 1995 in order to 

provide commercial launch services with the Rockot launch system, based on the SS-19 ballistic missile, 

for low Earth orbit (LEO) satellites. Eurockot is located in Bremen, Germany, and is 51% owned by 

EADS Space Transportation and 49% by the Russian company Khrunichev State Research and 

Production Space Center. Eurockot operates from dedicated launch facilities at Plesetsk in northern 

Russia, governed by the Russian liability regime. Eurockot includes third-party launch insurance coverage 

in Article 13 of its standard Launch Service Agreement (LSA). Typically it covers the period from lift-off 

until 12 months after the launch for the amount of 100 million euros (approximately equivalent to $120 

million). 

4.3.4.5 United Kingdom 

 The U.K. established national space legislation in 1986 through its Outer Space Act. This 

legislation was drafted with the close collaboration of satellite operators and suppliers rather than launch 

service providers due to their greater relevance to U.K. space industry activities. 

 The Outer Space Act requires U.K. individuals and organizations to apply for a license from the 

British National Space Center (BNSC), which is responsible for the control of space activities. The 

license is needed for launching or procuring the launch of a space object, operating a space object, or for 

any other activity in outer space. 

 The U.K. government requires insurance against third-party liability claims arising from 

commercial space launches. Companies, which conduct space activities, have to take out third-party 

 

72 Peter B. deSelding, “Liability at Guiana To Be Shared,” Space News, December 19, 2005. 
50

liability insurance for launch or in-orbit stages of the mission up to a minimum of 100 million British 

pounds (equivalent to approximately $177 million). The insurance must also cover the possible expenses 

of the U.K. government. If damages are incurred by a third party, the launch operator is obliged to 

indemnify the U.K. Government for the international claims presented to the U.K. under the Liability 

Convention. 

 The implementation of the Outer Space Act of 1986 is under review, especially the current policy 

on insurance requirements for applicants for licensed activities. Satellite operators are concerned about 

the amount of third-party liability insurance and the required indemnification of the government. They 

believe the insurance market capacity is too limited and current rates are too expensive based on the lack 

of liability claims to date. 

4.3.4.6 Sweden 

 Sweden is one of the few countries in Europe that has met its obligations through space 

legislation at a national level. The Act on Space Activities and the Decree on Space Activities73 laid the 

foundation for the legal regime applicable to commercial space launches. Section 2 of the Act on Space 

Activities establishes that space activities cannot be carried out from Swedish territory without a license. 

This principle is equally applicable to both natural and juridical persons. 

 The governmental body responsible for issuing licenses is the National Board for Space 

Activities. The provisions of international conventions regarding strict liability and risk allocation have 

been incorporated into Swedish legislation by special statutes. These statutes provide the legal basis for 

reimbursement of liability incurred by the State. It is noteworthy that a precise amount is not specified in 

the relevant decrees. 

4.3.5 India 

 India has ratified the Outer Space Treaty, Liability Convention, and Registration Convention. 

Consequently, India is liable under the 1972 Liability Convention to third parties for launch-related 

damages as a launching state. However, India does not have a national space law to harmonize 

international conventions which are necessary to meet international liability obligations at the national 

level.74

 One reason for the absence of national space law on liability is that commercial space launches 

are conducted by the Indian Space Research Organization (ISRO) and not by the private sector. However, 

when space launches are carried out from Indian launch sites, India currently provides third-party 

insurance of up to $100 million. This figure may vary in relation to the expected trajectory of the space 

launch and an estimate of the likely damage an accident could cause. 

4.3.6 Japan 

 Japan became a party to the Liability Convention in 1983. The Japan Aerospace Exploration 

Agency (JAXA) is the governmental body responsible for the space activities in Japan. The agency was 

formerly known as the National Space Development Agency of Japan (NASDA). 

 

73 Act on Space Activities (1982:963); Decree on Space Activities (1982:1069). 74 Mehmood Pracha, “Indian Space Law and Policy – A Private Sector Perspective,” United Nations/International 

Institute of Space Law (UN/IISL) Workshop on Capacity Building in Space Law, 2002. 
51

 Since developing a new family of H-II launch vehicles, based exclusively on Japanese 

technology, Japan has become more sensitive to third-party liability. The H-II technology is capable of 

both increasing the country’s launch capability and opening the possibility of commercial satellite 

launches, thus raising issues of potential liability. Although there are not specific regulations concerning 

third-party liability, portions of the law establishing JAXA, Articles 21 and 22 in particular, are related to 

this topic.75

 Article 21 states that JAXA shall not launch any satellites without an insurance contract that can 

provide the necessary compensation for any damages are incurred. The law does not define the specific 

amount of such insurance. The law states only that the amount of the compensation allowed by the 

insurance contract has to be defined by the competent government minister and the contract has to be 

appropriate for protection of the victims. The Minister of Education, Culture, Sports, Science and 

Technology holds authority in this area. 

