Commercial Space Launch Insurance: Views Differ on Need for Change to Insurance Approach but Clarification Is Needed
Published: 2016-11-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. commercial space industry has expanded, conducting eight launches in 2015 compared with none in 2011. These launches have traditionally been from federal facilities, but as of July 2016, there were 10 nonfederal FAA-licensed spaceport operators supporting both private and federal space activity. Almost all of these spaceport operators are local government entities. The complexity of the arrangements at these spaceports, and a mishap in October 2014 where the spaceport was not adequately insured, have raised questions about insurance coverage for spaceport assets, including potential federal involvement.
Congress included a provision in statute for GAO to report on the potential inclusion of local government property in the existing indemnification regime for commercial space launches. This report examines (1) the insurance coverage spaceport operators have in place and (2) stakeholder views on the need to change the current insurance approach and on options for revising it. GAO reviewed key documents; interviewed FAA and NASA officials and representatives of FAA-licensed spaceports, launch companies, insurance brokers, and insurance companies; and selected two spaceports to visit based on launch activity.
section_title: What GAO Found
paragraphs: Of the 10 spaceport operators (entities that host launches from their property) that are currently licensed by the Federal Aviation Administration (FAA), 3 have had commercial activity in the last 5 years, and all 3 told GAO that they have both property and liability coverage to protect themselves from losses resulting from space launch mishaps. Federal laws and regulations do not require spaceport operators to have insurance, but operators of nonfederal spaceports that are located on federal property could have federal contracts that require them to have insurance to protect their own property from damage resulting from space launch mishaps. Moreover, for launches licensed by FAA, since the Commercial Space Launch Act Amendments of 1988, FAA has required launch companies (firms that conduct or will conduct the launch of vehicles and payloads) to purchase insurance to cover damage to the uninvolved public, as well as damage to federal government property, in case of a launch mishap. Launch participants may also choose to negotiate additional insurance coverage through launch-specific contracts. However, spaceport operators said that they find the regulations that determine financial responsibility for commercial space launches to be confusing. Specifically, several spaceport operators GAO interviewed said that, based on their interpretation of the financial responsibility regulations, they were unsure whether their property would be covered under a launch company's insurance policy or whether they would need to purchase their own insurance for their property to be covered. FAA's mission includes encouraging, facilitating, and promoting commercial space launches by the private sector, among other things. Furthermore, federal internal control standards state that management should externally communicate the necessary quality information to achieve the entity's objectives. Unless spaceport operators have a clear understanding of FAA's financial responsibility regulations, a risk exists that they may not obtain adequate insurance against losses in the event of mishap. Uninsured losses, in turn, could potentially cause delays in resuming commercial launches following a mishap and unnecessary costs to the federal government, both of which could hinder the development of the domestic commercial launch industry.
Stakeholders in the space launch industry are divided on the need to change the current insurance approach, in which insurance for spaceports is not required but can be negotiated through contracts between launch companies, which operate launch vehicles, and spaceport operators, which run spaceports. Stakeholders identified some positive aspects of the current insurance approach—for example, some said that negotiating contracts specific to each launch allows for greater flexibility. However, they also raised concerns, including a lack of certainty about coverage for potential damage. GAO identified two potential options for requiring protection for spaceports: (1) requiring launch companies to purchase insurance to cover spaceport property and (2) requiring spaceport operators to purchase insurance to cover their own property. In general, stakeholders tended to oppose the option in which the burden of purchasing the insurance was on them. Specifically, most spaceport operators GAO interviewed favored the first option, while most launch companies favored continuing the current approach. Stakeholders discussed benefits associated with both options—for example, they said that both options could increase certainty by specifying which party was required to insure spaceport property. However, they also noted challenges, such as higher costs for the party required to purchase the insurance and decreased flexibility to customize their use of insurance depending on the details of a particular launch.
section_title: What GAO Recommends
paragraphs: GAO recommends that FAA provide additional communication to clarify its interpretation of the financial responsibility regulations for commercial space launches. The Department of Transportation provided technical comments.

section_title: Letter
paragraphs: In recent years, the U.S. commercial space industry has been  expanding—U.S. launch companies conducted eight launches in 2015,  compared with none in 2011—and federal law includes insurance  requirements for launch companies involved in commercial space  launches. Specifically, the Commercial Space Launch Act Amendments  of 1988 (CSLAA) requires launch companies—firms that operate launch  vehicles for launches licensed by the Federal Aviation Administration  (FAA)—to purchase insurance to cover damage to the uninvolved public,  or “third parties,” as well as damage to federal government property, in  case of a launch mishap. The CSLAA also added a requirement, subject  to appropriation, for the federal government to indemnify launch  companies for claims that exceed their required insurance coverage, up  to $1.5 billion adjusted for post-1988 inflation, which was around $3.06  billion in fiscal year 2016. Furthermore, the National Aeronautics and  Space Act (Space Act) authorizes the National Aeronautics and Space  Administration (NASA) to enter into legal agreements with spaceport  operators—entities that host launches at their launch sites (i.e.,  spaceports)—for use of NASA property in support of commercial space  launches, which may include insurance requirements for companies  involved in those launches. Almost all of the spaceport operators currently  licensed by FAA are state or municipal government entities.
A recent commercial space launch mishap highlighted confusion about  the insurance requirements for and protections of state and municipal  spaceport property. On October 28, 2014, an Orbital Sciences  Corporation resupply mission to the International Space Station failed  during lift-off. This mishap caused about $15 million in damage to the  Mid-Atlantic Regional Spaceport (MARS), a launch pad owned and  operated by the Virginia Commercial Space Flight Authority (VCSFA), a  state government entity, on land owned by the federal government at  NASA’s Wallops Flight Facility. In the aftermath of the failure, according  to NASA officials, Orbital Sciences Corporation and VCSFA each paid $5  million to help fund the repairs. The NASA Office of Inspector General  later confirmed that NASA was not financially responsible for damage to  NASA or VCSFA property and noted that the parties ultimately disagreed  about financial responsibility for the mishap in light of Congressional  direction to the contrary. As a result of the confusion, NASA contributed  by increasing the value of an existing contract with VCSFA by $5 million  to fund infrastructure at MARS. These funds were intended for other  space operations projects. The mishap was resolved with involvement  from Congress before the current insurance regulations could be tested.  Nevertheless, this event highlighted a potential concern about the  adequacy of insurance coverage obtained by FAA-licensed spaceport  operators, an increasingly key part of the U.S. commercial space industry.
