What happened since 1965 when the first insurance policy was placed with Lloyd’s of London to cover damages on the Early Bird satellite, Intelsat I? The first space insurance policy was issued almost 50 years ago. Since then, technology has made giant leaps and commercial spaceflight has become a permanent reality in the industry. Space activities have evolved with commercial space and space entrepreneurs paving the way to the final frontier, however, the basic risk categories and insurances types have remained essentially the same. This article will walk you through the basics of space insurance and detail the two main types of space insurance, first-party property insurance, and third-party liability insurance.
What is a Space Insurance?
As Monpert explains in Contracting for Space , “Space insurance” defines a specific insurance class tailored at protecting against financial losses that could arise between the lift-off and the end-of-lifetime of a satellite. Space insurance excludes covering risks associated with the preparation on the launch pad or the transportation to the launch site.
Why is a Space Insurance needed?
The list of disastrous launch failures is long. In May 2015, the Russian Proton rocket burned up over Siberia disintegrating the $300 million Mexican communications satellite. A month later, one of the SpaceX’s rockets exploded after launch from Cape Canaveral with its $110 million in NASA’s supplies supposed to be delivered to the International Space Station. Launching objects into space continues to be a risky endeavor. To protect yourself and your business against financial losses and claims, space insurance is necessary. In countries like the US, you are legally required to obtain a space insurance policy to be issued a launch licence.
Mark Fahey from CNBC reports, “Companies and governments spend huge sums to get things into space, but an average of about 1 in 20 launches will fail. That’s why many of today’s launches — especially those putting commercial satellites into orbit — are covered by space insurance policies to prevent catastrophic financial losses”. (Fahey 2015)
What are the two main types of insurance?
The insurance practices in launch contract are based on the concept of liability, indemnification, responsibility, and waivers. Insurance typically can be distinguished in two types:
- Satellite and Launcher First Party Property Insurance
The first party insurance is an insurance type that most of us are most familiar with. We buy insurance to protect ourselves in case our satellite burns up as a result of a launch failure. Typically, we want to make sure that the compensations allow us to rebuild the satellite.
How does it work?
- First, the “interparty waiver of liability” clauses apply. It is a concept of common law, in which you agree not to exercise your right of action. All parties agree to waive claims among themselves so that they cannot be liable to each other and each can focus on their own liability.
- Secondly, there is also a hold harmless obligation between the parties involved. This obligation builds upon the doctrine of privity in the common law of contract. Should anyone raise a claim against one of them for damage during the launch activities, there is indemnification.
|What types of satellite launch insurance are available?
A variety of insurance types allows coverage of any damage that might be encountered during standard space operations, from ground to orbit. The satellite risks are the following:
|Satellite pre-launch insurance||This insurance compensates for potential damages during the pre-launch procurement, when the satellite is brought to the launch site, inspected and integrated with the launch vehicle.|
|Launch insurance and in-orbit transfer||This insurance covers any damages that might occur during the transport from Earth to the satellite’s orbit.|
|In-orbit insurance||This insurance compensates for technical losses over the operational lifetime of a satellite. It helps to recover the technical value but does not necessarily compensate for market losses.|
|What are the different types of losses on a satellite?|
|Total failure||The satellite is entirely useless, for example after an explosion.|
|Partial failure||For example, a cutback in the operational lifetime from 10 to 15 years, fewer transponders available for communication or a lower power level.|
|Constructive total failure||The partial failure is so significant that the satellite is useless for your application. For example, if 50% of the satellite’s functionality is not effective, you want to be reimbursed or/if the coverage over “X country” is not working, you do not want the satellite.|
- The Third Party Liability Insurance
The most important concept of launch insurance is the third party insurance. It covers against all claims that could be made by external parties that are not directly involved in the launch.
The issue of liability is framed within the general framework developed at the international level. According to the Article VII of the Outer Space Treaty and the Liability Convention – the main legal frameworks governing commercial space activities – states retain responsibility for activities carried out in space. Consequently, states have their own indemnification regimes, as well as domestic indemnification mechanisms that usually require private operators to buy insurance or obtain financial guarantees.
|The United States Three-tier system Example|
The first tier is an insurance that the launch operator has to procure up to a cap of US $500m for damages to third parties and US$100m for the possible costs involved by the government. The exact amount is assessed based on the maximum probable loss and determined by the FAA ;
The U.S. government may accept the financial risk and indemnifies the operator up to a cap if approved by congressional appropriations and presidential request. The indemnification cap in the US is currently US$2.7b for third-party claims that exceed the insurance coverage;
But if it is such a huge catastrophe, over and above the government indemnification cap, responsibility reverts back to the licensee or the liable party.
Here is a non-exhaustive list of space insurances and their theoretical market capacity:
- The largest firms with branches including ‘space insurance units’ are: American International Group Inc. (counts Virgin Galactic as a client), Munich Re, Swiss Re, Partner Re, Global Aerospace, Inter Hannover, Allianz SE, Ironshore International’s Pembroke Managing Agency Limited (coverage for Space Tourism);
- Other insurance brokers: Aon PLC (counts SpaceX as a client), Willis Group, Jardine Lloyd Thompson Group PLC, Elson (counts Branson’s Virgin Galactic as a client), Inshore Inc.
- The value of your satellite determines the “insurable interest”. Of course, you cannot insure more value that the insurable interest, it corresponds to the amount of the price of your satellite.
- If you have not paid the insurance premium, the moment when you transfer the ownership is crucial. You can not insure if you have not paid.
- Waiver of subrogation: when you insure, make sure that you avoid claims in any form. For example, this waiver protects you from recourse by the insurance agency against the satellite manufacturer.
- Communication exchange between the insurers and the satellite manufacturers is a key element. Generally, insurances are based on the type of satellite being built and the quality of the components. Consider that if a component is too risky the insurance agency can veto against building that component into your satellite. Involve the insurance company from the early stages on!
- The International Traffic in Arms Regulation in the United States regulates the rules of satellite launch technology. This is why the insurers will ask for access to technical information and details on export licenses. Insurers will be involved in the technical meetings to understand the system and access its risk. Typically, they look at information regarding the launch vehicle and the satellite and its components. If you are planning to fly components that are not flight proven, your insurance fees will go up.
- The Space Insurance Market, Report by Willis Group
- Contracting for Space: Contract Practice in the European Space Sector by Ingo Baumann
- Insuring Space Activities by Aon Risk Solutions
- Cross-waivers of liability in Agreements to Explore Outer Space by Steve Mirmina
Posted by Emeline De Antonio and Timo Rühl