Source: https://www.federalregister.gov/documents/2002/04/23/02-9796/financial-responsibility-requirements-for-nonperformance-of-transportation-discontinuance-of
Timestamp: 2017-08-21 12:11:02
Document Index: 115016749

Matched Legal Cases: ['art 540', 'art 540', 'art 540', '§\u2009540', '§\u2009540', '§\u2009540', '§\u2009540']

Federal Register :: Financial Responsibility Requirements for Nonperformance of Transportation-Discontinuance of Self-Insurance and the Sliding Scale, and Guarantor Limitations
A Proposed Rule by the Federal Maritime Commission on 04/23/2002
Submit an original and 15 copies of comments (paper), or e-mail comments as an attachment in WordPerfect 8, Microsoft Word 97, or earlier versions of these applications, no later than May 23, 2002.
02-9796
https://www.federalregister.gov/d/02-9796 https://www.federalregister.gov/d/02-9796
The Federal Maritime Commission proposes to amend its procedures for establishing passenger vessel financial responsibility for nonperformance of transportation. The proposed rule eliminates the availability of self-insurance, limits those who can provide a guaranty, and discontinues the use of a sliding scale for required coverage of unearned passenger revenue (“UPR”).
Address all comments concerning this proposed rule to: Bryant L. VanBrakle, Secretary, Federal Maritime Commission, 800 North Capitol Street, NW, Room 1046, Washington, DC 20573-0001, E-mail: secretary@fmc.gov.
Sandra L. Kusumoto, Director, Bureau of Consumer Complaints and Licensing, Federal Maritime Commission, 800 North Capitol Street, NW, Room 970, Washington, DC 20573-0001, 202-523-5787. E-mail: sandrak@fmc.gov.
Section 3, Pub. L. 89-777, 46 U.S.C. app. 817e, (“section 3”) [1] requires passenger vessel Start Printed Page 19731operators (“PVOs”) [2] to establish their financial responsibility to indemnify passengers for nonperformance of transportation. The Commission's implementing regulations at 46 CFR part 540, subpart A, currently require PVOs to evidence financial responsibility by means of self-insurance, guaranty, escrow arrangement, surety bond, insurance policy, or combination thereof. Financial responsibility must be established in the amount of at least 110% of the PVO's highest unearned passenger revenue (“UPR”) [3] over the most recent two-year period, subject to a $15 million maximum for those PVOs establishing financial responsibility by means other than self-insurance or escrow agreement. However, those PVOs not qualifying by self-insurance may elect to use a sliding scale formula to compute the amount of financial responsibility required, if they can establish five years operational experience in the U.S. trades with a satisfactory explanation of any claim for nonperformance. Self-insuring PVOs must establish net worth equal to at least 110% of UPR.
Recent bankruptcies of several PVOs, coupled with the experience of passengers in receiving payment in satisfaction of claims, have caused the Commission to re-evaluate its rules governing PVO coverage for nonperformance. During the past fifteen months, the following cruise lines embarking passengers from U.S. ports ceased operations: Premier Cruise Operations Ltd., Commodore/Crown Cruise Lines, Cape Canaveral Cruise Lines, Inc., and American Classic Voyages Company (“AMCV”) [4] . All but Cape Canaveral filed for bankruptcy. After ceasing operations, Cape Canaveral provided reimbursement to passengers.
Even though passengers with tickets on Premier and Commodore experienced delays in being reimbursed,[5] they ultimately were protected by surety bonds under the Commission's PVO program. AMCV, however, had evidenced its financial responsibility by means of the self-insurance provisions of the Commission's rules (46 CFR 540.5(d)). Its passengers were limited to reimbursement by credit card companies, third party travel insurance the passenger had purchased,[6] or by filing a proof of claim with the appropriate bankruptcy court. Unfortunately, it appears that many of AMCV's passengers will receive little reimbursement.