Section 115 of the U.S. Commercial Space Launch Competitiveness Act  (CSLCA) contains a provision for GAO to report on the potential inclusion  of all government property, including state and municipal property, in the  existing indemnification regime established under 51 U.S.C. § 50914,  which covers liability insurance and financial responsibility requirements.
This report examines (1) the insurance coverage spaceport operators  have in place to protect themselves from losses resulting from space  launch mishaps and (2) stakeholder views on the need to change the  current insurance approach and options for revising it.
To address these objectives, we reviewed our prior related reports and  other studies and analyzed relevant laws and regulations. We conducted  semistructured interviews and analyzed responses from 9 of the 10  spaceport operators licensed by the FAA, as of July 2016. We also  visited 2 spaceports—sites where launches occur—selected based on  various factors including number of years in operation, colocation with a  federal range, commercial activity within the last 5 years, and occurrence  of a commercial space launch mishap. We visited MARS at NASA’s  Wallops Flight Facility in Wallops Island, Virginia, and Cape Canaveral  Spaceport at Cape Canaveral Air Force Station in Florida. We also  conducted semistructured interviews with other stakeholders, including  five launch companies that are active in the industry, all five key  insurance industry stakeholders that had provided coverage to the  commercial space industry (three insurance brokers and two insurance  companies), and two industry associations. Additionally, we interviewed  officials from FAA and NASA.
To examine stakeholder views on the need to change the current  insurance approach and options for revising it, we first conducted  semistructured interviews with all stakeholders as described earlier and  based on their inputs, we sent a follow-up questionnaire to the  stakeholders for their opinions on the options identified through  interviews. Additional information on our methodology is provided in  appendix I.
We conducted this performance audit from January 2016 to November  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Overview of Commercial Space Transportation
paragraphs: Commercial space transportation is carried out using launch vehicles  operated by private companies. In February 1984, Executive Order 12465  designated the Department of Transportation (DOT) as the lead federal  agency for enabling private-sector launch capabilities. In October 1984,  the Commercial Space Launch Act (CSLA) gave DOT the authority to,  among other things, license and monitor the safety of commercial space  launches and promote the commercial space industry. Regulatory  oversight of the commercial sector was delegated to the Office of  Commercial Space Transportation, within FAA, whose primary means of  authorizing space launch activities is through its licensing process.  Specifically, FAA’s Office of Commercial Space Transportation is  responsible for licensing launch and reentry vehicles and spaceport  operations carried out by U.S. citizens or within the United States, except  for operations carried out exclusively by and for the federal government.
In an informal guidance, FAA defines commercial space launches as  those that are licensed by FAA, among other characteristics. During an  FAA-licensed launch, several key parties are involved:
The spaceport operator is the entity that hosts the launch (or  reentry, or both) of the launch vehicle from its launch site. Almost all  spaceport operators currently licensed by FAA are state or municipal  government entities.
The launch company is the entity that conducts the launch of a  vehicle and any payload, such as a satellite, a probe, or a spacecraft  carrying humans or cargo.
The customer is the entity that pays the launch company to carry a  payload into space.
CSLA and its subsequent amendments require launch companies and  spaceport operators to obtain licenses. To obtain a launch or reentry  license, a launch company must meet safety and financial responsibility  requirements, among other things. FAA finalized its regulations related  to financial responsibility and allocation of risk requirements for launch  companies for licensed launches in August 1998. Similarly, a spaceport  operator must also meet safety requirements to receive an FAA launch  site license. FAA’s regulations related to spaceport licensing, which were  finalized in October 2000, require spaceport operators to demonstrate the  level of safety of the spaceport, including information on trajectory, debris  dispersion area, flight corridor, and if necessary, a risk analysis for  populated areas. In the following year, FAA issued its first spaceport  operator license under these regulations.
Although commercial activity has traditionally been from federal ranges,  as of July 2016 there were 10 FAA-licensed spaceports to support private  sector involvement in space-related activity. Three of the 10 were  colocated with federal ranges at an Air Force base or a NASA facility:  California Spaceport at Vandenberg Air Force Base, Cape Canaveral  Spaceport at Cape Canaveral Air Force Station, and MARS at NASA’s  Wallops Flight Facility (see table 1).
FAA licenses the operation of spaceports for vertical takeoffs or landings,  horizontal takeoffs or landings, or both. Four sites are dedicated to  vertical launches, four conduct horizontal launches only, and two can host  both types of operations. Figure 1 illustrates examples of vertical and  horizontal spaceports.
In addition to these sites, there are three private spaceports where  individual companies may conduct FAA-licensed or permitted launches.  Because the companies own and operate these sites using their own  vehicles exclusively, a launch site license is not required. Also, as of July  2016, FAA had conducted pre-application consultations for seven  additional sites. Figure 2 illustrates the location of existing and proposed  commercial spaceports as of July 2016.
section_title: U.S. Indemnification Regime
paragraphs: CSLAA created a three-tiered approach for sharing liability between the  federal government and the private sector for damages to third parties— known as the indemnification regime—to encourage the development of  the U.S. commercial space launch industry and promote a competitive  environment (see fig. 3). All FAA-licensed commercial space launches  and reentries by U.S. companies, whether unmanned or manned and  whether from the United States or overseas, are covered by the  indemnification regime for third-party damage that results from launch or  reentry. Third parties include persons that are not involved in launch or  reentry services—those other than the federal government, the launch  company, contractors and subcontractors of the federal government or  the launch company, and customers of the launch company.