 In order to establish the appropriate amount of insurance, a maximum probable loss calculation is 

used. As in the U.S., the amount of the insurance coverage differs depending on the launch vehicle. For 

the H-IIA, for example, the third-party liability insurance is 20 billion yen (approximately $168 million). 

For the smaller solid-fuel M-series rockets, the third-party liability insurance is usually 5 billion yen 

(approximately $42 million).76

4.3.7 Russia 

 Russia operates several different launch facilities. These include Plesetsk, Svobodny, Baikonur 

(located on the territory of Kazakhstan) and Kapustin Yar. Baikonur is the Russia's largest cosmodrome, 

used for both human spaceflights and unmanned launches, with facilities for Cyclone, Dneper, Molniya, 

Proton, Rockot, Soyuz, and Zenit launch vehicles. 

 On October 2, 1992 Russia and Kazakhstan signed an intergovernmental agreement, prohibiting 

privatization of the Baikonur Cosmodrome facilities.77 Because the Baikonur launch facilities are of 

primary importance for the conduct of Russian space activities, Russia and Kazakhstan signed an 

agreement on the basic principles and terms of use of the Baikonur Cosmodrome on March 28, 1994. 

According to the terms of this agreement, Russia leased the Baikonur facilities for 20 years for the 

amount of $115 million per year. On January 9, 2004, the two countries signed a revised agreement with 

similar conditions, but the lease period was extended to 50 years. 

 The Russian space agency Roscosmos has recently changed its reporting relationship. Since the 

March 9, 2004 presidential decree “On the systems and structure of federal bodies representing executive 

power,” Roscosmos is under the control of the Ministry of Industry and Energy. The presidential decree 

and Article 8 of the Federal Law on Space Activity give the agency the right to hold direct negotiations 

and sign contracts with foreign space agencies, issue licenses for space activities, finance the federal 

space program, and organize and coordinate commercial space projects. Article 9.1 of the Federal Law 

provides the legal basis for the licensing procedure and addresses the testing, manufacturing, storage, 

launch preparation, and launch of space objects. According to the Article 11 of the Federal Law, before a 

license can be issued a special commission has to carry out an expert review of the space technology 

involved. 

 

75 Law concerning Japan Aerospace Exploration Agency, Law Number 161, December 13, 2002. 76 Masahiko Sato, “The Japanese Legal Framework: Third-Party Liability Resulting From NASDA Launch 

Activities,” International Institute of Space Law, 1998. 77 M. Bjornerud, “Baikonur Continues: The New Lease Agreement Between Russia and Kazakhstan,” Journal of 

Space Law, Vol. 30, No. 1, 2004, pp. 13-36. 
52

 An August 1993 Russian law (revised in November 1996) regulates the organization of space 

activities, licensing procedures, the use and transfer of space technology, and liability.78 Article 25.1 deals 

with the obligation to obtain the mandatory insurance to conduct space activities. This insurance has to 

cover damages caused by a space object to astronauts, ground personnel, and any third party. The 

minimum amount of launch liability insurance depends on the specific launch vehicle and is determined 

by Roscosmos. Typical levels of compulsory insurance vary from $80 million for Start launch vehicles to 

$300 million for Soyuz and Proton. The Russian government pays liability claims in excess of insurance 

coverage if this is specified in the launch services contract. If it is not, the launch customer is liable for 

these claims. 

Table 4.1 – Summary of Indemnification Regimes of Spacefaring Nations 

Country Regime Amount Comments 

Australia Space Activities Act 1998 $750 million Australian 

(~$565 million U.S.) or MPL 

amount 

Limit up to $3 billion 

(Australian) for claims by 

Australian nationals 

Brazil License Regulation 

Authorization Regulation 

No fixed amount 

China No specific legislation $100 million 3rd-party liability insurance 

is in effect for a period of 2 

years following the launch. 

France Declaration by certain European 

governments relating to the Ariane 

Launcher Production Phase 1980 

60 million euros (~$72 

million) 

UK Outer Space Act 1986 100 million British pounds 

(~$177 million) 

Sweden Act on Space Activities 

(1982:963); Decree on Space 

Activities (1982:1069) 

No fixed amount 

India No National Space Legislation $100 million 

Japan Law Concerning Japan Aerospace 

Exploration Agency, Law Number 

161 of 13th December 2002 

20 billion yen for H-IIA 

(~$168 million); 5 billion yen 

for smaller rocket (~$42 

million) 

Amount of the insurance 

depends on the specific 

launch vehicle. 

