Dish Network 2000 Annual Report Download - page 67

ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
F–16
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy and the failure of 28 transponders to
date, a maximum of approximately 14 of the 44 transponders on EchoStar IV are available for use at this time. Due
to the normal degradation of the solar arrays, the number of available transponders will further decrease over time.
In addition to the transponder and solar array failures, EchoStar IV experienced anomalies affecting its thermal
systems and propulsion system. There can be no assurance that further material degradation, or total loss of use, of
EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for a constructive total loss under the
launch insurance policies covering EchoStar IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total insured amount of $219.3 million.
The insurance carriers offered EchoStar a total of approximately $88 million, or 40% of the total policy
amount, in settlement of the EchoStar IV insurance claim. The insurers allege that all other impairment to the
satellite occurred after expiration of the policy period and is not covered. EchoStar strongly disagrees with the
position of the insurers and has filed an arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There can be no assurance that EchoStar
will receive the amount claimed or, if EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
At the time EchoStar filed its claim in 1998, EchoStar recognized an impairment loss of $106 million to
write-down the carrying value of the satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately recover at least the amount
originally recorded and does not intend to adjust the amount of the receivable until there is greater certainty with
respect to the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar reduced the estimated remaining
useful life of EchoStar IV to approximately 4 years during January 2000. This change increased depreciation
expense recognized by EchoStar during the year ending December 31, 2000 by approximately $9.6 million.
EchoStar will continue to evaluate the performance of EchoStar IV and may modify its loss assessment as new
events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar III expired July 25, 2000. The
insurers have to date refused to renew insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms.
Based on, among other things, the insurance carriers' unanimous refusal to negotiate reasonable renewal insurance
coverage, EchoStar believes that the carriers colluded and conspired to boycott EchoStar unless EchoStar accepts
their offer to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in its EchoStar IV demand for
arbitration for breach of the duty of good faith and fair dealing, and unfair claim practices. Additionally, EchoStar
has filed a lawsuit against the insurance carriers in the United States District Court for the District of Colorado
asserting causes of action for violation of Federal and State Antitrust laws. While EchoStar believes it is entitled to
the full amount claimed under the EchoStar IV insurance policy and believes the insurance carriers are in violation
of Antitrust laws and have committed further acts of bad faith in connection with their refusal to negotiate
reasonable insurance coverage on EchoStar's other satellites, there can be no assurance as to the outcome of these
proceedings.
The indentures related to the outstanding senior notes of EDBS contain restrictive covenants that require
EchoStar to maintain satellite insurance with respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in orbit. EchoStar has procured normal and
customary launch insurance for EchoStar VI. This launch insurance policy provides for insurance of $225.0 million.
The EchoStar VI launch insurance policy expires in July 2001. EchoStar is currently self-insuring EchoStar I,