The U.S. indemnification regime has a three-tier approach for sharing  liability between the federal government and the private sector to cover  third-party claims, from when the launch vehicle arrives at the spaceport  to the end of a launch.
The first tier of coverage is an insurance policy the launch company  is required to purchase for an individual launch or set of launches. As  part of FAA’s process for issuing a license for a commercial space  launch or reentry, the agency determines the amount of insurance a  launch company is required to purchase so the launch company can  compensate third parties for claims and the federal government for  any damage to its property that occurs as a result of activities carried  out under the license. FAA calculates the insurance amount to reflect  the maximum probable loss that is likely to occur because of a mishap  that results in (1) third-party damage, including deaths and injuries on  the ground and damage to property caused by anything that resulted  from a launch or reentry, and (2) damage to government property.  The liability insurance obtained by the launch company also protects  its customer(s) (i.e., the entity(ies) paying the launch company to  bring a payload into space), the federal government, and their  respective contractors and subcontractors from claims by a third  party. Launch companies must purchase coverage to meet FAA’s  maximum probable loss amount, up to the maximum amount of  coverage available in the world market at a reasonable cost, as  determined by FAA. This first tier of required insurance coverage is  capped at a maximum of $500 million for third-party damages.  Additionally, the required insurance coverage is capped at a  maximum of $100 million for any potential damage to government  property.
The second tier of coverage—which is adjusted for inflation and is  capped at $3.06 billion in fiscal year 2016 dollars—may be provided  by the U.S. government and covers any third-party claims in excess of  the specific first-tier amount. For the federal government to be able  to make payments for these claims, Congress would need to  appropriate funds. The second tier of coverage has never been  invoked because to date, no mishaps have resulted in third-party  claims in excess of the first tier.
The third tier of coverage is for third-party claims in excess of the  second tier. Like the first tier, this third tier is the responsibility of the  launch company, which may seek insurance above the required first  tier amount for this coverage. Unlike the first tier, no insurance for this  third tier is required under federal law.
Another component of the U.S. indemnification regime for commercial  space launches and reentries is cross waivers. A cross waiver provides  that each party involved in a launch agrees not to bring claims against the  other parties and assumes financial responsibility for damage to its own  property or loss or injury sustained by its own employees. FAA officials  we interviewed said that the launch company, its customer(s), and FAA  (on behalf of the federal government) must sign each cross waiver. FAA  verifies these parties’ signatures on each cross waiver as part of the  licensing process. These waivers include their respective contractors and  subcontractors, who must sign them as well.
FAA can also issue permits—rather than licenses—for certain launch  activities, such as launch or reentry of a reusable suborbital rocket.  Launch companies operating under an FAA-issued permit must purchase  insurance under the first tier of the indemnification regime, but they do not  gain coverage under the second tier of the indemnification regime.  Therefore, permitted activities are excluded from the federal  indemnification. Similar to launch companies operating under launch  licenses, launch companies operating under permits are not required to  purchase insurance under the third tier of the indemnification regime.  Launch companies that receive permits for launch activities, rather than  licenses, are also required to sign cross waivers as part of the permitting  process.
According to FAA, no FAA-licensed commercial space launch since  CSLAA was enacted has resulted in casualties or substantial property  damage to third parties that exceeded the amount of insurance coverage  FAA required the launch company to provide. According to FAA officials,  in the event of a third-party claim that exceeded the launch provider’s  first-tier coverage, FAA would be involved in any negotiation of the federal  government’s potential payment, and the Secretary of Transportation  would have to approve any settlement to be paid out of the congressional  appropriations.
section_title: Spaceport Insurance Coverage Varies and Could Potentially Be Inadequate Because FAA Has Not Clearly Communicated Its Interpretation of Regulations
paragraphs: Federal statute does not give FAA the authority to require spaceport  operators to obtain insurance, but spaceports colocated with federal  ranges may be required under federal contractual agreements to insure  their property against damage resulting from space launch mishaps.  Spaceport insurance coverage varies among the spaceport operators we  interviewed, and the stakeholders we spoke with had differing views on  the affordability of insurance. Several spaceport operators we interviewed  found the financial responsibility regulations for commercial space  launches confusing, which could potentially result in their failure to obtain  adequate insurance protection.
subsections: section_title: Federal Statute Does Not Require Spaceport Operators to Obtain Insurance, but Spaceports Colocated with Federal Ranges Could Face Insurance Requirements
paragraphs: Unlike launch companies, spaceport operators face no federal statutory  or regulatory insurance requirements. Specifically, FAA’s spaceport  licensing process includes safety requirements for spaceport operators  but does not include any insurance requirements. FAA officials stated that  their focus is on ensuring public safety and that spaceport operators are  responsible for protecting their own property against the risks associated  with spaceflight.
Operators of spaceports that are located on federal government  properties, however, could have federal contracts or agreements that  require them to have insurance to protect their own property from damage  resulting from space launch mishaps. For example, through Space Act  Agreements, which NASA signs with other organizations to formalize  partnerships that help NASA achieve its mission, NASA has imposed  insurance requirements for an FAA-licensed spaceport that is located on  NASA property. As of July 2016, FAA has licensed just one spaceport  that is colocated with a NASA facility—MARS at NASA’s Wallops Flight  Facility. A Space Act Agreement between NASA and VCSFA, the  spaceport operator at MARS, requires, among other things, that VCSFA  certify that sufficient insurance is in place to cover MARS property from  damage resulting from space launch mishaps. Similarly, the Air Force  could also require spaceport operators to hold insurance to protect the  spaceport operators’ own property from damage resulting from space  launch mishaps, but the Air Force does not always do so. For example, a  Space Operations Support Agreement between the Air Force and Space  Florida for Cape Canaveral Spaceport sets some insurance requirements  for Space Florida, although the agreement does not explicitly mention  insurance to cover Space Florida property against damage resulting from  space launch mishaps.
section_title: Spaceport Insurance Coverage Varies among Spaceport Operators with Recent Commercial Activity, and Views Differ on the Affordability of Insurance
paragraphs: Three of the 10 spaceports FAA has licensed for commercial activity— MARS, Mojave Air and Space Port, and Spaceport America—have had  commercial activity in the last 5 years, and their insurance coverage  varies. Even though FAA does not require spaceport operators to hold  insurance, representatives of these three commercially active spaceports  told us that they have both property and liability insurance coverage to  protect themselves from losses resulting from space launch mishaps.
