Assessing the U.S. House of Representatives’ SPACE Act of 2015 (H.R. 2262) and the related U.S. Senate Bill (S. 1297), Part II – Provisions Governing Liability for Third-Party Injury

©Matthew Schaefer. All rights reserved.

Foreign country launch providers and those involved in the launches (i.e. contractors and customers) benefit from permanent liability caps with respect to third-party (e.g. bystanders) injuries. In contrast, the U.S. launch industry has not been given even a long-term extension of the promise of U.S. government indemnification in the case of a launch failure causing massive, catastrophic third-party injury. However, there is some hope that more long-term certainty with respect to third-party liability can be adopted by Congress this year. The U.S. House of Representatives passed H.R. 2262 (Spurring Private Aerospace Competitiveness and Entrepreneurship Act or SPACE Act of 2015) on May 22nd and the U.S. Senate passed S. 1297 (U.S. Commercial Space Launch Competitiveness Act) on Aug. 4th. The two bills would need to be reconciled (likely in a conference committee) and then passed by both houses of Congress to become law (or, alternatively, one body would need to pass what the other has already passed in identical form to become law, although that is much less likely).

In a November 2013 White Paper prepared for Nebraska Law’s 6th Annual DC space law conference –and that subsequently was refined into a law review-styled article appearing in Vol. 33 of the Berkeley Journal of International Law, pp. 223-273 (2015), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2420538

I made the following recommendation :

“Congress should create a cap on third-party liability for commercial space launch operators equivalent to the maximum probable loss. Until such a cap is enacted, Congress should enact a long-term extension of the promise of US government indemnification for third-party liability.

Rationale: The most significant US competitors in the commercial space launch sector benefit from de jure or de facto liability caps. Moreover, Congress has set third-party liability caps for other industries for national security related reasons, such as anti-terrorism technology sellers, and for national economic reasons, such as the nuclear industry, particularly during its nascent stages when few nuclear operators existed.   Setting the cap at the Maximum Probable Loss (MPL) still allows risk factors that differ between launches to be taken into account, such as the launch vehicle and launch location. With the current government promise of indemnification for third-party liability set to expire [Dec. 31, 2016] and liability caps likely requiring a lengthy legislative process, Congress should first extend the promise of government indemnification for third-party liability. A long-term extension ensures no instability ensues in the US commercial space launch industry as the indemnification regime is a factor in commercial launch contract negotiations and also allows Congress ample time to create a liability cap.”

Well, a pure liability cap such as those enjoyed by French, Russian and Chinese launch providers (and other parties involved in the launch) is probably a not obtainable in the near term. One reason is committee jurisdiction within the House and Senate. While that is still the most desired result, the back-up or interim recommendation to enact a long-term extension of US government indemnification for third-party liability is a real possibility.

First, a little primer on the third-party liability regime for commercial space launches in the United States: “The US third-party liability regime is broken into three tiers. First, the US Government requires, as one of the conditions for obtaining a license, that commercial space flight operators obtain third-party liability insurance in the amount of the maximum probable loss (MPL), according to a calculation performed by the FAA. This amount of required insurance cannot exceed $500 million nor the amount of insurance available on world markets at reasonable cost. Second, if third-party liability claims exceed the insured amount (MPL), the government has in essence made a statutory promise to pay for the next tier or traunch of $2.8 billion dollars in any third-party liability claims faced by a space flight entity. In the third tier, where third-party claims exceed the MPL plus the amount of promised government indemnification, liability reverts back to the operator. (footnotes omitted). ” See Schaefer, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2420538

Both H.R. 2262 and S. 1297 extend the promise of government indemnification for MPL-exceeding events beyond its current expiration date of Dec. 31, 2016. The House bill extends the promise through Dec. 31, 2025 and the Senate bill extends the promise through the end of 2020. Which length of extension is to be preferred? The House bill for several reasons.

First, an MPL-exceeding third-party damage event has never occurred and never even come close to occurring so there is little to no risk to the government to making a longer-term promise of indemnification, even though reentries will likely be added to the mix with launches with the development of reusable vehicles (that will be game changers in the economics of launch).

Second, as noted above, foreign industry benefits from a permanent third-party liability caps. A promise of government indemnification provides less certainty that a liability cap and any certainty provided to the US launch industry, and its customers and contractors, is weakened further when the promise is only extended for short periods, particularly when one realizes launch contracts are often negotiated 1-2 years in advance of launch. Customers and contractors are additional insureds on insurance policies obtained by launch companies and also benefit from the promise of government indemnification for any MPL-exceeding event. Thus, uncertainty over third-party liability can impact contract negotiations, even though pre-existing licensed launches are still covered when the promise expires – as has happened several times in the past five years.

Extending the promise for three years at the beginning of 2014 was an improvement over one-year extensions previously adopted but both the recent House and the Senate bills recognize that a longer-term extension is beneficial and helps level the playing field with foreign industry. A five year extension is an improvement from recent practice, but a ten-year extension does a much better job of providing enhanced certainty, encouraging space activities in the United States, leveling the playing field with foreign industry, and stimulating a sector important for the US economy and ultimately national security. When one realizes increased attention being paid by venture capital and angel investors to the sector, certainty as regards third-party liability makes even more sense.

Next blog post covering revisiting the Maximum Probable Loss (MPL) issue coming soon.

(©Matthew Schaefer. All rights reserved).

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