Space Insurance – Lecture 2

1. 26 January 2010 Space Insurance – Lecture 2 Neil Stevens Legal Counsel – Space Atrium Space Insurance Consortium

2. Insurance and Wager Distinguished

3. The Origins of Insurance • Merchants engaged in shipping using the London mutuality concept • Edward Lloyd's coffeehouse around 1688 • Merchants sharing in taking risk associated with carriage of goods by sea • Depended on reliable knowledge of shipping, weather and good practice

4. Modern Lloyd’s Market • Lloyd’s today is located in Lime Street • Billion dollar business with sophisticated players • Syndicates offer insurance capacity • Syndicate used to be individual investors until 1992 • Reinsurance markets collapsed causing number of syndicates (approx 500 to reduce to about 100) • Now corporate investors

5. The Origins of Insurance at Lloyd’s • Greater regulation • Exposures tightly monitored • Solvency requirements are higher • Greater diversity • Smarter reinsurance structures • Is insurance regulated gambling? • There is an element of fortuity • Losses could be considered bad luck • Some premium rating could be considered a gamble

6. Wagers and Gambling • Consideration is the ‘stake’ • Both parties are engaged in taking the risk • In a wager, one party wins and one loses • The stake is returned if the wager is won • One party bets that an event will happen, the other bets against it happening – desired outcomes are different • The parties and the event are seldom connected • Until 2005, gambling contracts were unenforceable in a court of law

7. Wager compared to Insurance • Consideration is the ‘premium’ • Insurance involves transferring the risk from the party that would have the risk to one who would not • Insurance nether party should lose • Premium rate should reflect the burn cost + a profit margin • The premium is not returned if the risk runs free of claims • The premium charged is the statistical chance of the event happening [same] • The party transferring the risk MUST have an insurable interest • The contract is enforceable in a court of law • The contract is subject to principle of utmost good faith

8. Wager compared to Insurance WAGER GAMBLER GAMBLER Wager is struck within this range INSURANCE Premium + risk INSURED INSURER Cover

9. Insurable Interest and Wager at Lloyd’s

10. Insurable Interest

11. What is an Insurable Interest? • Historical basis of insurance lies in marine insurance • English law based on statute and precedent • Statute under English law • Life Insurance Act 1774 • Marine Insurance Acts of 1746 and 1778 • Codification into the Marine Insurance Act 1906 • Section 5 of the Marine Insurance Act 1906 defines insurable interest “(1)Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure. (2)In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.”

12. Indemnity Non- indemnity Recover the actual amount lost Recover a fixed sum Life personal accident and critical illness Liability and Property Insurance Insurable Interest • Gain a benefit from preservation of the subject matter or suffer a disadvantage if it is lost • Distinguish between indemnity and non indemnity insurance

13. Insurable Interest - Examples

14. Insurable Interest – Indemnity Insurance • Meaning of ‘indemnity’: • Compensate • make good • guarantee • Before UK Gambling Act 2005, law required that anyone taking out property insurance (contract of indemnity) had to have a legal or equitable interest in the property • Used to be the case that contract unenforceable if link was absent • Section 335 of the 2005 Act inadvertently removed the requirement “the fact that a contract relates to gambling shall not prevent its enforcement” • Indemnity principle still requires policyholder to have suffered a loss otherwise cannot be indemnified • Doctrine of insurable interest is under review • Australia have abolished altogether

15. Critical Illness Buildings Life Mortgage Protection Contents Business Interruption Cover Car Hire Cover Characteristics of Satellite Insurance HIGH HIGH Satellite NON- INDEMNITY INDEMNITY LOW LOW

16. Risks Typically Covered

17. Timeline Asset pre-launch Launch phase Post separation phase Terminated ignition Asset launch and completion of IOT (manufacturer) Post in-orbit testing phase • Satellite manufacture Manufacturers performance incentives • Transit / integration Asset in-orbit (operator) Loss of Service Loss of revenue Astronaut / Passenger personal accident Third party liability Astronaut / Passenger No flight Risk Matrix LAUNCH L + 30 minutes L + 90 days L + 12 months Asset launch and in-orbit (operator) L - 3 seconds (Intentional Ignition) L - 2 years L - 30 days

18. PROPERTY TRANSIT Pre Launch Insurance All risk of physical loss or damage storage, transit and integration with launcher Underwritten by marine cargo market Rated between 03% and 0.5%