Operators of the three commercially active spaceports said they have  property insurance coverage either through their contracts with launch  companies or through their state government. Operators of two of the  three commercially active spaceports said they receive property  insurance coverage through the launch companies that operate from their  property. Specifically, according to stakeholders, contracts between  spaceport operators and launch companies may include provisions  requiring the launch company to include the spaceport operator as an  additional insured during launch activities. The operator of the other  commercially active spaceport said its state provides property coverage  for damage resulting from space launch mishaps.
Operators of the three commercially active spaceports receive liability  insurance coverage through their status as launch companies’  contractors, and additionally through their state if coverage is available.  FAA officials said that when a spaceport operator hosts commercial  activity at its spaceport, the spaceport operator is considered a contractor  of the launch company, which is one kind of “involved party” to a launch.  Furthermore, the financial responsibility regulations for commercial space  launches state that a launch company must include its contractors and  subcontractors as additional insureds on the insurance policy or policies  purchased to comply with the insurance requirements FAA sets for launch  companies. This means that when a spaceport operator hosts  commercial activity at its spaceport, it receives liability coverage under  the insurance policy the launch company must purchase to comply with  the insurance requirements FAA sets for launch companies. In addition to  the liability insurance coverage spaceport operators receive through their  status as launch companies’ contractors, operators of two of the three  commercially active spaceports said their states provide some degree of  liability coverage for damage resulting from space launch mishaps. This  coverage may, however, be limited. For example, one commercially  active spaceport operator said that it participates in its state’s minor  liability program with a cap of $1 million per event, which is small when  compared to the $500 million cap FAA sets for the liability insurance  launch companies must purchase.
Operators of the seven spaceports that have not had commercial activity  in the last 5 years have not recently had to obtain insurance to protect  their property from damage resulting from launch mishaps. Several of  these spaceport operators said they plan to evaluate options for insuring  their property against launch-related damage if they host commercial  space launches in the future. Operators of three of these spaceports— Cecil Field Spaceport, Midland International Airport, and Ellington  Airport—also said their sites are still under development, another reason  they have not had to obtain insurance to protect their property from  damage resulting from launch mishaps. While these seven spaceports  have not had to obtain insurance coverage to protect their property from  damage resulting from space launch mishaps, several told us that they  have independently purchased property and liability insurance to cover  damage resulting from day-to-day operations.
While operators of the three commercially active spaceports were able to  obtain or receive property and liability insurance coverage, five of the nine  spaceport operators we interviewed—including two of the three  commercially active spaceports—reported encountering difficulties in  obtaining these kinds of insurance for commercial space launches or  expressed concerns about their affordability. For example,  representatives from one of the three commercially active spaceports  explained that when they tried to purchase property insurance to protect  the infrastructure at their spaceport from damage resulting from space  launch mishaps, insurance providers either declined to provide  quotations, provided quotations exceeding or similar to the site’s launch  fees, or included substantial deductibles. As a result, this spaceport  operator, in negotiations with the launch company that operates from their  site, pressed for a provision in their contract specifying that the launch  company would include the spaceport operator as an additional insured in  its insurance policy to protect the spaceport infrastructure against any  damage resulting from the launch company’s activities under the contract.  Representatives from this spaceport also told us that based on the  insurance quotations they received, purchasing their own property  insurance would have been significantly more expensive than it was for  the launch company that operates from their site to expand their policy to  cover the spaceport infrastructure.
Other stakeholders we spoke with said insurance for commercial space  launches is currently available and affordable. All five insurance  companies and brokers we interviewed said insurance for commercial  space launches is currently available, and four also categorized insurance  for commercial space launches as affordable. Several insurance  companies and brokers said the supply of capital invested in the market  for this insurance is currently high, which reduces the cost of insurance.  One insurance company we interviewed attributed the high supply of  capital to relatively low interest rates across financial markets. Two  insurance industry stakeholders also said one reason that the commercial  space insurance market is an attractive option for investors is that space  launch risks are not correlated with other market risks, such as the risk of  a natural disaster or financial market risks, so investors can diversify  portfolio risks.
Despite the consensus among insurance companies and brokers that  insurance for commercial space launches is currently available and  affordable, four of the five insurance companies and brokers we  interviewed said a catastrophic space launch mishap could reduce its  availability. Furthermore, according to two of the insurance companies  and brokers we interviewed, the commercial space insurance market is  linked to the market for aviation insurance, so a large aviation claim could  affect the commercial space insurance market.
section_title: Because of Confusion about Financial Responsibility Regulations, Spaceport Operators May Not Obtain Adequate Protection
paragraphs: FAA has not clearly communicated its interpretation of financial  responsibility regulations to spaceport operators, and spaceport operators  may not have adequate protection as a result. As previously discussed,  CSLAA and its amendments require launch companies to purchase  insurance to cover damage to third parties in case of a launch mishap.  FAA officials told us they believe the statute and regulations are clear that  during a launch, a spaceport operator that is an active participant in the  launch is not considered a third party. Instead, FAA considers spaceport  operators that host commercial space launches to be “involved parties” to  launches. Because FAA considers spaceport operators hosting  commercial space launches involved parties, any damage to spaceport  property may not be covered under the liability insurance policy  purchased by a launch company. However, spaceport operators may  negotiate property insurance coverage with the launch companies that  operate from their spaceports and document agreements related to  insurance in their contracts, as described in earlier examples. FAA  officials said they think the financial responsibility regulations are clear as- is. FAA officials reported that they have not had any significant internal  disputes about how these laws and regulations should be interpreted.