Russia Decree No. 5663-1 “About Space 

Activity,” 1993 

$80 million for Start launch 

vehicles; $300 million for 

Soyuz and Proton 

Amount of the insurance 

depends on the specific 

launch vehicle. 

4.4 Summary of Findings from Interviews and Questionnaires 

 On the question of whether any individual governments are planning to make changes, the 

general response was negative. Respondents noted a general satisfaction with the present risk-sharing 

regime in most countries reviewed. However, there are initial indications of efforts taking place in Europe 

and Australia to study some alternatives for sharing responsibility. Also, some changes are occurring in 

space organizations, particularly in Russia where a global review of the structure and function of its space 

agency is underway. This is unlikely to lead to immediate attention to third-party liability policy, but this 

position may change as new structures become established. Taking into account normal lead times, this is 

not likely to be the case for several years. 

 

78 Law of the Russian Federation, “About Space Activity,” Decree 5663-1, 1993; Decree No. 104, Statute on 

Licensing Space Operations, 1994. 
53

 It is noteworthy that the revised text being discussed in the UK for the Outer Space Act, as well 

as the draft French national space law due to be published in 2007, do not foresee any substantial changes 

in this area. This information is based upon discussions with the authors of both documents. 

 In the event of a change in U.S. policy in this matter, it appears unlikely that there would be any 

significant reaction as long as the general principles of the Liability Convention remain intact. Depending 

on the substance of such a change, some reactions seem possible where a change appears likely to 

influence competition. However, in view of the relatively low cost of liability insurance premiums, the 

probability of such reaction seems quite limited. 

Table 4.2 – Summary of Interview Responses

 Has your government’s risksharing arrangement changed 

since 2002? Are there any 

plans to change it in the next 

few years? 

Is your government satisfied 

that its level of third-party risk 

sharing is appropriate, or 

would it like to reduce its risk 

exposure? 

How would your 

country/company react if the 

U.S. government reduced or 

eliminated its third-party risksharing regime? Would your 

government be inclined to 

reduce its risk sharing? 

Australia No current plan to change the 

legislation. 

Satisfied for time being, but 

there are some proposals to 

lower the maximum Australian 

insurance standards. 

No impact on Australian 

government policy in the short 

term. 

Brazil No plan to change the legal 

framework because the 

Brazilian Alcantara launch 

range is not in operation. 

The question is not yet in open 

discussion. 

Brazil will not react to these 

changes. 

China No plan to change it in the near 

future. 

As long as 3rd-party liability 

insurance is properly arranged 

and is in place before a 

commercial launch, the current 

risk-sharing arrangement is 

acceptable to the government 

and no reduction scheme can 

be foreseen at the moment. 

Chinese government might 

consider a change if 

governments of all other 

commercial launch providers 

react and make changes. If U.S. 

export control laws and 

regulations remain unchanged, 

China does not have 

opportunities for marketing and 

business development. 

Europe/ 

France 

No changes in the near future. Not calling into question the 

insurance with a ceiling of 60 

million euros. French 

government would like to share 

the responsibility with others 

States (Russia for Soyuzlauncher at the Guiana Space 

Center and European States for 

VEGA launcher) 

Very small probability that the 

French government would be 

inclined to reduce its risk 

sharing regime. Arianespace 

will seek to exploit the U.S. 

change for marketing 

advantages but the impact will 

be not very important because 

of the small 3rd-party liability 

premium. 

Europe/ 

UK 

No changes in the past three 

years, but BNSC is currently 

reviewing the Outer Space Act 

licensing system. 

The current 3rd-party liability 

arrangement is a major part of 

the review, looking at different 

options for ensuring that risk is 

managed adequately. 

Under review, but the 

probability is small that the UK 

government would have a 

reaction. 
54

Table 4.2 – Summary of Interview Responses

 Has your government’s risksharing arrangement changed 

since 2002? Are there any 

plans to change it in the next 

few years? 

Is your government satisfied 

that its level of third-party risk 

sharing is appropriate, or 

would it like to reduce its risk 

exposure? 

How would your 

country/company react if the 

U.S. government reduced or 

eliminated its third-party risksharing regime? Would your 

government be inclined to 

reduce its risk sharing? 

India No changes in the past three 

years and no plan to change in 

the near future. 