19. Pre-launch Covers • Placed in the marine cargo markets which means it is subject to the peculiarities of Marine Insurance Law • Most notably the exclusions • Process Clause excludes cover where loss is due to a process of manufacture • Date Recognition Exclusions • Cover is for all risks of physical loss or damage • Normal risks associated with property cover • Transit risks • Integration and assembly with launcher • Assembly through to launch or lift off … no gaps

20. Insurance premium Extra Expenses Launch service costs Satellite Satellite Insurable Typical Interests Covered under Launch Policy • Covers the riskiest part of the mission • Cover to reinstate cost of … • Launch insurance premium calculated on the insured items

21. Launch Insurance • Third largest mission cost • Risk of loss rated between 10% and 20% - depends on satellite / launch vehicle combination • Historical ‘burn rate’ 1 in 7 • Covers satellite from launch through in orbit testing and up to 365 days after launch • Placed in specialist insurance market • Communications satellites generally covered for between USD200m to USD300m

22. Asset Life Timeline IOT In-Orbit Insurance Launch Insurance In-Orbit Insurance LAUNCH L + 90 days L + 12 months Separation

23. In-Orbit Cover • Placed in specialist space insurance market • Cover for loss damage or failure of the satellite on a fixed value basis • Losses determined by telemetry data or lack of it • Rates are in region of 1.5% for 12 months cover depending on satellite health and type • Insurance Capacity is high which is presently causing rates to fall

24. Third Party Liability Insurance

25. Third Party Liability Insurance Red-hot piece of space junk crashes through pensioner's roof 16th October 2009 Mr Peter Welton of Hull

26. Third Party Liability Insurance • Basis of cover is to protect insured parties from liability claims for damage caused by space related activities • Cover is for the consequences of an occurrence, typically “to indemnify the Insured for all sums that it becomes legally obligated to pay due to an occurrence that causes death or personal injury to any third party” • Cost is relatively cheap (0.1%) because there are relatively few accidents • Cover generally provided for the initial 12 months through the launch service provider • Cover for satellite life depends on obligations on the operator and attitude to risk

27. Indemnity and Insurance

28. Timeline Asset pre-launch Asset launch and in-orbit (operator) Third party liability Space Insurance Risks LAUNCH • TPL is indemnity based insurance • Settling claims • Paying lawyers fees • Unquantifiable in advance • Pre-Launch is indemnity based insurance • Property insurance • Satellite only • Cost to rebuild/repair/re-test • Launch and in orbit insurance is non-indemnity based • Launch Service Cost • Satellite cannot be repaired (few exceptions) • Extra expenses Satellite only • Cost to build new satellite and launch it • Insurance costs

29. Indemnity Based Space Risks • Pre-launch Scenario • Satellite is damaged at facility • Claim is based on physical loss or damage to the satellite • Policy may be held be manufacturer or operator depending on contract terms • Basis of claim is to put the satellite back into its pre-loss state • Indemnity in this situation is based on repair or replacement

30. Non – Indemnity Based Space Risks Purpose of the cover is to fully reinstate the insured party Sea Launch Titan 4 Long March 3B

31. Difference between Indemnity and Non Indemnity • Policy language will be different • “to indemnify the Named Insured for Partial Loss” • “to pay the Named Insured for a Partial Loss” • Significant difference between what you may get back as a purchaser of insurance particularly in relation to Constructive Total Loss (CTL) • CTL point in space policies is usually 75% • Available communications capacity is reduced to below 25% • Can a satellite operator provide a meaningful commercial service with only 25% capacity remaining • Eventually need to replace the impaired satellite • Cannot buy 3 quarters of a satellite

32. Space Risk Constructive Total Loss • CTL points are included to accelerate the loss payment to 100% • Indemnity policy would only pay for what is actually lost • CTL point of 75% comes with a quid pro quo • Insurers acquire salvage rights • Could mean impaired satellite is sold to a competitor • Alternative is to have a higher CTL point (90%) • Insurers generally agree to relinquish salvage rights • Operator can continue to offer service and earn revenue • Operator may have regulatory requirements to maintain

33. Satellite Insurance Profile of Risks Full Cover Depreciation based on revenues Amount of Insurance Satellite only Incentives Depreciation based on asset value End of Life Construction Launch Time