However, several spaceport operators we interviewed reported that they  find the financial responsibility regulations to be ambiguous. Specifically,  they said they are unsure whether they are considered third parties or  involved parties to launches. For example, among the spaceport  operators, launch companies, and insurance industry stakeholders we  interviewed, six said they believe spaceport operators are involved  parties; one said it believes spaceport operators are third parties; and six  said they believe spaceport operators may be involved parties, third  parties, or both, depending on the circumstances. Furthermore, one  spaceport operator told us that it asked FAA to clarify its status under a  variety of hypothetical scenarios, but FAA officials did not address the  confusion about whether the spaceport operator would be considered a  third party or an involved party under the scenarios presented. Rather,  FAA officials provided general guidance on the financial responsibility  regulations. Similarly, another spaceport operator argued that its property  should be covered under the liability insurance policy purchased by the  launch company that operates from its site because it is a third party. A  few stakeholders indicated that guidance or further discussion to clarify  the language of the financial responsibility regulations would be useful.
Furthermore, several factors can generate additional uncertainty for  spaceport operators trying to determine whether they are involved parties  or third parties to launches.
Ownership of the assets involved in commercial space launches may  be split among several different parties, including the federal  government, a state or municipal government, a launch company, and  a launch company’s customer. Figure 4 shows the main assets  involved in vertical space launches, as well as the variety of parties  that stakeholders said may own each asset. A few spaceport  operators told us that mixed ownership of spaceport assets can create  confusion when they are trying to draw a line between their property  and other parties’ property.
Complex launch arrangements or relationships may render unclear a  spaceport operator’s status as an involved party or a third party. For  example, FAA officials acknowledged that a spaceport operator could,  in theory, be both a third party and an involved party for a given  launch but did not provide any real-world examples of this occurring.  Moreover, according to FAA officials, a spaceport operator’s status as  an involved party or a third party could vary by launch. Spaceport  operators may also have a stake in spaceports they themselves do  not operate. For example, while Space Florida is licensed to operate  Cape Canaveral Spaceport, it also provides financing for space  transportation-related infrastructure at other nearby launch facilities.  Because relationships like those Space Florida has with operators of  nearby launch facilities are not explicitly mentioned in FAA’s financial  responsibility regulations, Space Florida officials reported being  unsure whether Space Florida is considered an involved party or a  third party with regard to the financing it provides at spaceports for  which Space Florida is not the licensed operator.
When Congress passed CSLA in 1984 and significant amendments to  CSLA in 1988, U.S. space launches occurred exclusively at federal  ranges, which, as previously mentioned, are U.S. government facilities  that can host both government and commercial space launches. At the  time, Congress may not have anticipated that state and municipal  governments would later become involved in the commercial space  industry. For example, FAA first licensed California Spaceport for  commercial activity in 1996, nearly a decade after Congress passed  significant amendments to CSLA. Additionally, the original financial  responsibility regulations for commercial space launches were finalized  before regulations implementing a spaceport operator licensing regime  were finalized.
Congress has stated that state participation in the commercial space  industry is in the national interest and of public benefit, and FAA has the  dual mission of both regulating and promoting this industry.  Furthermore, to carry out its mission, FAA must communicate with  spaceport operators. Federal internal control standards state that  managers should communicate information externally to achieve the  entity’s objectives. However, FAA has not clearly communicated its  interpretation of financial responsibility regulations for commercial space  launches to spaceport operators. Specifically, FAA has not issued  guidance to spaceport operators to clarify when it considers them third  parties and when it considers them involved parties. FAA officials told us  that while they consult with prospective spaceport operators during the  pre-application phase of licensing, they do not have formal guidance to  provide to spaceport operators to help spaceport operators understand  when they are considered involved parties and when they are considered  third parties. According to FAA officials, issuing formal guidance, in  general, has not been a high priority; officials believe spaceport operators  have several opportunities to ask questions and receive answers about  their financial responsibilities, including during pre-application  consultation, when renewing a spaceport operator license, during an  annual inspection, or informally at any time.
If FAA does not clarify and communicate its interpretation of financial  responsibility regulations, spaceport operators that consider themselves  third parties may mistakenly assume any launch-related damage to their  property would be protected under insurance purchased by launch  companies operating from their property. Uninsured losses, which could  result from such misunderstandings, can be detrimental in several ways.  Uninsured losses may require more recovery time than insured losses,  delaying federal efforts to encourage state and municipal governments to  establish space transportation-related infrastructure. They may also lead  to unexpected costs to taxpayers. For example, VCSFA reported that  confusion over who should pay for repairs in the aftermath of the mishap  at Wallops Island contributed to delays in resuming launches to resupply  the International Space Station from this spaceport. Additionally,  according to NASA officials, NASA contributed by increasing the value of  an existing contract with VCSFA by $5 million (funds that were intended  for other space operations projects) to fund infrastructure repairs at  MARS. The complicating factors that generate additional uncertainty for  spaceport operators—mixed ownership of spaceport assets and the  potential for a spaceport operator to be both an involved party and a third  party or for their status to vary by launch—also underscore the need for  FAA to provide clear guidance to spaceport operators.
section_title: Stakeholders Are Divided on the Need to Change the Current Insurance Approach and on Support for Potential Options
paragraphs: Stakeholders we interviewed were divided in their opinions on the need to  revise the current insurance approach, which constitutes the first tier of  the existing indemnification regime. Similarly, they expressed differing  views about the options we identified for revising the approach: (1)  requiring launch companies to purchase insurance to cover spaceport  property, and (2) requiring spaceport operators to purchase insurance for  their own property. Stakeholders identified some positive aspects and  also raised concerns about each option.