The level of the risk is 

appropriate for the time being. 

If the U.S. government 

changed its current risk sharing 

regime, the Indian government 

would probably reconsider its 

legislation. 

Japan No plan to change the legal 

framework. The content of 

JAXA law uses the same 

formulation as the NASDA law 

amended in 1998. 

The level of the risk is 

appropriate for the time being. 

Because the level of activity in 

the commercial launch market 

is not very high, there is no 

reaction as long as the Liability 

Convention is intact. 

Russia No plan for changes. The Russian Government is 

satisfied with the risk sharing 

regime for the time being. 

It will depend on the position 

of the U.S. government. 
55

5. Analysis and Options 

 The current third-party liability indemnification regime remains in force until the end of 2009. As 

a result, this study’s analysis considers not only current circumstances but also the business environment 

that the U.S. launch industry may face in the next decade. Many factors that would affect a decision on 

the future of government indemnification could change: 

• International competition could continue to increase. 

• The number and characteristics of domestic launch providers could change significantly. 

• Domestic launch providers could expand their operations through new technologies (e.g., 

reusable launch vehicles), new markets (e.g., space tourism), or new government policies (e.g., 

loosening of export controls, “buy American” laws, or privatization of International Space Station 

operations). 

• A major launch accident or Katrina-like natural disaster could disrupt the liability insurance 

market. 

 Chapter 1 noted the long-held position of the executive and legislative branches that the success 

of the U.S. commercial launch industry is in the national interest, and that it is appropriate for the 

government to encourage and facilitate a healthy, internationally competitive industry. With this is mind, 

this chapter returns to the policy choice posed in Chapter 1: Which course of action better serves the 

national interest? 

Maintenance of a policy/legal environment favoring the U.S. commercial space launch industry 

through government sharing of low-probability but potentially high-consequence thirdparty liability risk. 

or 

Phase-out of U.S. government (taxpayer) risk exposure for this hazardous private-sector activity. 

Policy objectives that collectively support the national interest in this area are as follows: 

• Assure adequate liability coverage for catastrophic launch-related events. 

• Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies. 

• Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities 

by: 

o Enhancing international competitiveness of the U.S. space transportation industry. 

o Maintaining continuity in the business environment for U.S. launch providers. 

o Encouraging new U.S. entrants to the commercial launch market. 

 This analysis does not endorse the option of simply allowing government indemnification to 

expire at the end of 2009 with nothing to take its place. Such an abrupt change would be too disruptive, 

leaving the U.S. commercial launch industry with little time to implement alternatives. At some point in 

its development, the industry may be able to shoulder more (and maybe all) of its liability risk. But that 

point is not on the immediate horizon. The robustness of the insurance market and private operators’ 

ability to meet obligations in a secondary fund both appear to be lacking. While the pace of the industry’s 

development is impossible to predict, it is likely that it will be more than a decade before both the launch 

and insurance industries reach the point where risk can be accommodated without government help. 
56

5.1 Assure Adequate Liability Coverage for Catastrophic Launch-Related Events 

 This was one of the primary objectives of the 1988 amendments to the CSLA. The insurance 

industry at that time lacked sufficient capacity to handle a growing launch industry. By the time of the 

April 2002 DOT/FAA study (which based its findings on pre-9/11 interviews), capacity had grown so that 

up to $1 billion in liability coverage was available per launch event. However, as noted earlier, capacity 

today stands at $300-500 million per event, according to insurance industry representatives. 

 The fragility of the launch liability insurance market demonstrates the continuing need for a 

supplement to the Tier I insurance requirement. Marginal increases in Tier I coverage could be provided 

by the insurance industry, but not in amounts that would constitute a significant fraction of the Tier II 

indemnification available today from the U.S. government. Insurers would be happy to write contracts for 

greater coverage that would bring in higher premiums, but acknowledge that they can’t do so at a 

reasonable price for amounts approaching the U.S. government’s current indemnification limit. There is 

no evidence to indicate that the global insurance industry pool, in the absence of U.S. government 

indemnification, would ever make up the difference by growing to four or five times its current capacity 

as other launching states maintain their government indemnification regimes. 

 A further concern is that the amount of insurance available on the market to cover Tier I 

requirements could shrink to near zero in the event of a single large payout resulting from a launch 

mishap anywhere in the world. In such a circumstance, Tier II would become an essential backup to keep 

the U.S. launch industry alive until the insurance market recovers or other means are found to address 

liability risk-sharing. Without this backup, the U.S. commercial launch industry may have to suspend 

launch activity for an indefinite period, which could force some participants to exit the business 

permanently. In the absence of indemnification, the FAA may be compelled to suspend commercial 

licenses unless launch companies demonstrate the ability to provide alternative coverage of catastrophic 

risk. Meanwhile, foreign competitors can be expected to use their government indemnification regimes to 

keep their launch providers active. 

