Editor's note: Vikki Stone is senior vice president, Poms and Associates

Though the use of small, unmanned aircraft systems (UAS)—more familiarly known as “drones”—is in its infancy, commercial growth is predicted to significantly increase in the next 10 years as businesses such as Amazon and UPS explore using them for deliveries and enthusiasts adopt them for commercial and recreational purposes.

Drones will require insurance coverage, which can open the door to new business for agents and brokers. But insuring an unmanned aircraft system means considering a multitude of insurance liability and coverage issues, ranging from personal injury and invasion of privacy to aerial surveillance and data collection.

The Federal Aviation Administration (FAA) estimates that by 2020, about 30,000 small, unmanned aircrafts will be used for all types of business purposes. Worldwide, total spending for these aircraft systems is expected to top $89 billion in the next decade, thanks to strong military and commercial demand, according to a 2012 market study by Teal Group, an aerospace industry analyst.

The FAA has allocated $63.4 billion to modernize the country's air traffic control systems and expand airspace to accommodate the commercial use of these aircrafts. As regulatory constraints are modified to reflect the introduction of these new aircraft systems, commercial markets for their use will expand rapidly. The FAA estimates that roughly 7,500 commercial drones could be viable in five years.

This is quite a change; before the FAA approved two flying robotics models for commercial operations, the only way the commercial/private sector could fly an unmanned aircraft in U.S. airspace was with an experimental airworthiness certification.

The FAA-approved drones each weigh less than 55 pounds and is about 4.5 feet long. They have no pilot on board but are controlled by an offsite operator using a sophisticated remote-control system and data link transmissions.

These flying systems can carry high-powered cameras, infrared sensors, facial-recognition technology and license plate readers.

Business uses are endless. Halstead Property, a real estate business in Darien, Conn., has been using aerial robotic cameras for almost four years to showcase home listings. The business recently demonstrated on the Today show how its drones capture footage of homes for sale, showcasing their interior and exterior features. The use of the technology has increased Halstead's online listings views threefold, and clients are impressed by the company's progressive marketing efforts and cutting-edge technology.

Congress has tasked the FAA with integrating unmanned aircraft systems into the national airspace system by late 2015. This demand requires the FAA to quickly develop a comprehensive plan focused on the safety of UAS technology as well as operator certification. To meet these objectives, the FAA created a new UAS Integration office in March 2012 to tap the knowledge of specialists in aviation safety and air traffic control.

The FAA must develop effective policies and standards to address the increasing number of drones taking to the skies, balancing efficiency and predictability while enhancing safety; operating globally; creating a viable system for airspace use and protecting both safety and the environment.

And legal issues will also arise: Can a property owner claim a drone is “trespassing” on his land? How will stalking, harassment and other laws regulating criminal behavior be applied to drone use? Does airspace ownership apply to unmanned aircraft systems? What about claims of invasion of privacy and spying?

And how will federal aviation law conflict with state law on some of these issues? The government has already made a foray into this quagmire with the Drone Aircraft Privacy & Transparency Act of 2013, introduced to create a regulatory structure for the private use of drones, including privacy protection, data collection and enforcement.

In addition to many regulatory and legal challenges, a slew of complex liability and coverage issues related to insuring unmanned aircraft systems for commercial use is on the horizon too. New and serious problems are likely to arise over airspace procedures, types of accidents and inadvertent eavesdropping.

Fewer than two dozen insurers provide insurance to the aircraft industry—up from less than a dozen a few years ago—and this number is likely to grow once the FAA gives its OK. Although carriers are developing policies to cover insurance exposures relating to drones, they don't have much data to guide them as they branch into this new territory.

To properly insure these aircrafts, insurers will need to know their function or intent, their takeoff and landing locations, whether they will be operating over populated areas, and their flying altitude. And because these systems can collect massive amounts of data, they can pose a threat to individual privacy and a significant challenge for insurers. In drafting policies, insurers must know how the owner of these aircraft systems will use the data it has gathered and what steps it will take to safeguard or destroy the information it has amassed.

Two areas have the potential to raise huge red flags for the insurance industry: personal injury and invasion of privacy.

Unmanned aircraft systems will have much the same insurance requirements as other aircrafts—only on a smaller scale given their size, flying range and price tag. Given the inherently conservative nature of the insurance industry, carriers might require even stricter guidelines than what the FAA may mandate. Expect to see these types of coverage for drones and their ancillary business activities: liability, personal injury, invasion of privacy, property, and workers' compensation.

Read related: Flier's Market

Liability coverage typically includes protection for personal injury, which also covers invasion of privacy. The scope of coverage will depend on what the aircraft is meant to do. If it's meant to gather data rather than deliver packages, the coverage may need to be broader to provide additional protection.

Property coverage broadly applies to the production, assembly and wholesaling process, which not only protects the parts and the finished product in a warehouse, but also the machinery.

In addition, although whole coverage will be essential, aircraft underwriters have not yet decided how to write these policies. Drones are significantly smaller than standard aircraft, and at this stage, it's difficult to predict what they will or will not do.

Workers' compensation coverage is necessary to protect the people working for and in the facilities of UAS-related businesses.

Also, since many of the businesses that will spring up around the UAS industry are likely to be entrepreneurial startups funded by investors, insurers would be wise to offer protection against financial loss due to mismanagement. Exploring directors and officers liability insurance is a prudent option under the circumstances.

Brokers looking to get into the UAS industry must ask extensive questions and “go deep” as they gather information. For example, brokers should inquire about data collection, storage and usage policies as well as a drone's particular purpose and other physical specifications. This information is essential to help the underwriter prepare a policy that takes all risks into account and provides the proper coverage.

Expect to see the capacity to underwrite drone policies increase as insurers become more familiar with the territory. But insurance is about the collective, so when insurers are hit with the first few claims alleging serious injury or death, they will inevitably start to pull back, resulting in less available coverage and higher prices.

Special Reports /

Insurance Coverage for Commercial Drones: Sky's the Limit

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