GAO Wants FAA To Update Method for Calculating Liability Insurance Requirements

The Government Accountability Office (GAO) wants the Federal Aviation Administration (FAA) to update how it calculates the amount of third party liability insurance companies must purchase when they conduct commercial space launches.  FAA indemnifies companies against certain amounts of damages if there is an accident that hurts the general public.  GAO is concerned that the government could end up paying more than expected if FAA does not correctly calculate how much insurance the company itself must purchase.

GAO testified to House and Senate committees in June about whether Congress should renew the FAA’s authority to indemnify commercial launch companies against potential third party claims.   Under current law, companies must purchase insurance up to $500 million for third party claims, the government agrees to cover claims between $500 million and $2.7 billion, and the company must cover claims above that.  The authority expires on December 31, 2012.

The FAA and the commercial launch industry want the authority extended.  FAA is asking for a 5-year extension while industry representatives told the House committee that they would like the authority to be permanent. 

Today’s report adds little to what the GAO witnesses said at the hearings.  GAO supports extending the third party liability indemnification authority on a short term basis, but wants the FAA to update how it calculates the amount of insurance commercial launch companies must purchase.  The exact amount may be less than the $500 million set in law.   It depends on the FAA’s calculation of the Maximum Probable Loss (MPL) if there is an accident that harms the general public or property.  GAO found that the insurance industry is willing to sell up to $500 million of coverage, but the FAA requires companies to buy only $99 million of coverage on average.  The insurance costs about one percent of the dollar amount of coverage, which means launch companies are paying less than $1 million for that coverage now.

In today’s report, the GAO said that FAA has used the same method to calculate MPL since 1988 and insurance officials it interviewed said the method is outdated.  “An inaccurate calculation that understates the amount of insurance a launch provider must obtain would increase the likelihood of costs to the federal government; a calculation that overstates the amount of insurance needed would raise the cost of insurance for the launch provider,” GAO argued.

GAO’s recommendation is that the FAA periodically update and review its methodology.   George Nield, who heads the FAA’s Office of Commercial Space Transportation, said at the House hearing that he is open to doing so as long as he has the requisite funds.