Commentary | Make Space Launch Indemnification Permanent

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It’s December in the United States, so along with cold weather and crowded shopping malls, it’s time for another last-minute scramble in Congress to extend federal “space launch indemnification.” More precisely, key senators and representatives are working to extend the secretary of transportation’s legal authority to promise to pay for “excess third-party claims” in the very unlikely event of an accident with a licensed launch or re-entry causing unusually high damages to uninvolved third parties. (Congress originally created this arrangement in the Commercial Space Launch Amendments Act of 1988, which modified the original Commercial Space Launch Act of 1984.) 

Many people claim indemnification helps American launch firms compete abroad against foreign nations that are more generous in shielding their industry from lawsuits. Some argue that U.S. companies shouldn’t have to “bet the company” on every launch, and should get some protection from the risk of a worst-case launch accident. These and other talking points are true, but they’re beside the point.  

The reality is that indemnification provides huge benefits to the government, and therefore to the taxpayer. It’s not a favor that government is doing (and should do) for industry. Why do I say this?

First, this is not a situation where the government is taking on legal risk it wouldn’t otherwise have. The Outer Space Treaty of 1967 and Space Liability Convention of 1972 make the U.S. government, as the “launching state” for U.S. commercial launches, absolutely liable for all damages to persons or property on the surface of Earth. Even without that, the government’s licensing of the launch exposes it to civil lawsuits under the Federal Tort Claims Act. So the federal government is already at risk for all damages, just like the launch firm. 

Second, and more importantly, under indemnification the federal government does not protect commercial launch companies against all third-party damage claims. Indemnification is often more accurately called a “risk-sharing regime” because what it does is allocate the risk between the licensee and the government. The company agrees to pay almost all claims, and any much less likely (albeit more costly) claims are handled by the government. 

The dividing point of responsibility is referred to as the “maximum probable loss,” or MPL. That’s a calculated estimate of the highest damages that could be caused in any accident with a likelihood greater than one in 10 million. So higher damages would happen less than one time in 10 million launches. 

The licensee is required to buy insurance, or demonstrate financial responsibility, sufficient to pay claims up to the MPL. (This requirement is capped at $500 million, or the maximum amount of reasonably available insurance on the world market.) Then, if indemnification authority is in place, the secretary of transportation would seek approval from Congress to pay excess third-party claims above the MPL, up to a limit of $1.5 billion (in 1989 dollars, adjusted for inflation). By law, both parties are responsible for their own liabilities above this amount. 

Now, because the government could be exposed to as much as approximately $3 billion in claims whereas industry might only have to pay tens or hundreds of millions, a skeptic might argue that government is bearing too much of the risk. But that logic ignores the relative probabilities. The fact is, if you assume that any serious accident generated the maximum possible valid excess claims — about $3 billion — the chance of that happening is still only one in 10 million. So the expected value, i.e. the average risk for any one launch, is only $300. (Because most excess claims will be much smaller, the actual risk is probably less than $10 per launch.) Compare this with third-party damage insurance rates that can cost hundreds of thousands of dollars per launch. So clearly industry is bearing the overwhelming financial share of the risk. 

There is a third reason this isn’t a giveaway to industry. Strictly speaking, when Congress extends indemnification it is allowing the secretary of transportation to continue, until the new expiration date, to promise to seek funds to pay excess claims for accidents arising from any launches or re-entries conducted under a license in effect before that date. But the law requires the licensee to buy insurance whether or not indemnification authority is still in place. Furthermore, the law requires that the insurance policy shield the government from claims up to the MPL whether or not indemnification is in place. So these requirements don’t expire when indemnification authority expires. 

Now, it’s good public policy to always require industry to buy insurance or show sufficient assets to pay claims up to MPL. That ensures that third parties have someplace to go for compensation. But to require industry to protect the government against all probable claims without honoring the other side of the “risk-sharing” deal struck in 1988 is wholly unfair. 

Since the law currently has a permanent requirement for industry to shield the government at no cost to the government, basic fairness demands that government be permanently authorized to keep its side of the deal as well. If Congress insists that industry and the Department of Transportation keep coming back every few years to renew indemnification authority, then Congress should also sunset the requirement for industry to shield the government from its own third-party liability exposure. 

As I write this, the current authority will expire on Dec. 31. The House has introduced and passed a one-year extension, promising to consider a longer extension early next year as part of Commercial Space Launch Act reauthorization legislation. The Senate has introduced a three-year extension. Thanks to good efforts on all sides, I’m confident that Congress will extend the authority for somewhere between one and three years. Obviously longer is better, since it gives a long-lead industry more certainty, and it’s also important that the authority not lapse this year, as it did for the first couple days of 2013. 

The real challenge is to fix the fundamental imbalance in the law. The right answer is for Congress to permanently extend indemnification early in 2014, since the expected cost is trivial versus the benefit of industry’s insurance protecting the government. If not, then Congress should sunset both sides of the 1988 bargain — hopefully sometime very far in the future. 

 

James A.M. Muncy is founder and principal of PoliSpace, an independent space policy consultancy.