 If Tier II coverage were to be replaced by some sort of industry insurance pool, it is likely that 

such a pool would take a considerable number of years to grow to meaningful size. U.S. government 

indemnification would need to continue at gradually decreasing levels during this time. Government 

participation in liability risk-sharing in other areas, such as the nuclear power industry, floods, and 

terrorism, has involved a gradual ramping down of government risk exposure. If this approach is applied 

to the commercial space launch industry, it is essential to recognize that this industry is not directly 

comparable to the others in size, resources, or experience. (For example, as noted in Chapter 2, the 

nation’s 104 nuclear power plants are distributed among more than 30 owners, with the top 13 accounting 

for three-quarters of U.S. nuclear power production and having multi-billion-dollar annual revenues.) Nor 

is it likely to evolve at a predictable rate, as demonstrated by the fact that insurance capacity in this 

business line is little changed from 1988. 

 There is a clear need for some type of Tier II coverage – the question is whether that tier is 

financed by the U.S. government or by industry. Assurance of adequate liability coverage for catastrophic 

launch-related events has been well served by the current arrangement. Maintaining this arrangement 

would be the simpler solution to fulfilling this policy objective since no new funding mechanisms or 

bureaucracy would need to be created. 

5.2 Minimize U.S. Government Risk Exposure and Annual Outlays/Subsidies 

 The potential magnitude of the risk is large, but its probability is very low due to industry safety 

efforts and the FAA’s enforcement of commercial launch license requirements. The current 
57

indemnification regime has not resulted in any outlays for liability claims since it was initiated in 1988. It 

requires no government funding except in the extremely rare circumstance of an FAA-licensed launcher 

causing third-party damage in excess of maximum probable loss. In contrast, alternatives to the current 

regime would entail routine costs to the government. Industry risk-sharing initiatives such as trust funds 

and insurance pools would require, at a minimum, monitoring by the FAA or some other government 

agency, and at a maximum, direct management by the government, thus expanding the regulatory 

bureaucracy. Direct subsidies would involve outlays from appropriated funds. Tax subsidies would reduce 

government revenues and would only benefit well-established launch firms that have taxable income. In 

the absence of a major accident incurring a large liability claim against the government, any alternative 

that involves government subsidies or increased oversight would cost more than the current regime. 

 Of course, a major launch mishap would alter this calculus in unpredictable ways. If U.S. launch 

providers are fortunate enough to continue their spotless record in avoiding catastrophic third-party 

liability, the current regime minimizes the cost to the taxpayer because there are no outlays for either 

claims or routine administrative costs. However, if a major accident does occur and the government pays 

a sizable claim, the administrative costs of overseeing an industry insurance pool, by comparison, would 

seem insignificant. 

 Ideally, a mature industry in a competitive market should be able to internalize its risk, managing 

it without government help. However, the global launch market is distorted by factors unrelated to the 

desire to make a profit. Launch capability is developed for non-commercial reasons as well, including 

national security and national pride. As a result, governments bestow subsidies and other preferential 

treatment upon domestic or regional launchers. This is true in the U.S., where some commercial launchers 

evolved from government rocket programs, and U.S. government payloads are required to ride on U.S. 

launch vehicles. As long as national (non-commercial) interests remain a key rationale for maintaining a 

healthy industry, it is in the government’s (and taxpayers’) interest to accept some risk-sharing. Another 

factor to consider for commercial launches that take place on federal ranges is that the range safety 

function is performed by a government employee, which suggests that the government shares some 

responsibility for damage caused by errant rockets. 

 To minimize U.S. government risk and outlays, the choice between maintenance or phase-out of 

indemnification is not clear in the absence of knowledge about the occurrence of future catastrophic 

launch events. However, the government cannot be absolved of all risk from launches that utilize federal 

ranges, or from international launch incidents that are covered by treaty obligations, as noted in Chapter 

1. 

