As the commercial and recreational use of drones continues to expand rapidly throughout the U.S, businesses and government entities relying on them face potential liability exposures, which may not be covered under standard commercial general liability (CGL) insurance policies. Meanwhile, insurance companies are becoming increasingly concerned about aviation risks the proliferation of drones represents, while brokers have an opportunity to service this relatively new market.
A new white paper – prepared by Assurex Global in collaboration with insurance brokerage Shaw Sabey & Associates and managing general agent Plus Underwriting Managers – finds a growing number of insurance companies envision a large, robust insurance market for liability and property coverage associated with drone use. However, many insurers currently are proceeding with caution in light of uncertainty about how the drones will be used and scope of the related risks they represent for owners and operators.
Indeed, the paper lists an array of potential property and liability exposures for drone operators, ranging from theft of the drone and its related equipment to property damage and bodily injury caused by drones, as well as premises liability at sites used for scheduled flights, malicious damage, system hacking and contractual liability.
Business and government entities are increasingly using drones, such as this one equipped with a camera.
According to the paper, larger insurers operating in the U.S. generally have been reluctant to offer specific coverage for drones as they wait for the FAA (Federal Aviation Administration) to finalize and completely implement the regulatory framework it proposed in 2015. In the interim, several specialty insurers, including many based outside the U.S., have begun offering liability insurance and other commercial coverages for drone-related risks.
The FAA’s proposed regulations “allow routine use of certain small unmanned aircraft systems in today’s aviation system, while maintaining flexibility to accommodate future technological innovations.” The proposed rules address such issues as height restrictions, operator certification and operational limits.
Insurance is important for both hobbyists and commercial enterprises.
“Flying a drone is not much different than driving a car or a boat,” said Karen McGee, vice president of Plus Underwriting Managers in Vancouver, British Columbia. “The exposures are immense.” They include damage to the drone and any attached equipment, such as cameras, as well as liability exposures. “If the pilot is inexperienced, loses control and the drone causes property damage or bodily injury, does he or she want to pay out of pocket?” asks McGee.
Plus Underwriting Managers is a full-service managing general agent offering commercial property, liability and professional liability products. It also offers aviation general liability (AGL) insurance. The company receives approximately 100 inquiries a month on drone insurance from broker partners, including Shaw Sabey & Associates in Vancouver.
Brokers play a crucial role in the development of coverage products.
“Brokers are always going to drive demand for new products,” said Jeffrey McCann, vice president of digital strategy for the Vertical Insurance Group at Shaw Sabey & Associates. “If clients come to us with new exposures, we’re obligated to take care of them.” A customer in the film industry reached out to McCann in January 2016 to insure a $4,000 drone with $25,000 of camera equipment. The customer uses the drone for filming, but also wants to offer drone rentals and start a drone camp for kids. He wondered about his insurance needs.
“These are questions that haven’t really been answered yet because it’s such a new market,” said McCann, who is currently working with the client to determine coverage. “It’s fascinating to see where [drone] pilots are taking these things. Regulators, the law and the insurance industry are all trying to keep up accordingly.”
Commercial drone use seems limited only by imagination. Perhaps the most publicized potential use is for package delivery. The online retailer Amazon is working on Prime Air, a future shipping system designed to deliver packages via drones within 30 minutes of ordering.
But there are other innovative drone applications:
• The University of Alaska Fairbanks and the National Marine Mammal Laboratory used drones to collect information on endangered Steller sea lions in 2014.
• Researchers in Oklahoma are working with weather drones to measure the lower atmosphere and more accurately predict weather patterns, which could allow for earlier tornado warnings.
• The Syria Airlift Project seeks to deliver food and medicine to conflict zones via drones.
• A California vineyard relies on drone photography to see which sections of grapes are ripening earlier than anticipated and need to be harvested.
“As the commercial insurance market for drones evolves, businesses and government entities planning to use drones or to expand their deployment should assess their risks and evaluate available insurance coverage,” said Shaw Sabey’s McCann.
Accordingly, the Assurex Global paper cites some key reasons for drone operators to purchase insurance:
• Existing policy exclusions. Most insurance company commercial general liability (CGL) policies contain exclusions for aviation exposures, which are likely to apply to drones.
• Contractual requirements. Business customers eventually may require liability insurance as a condition of doing business.
• Legal environment. The plaintiffs’ bar may be gearing up to bring suits against companies whose drones cause property damage or bodily injury.
• Reputation. Drone insurance signals prospective customers that the insured firm is professional, thorough and reputable.
Assessing potential drone-related exposures
According to Assurex Global, businesses seeking insurance to address exposures potentially created by their drones should start by establishing comprehensive standard operating procedures. This can help the firm demonstrate a commitment to safety and qualify for available insurance.
Businesses applying for insurance coverage should be prepared to provide extensive details of their drone utilization, including: standard operating procedures; drone operators’ experience, training and certification; flight and maintenance logs; FAA approval or exemption from regulatory requirements for manned aircraft; flight conditions, including travel routes and times (day or night); and accident history.
Choosing an insurer with “staying power”
In selecting an insurance company to cover their drone-related risks, businesses should work closely with their insurance brokers. According to the Assurex Global paper, the market for drones might expand significantly early on and attract many new insurers; however, it could contract dramatically following any large losses. In the event of such a scenario, underwriters already specializing in aviation risk may have the most staying power on the basis of their experience with these types of exposures.
