EchoStar Communications Corp.’s $240 million victory over space-insurance underwriters came after seven years of wrangling that ultimately came down to basic questions of how a satellite works, according to industry officials.
After having initially sought more than $400 million to cover its losses and to include interest and a punitive payment for bad-faith denial of a valid claim, the Littleton, Colo., satellite-television broadcaster settled for a $240 million payment from the insurers, including most of the world’s major space-insurance underwriters.
The terms of the agreement were not disclosed beyond the fact that each member of the insurance underwriting consortium involved in the suit is expected to pay its pro rata share of the award by April 26.
EchoStar alleged that insurers owed the company $219.3 million following the failure of the EchoStar 4 satellite’s solar arrays to deploy fully after its launch in May 1998. The company said the solar-array problem, which occurred while EchoStar 4’s insurance policy was in effect, caused subsequent failures of the satellite’s propulsion and thermal-control systems.
Some of these component failures occurred after the policy expired. But if they could be linked to the original solar-array glitch, they would be covered under the policy, permitting EchoStar to declare the satellite a total loss under the policy and claim the $219.3 million.
The underwriters said the component failures in the Lockheed Martin-built satellite were unrelated to the solar-array problem and occurred after the insurance policy’s expiration.
The policy was written in 1996, a time when insurers routinely permitted satellite owners to file claims for “total loss” even if only 50 percent of a satellite’s capacity was lost. That threshold has since been raised to 75 percent for most policies .
Several insurance industry officials contacted for this article declined to comment publicly on the EchoStar situation, saying the settlement features nondisclosure clauses. “EchoStar is the most litigious company I have ever seen,” one industry official said in explaining insurers’ unwillingness to detail what happened before the New York arbitration panel handling the dispute. “They won, there’s no doubt about it. How it happened is a long story.”
EchoStar’s original claim was filed in September 1998. It was transferred to the New York arbitration panel for resolution in April 2003.
EchoStar spokesman Steve Caulk said March 10 that the company would have no comment on the insurance settlement beyond its March 9 submission to the U.S. Securities and Exchange Commission (SEC). In that filing, EchoStar says it is retaining ownership of EchoStar 4. Caulk said the satellite remains operational.
The underwriters legally could have taken possession of the satellite since they now must pay a claim for a total loss. In practice they rarely do this.
In an event that apparently had no effect on the dispute with insurers, the EchoStar 4 solar panels popped open in September 2004. But EchoStar Chairman Charlie Ergen said the deployment did not provide EchoStar with much new capacity .
EchoStar’s relations with insurance underwriters in the months following the initial EchoStar 4 claim became so strained that EchoStar ceased insuring much of its in-orbit fleet, preferring to meet its bond covenants by carrying additional cash on its books.
Ergen said repeatedly that insurance was too expensive, and at one point EchoStar alleged that the insurance industry had colluded to keep the company’s rates high, in violation of antitrust law, to penalize it for not accepting an $88 million EchoStar 4 settlement offered by the underwriters. EchoStar subsequently dropped that allegation but the rest of the dispute continued.
EchoStar said in its SEC filing that it had previously recorded a $106 million receivable on its books in anticipation of winning at least that much from the underwriters. The remaining $134 million it now expects to receive will be recorded as income, the company said.