5.3 Improve Economic Benefits and Strengthen the U.S. Industrial Base 

 in Space Launch Capabilities

 As discussed in Chapter 2, by some measures (continued investment, technological evolution, 

ongoing partnerships, consolidation, new entrants) the U.S. commercial launch industry is mature. But 

stability and profitability are questionable. The large aerospace companies do not separately report profits 

from commercial launch services, but industry representatives and the trade press leave the impression 

that profit margins are small or nonexistent. Commercial launch efforts, a minor part of these companies’ 

portfolios, are important to the companies because they keep production lines active (which may help 

reduce unit costs in U.S. government contracts) and exercise the technical skills of the workforce. Even 

so, Boeing has chosen not to commercially market the Delta 2 and Delta 4 at this time despite holding 

active FAA licenses for these rockets. Lockheed Martin markets its Atlas 5 through the International 

Launch Services partnership, but in 2005 the partnership’s competitive commercial launches included 
58

four on Russian Proton rockets and only one on an Atlas.79 With global competition increasing, these 

companies will be faced with decisions in the years to come regarding their continued presence in the 

commercial launch industry. Undoubtedly, third-party liability risk will be one of the factors considered. 

 The continued health of the U.S. industrial base has been a concern for many years.80 An 

internationally competitive space launch industry is one component of a strong space industrial base. A 

successful commercial launch industry will help sustain the skills and facilities essential to all U.S. space 

sectors. The launch liability indemnification regime alone does not drive the success or failure of the 

nation’s space industrial base, but coupled with other variables in today’s environment, its disappearance 

could drive critical business decisions in a particular direction. Some industry participants in the study 

linked it with the changes in the export control regime since 1999. They believe that the space industry 

was hurt badly by the stricter export regulations, and that loss of government indemnification would be 

another serious blow, this one specifically aimed at the launch companies, which could have a negative 

impact on future corporate decisions regarding involvement in the commercial launch business. 

 There is no quantitative evidence showing that the current indemnification regime improves U.S. 

competitiveness, or that it was the deciding factor in any specific international launch service contracts. 

However, since government indemnification has become the norm on the world market, there is serious 

concern in industry regarding the extent that U.S. competitiveness could be hurt if the nation terminated 

or significantly reduced government indemnification. Participants in the study felt that such a withdrawal 

of support would be interpreted internationally as the U.S. government losing confidence in the industry – 

and would be portrayed as such in competitors’ marketing efforts. As noted in Chapter 4, the governments 

of foreign competitors are not anticipating any changes to their risk-sharing regimes, nor do they plan to 

react to any changes the U.S. might make in this area. 

 Continuity and predictability in the business environment are factors that encourage a strong 

industrial base. To minimize costs and disruptions, companies tend to prefer changes that are incremental. 

Industry is familiar with the current indemnification regime and has built it into business plans for its 

launch enterprises. Sudden, dramatic changes to current circumstances, such as eliminating 

indemnification, would disrupt plans, increase costs, and prompt a rethinking of the business case for each 

of the players. Participants in the study were hesitant to offer suggestions on how to best phase out 

indemnification because they didn’t want to endorse such a path. But clearly, if changes are to be made, 

such as an increase to Tier I coverage requirements and/or a decrease to Tier II indemnification, they 

should be done gradually, over a period of several years, to minimize disruption to the industry. When 

considering other possible changes, it is important to note that the launch and insurance industries are 

uncomfortable with trusts and insurance pools because the number of participants would be too small to 

build reserves in a reasonable time. Also, many participants are small in size and do not yet have the 

resources to make a substantial contribution. 

 One indicator of a healthy industry is the continued influx of new players and the eventual 

success of some of them. Encouragement of new entrants into the U.S. launch market is in the national 

interest, since many technological and cost-saving ideas are likely to come from this source. But resource 

scarcity among entrepreneurs means that any actions that increase their costs or time-to-market (e.g., 

higher insurance coverage requirements, routine contributions to an industry pool) will inhibit their 

development. 

 

79 International Launch Services launch archive, http://www.ilslaunch.com/launches/ (accessed February 2006). 80 GAO has published many reports on this subject since the mid-1980s. Numerous reports from industry groups 

and think tanks have emerged in recent years as well. For example, see Booz Allen & Hamilton, “U.S. Defense 

Industry Under Siege – An Agenda for Change,” 2000. 
59

 The mix of participants in the U.S. commercial launch industry could look very different in a few 

years. As of August 2006, small launch companies held only three active FAA licenses, and had yet to 

demonstrate their longevity and profitability. Several more companies with similar goals hope to prove 

themselves in the near future. In contrast to the large aerospace companies, commercial launch is the 

primary function of these firms. Ultimately, the successful ones may account for a much more significant 

part, and perhaps the majority, of U.S. commercial launch revenues. But to reach that point, this new 

wave of launch providers needs many years to mature. The post-2009 indemnification regime will affect 

them much more than it does today, and its effect on their business plans may be more significant than it 

is for the large launch companies today. 