subsections: section_title: Stakeholders Presented Mixed Views on the Current Insurance Approach and the Need for Change
paragraphs: Stakeholders we spoke with offered various views on the current  insurance approach and on the need to revise it. Several stakeholders  noted that the domestic space industry is still in a nascent stage of  development and that damage caused by launch mishaps has been  limited and infrequent. As a result, a few stakeholders said, the current  insurance approach has not yet been sufficiently tested to suggest a need  for change. As previously discussed, spaceport operators currently are  not required to hold insurance to cover their own property, and launch  companies are not explicitly required to purchase insurance to protect  spaceport property. In the absence of such requirements, spaceport  operators may purchase their own property insurance to protect against  damage resulting from launch activity, negotiate insurance protections  through contractual agreements with launch companies, or forgo  insurance entirely. Few (3 of 10) FAA-licensed spaceports have had  commercial activity in the last 5 years. Moreover, as of October 2016, the  only FAA-licensed space launch mishap to occur at a nonfederal  spaceport was Orbital Sciences Corporation’s incident in October 2014  which resulted in damages to the spaceport. The mishap was resolved  among the spaceport, the launch company, and NASA outside of any  requirements of the current insurance approach.
Stakeholders we interviewed—spaceport operators, launch companies,  and insurance industry stakeholders—provided mixed views on the  current insurance approach. Specifically, stakeholders were almost  evenly split in their views of supporting, opposing, or neither supporting  nor opposing the current insurance approach (see table 2). Two of the  three launch companies supported continuing the current insurance  approach, while spaceport operators and insurance industry stakeholders  were more divided on the need for change.
Furthermore, stakeholders had mixed views on how well the current  insurance approach is working. In particular, some felt that the current  approach creates a lack of certainty, creates an uneven playing field  between federal and nonfederal ranges, and increases inefficiency,  although views were not always uniform:
Lack of certainty. Some stakeholders we spoke with said that the  current insurance approach—which, for example, relies on contracts  between launch companies and spaceport operators to determine  insurance coverage—does not promote certainty because contracts  can be open to interpretation and unclear. One spaceport operator  also said that such confusion is likely to continue as more states build  spaceports, because each state and spaceport may have different  policies or agreements with each launch company. However,  concerns about the current insurance approach lacking certainty were  not shared by all stakeholders. We heard from two launch companies  and one insurance industry stakeholder that as long as the insurance  coverage specified in the contracts is agreed upon in advance of any  launches, all involved parties should be certain about the terms and  levels of protections.
Uneven playing field. Some spaceport operators we interviewed said  that the current insurance approach has not promoted a level playing  field between federal ranges and state or municipal spaceports.  These operators pointed out that federal ranges enjoy a competitive  advantage because launch companies are already required to  purchase insurance to cover damage to federal property, while  nonfederal spaceports are not similarly protected.
Inefficiency. Some stakeholders said that the current approach is  less efficient because currently insurance coverage has to be  negotiated for every launch or set of launches, whereas if insurance  were required by law or regulation, such negotiations would be  unnecessary. On the other hand, some stakeholders said that  negotiating contracts could be more efficient and that the contracts  could be adjusted more quickly than creating new regulations or  amending existing regulations.
However, stakeholders also identified reasons why the current insurance  approach should be continued, including greater flexibility, enhanced  competition, and assured consistency, although here again views were  not always uniform.
Greater flexibility. Several stakeholders we interviewed, including at  least one from each of our three stakeholder groups, said that using  contractual agreements for insurance coverage allows involved  parties to individually assess their assets and risks and to make  decisions on how best to protect them given the varying  characteristics of the launch vehicles and sites. For example, a  spaceport may have expensive equipment to protect, or it may be  interested in only hosting experimental activity, some of which is  designed to fail for testing purposes. In either of these cases, the  involved parties can determine the desired level of protection.
Enhanced competition. Some stakeholders we interviewed,  including at least one from each of our three stakeholder groups, said  that the flexibility to make their own business decisions regarding  what type and how much insurance coverage to obtain allows for  competitive pricing to attract businesses. Specifically, spaceport  operators might keep their launch prices low by purchasing less  coverage, which might allow them to attract new launch companies to  their spaceports. In contrast, some stakeholders, including at least  one from each of our three stakeholder groups, said they would like to  remove the temptation for spaceport operators to forego insurance in  order to attract new customers with lower prices, as it puts those  operators at risk of not being able to recover from a mishap.
Assured consistency. An insurance industry stakeholder said that  because commercial space launch activities require significant  advanced planning, changing regulatory conditions after such  activities have begun can create an additional expense that they did  not consider in their initial plans. One launch company we spoke with  added that continuing the current insurance approach is important, as  changes to the insurance rules may complicate the business  environment for launch companies in the early stages of operations.
section_title: Stakeholders Had Differing Views on Potential Options for Revising the Insurance Approach
paragraphs: Based on interviews with FAA, spaceport operators, launch companies,  and insurance industry stakeholders, we identified two primary options for  implementing a revised insurance approach as it relates to state and  municipal spaceports:
Require launch companies to purchase insurance to cover  spaceport property against damage resulting from launch accidents.  This option would likely be implemented through FAA’s launch  licensing process by including an insurance requirement for potential  damage to spaceport property.
Require the spaceport operators to purchase insurance to cover  their own property against damage resulting from launch accidents.  This option would likely be implemented through the spaceport  operator licensing process.
While stakeholder groups we interviewed expressed differing views about  the options, within stakeholder groups, views on the potential options  were fairly consistent. Most spaceport operators we interviewed favored  the option to require launch companies to purchase insurance, while most  launch companies favored continuing the current approach. Others, such  as those among the insurance industry stakeholders we interviewed,  tended to favor the option to require launch companies to purchase  insurance. In general, stakeholders tended to oppose options where the  burden of purchasing the insurance was on them.
Stakeholder groups we interviewed expressed differing views about the  option of requiring launch companies to purchase insurance to cover  spaceport property against damage resulting from a mishap. Nearly all  spaceport operators and insurance industry stakeholders we interviewed  supported this option, while launch companies either opposed it or were  neutral (see table 3).