Although self-insurers currently are required to submit quarterly and annual balance sheets and income statements, by the time such data are received, financial and economic conditions could change substantially.[7] Historically, self-insurers under the Commission's program typically are those with the greatest financial vulnerability.[8] Consequently, self-insurance presents significantly greater risk to passengers than other methods available to PVOs to demonstrate the required evidence of financial responsibility.
During the 1990s, the Commission raised the question of continuing to allow PVO self-insurance on a number of occasions.[9] Prior to 1993, the Commission required that a self-insuring PVO maintain both net worth and working capital in an amount exceeding their UPR by 110%. Effective February 1, 1993, the Commission eliminated the working capital requirement, instead requiring at least five years of operation in the U.S. trades with a satisfactory explanation of any claims for nonperformance of transportation, along with the necessary net worth.[10] The Commission's recent experiences, particularly with AMCV, indicate that length of operations and net worth are not sufficient criteria to insure the necessary protection to the passenger public.
One of the more serious criticisms of self-insurance is the virtual impossibility of protecting passengers when an operator begins to show financial problems. Once its financial situation begins to deteriorate, a self-insuring PVO may not be able to obtain a surety bond or a guaranty. Typically, to provide coverage in such a situation a bond issuer would require, in addition to the bond premium, secure, liquid collateral in an amount close to, if not equal to, the face amount of the bond. Providing such collateral, or even depositing UPR into an escrow agreement, could cause the demise of a PVO that is experiencing financial problems. Similarly, for the Commission to revoke the PVO's self-insurance certificate under such circumstances increases the risk that the PVO would be forced into bankruptcy, thus causing the very nonperformance the Commission seeks to prevent.
The Commission also has considered recent developments impacting its passenger vessel operator financial responsibility program. Those Start Printed Page 19732developments include recent cruise line bankruptcies; the aftermath of the events of September 11, 2001; the current economic uncertainty and its effect on sales of cruises; and the impending deployment of a substantial increase in cruise ship capacity. These developments, combined with the financial condition of current self-insurers, inevitably lead to the conclusion that self-insurance is an inadequate method of protecting passengers for non-performance.
Additionally, the Commission occasionally has approved guarantors using the same financial standards as for self-insurers, i.e. net worth. As with self-insurers, the Commission finds those requirements inadequate for guarantors, and proposes to modify its guaranty requirements to limit guarantors to Protection and Indemnity Associations with substantial assets, reserves and reinsurance to protect covered PVOs.
Further, the current sliding scale formula provides for reduced coverage, the amount of which is not based on financial criteria. There is no requirement for a fixed amount under the sliding scale provisions. As a result, the current formula reduces the required financial coverage to levels the Commission now believes are inadequate, in light of recent developments.
Accordingly, the Commission is proposing to amend its rules to eliminate self-insurance as an acceptable method of evidencing financial responsibility under section 3 of Pub. L. 89-777. In addition, the proposed rule would eliminate the reduced coverage requirements under the Commission's sliding scale formula. If made final, all PVOs who are self-insurers or who use the sliding scale would be required to obtain coverage that comports with the Commission's new rules.
Therefore, pursuant to 5 U.S. C. 553; section 3 Pub. L. 89-777, 80 Stat. 1356-1358 (46 U.S.C. app. 817e); and section 17(a) of the Shipping Act of 1984, as amended (46 U.S.C. app. 1716(a), and for the reasons stated above, the Federal Maritime Commission proposes to amend 46 CFR part 540 as follows:
1. The authority citation to Part 540 continues to read:
Authority: 5 U.S.C. 552, 553; secs. 2 and 3, Pub. L. 89-777, 80 Stat.1356-1358 (46 U.S.C. app. 317(e, 817d); sec. 17(a) of the Shipping Act of 1984 (46 U.S.C. app. 1716(a)). 2. Section 540.5 is amended as follows: a. Revise the heading and introductory text; b. Revise paragraph (c); c. Remove paragraphs (d) and (e). d. Redesignate paragraph (f) as paragraph (d). The revisions read as follows:
Except as provided in § 540.9(j), the amount of coverage required under this section and § 540.6(b) shall be in an amount determined by the Commission to be no less than 110 percent of the unearned passenger revenue of the applicant on the date within the two fiscal years immediately prior to the filing of the application which reflects the greatest amount of unearned passenger revenue. The Commission, for good cause shown, may consider a time period other than the previous two-fiscal-year requirement in this section or other methods acceptable to the Commission to determine the amount of coverage required. Evidence of adequate financial responsibility for the purposes of this subpart may be established by one or a combination (including § 540.6 Surety Bonds) of the following methods:
(c) Filing with the Commission a guaranty on Form FMC-133A, by a Protection and Indemnity Association with established assets, reserves and reinsurance acceptable to the Commission, for indemnification of passengers in the event of nonperformance of water transportation. The requirements of Form FMC-133A, however, may be amended by the Commission in a particular case for good cause.
