Dish Network 2001 Annual Report Download - page 86

ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
F–21
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 substantially identical
policies with different carriers for varying amounts that, in combination, create a total insured amount of $219.3
million. EchoStar’s 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 offered to pay only part of the $219.3 million
claim because they allege we did not abide by the exact terms of the insurance policy. The insurers also assert that
EchoStar IV was not a constructive total loss, as that term is defined in the policy. EchoStar strongly disagrees and filed
an arbitration claim against the insurers 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. Based on the carriers’
failure to pay the amount EchoStar believes is owed under the policy and their improper attempts to force EchoStar to
settle for less than the full amount of its claim, 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 filed
a lawsuit against the insurance carriers in the U.S. District Court for the District of Colorado asserting causes of action
for violation of Federal and State antitrust laws. During March 2001, EchoStar voluntarily dismissed its antitrust
lawsuit without prejudice. EchoStar has the right to re-file an antitrust action against the insurers in the future.
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 will have to reduce the amount of the receivable if a final settlement is reached for less
than this amount.
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. EchoStar will continue to evaluate the performance
of EchoStar IV and may modify its loss assessment as new events or circumstances develop.
The indentures related to certain of EDBS’ senior notes contain restrictive covenants that require EchoStar to
maintain satellite insurance with respect to at least half of the satellites it owns or leases. In addition, the indenture
related to EBC’s senior notes requires EchoStar to maintain satellite insurance on the lesser of half of its satellites or
three of its satellites. EchoStar I through EchoStar IX are owned by a direct subsidiary of EBC. Insurance coverage is
therefore required for at least three of EchoStar’s seven satellites currently in-orbit. The launch and/or in-orbit
insurance policies for EchoStar I through EchoStar VII have expired. To date EchoStar has been unable to obtain
insurance on any of these satellites on terms acceptable to EchoStar. As a result, EchoStar is currently self-insuring
these satellites. To satisfy insurance covenants related to EDBS’ and EBC’s senior notes, EchoStar has reclassified an
amount equal to the depreciated cost of three of its satellites from cash and cash equivalents to cash reserved for
satellite insurance on its balance sheet. As of December 31, 2001, cash reserved for satellite insurance totaled
approximately $122 million. If EchoStar leases or transfers ownership of EchoStar VII, EchoStar VIII or EchoStar IX
to EDBS, which it is currently considering, EchoStar would need to reserve additional cash for the depreciated cost of
additional satellites. The reserve would increase by approximately $60 million if one or two satellites are so leased or
transferred, and by an additional material amount if a third satellite is leased or transferred. The reclassifications will
continue until such time, if ever, as EchoStar can again insure its satellites on acceptable terms and for acceptable
amounts.