Similarly, stakeholder groups we interviewed expressed differing views  about the option of requiring spaceport operators to purchase insurance  to cover their own property against damage resulting from mishaps. Most  spaceport operators opposed this option, while launch companies either  opposed it or were neutral, and insurance industry stakeholders were  divided (see table 4).
In addition, stakeholders we interviewed said that one or both options  would benefit participants by leveling the playing field, increasing  certainty, and increasing efficiency:
Leveled playing field. Many stakeholders we interviewed, including  at least one from each of the three stakeholder groups, said that the  option of requiring launch companies to purchase insurance to cover  spaceport property would help promote a level playing field with  federal ranges. This is because commercial spaceports would then  receive the same level of insurance protection as federal spaceports,  which launch companies are already required to cover in their  insurance policies. According to a number of spaceport operators and  insurance industry stakeholders we spoke with, this option would be  more equitable, as state and municipal spaceports are no different  from federal ranges in terms of function or capabilities.
Increased certainty. Depending on which option was implemented,  several stakeholders from all three stakeholder groups said each of  the potential options would provide certainty to all parties on what  would be covered, and by whom, should a mishap occur. Moreover,  they said that one or both options would provide certainty to all  involved parties that spaceport operators would have the financial  means to repair damage quickly after a mishap and resume launch  activities without keeping the launch customers waiting. In addition,  several stakeholders, including at least one from each stakeholder  group, said that the option of requiring launch companies to purchase  insurance would promote investment in and development of  spaceports. Specifically, some stakeholders said that investors and  owners would have greater assurance that the assets they have  invested in would have adequate protections in the event of a launch  mishap.
Increased efficiency. Several stakeholders, including at least one  from each stakeholder group, said that either option would make  contract negotiations more efficient, as the insurance protections  would be clearly stipulated in law.
However, stakeholders raised several concerns about one or both options  to revise the current insurance approach. Specifically, stakeholders said  one or both options could provide less flexibility, increase costs for some  participants, and limit participants’ ability to do business in some ways.
Less flexibility. Some stakeholders we spoke with told us that one or  both options could reduce flexibility in various ways. For example, one  spaceport operator said that either option would require launch  companies or spaceport operators to purchase insurance to cover  spaceport property rather than allowing them to make decisions on  how best to protect and manage their risk and property assets. For  example, this representative said that spaceport operators may not  want to insure some of their own property because of its low value.  According to two spaceport operators, requiring full protection of this  property could burden a spaceport operator to take on a cost it  otherwise would not. For example, requiring spaceport operators to  purchase insurance may also be overly burdensome for spaceports  that host experimental activity or for those that have more facilities  and expensive assets to insure.
Higher costs. Some stakeholders also noted that one or both options  could increase costs or shift them to certain participants, depending  on which option was implemented. A few spaceport operators  expressed concerns that the option of requiring spaceport operators  to purchase insurance would be onerous because of the potentially  high cost of securing such coverage. According to some insurance  industry stakeholders, the cost for the launch company to add the  spaceport as an insured party under the launch company’s policy  would be less than the cost for the spaceport to have its own policy  covering the same property.
On the other hand, some stakeholders, including at least one from  each of our three stakeholder groups, raised the concern that the  option of requiring launch companies to purchase insurance would  increase their cost of conducting business. According to one  insurance industry stakeholder it could disproportionately affect  smaller launch companies that may have fewer resources.  Additionally, according to another insurance industry stakeholder and  one spaceport operator, the increased cost of conducting business for  launch companies could reduce the amount of launch activity that  would otherwise take place. However, a few stakeholders—namely,  spaceport operators and insurance industry stakeholders—said that  the government maximum probable loss calculation would not be  significantly different if state and municipal spaceport property were  included, as the addition of such property would present little  increased cost in the maximum probable loss calculation.
Limited ability to do business. For one or both options, several  stakeholders, including at least one from each of our three  stakeholder groups, expressed concern that requiring the purchase of  insurance would negatively affect participants’ ability to do business.  For example, one spaceport operator raised the concern that if launch  companies were required to purchase insurance, the amount of  liability insurance required to protect each spaceport would become  part of the launch company’s business decision regarding which  spaceport to partner with. As a result, according to a launch company  and a spaceport operator, such a requirement could affect competition  between spaceports because some spaceports would require less  insurance due to less property that needs protection. In another  example, some stakeholders said that requiring spaceport operators  to purchase insurance may be more burdensome for newer  spaceports due to their limited track records or for spaceports with  lower risks.
Stakeholder views were mixed on which party was in the best position to  determine risk. Both spaceport operators and insurance industry  stakeholders said that the responsibility should be on the entity that has  the most control over launch activities and is in the best position to avoid  causing damage. Specifically, they said that launch companies perform  the risky activities and exercise the most control over those activities, and  it would therefore be most fair for the launch companies to be responsible  for insuring against damages caused by those activities. One spaceport  operator also said that because the launch companies, which conduct the  launches, have a clearer idea of the risk of each launch (e.g., the  vehicle’s track record), they are better positioned to make an informed  decision on insurance coverage for those risks. However, two  stakeholders said that spaceport operators are aware of the risks of their  involvement and are well positioned to make informed business decisions  about whether or not to purchase insurance and to what extent.
