5. Issues Considered by the Parties

Petitioners argue that the availability of insurance through a single carrier is at best a temporary solution to their problems of insurability, since Houston Casualty, like other carriers before it, may withdraw from this limited market if profitability is disappointing. Petitioners urge more fundamental changes to California's balloon insurance laws, asking that the Commission cede its jurisdiction in this area or, failing that, redraft GO 120-C to reduce or eliminate its liability requirements. Staff and protestant oppose changes in GO 120-C, although staff does suggest that the Commission reconsider the $400,000 requirement for property damage and injury to persons on the ground.

At the hearing on November 18, 2003, evidence was heard regarding adjudicatory facts as to these matters. In the discussion that follows, we will consider each of the proposals raised by parties at hearing and in their briefs.

5.1 Should the Commission Seek to Cede Jurisdiction?

Carol Ann Rogers, president of Napa Valley Aloft, Inc., testified that GO 120-C regulations were written at a time when commercial balloon operations did not exist, and their after-the-fact application to balloonists is unwieldy and unfair. She offered evidence showing that most other states with manned balloon operations regulate insurers through their state departments of insurance, but otherwise leave policy limits to the balloonists themselves.

Timothy Brady, western region director of the Balloon Federation of America, testified that accident and injury rates for ballooning are the lowest of any type of aviation, and that California balloonists lead the nation in fewest number of accidents. In his view, balloon rides should not be subject to the liability limits fashioned 30 years ago for engine-driven aircraft.

Petitioners urge the Commission to join with them in encouraging the Legislature to withdraw the Commission's jurisdiction over manned balloon insurance requirements. They propose that this be done by redefining the word "aircraft" in Sections 5500, 5501 and 5503 to include only "engine-driven" aircraft, and defining "balloon" as "a lighter-than-air aircraft that is not engine-driven."

In support of their proposal, Petitioners cite a report by the National Transportation Safety Board (NTSB) that during the 10-year period from January 1, 1992, through December 31, 2001, there were only 15 reported hot air balloon accidents in California involving both occasional and professional balloon ride operators. The NTSB report showed that there were three fatalities in two of the accidents, as well as four accidents in which six of 39 passengers were injured. (Exhibit 1, at 13.)

Protestant Welker testified that, in his experience as a broker of manned balloon insurance, the industry experiences incidents that trigger insurance coverage but that are not required under FAA rules to be formally reported. He testified that the Commission's enforcement role is necessary to be sure that balloon operators keep insurance protection in place. Staff asserted that it takes no position on whether the Commission should or should not regulate balloon insurance limits, but it noted that the obligation exists and has been carried out for more than 20 years.

It is clear that under current law the Commission is required to regulate insurance limits for commercial balloon flights. The Legislature in Pub. Util. Code § 5503 mandated that the Commission "shall" require every commercial air operator to procure and continue in effect "adequate protection against liability." Petitioners make a good case that commercial balloon flights could not have been intended when the law was originally passed in 1963, and they are free to ask the Legislature to exclude them from the requirements of Pub. Util. Code §§ 5500-5512. On this record, however, we are not prepared to join Petitioners in that request, absent a showing that another government agency would take the place of the Commission in enforcing minimum insurance requirements.

5.2 Should the $100,000 Passenger Liability Be Reduced?

GO 120-C requires a minimum of $100,000 liability insurance per passenger seat on all aircraft flown by a balloon operator. Petitioners' witnesses testified that most states other than California accept the type of insurance offered by Tudor and Contractors Bonding, with $1 million liability coverage per occurrence and no per-seat minimum requirement. On behalf of the Balloon Federation of America, Brady testified that Contractors Bonding, while barred in this state by California insurance regulations, was the insurer for the country's largest balloon gathering, the Albuquerque Balloon Fiesta, and that $1 million liability limits were accepted for the 800 balloons that took part in that event.

Other balloon company executives and pilots testified to the high levels of FAA training and low level of accidents attributable to commercial ballooning. Scott Vander Horst, president and chief pilot of Sonoma Thunder, Inc., stated that he has been flying balloons for 30 years, has transported more than 20,000 passengers, and has had only one reportable accident in his career.

Evidence presented by the balloonists showed that the average cost for a one-hour ride is about $200, and one witness suggested that those who can afford that cost presumably have sufficient life and health insurance to meet their needs in case of accident. Another witness noted that passengers are required to sign a liability disclaimer prior to flight that alerts them to the possibility of accident and potentially reduces any damage claim.

Paul Wuerstle, principal in the Transportation Enforcement Branch, testified on behalf of staff. He sponsored an exhibit (Exhibit 9) showing that, with few exceptions, the amount of personal injury protection required by Commission general orders for modes of transportation other than balloons (i.e., passenger stage coaches, vessel common carriers, charter party carriers, for-hire vessels) is generally $100,000 per passenger. He recommended against petitioners' request for a reduction of balloon liability amounts.

We are not persuaded that the $100,000-per-seat requirement should be changed. The only arguments in favor of reducing that amount are that balloon accidents are few and a number of insurers have a $1 million per occurrence limit on such insurance (which, presumably, would cover balloons with no more than 10 seats under GO 120-C standards). On the other hand, all parties agreed that today's costs of any serious injury are likely to exceed $100,000. Until the recent decline in number of insurers available, insurance at the $100,000-per-seat level has been available to balloonists in California for more than 20 years.

