Telesat Seeks Compensation From Boeing for 702 Defects

PARIS — Telesat Canada’s decision to seek damages from Boeing for defective satellite hardware — as insurers are — increases Boeing’s potential liability $760 million for problems with its 702 series satellites just weeks after an arbitration panel’s ruling that some interpreted as favorable to Boeing, according to industry officials.

Ottawa-based Telesat Canada’s newly appointed chief executive, Daniel S. Goldberg, won concessions from Boeing in his previous job following delivery delays in the NSS-8 satellite ordered by Goldberg’s former company, SES New Skies.

Less than two weeks after Goldberg arrived at Telesat, a Canadian satellite-fleet operator, the company notified Boeing that it was seeking damages for “gross negligence and willful misconduct” relating to a solar-array design defect in Telesat’s Anik F1 satellite.

In an Oct. 25 filing with the U.S. Securities and Exchange Commission (SEC), Chicago-based Boeing said Telesat served notice Sept 27 that it was seeking $395 million in damages.

Boeing also said the allegations are “meritless.”

Launched in November 2000, Telesat’s Anik F1 is one of the six defective first-generation Boeing 702 satellites that were launched between December 1999 and November 2001. These satellites have a new solar-array design that causes a gradual drop in the power produced by the satellites, reducing their output and operational life.

Insurance underwriters have paid out some $840 million in claims to satellite-fleet operators — including Telesat Canada — as a result of the issue, and some of these insurers are seeking redress from Boeing. Insurers that paid a claim to Thuraya Satellite Telecommunications of Abu Dhabi are asking for a damage award that, together with a separate claim threatened by Thuraya, could total $365 million.

Boeing has been battling insurers in the International Chamber of Commerce, based here, since September 2004 over whether the company knew or should have known of the design defect on the 702s and informed insurers and customers earlier so that at least some of the launches could have been delayed . Boeing has repeatedly denied the allegations and said it acted as soon as it had clear information.

In a Sept. 19 filing with Canadian stock market authorities, Telesat Canada said Boeing did not inform Telesat of the solar-array problem until August 2001 — nine months after the Anik F1 launch and 20 months after the first of the defective 702s, PanAmSat’s Galaxy 11, was launched.

Telesat says the Anik F1, whose contracted service life runs to 2016, will not last beyond 2011. In the meantime, its power limitations have forced Telesat to transfer all its North American traffic to another satellite.

A recent decision by arbitrators who ruled against XM Satellite Radio, another Boeing 702 satellite customer, could be viewed as bolstering Boeing in other cases if the same circumstances are involved.

Some of XM’s insurers had refused to pay the company’s claims for its two defective Boeing 702 satellites, saying XM knew of their design flaw before they were launched and therefore is not eligible to receive an insurance payment. XM appealed to the arbitration panel, saying it had no knowledge of the issue before its satellites were launched in March and May 2001. The panel ruled against XM, meaning the holdout insurers will not be paying their pro rata share of the claims for the satellite defects, XM announced Sept. 26.

One industry official said insurers were able to produce a notice from Boeing, dated before the XM launches, informing customers of a possible solar-array issue. “It looks in this case as if Boeing correctly performed its duties as a prime contractor to inform insurers and customers,” this official said. “Whether Boeing’s notice was early enough to provide a defense for the other four satellites is not clear.”

XM spokesman Chance Patterson declined to discuss the ruling.

In its SEC filing, Boeing said it has its own insurance to cover an adverse ruling in the Thuraya case. But the company said that in May, a group of its own insurers asked the Circuit Court of Cook County, Ill., to rule that Boeing’s insurance policy does not include this kind of liability.

“We believe the insurers’ claims lack merit and intend to vigorously defend against them,” Boeing said in its SEC filing.

Boeing spokesman Todd Blecher said Oct. 27 that the company continues to believe that its insurance policies will apply in cases like this, in which willful misconduct is alleged. He declined to discuss the issue in detail.

Boeing also is defending itself against a lawsuit by former customer ICO Global Communications Ltd.

ICO is seeking $2 billion in refunds for money that ICO paid Boeing to build a now-abandoned constellation of satellites for broadband communications. Boeing has countersued, alleging fraud on ICO’s part.

The case is being heard in Los Angeles County Superior Court. Boeing asked the court in March for a quick ruling in favor of Boeing to avoid a long trial. In August, the court denied Boeing’s request and a trial date has been set for September 2007, Boeing said in its SEC filing.