 The effects of U.S. government risk-sharing on economic and industrial strength are impossible 

to measure with any precision. However, it is reasonable to conclude that the effects of maintaining 

indemnification would be potentially positive and at worst neutral, while the effects of phasing it out 

would be at best neutral but potentially negative. 

5.4 Options for Consideration 

 The first option is maintenance of the indemnification regime to ensure that the U.S. 

commercial launch industry will be able to match the liability coverage of its global competitors. Should 

the Congress choose this path, the following modifications to the current indemnification regime should 

be considered when addressing its renewal in 2009: 

• Make indemnification permanent. The sunset provision introduces uncertainty in the business 

environment and provides ammunition for the marketing efforts of foreign competitors. Future 

changes to the risk-sharing regime should be dependent on dramatic growth in the U.S. 

commercial launch industry, substantially increased capacity in the liability insurance market, 

and/or other changes in the business environment that may make other options viable and 

desirable. This will not happen on a predictable schedule. The FAA should continue to monitor 

indicators of industry maturity, stability, and financial strength and alert the Congress when the 

landscape has evolved sufficiently to warrant changes. 

• Remove the cap on Tier II indemnification. Since the payment of a Tier II claim is subject to 

the congressional appropriations process, a cap is unnecessary. The Congress has complete 

control over the size of any payment. 

 The Congress has a second option, which is to phase-out U.S. government risk-sharing. In this 

case, the following steps could be taken:81

• Direct the FAA to initiate a plan that gradually changes, and eventually reverses, responsibility 

for Tiers II and III. (Currently, the U.S. government is responsible for Tier II and the launch 

industry is responsible for Tiers I and III.) Modifications to Tier I maximum probable loss are not 

required. 

• Upon expiration of the current indemnification statute, the FAA would initiate a requirement for 

industry to cover its Tier III risk exposure by creating a pool or trust. The government's Tier II 

commitment would remain unchanged initially. When the industry pool reaches a value of $500 

million, or after 5 years – whichever comes first – the government's Tier II commitment would be 

reduced to $1 billion. 

 

81 All dollar amounts in this description are in 1988 dollars to conform to the convention used in the CSLA 

Amendments. The conversion factor to 2006 dollars is approximately 1.71. In other words, $1.5 billion in 1988 

dollars is equivalent to slightly more than $2.5 billion in 2006 dollars. 
60

• When the pool reaches $1 billion or 10 years, the government's Tier II commitment reduces to 

$500 million. 

• When the pool reaches $1.5 billion or 15 years, the roles reverse. The industry pool (with a 

regulatory requirement to maintain a minimum value of $1.5 billion) becomes Tier II. 

Government indemnification becomes Tier III, with no cap and no sunset provision, but retaining 

the requirement for an appropriations bill in the event of a claim. 

• At this stage and at regular intervals thereafter, the FAA would assess the appropriate minimum 

required value of the industry pool, and recommend to Congress any changes in that requirement, 

if necessary. 

This is shown graphically in Figure 5.1. 

 If the Congress pursues this second option, there are several difficult issues that must be 

addressed: 

• Five years may not be a long enough interval between the stages described above. This pace 

would require industry to increase the pool's value an average of $100 million per year (about 

$171 million in 2006 dollars) to match the government indemnification withdrawn at each stage. 

• Companies that leave the industry would rightfully expect their contributions to the pool, plus 

interest, to be returned. If the industry experiences high turnover during the process, this will 

hinder the effort to reach and maintain the pool's targets. This problem will be particularly 

troublesome if one or more of the larger players exits the commercial launch business. 

• The U.S. commercial launch industry is diverse. Companies vary widely in size, financial 

resources, and experience. A determination would need to be made as to how these differences 

should be taken into account for the industry pool’s contribution scheme. Should all companies 

contribute equally? Or should contributions vary based on a formula that accounts for financial 

resources, size of launch vehicles, frequency of launches, location of launch site, or other 

parameters? Would such a formula allow achievement of funding targets? 
61

• A new requirement to make regular contributions to an industry pool may not, by itself, drive 

entrepreneurial launch providers out of the business, but it could become the proverbial “straw 

that breaks the camel's back.” For small companies, the added cost and risk could discourage 

investors or become the tipping point for decisions about going offshore or going out of business. 

For large companies, management may seize on this issue in considerations of whether to stay in 

the commercial launch business. 