The evidence shows that at least one insurer, Houston Casualty, will provide $100,000 coverage per seat per occurrence for even the largest commercial balloons. Another insurer, Tudor, apparently will cover smaller one-balloon operations pursuant to GO 120-C if its insurance is placed through an approved surplus line broker. As staff has shown, the $100,000-per-seat requirement is generally applicable to all of the charter party buses and for-hire vehicles that this Commission regulates. The evidence suggests that, if anything, the 30-year-old minimum of $100,000 should be increased to reflect today's higher costs, but we are unwilling in this limited proceeding to consider that for the single category of hot air balloons.

To provide operators with some flexibility, however, our order today continues the relief we fashioned in D.03-07-047, allowing an operator to limit the number of balloons it flies or the number of passengers it carries to fit within a $1 million per-occurrence policy, provided that the $100,000-per-seat minimum applies at all times to that operator's balloon operations. We take official notice that no balloonist has to date availed itself of these options, but we make the options part of GO 120-C in the event an operator must choose between shutting down (because all of its operation cannot be adequately insured) or limiting its flights within the parameters of insurance available until full insurance can be obtained.

5.3 Should Property Damage/Ground Liability Be Reduced?

Staff acknowledges that most of the Commission's general orders do not require separate exclusive limits for property damage or for injury to persons outside the vehicle, providing instead that such liability is covered in a comprehensive policy. GO 120-C is the only general order that sets a $100,000 minimum for property damage and $300,000 per occurrence for persons on the ground.

Petitioners, on the other hand, have shown that there has been no balloon accident in California for at least 10 years that involved injury to persons on the ground or more than minimal damage to property of those on the ground. Staff introduced two Napa County landowners, who testified that they were concerned about property damage, saying that low-flying balloons that encounter a sudden downdraft represent a threat to vineyards, where replacement of a mature grape vine could cost as much as $2,500. One of the landowners said that low-flying balloons in the past have spooked his small herd of cattle and required the owners to remove them from deep mud after they had run wild.

Based on its review of ballooning accidents in California, staff concludes that it is unlikely that personal injuries to those on the ground or property damage would amount to the respective $300,000 and $100,000 minimums required by GO 120-C. Accordingly, staff recommends as an alternative that a minimum level of liability be established in a combined single limit of $100,000 per passenger seat and a single limit of not less than $1 million per accident. Under this alternative, any damage to property or persons on the ground would be covered by the same pool of money available to pay claims for injuries to passengers.

Staff's recommendation has merit. Under its proposed alternative, balloons with 10 or fewer passenger seats could be covered in an amount of $100,000 per passenger seat and $1 million per accident limits. The evidence shows that most balloon accidents rarely involve injury to all persons aboard. Unlike engine-driven aircraft, the likelihood of injury to persons on the ground or damage to property is remote. With a $1 million-per-accident minimum requirement, there would be a pool of money available to cover all likely injury and damage claims. Since the $1 million-per-accident minimum mirrors the kind of policy available to balloonists in other states, more insurers may be encouraged to provide that coverage (so long as that limit includes a $100,000-per-passenger-seat minimum) in California. Our order today amends GO 120-C to make this alternative available.

5.4 Should PE-794 Certificate of Insurance Be Discontinued?

Petitioners urge elimination of the requirement that insurers sign a Form PE-794 certificate of insurance certifying that their policy meets the requirements of GO 120-C. Petitioners submitted evidence showing that some insurers are reluctant to sign a Form PE-794 because of its acknowledgement that all flights are covered and that the insurance shall not be subject to exclusions because of violations by the balloon operators. Staff, on the other hand, argues that the Form PE-794 is a separately enforceable obligation by insurers to provide the required coverage and thus enhances protection of the public. Staff's witness Wuerstle testified:

I believe [Form PE-794] affords the public added protection by essentially closing any loopholes, if you will, that the insurance company might try to claim in the event of an injury or death or damage to property. Insurance policies often have limitations, exclusions, some in the form of endorsements or warranties, and the PE-794, like other certificates that are filed with the Commission, is designed to overcome any of those sorts of exclusions and supersede them by insuring the coverage is in place and the public is protected.

For example, a balloon policy might have a limitation that provides that coverage is void if the operator has more than two balloons in the air at one time. That's not acceptable under the PE-794, which provides that all flights are covered. (Transcript, at 131.)

Both Petitioners and staff agree that the enforceability of Form PE-794 has never been the subject of challenge by insurers. Moreover, the evidence indicates that insurers prior to 2002 routinely signed the form as evidence of insurance. At time of hearing, Houston Casualty executed Form PE-794s on behalf of three manned balloon operators in California. As a practical matter, execution of this form appears to be more efficient for both insurers and staff than submitting a certified copy or extract of the policy itself (as permitted by GO 120-C(7)(A) and GO 120-C(7)(C)) and meeting requirements that those documents be constantly updated.

Our order today retains the use of the Form PE-794 as the preferred method of certifying that insurance meeting the requirements of GO 120-C is in place.

5.5 Self-Insurance and Surety Provisions

GO 120-C permits aircraft operators to file an application for authority to provide coverage through self-insurance or surety bonds instead of through insurance. Both Petitioners and staff contend that these options have never been used by balloonists and are unlikely to be used in the future because of the relatively small size and lean budgets of most balloon operations. Accordingly, no party recommends that we retain the detailed requirements for bonding or self-insurance that we offered to the industry in our Interim Order. While such options continue to be available by filing an application under GO 120-C, our order today discontinues the procedures for use of those options that were part of D.03-07-047.