Policy makers in both the United States and the United Kingdom are examining their rules on the accident liability of launch providers and satellite operators.

The U.K. Space Agency (UKSA) initiated a consultation at the end of May 2012, with comments due at the end of August, on liability provisions in the Outer Space Act 1986. This Act had not been amended for more than 20 years, but now the UKSA is proposing basic changes.

Coincidentally, a few days after the UKSA consultation commenced, in early June the Subcommittee on Space and Aeronautics, of the House of Representatives Committee on Science, Space and Technology, held a hearing on similar issues under the U.S. Commercial Space Launch Act (CSLA).

The CSLA provisions are almost as old as the U.K. Outer Space Act. The CSLA was amended in 1988 to include a risk management regime for possible losses from commercial launch accidents. These provisions have been extended five times, each time with a fixed duration. The June hearing concerned whether to renew the regime yet again, with possibly some modifications.

The CSLA regime is based on three tiers of liability. First, operators must obtain private insurance for each launch up to an amount that the U.S. Federal Aviation Authority (FAA) calculates as the “maximum probable loss” (MPL) from a hypothetical launch or re-entry accident. To calculate this tier 1 figure, the FAA assesses the debris field that could come from a presumed accident, models the probability of the failure and calculates possible property or casualty damage. The MPL is capped at $500 million per launch, although the FAA rarely applies that maximum to a particular launch, as the average in recent years has been about $99 million.

In tier 2, beyond the MPL, the U.S. government indemnifies operators up to a cap. This indemnity would have to be approved by the U.S. Congress if a claim is made. The cap is currently $2.7 billion — losses beyond that amount would be the responsibility of the operator in tier 3. An additional element of that third tier is that all launch participants agree to waive claims among themselves, including any claims against the U.S. government.

This three-tier system has not actually been used. Losses to date have been relatively minor and never exceeded the MPL. There were no U.S. commercial launches in 2011 in any event, due to competition from foreign launch vehicles.

Nevertheless, testimony in the hearing indicated that the regime is a critical element for U.S. industry. Without it, there are fewer chances for a resurgent U.S. launch sector, due to the resulting unlimited liability. In their June 2012 testimony, the FAA and U.S. administration urged the Congress to extend the CSLA, with some slight modifications. The U.S. Government Accountability Office (GAO) also suggested that the FAA formula for calculating the MPL needed to be updated. The Aerospace Industries Association maintained that the indemnification caps beyond tier 1 should be eliminated altogether and that the regime should either be put in place indefinitely or extended for a longer time than in the previous renewals.

By contrast, the U.K. Outer Space Act effectively has no indemnification, meaning that U.K. licensed operators have unlimited liability. Until recently, licensees had to obtain liability insurance, in an amount which was lowered in mid-2011 to 60 million euros (about $75 million) for launch and in-orbit phases.

In its May consultation, however, the UKSA proposes to amend the Act to cap the unlimited liability of operators for the majority of missions, with the maximum liability set at the compulsory insurance level. The UKSA also proposes to waive these requirements altogether for in-orbit operations of mini-satellites called “CubeSats,” which weigh up to 5 kilograms (11 pounds).

The UKSA says that U.K. space companies have long argued that the unlimited liability they face is difficult to manage and places them at a competitive disadvantage. This position is supported by the U.S. testimony; in particular the GAO materials showing that even the U.S. indemnification provides less coverage than China, France or Russia — the primary commercial space launching companies in the last five years. The GAO figures for foreign government indemnification are a bit old — the latest numbers were from 2006 — but they make the point that foreign competitors appear to have a good advantage over U.S. (and presumably U.K.) commercial launches.

Gerry Oberst is a partner in the Hogan Lovells Brussels office.