In addition to the issues stakeholders raised, limiting costs to the federal  government before and after a disaster is another relevant consideration  for revising the current insurance approach, as our prior work suggests.  The potential cost to the federal government of revising the current  insurance approach related to FAA-licensed spaceports depends on the  accuracy of the related maximum probable loss calculation. As discussed  previously, this calculation evaluates and estimates the risk and potential  losses associated with launch activity and the corresponding insurance  coverage a launch company must purchase. An inaccurate calculation  that understates the amount of insurance a launch company must obtain  would increase the exposure to the federal government, as the insurance  amount would be less than the potential losses associated with the  launch activity and the property would be inadequately protected. In a  July 2012 report, we found that the potential cost to the federal  government of indemnifying third-party losses is currently unclear  because it depends in part on a calculation that may not be sound. We  recommended that FAA review and periodically reassess its maximum  probable loss methodology, including assessing the reasonableness of  the assumptions used. FAA is currently evaluating its maximum  probable loss methodology. We have an ongoing review to independently  assess the methodology used by FAA.
section_title: Conclusions
paragraphs: Congress has clearly expressed an interest in the development of the  commercial space industry, which has begun to move beyond launching  exclusively from federal ranges to launching from state, municipal, and  private spaceports. Expansion in the number of spaceport operator  licenses—and the potentially complex ownership and contractual  arrangements at the spaceports FAA has licensed—developed largely  after the legislation authorizing the current indemnification approach were  established. The spaceport operators we spoke with expressed confusion  about the financial responsibility regulations for commercial space  launches, which could potentially result in gaps in insurance protection.  Among other things, FAA is tasked with regulating and promoting  commercial space launches by the private sector, as well as facilitating  the expansion of U.S. commercial space transportation. Gaps in  insurance protection can result in uninsured losses, which can, in turn,  hinder the development of space-transportation-related infrastructure that  supports the commercial space launch industry. Given the growth in  nonfederal spaceports, ensuring that spaceport operators have an  accurate understanding of the financial responsibility regulations will only  become more important.
section_title: Recommendations for Executive Action
paragraphs: To better ensure spaceport operators’ understanding of FAA’s financial  responsibility regulations for commercial space launches, we recommend  that the Secretary of Transportation ensure that the FAA Administrator  provides additional communication to clarify FAA’s interpretation of the  financial responsibility regulations for commercial space launches. The  forms of communication could include, among other things, issuing  additional guidance or using other forums to clarify when a spaceport  operator is a third party to a launch and when it is not.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Transportation for  its review and comment. The Department of Transportation provided us  with technical comments, which we incorporated as appropriate, but did  not comment on the recommendation.
We will send copies of this report to the appropriate congressional  committees, the Secretary of the Department of Transportation, and the  Administrator of the National Aeronautics and Space Administration. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last part of this report. GAO staff who made major  contribution to this report are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: The report examines (1) the insurance coverage spaceport operators  have in place to protect themselves from losses resulting from space  launch mishaps and (2) stakeholder views on the need to change the  current insurance approach and options for revising it.
To address these objectives, we reviewed our prior related reports and  other studies and analyzed relevant laws and regulations. We reached  out to all 10 spaceport operators licensed by the Federal Aviation  Administration (FAA), as of July 2016, and conducted semistructured  interviews with 8 of these 10 spaceport operators. Two declined to be  interviewed (due to transitions they were making in their operations) but  one of these two provided written responses to our semistructured  interview questions. Their responses were incorporated as appropriate.  Therefore, we analyzed information from 9 of the 10 FAA-licensed  spaceports.
We also conducted semistructured interviews with launch companies. We  selected all launch companies that had conducted more than one  commercial space launch from a spaceport in the last 5 years for  interviews. Of the seven launch companies we identified that conducted a  launch in the last 5 years, we interviewed four. Of the remaining three,  two declined our request and another was no longer in operation. We also  included one launch company that had not launched in the last 5 years  but has been active in advancing the commercial space launch activities.  Therefore, we interviewed a total of five launch companies. Furthermore,  we conducted semistructured interviews with all five key insurance  industry stakeholders—three insurance brokers and two insurance  companies—that had provided coverage to the commercial space  industry, and two industry associations. Additionally, we interviewed  officials from FAA and National Aeronautics and Space Administration  (NASA).
We also visited two spaceports selected based on various factors  including number of years in operation, colocation with federal ranges,  commercial activity within the last 5 years, and occurrence of a  commercial space launch mishap. We visited Mid-Atlantic Regional  Spaceport at NASA’s Wallops Flight Facility in Wallops Island, Virginia,  because it is the site of the most recent mishap at a nonfederal  spaceport, among other factors. In addition, we visited Cape Canaveral  Spaceport because it has conducted many commercial space activities  within the last 5 years, among other factors.
In addition to analyzing information from our semistructured interviews, to  examine the insurance coverage spaceport operators have put in place to  protect themselves from losses resulting from space launch mishaps, we  requested documentation, such as agreements with language related to  insurance coverage, from a nonprobability sample of operators of  spaceports. Specifically, we requested documentation from one  spaceport that conducts vertical launches and one that conducts  horizontal launches to understand how spaceports are protecting  themselves against losses from space launch mishaps. We reviewed  agreements from one spaceport; the other spaceport provided standard  insurance language in an email. We selected these two spaceports based  on factors such as number of years in operation and commercial space  launch activities within the last 5 years. In some cases, the information we  requested is proprietary, and spaceport operators said that they could not  provide it.
To examine the stakeholder views on the need to change the current  insurance approach and options for revising it, we first conducted  semistructured interviews with all stakeholders as described earlier, and  based on their inputs, we sent a questionnaire to the stakeholders for  their opinion on the options identified. We excluded industry associations  from our follow-up questionnaire because many of their member  organizations received our questionnaire individually, and members’  views for the options are reflected in our analysis. We sent questionnaires  to nine spaceport operators—those that we interviewed or received  written responses from—and received responses from all nine. Of the five  launch companies, we sent questionnaires to four and excluded one  launch company because during our first round of data collection, its  representatives expressed that they did not feel comfortable providing  their opinion on the options. We received responses from three of the four  launch companies. Lastly, we sent questionnaires to five insurance  industry stakeholders and received responses from all five. A copy of our  questionnaire is included as appendix II.
We conducted this performance audit from January 2016 to November  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: GAO Questionnaire to Stakeholders on Options for Addressing the Protection of Launch Site (i.e., Spaceport) Property
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Patrick A. Ward (Assistant  Director), Chir-Jen Huang (Analyst-in-Charge), Caitlin Cusati, Shilpa  Grover, Anne Kruse, Maureen Luna-Long, Jessica Sandler, Jennifer  Schwartz, Joseph Silvestri, Jena Sinkfield, Molly Traci and Shana  Wallace made key contributions to this report.