May the Fourth Be Well Insured

Posted on May 04, 2017
You should have pretty good insurance before handing your car keys to Han Solo. While we don’t have insights into the Millennium Falcon’s insurance policy, the federal government has helped the commercial space launch industry since 1988 by sharing the liability for potential damages that could result from a launch accident. On this Star Wars Day, the WatchBlog is examining the liability risk in commercial space launches. “It’s not my fault.” – Han Solo Before delving in to risk sharing, you should know that commercial space flights have safety systems to trigger a somewhat controlled self-destruct if a launch problem is detected. These can be triggered automatically or by a Missile Flight Control Officer if the launch vehicle moves off its planned trajectory. However, even self-destructs can result in falling debris damaging property or hurting people on the ground. So, how does risk sharing for space launches work? Under the risk-sharing arrangement with the commercial space launch industry, the Federal Aviation Administration sets the dollar value of damages that can reasonably be expected to result from a launch accident—called the Maximum Probable Loss. Space launch companies are responsible for any damages up to that maximum amount. The companies must either show that they can pay for the damages, or purchase insurance that would cover them. The federal government is then responsible for damages that exceed that maximum amount— up to $3.1 billion (and subject to congressional appropriation). “Never tell me the odds.” – Han Solo But how is the Maximum Probable Loss amount set? It is a methodology involving three key estimates: number of casualties, property damage, and average cost of a casualty. Contractors commissioned by FAA to study this methodology found problems with all three estimates.
  • FAA estimates of the number of casualties (serious injuries and deaths) that could result from a launch accident have likely been too high, and have been based on an unrealistic scenario—i.e., that if the self-destruct is triggered for a launch, the debris from the destruction would land in an area with the most people.
  • FAA estimates of losses due to property damage may be too high in some cases, and too low in others.
  • FAA’s estimate of the average cost of a casualty is based on outdated information and is likely too low. The amount has been fixed at $3 million since 1988.
“Do. Or do not. There is no try.” – Yoda To improve the first two estimates, FAA started using computer software in April 2016 to simulate more realistic launch accidents and is piloting a similar system for estimating property damage. However, FAA has not yet addressed the outdated $3 million figure—a crucial component in determining the Maximum Probable Loss. When the agency hired a contractor to study potential improvements in how it estimates this cost, the contractor found significant issues with all of the alternative approaches examined. If FAA does not update its estimate of the average cost of a casualty, it may underestimate potential damages and expose the government to unnecessary risk. We made a recommendation to address this issue. To learn more about FAA’s scenarios, the math behind the contractor’s estimates, and much more on commercial space launch insurance, check out our full report.
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