Third Party Liability Coverage for a Contractor of an FAA Launch or Reentry Licensee

Let’s suppose that you want to sell components or services to an FAA launch or reentry licensee for use during its launch or reentry. You know that a launch that goes badly wrong could create what a risk analyst calls a “high consequence event.”  You are therefore wondering whether to buy insurance for third party liability coverage or whether the licensee’s insurance could cover you if a court found you liable for contributing to any damages.  You are not alone in wondering about this.  Someone else did, too, and asked the FAA for a legal interpretation.

Orbital ATK, Inc. asked the FAA whether Orbital, in its capacity as a supplier of composite structures, payload fairings, and other launch vehicle components would need more insurance than what the law required an FAA licensed launch operator to purchase.  The Commercial Space Launch Act requires that licensed launch and reentry operators (aka “the licensee”) obtain insurance coverage for any damage a launch or reentry may cause to third parties or government property.  Although the FAA declined to advise on whether Orbital ATK should purchase additional insurance, it provided the following primer:

Orbital ATK is covered against third-party claims arising out of licensed activities by the policy of liability insurance that the launch licensee is required to obtain by 14 C.F.R. § 440.9. The law requires that the holder of a launch or reentry license, before conducting a launch or reentry under 51 U.S.C. Subtitle V, chapter 509, obtain and maintain in effect a policy (or policies) of liability insurance that protects, among others, the licensee, its customers, and their respective contractors and subcontractors, and the employees of each, involved in licensed activities, as additional insureds to the extent of their respective potential liabilities against (1) covered claims by a third party for bodily injury or property damage resulting from a licensed activity and (2) claims by the United States, its agencies, and its contractors and subcontractors involved in a licensed activity for property damage or loss resulting from a licensed activity. 51 U.S.C. § 50914(a)(l); 14 C.F.R. § 440.9. A licensee is not required to obtain insurance of more than $500,000,000 for third party claims; $100,000,000 for government claims; or the maximum liability insurance available on the world market at reasonable cost for both third-party claims and government claims if the amount is less than those amounts. 51 U.S.C. § 50914(a)(3); 14 C.F.R. § 440.9(c), (e). This insurance policy (or policies) must comply with the standard conditions set forth in 14 C.F.R. § 440.13.

Coverage for contractors.  The FAA’s first statement answers the original question.  If Orbital ATK only wanted to know that the licensee’s insurance policy had to provide coverage for its contractors, section 440.9 of the FAA’s regulations makes that coverage a requirement.  Section 440.3 defines “contractors and subcontractors” as “those entities that are involved at any level, directly or indirectly, in licensed or permitted activities, and includes suppliers of property and services, and the component manufacturers of a launch vehicle, reentry vehicle, or payload.” (emphasis added). A component manufacturer of a vehicle looks to be a contractor, and a licensee must have a liability policy in effect that protects contractors.  Therefore, yes, the licensee’s policy must provide coverage for its contractors, including vehicle component manufacturers.

Appetite for risk.  It is clear why the FAA declined to advise on whether Orbital ATK should obtain more insurance coverage.  That is a business decision that depends on a company’s appetite for risk acceptance.  The FAA’s little primer raises some questions that you as a contractor should consider.  The mandatory insurance coverage only extends, for example, to $500,000,000 for third party claims.  That seems like a lot, but is it?  Only you can assess your own exposure.  You, after all, know the value of what you have at risk in the event of litigation.  Additionally, when the FAA tells a licensee to buy a specified amount of insurance, the FAA bases that amount on the maximum probable loss that could arise out of the launch or reentry, not the maximum possible loss.  Again, you must ask yourself what your appetite for risk is and whether you should obtain additional coverage.

Worst-case scenario.  What if the licensee doesn’t obtain coverage for its contractors?  Sure, the regulations require it, but regulations require lots of things, and the people who are supposed to follow them don’t always do so.  Should you rest easy knowing that there’s a regulatory requirement that someone else has to get your company liability coverage?  One worst-case scenario in a legal context would arise if the insurance carrier claimed that the premium was insufficient to cover all the contractors and subcontractors and, look, the policy is silent with respect to those people. Even if the FAA subjected the licensee to civil penalties (which means “fines” in plain language.) for failing to obtain coverage for its contractors as required by section 440.9, that wouldn’t necessarily help you.  Prudence might dictate that you contractually require that the licensee obtain that coverage in accordance with section 440.9(b).  You might even ask to see the policy if you are a super-cautious type.

Just some things to think about.