Transcript Insurable Risks - London Institute of Space Policy and Law

26 January 2010
Space Insurance – Lecture 2
Neil Stevens
Legal Counsel – Space
Atrium Space Insurance Consortium
Insurance and Wager
Distinguished
1
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
2
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
3
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
4
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
5
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
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Wager compared to Insurance
WAGER
GAMBLER
GAMBLER
Wager is struck within this range
INSURANCE
INSURER
Premium + risk
INSURED
Cover
7
Insurable Interest and Wager at Lloyd’s
8
Insurable Interest
9
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.”
10
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
Indemnity
Nonindemnity
Recover the actual amount
lost
Recover a fixed sum
Liability and Property
Insurance
Life personal
accident and
critical illness
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Insurable Interest - Examples
1. I want to insure my car against
theft?
2. I want to insure your car against
theft?
3. I want to insure my company’s
operations against making a loss?
4. I want to insure my own life
against my death?
5. I want to insure your life against
death?
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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
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Characteristics of Satellite Insurance
HIGH
HIGH
Buildings
Critical Illness
INDEMNITY
Contents
NON- INDEMNITY
Life
Satellite
Mortgage Protection
Car Hire Cover
LOW
Business Interruption Cover
LOW
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Risks Typically Covered
15
Risk Matrix
LAUNCH
L + 30
minutes
L + 90
days
L + 12
months
Timeline
Asset launch and in-orbit (operator)
Asset pre-launch
Launch
phase
Post in-orbit testing phase
Terminated
ignition
Satellite manufacture
Transit /
integration
L-2
years
Post separation
phase
L - 30
days
Asset launch and completion
of IOT (manufacturer)
L-3
seconds
Asset in-orbit (operator)
(Intentional
Ignition)
Loss of revenue
Astronaut / Passenger
personal accident
Astronaut / Passenger
No flight
Manufacturers performance incentives
Loss of Service
Third party liability
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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%
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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
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Satellite Insurable Typical Interests Covered under Launch Policy
 Covers the riskiest part of
the mission
 Cover to reinstate cost of …
 Launch insurance
Extra Expenses
Launch
service costs
premium calculated on the
insured items
Satellite
Insurance
premium
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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
20
In-Orbit Insurance
LAUNCH
Separation
L + 90
days
L + 12
months
Timeline
Asset Life
IOT
Launch Insurance
In-Orbit Insurance
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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
22
Third Party Liability Insurance
23
Third Party Liability Insurance
Red-hot piece of space junk crashes
through pensioner's roof
16th October 2009
Mr Peter Welton
of Hull
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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
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Indemnity and Insurance
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Space Insurance Risks
LAUNCH
Timeline
Asset pre-launch
TPL is indemnity based insurance
•
Settling claims
Pre-Launch is
indemnity
based
insurance
• Asset
Paying
lawyers
fees
launch
and in-orbit
(operator)
Property
•insurance
Unquantifiable
in advance
Launch and in •orbit
insurance
is non-indemnity
based
•
• Satellite
Launch Service
Cost only
•
party liability
• Cost
to rebuild/repair/re-test
Satellite cannot
be repaired
(fewThird
exceptions)
•
Extra expenses Satellite only
•
Cost to build new satellite and launch it
•
Insurance costs
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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
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Non – Indemnity Based Space Risks
Purpose of the cover is to fully
reinstate the insured party
Sea Launch
Titan 4
Long March 3B
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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
30
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
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Satellite Insurance Profile of Risks
Amount of Insurance
Full Cover
Depreciation
based on
revenues
Satellite only
Incentives
Depreciation
based on
asset value
Construction
Launch
End of Life
Time
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