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

Letter

Background

Overview of Commercial Space Transportation

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.

U.S. Indemnification Regime

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.

Spaceport Insurance Coverage Varies and Could Potentially Be Inadequate Because FAA Has Not Clearly Communicated Its Interpretation of Regulations

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.

Federal Statute Does Not Require Spaceport Operators to Obtain Insurance, but Spaceports Colocated with Federal Ranges Could Face Insurance Requirements

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.

Spaceport Insurance Coverage Varies among Spaceport Operators with Recent Commercial Activity, and Views Differ on the Affordability of Insurance

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.

Because of Confusion about Financial Responsibility Regulations, Spaceport Operators May Not Obtain Adequate Protection

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.

Stakeholders Are Divided on the Need to Change the Current Insurance Approach and on Support for Potential Options

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.

Stakeholders Presented Mixed Views on the Current Insurance Approach and the Need for Change

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.

Stakeholders Had Differing Views on Potential Options for Revising the Insurance Approach

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments

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.

Appendix I: Scope and Methodology

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.

Appendix II: GAO Questionnaire to Stakeholders on Options for Addressing the Protection of Launch Site (i.e., Spaceport) Property

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.