3. Amend Form FMC-131, Part II, as follows:
a. Revise Item 10. to read:
b. Remove Item 15.
10. Items 11—14 are optional methods; answer only the one item which is applicable to this application. Check the appropriate box below:
[ ] Insurance (item 11).
[ ] Escrow (item 12).
[ ] Surety bond (item 13).
[ ] Guaranty (item 14).
3. UPR means “passenger revenue received for water transportation and all other accommodations, services, and facilities relating thereto not yet performed.” (46 CFR § 540.2(i)).
4. Currently, the Delta Queen Steamboat Co. does provide limited service via the operations of the DELTA QUEEN and the MISSISSIPPI QUEEN. This service is covered by an approved escrow agreement.
5. Premier's surety began payments late in the summer of 2001, almost a year after its bankruptcy, and Commodore's began paying claims the first week of January 2002, slightly more than a year after its bankruptcy.
6. Often cancellation insurance is offered by both the cruise line itself and by various third party insurers. Not all policies include coverage in the event of bankruptcy.
7. The financial information submitted by AMCV for the quarter ending June 30, 2001, was submitted on August 30, 2001. This data showed AMCV's net worth clearly exceeding that required by Commission rules for self-insurers. Data for the quarter ending September 30, 2001 had not been submitted by the time AMCV filed for bankruptcy on October 19, 2001.
8. Financial data for the two private PVOs presently establishing coverage under the Commission's self-insurance criteria show both companies operating with substantially less than positive net working capital. The Commission currently is working with each of these PVOs to establish a more acceptable form of financial coverage.
9. Docket No. 90-1, Security for the Protection of the Public, Maximum Required Performance Amount; Proposed Rule, 55 FR 1850 (January 19, 1990); Final Rule, 55 FR 34564 (August 23, 1990); Correction, 55 FR 35983 (September 4, 1990).
Fact Finding Investigation No. 19, Passenger Vessel Financial Responsibility Requirements, Order of Investigation, 55 FR 34610 (August 23, 1990).
Docket No. 91-32, Passenger Vessel Financial Responsibility Requirements for Indemnification of Passengers for Nonperformance of Transportation—Advance Notice of Proposed Rulemaking and Notice of Inquiry, 56 FR 40586 (August 15, 1991).
Docket No. 92-19, Revision of Financial Responsibility Requirements for Nonperformance of Transportation; Proposed Rule, 57 FR 19097 (May 4, 1992); Final Rule, 57 FR 41887 (September 14, 1992).
Docket No. 92-50, Financial Responsibility Requirements for Nonperformance of Transportation—Revision of Self-Insurance Qualification Standards; Proposed Rule, 57 FR 47830 (October 20, 1992); Final Rule, 57 FR 62479 (December 31, 1992).
Docket No. 94-06, Financial Responsibility Requirements for Nonperformance of Transportation; Proposed Rule, 59 FR 15149 (March 31, 1994); Further Proposed Rule, 61 33059 (June 26, 1996).
Docket No. 94-21, Inquiry into Alternative Forms of Financial Responsibility for Nonperformance of Transportation. 59 FR 52133 (October 26, 1994).
10. Docket No. 92-50, supra.
[FR Doc. 02-9796 Filed 4-22-02; 8:45 am]