These issues require further study and must consider the continuing evolution of the domestic 

launch industry and the global business environment.
62
63

Appendix A: Acronyms and Abbreviations 

AEB Agencia Espacial Brasileira (Brazil) 

AIA Aerospace Industries Association 

AST Associate Administrator for Space Transportation 

BNSC British National Space Center 

BSC Brussels Supplementary Convention 

CAT Catastrophe (bonds) 

CGWIC China Great Wall Industry Corporation 

CNSA China National Space Agency 

COMSTAC Commercial Space Transportation Advisory Committee 

COTR Contracting Officer’s Technical Representative 

CRS Congressional Research Service 

CSLA Commercial Space Launch Act 

DLR Deutschen Zentrums für Luft und Raumfahrt (German Space Agency) 

DOD Department of Defense 

DOT Department of Transportation 

EADS European Aeronautic Defence and Space Company 

EELV Evolved Expendable Launch Vehicle 

EGAS European Guaranteed Access to Space (Program) 

ELV Expendable Launch Vehicle 

ESA European Space Agency 

FAA Federal Aviation Administration 

FTS Flight Termination System 

GEO Geosynchronous Earth Orbit 

GSC Guiana Space Center 

GSO Geostationary Orbit 

ILS International Launch Services 

ISRO Indian Space Research Organization 

JAXA Japan Aerospace Exploration Agency 

LEO Low Earth Orbit 

LSA Launch Service Agreement 

LV Launch Vehicle 

MPL Maximum Probable Loss 

NASA National Aeronautics and Space Administration 

NASDA National Space Development Agency of Japan 

NEA Nuclear Energy Agency 

NFIP National Flood Insurance Program 

NGSO Non-Geostationary Earth Orbit 

OECD Organization for Economic Co-operation and Development 

OPIC Overseas Private Investment Corporation 

P.L. Public Law 

R&D Research and Development 

RLV Reusable Launch Vehicle 

SIA Satellite Industry Association 

SLASO Space Licensing and Safety Office (Australia) 

START Strategic Arms Reduction Treaty 

TRIA Terrorism Risk Insurance Act 

U.K. United Kingdom 

U.S. United States 

USC United States Code 
64
65

Appendix B: Statutory Language 

Commercial Space Launch Amendments Act of 2004 

SEC. 3. STUDIES. 

 (a) RISK SHARING.—Not later than 60 days after the date of enactment of this Act, the 

Secretary of Transportation shall enter into an arrangement with a nonprofit entity for the conduct of an 

independent comprehensive study of the liability risk sharing regime in the United States for commercial 

space transportation under section 70113 of title 49, United States Code. To ensure that Congress has a 

full analysis of the liability risk sharing regime, the study shall assess methods by which the current 

system could be eliminated, including an estimate of the time required to implement each of the methods 

assessed. The study shall assess whether any alternative steps would be needed to maintain a viable and 

competitive United States space transportation industry if the current regime were eliminated. In 

conducting the assessment under this subsection, input from commercial space transportation insurance 

experts shall be sought. The study also shall examine liability risk sharing in other nations with 

commercial launch capability and evaluate the direct and indirect impact that ending this regime would 

have on the competitiveness of the United States commercial space launch industry in relation to foreign 

commercial launch providers and on United States assured access to space. 
66
67

Appendix C: Participants 

Space Insurance 

 Aon Space 

 International Space Brokers 

 U.S. Aviation Underwriters 

 Willis Space 

Launch Providers 

 Arianespace 

 Boeing / Sea Launch 

 DTI Associates 

 Eurockot 

 Garvey Spacecraft Corp. 

 Kistler Aerospace (now Rocketplane Kistler) 

 Lockheed Martin / ILS 

 Orbital Sciences 

 Starsem 

Launch Customers 

 EADS Astrium 

 ManSat LLC 

 Optus Communications 

 SES Americom 

Industry Associations and Advisory Boards 

 Adelta Legal (Australia) 

 Aerospace Industries Association (AIA) 

 Brazilian Association of Air and Space Law (Brazilia) 

 Commercial Space Transportation Advisory Committee (COMSTAC) 

 Satellite Industry Association (SIA) 

Academic and Research Organizations 

 City University of Hong Kong School of Law 

 International Space University (contributor, Chapter 4) 

 Naval War College 

 Resources for the Future (contributor, Chapters 2 & 3)

 Université de Bourgogne, France 

 University of Mississippi School of Law 

 University of Pennsylvania, Wharton School 

Foreign Government Organizations 

 British National Space Centre (BNSC) 

 China National Space Administration (CNSA) 

 Deutschen Zentrums für Luft und Raumfahrt (DLR – German Space Agency) 

 European Space Agency (ESA) 

 Japan Aerospace Exploration Agency (JAXA)