As the space race intensifies among more countries and within commercial operators, Michael D. Nolan Partner, Litigation and Arbitration in the Washington DC-based law firm, Milbank Tweed Hadley & McCloy LLP outlines the limitations inherent in current insurance models.
“Coverage is typically limited to launch and a specified in-orbit period. The compensable loss is limited and satellite insurance models protect against loss of satellite communications capacity, not the loss of business, opportunity or rights under contracts”
The launch and in-orbit insurance follow a traditional model for managing risk, states Nolan.
“Coverage is typically limited to launch and a specified in-orbit period. The compensable loss is limited and satellite insurance models protect against loss of satellite communications capacity, not the loss of business, opportunity or rights under contracts.”
In the past decade, the industry has witnessed disputes and uncertainty, increasing the sensitivity to risk in the market. These disputes include the revoking of authorisation for LightSquared. Similarly in the case of Devas Entertainment, the Indian government revoked the lease of satellite space. One also witnessed the freezing of licences of satellite television broadcasters by Egypt and the Sea Launch bankruptcy.
“With respect to space, protected “investments” could include: licenses issued by a host state, government contracts and rights under contracts with third parties”
Adding to the uncertainty was the objections raised about the UNIDROIT’s draft Space Assets Protocol. The protocol was criticised by satellite operators, manufacturers and financiers for creating additional uncertainty and adding a layer of bureaucracy.
Protection against political risk
Commenting on the approaches to risk mitigation and management in non-space sectors, Nolan observes, “There needs to be increased vigilance as to business risks, including protection against loss of financial capability and insolvency. There has to be provisions for investor- state treaty protection and political risk insurance and guarantees.”
In addition, risks of non-performance by contracting parties need to be mitigated, says Nolan.
He adds, “Among the steps to be taken in the regard, I would include a reliance on letters of credit, financial assurances from contracting parties and other credit enhancements, such as surety bonds. The Sea Launch bankruptcy and other troubled space enterprises underscore need for vigilance and there needs to be a provision for security or pledge agreements in the contracts.”
“The Sea Launch bankruptcy and other troubled space enterprises underscore need for vigilance and there needs to be a provision for security or pledge agreements in the contracts”
Nolan concedes that the space business is highly subject to governmental and political risks.
“Factors include government restriction on satellite use/ import and export controls, national regulatory requirements and finally, governments as market participants. For instance, nearly 80% of the U.S. government’s satellite communications capacity comes from the commercial sector. And lastly, as countries develop, managing satellite communications capacity becomes important,” adds Nolan.
Nolan puts forward the concept of bilateral investment treaties as legal protection against political risk.
“Bilateral investment treaties protect investors against unfair treatment by host states. This is increasingly important when structuring power plants, mines, roadways and other infrastructure projects. With respect to space, protected “investments” could include: licenses issued by a host state, government contracts and rights under contracts with third parties.”
Nolan affirms that subrogation must be made available for insurers of political risk. At the same time, he observes that political risk insurance has not been widely used in the space industry.
“Traditionally, protections have been narrow but there has been an increased push for innovative products to manage risk, especially “binary” coverage with regard to non-performance of financial obligations or non-performance of arbitral awards.”
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