Filed Under:Agent Broker, Personal Lines Business

Drone insurance: Are your clients covered?

The Federal Aviation Administration has released new regulations for the commercial use of unmanned aircraft systems. (Photo: iStock)
The Federal Aviation Administration has released new regulations for the commercial use of unmanned aircraft systems. (Photo: iStock)

If you’ve shopped for residential property online lately, especially waterfront property, you may have noticed some amazing photographs. Chances are they were taken with a professional camera mounted on an unmanned aircraft system, commonly called a drone.

Likewise, many action sequences in movies are being filmed using drones — giving rise to the New York City Drone Film Festival, now in its second year.

The use of drones is spreading rapidly, presenting significant growth opportunities for commercial enterprises and their insurers. Just how big is the potential market? According to data gathered by Statista, commercial unmanned aerial vehicles are set to contribute billions to the U.S. economy. By 2025, the direct economic impact of the commercial drone sector is expected to reach $5 billion.

Chris Proudlove, senior vice president and manager, Northeast regional office and unmanned aircraft system risks for Global Aerospace in Parsippany, New Jersey, said he believes that the widespread commercial use of drones is just beginning to be explored. Commercial use is growing from the grass roots, in the “prosumer” market, he says, that is, people buying small quadcopters or fixed-wing units from sources like Amazon or Best Buy.

“Drones are currently in their infancy,” says Shawn Ram, Western regional manager for Crystal & Co., based in San Francisco. In addition to mining, natural resources and agriculture, he sees drones being used to help illustrate “what’s going on in an area that’s not easily accessible by people. They give you a bird’s eye view of what’s occurring below.”

Industry uses

For now, the primary industries using drone technology are energy and construction. Although Proudlove sees a high percentage of aerial photography clients, they could be doing work for a variety of other companies. “We’re basically insuring data companies that are using aircraft to find the best way to access the data they need,” he explains.

In Portsmouth, New Hampshire, C.J. Lotter, senior vice president and chief research and development officer at Willis Programs, sees the largest application in agriculture, but he also expects that the energy industry will be a growth area, along with real estate and property management. “There are multiple uses for looking at properties from the air,” he adds.

Before using a drone commercially, owners will need to comply with the new regulations issued by the Federal Aviation Administration on June 21. The new rules cover a broad spectrum of commercial uses for drones weighing less than 55 pounds, and include specific operating requirements.

According to Tom McMahon, vice president of advocacy and public affairs for the Association for Unmanned Vehicle Systems International in Arlington, Virginia, a study conducted recently by the association found 38 types of business applications among the more than 3,000 exemptions granted by the FAA for commercial unmanned aircraft system operations in the United States. He agrees that the most prevalent businesses are aerial photography, followed by real estate and aerial inspection.

Related: World drone market seen nearing $127 billion in 2020, PwC says 

Drone near house

Drones record everything their cameras see, include what might be going on inside a house that it passes by. (Photo: iStock)

Biggest risks

Ram said he feels that the biggest emerging risk is an allegation of invasion of privacy.

Drones record everything their cameras see, sometimes by design, sometimes by accident, he explains. “Often, the drone will capture data that an individual or entity isn’t interested in another individual or entity having.”

In some cases, that might include photographs of people in their homes, engaged in illegal activity or being in places where they shouldn’t. In other cases, the data may be proprietary or include trade secrets.

Lotter says the biggest issues in underwriting drone coverage are war, cyber and privacy laws. “War in this instance means something like hacking or hijacking,” he explains. For example, a drone is operating legally, but a malicious actor overrides the controls and intentionally crashes the drone into bystanders or a nearby power facility. That would be an act of war, and something insurers need to look at as an exposure.

Drone operators will need coverages that are typical of aviation risk protection, McMahon points out, such as hull and liability insurance, as well as coverage for the cameras or other sensors carried by the drone. Commercial drone operators will also need coverage for professional liability and errors and omissions.

Willis Programs, managing general agent and a unit of Willis Towers Watson, has developed a drone insurance program for members of the Association for Unmanned Vehicle Systems International, Lotter says. Known as “DroneGuard,” the insurance is underwritten by Global Aerospace, and it includes protection for physical damage, third-party liability and personal injury. It is one example of the kinds of unmanned aircraft system coverages available from a range of aviation insurers for drone owners and operators.

Drone crashed in tree

Drone coverage needs to include damage done to other people's property as well as damage to the drone. (Photo: iStock)

Types of drone coverage

Coverages for drones break down into first-party and third-party liability.

First-party physical damage covers the drone and its payload as well as ground equipment such as the controllers and launchers. “Often, the payload items are far more valuable than the aircraft itself,” says Proudlove.

Third-party liability coverage applies to the situations in which the drone causes property damage or bodily injury. For example, Proudlove adds, a drone could fall out of the sky and land on a car or building, there might be an incident as serious as a midair collision between the drone and a commercial passenger aircraft, or a driver could be distracted by watching a drone flying and get into an accident.

For the drone manufacturer, Ram says, claims are likely to be related to the warranty with the most expensive claims from technology failure. For example, the drone flight was intended to view something that was time-sensitive, such as the winning play at a sporting event, but it didn’t capture the appropriate footage because of a software failure or drone malfunction, causing the client who hired the drone to lose money. Another source of loss would be the situation in which the drone gathered the data correctly but the third-party cloud storage network failed.

Insurance policy

With final rules from the Federal Aviation Administration concerning commercial drones in place, the use of drones ― and need for drone insurance ― is expected to skyrocket. (Photo: iStock)

Growth opportunities for agents

Now that the FAA’s regulations allowing regular commercial unmanned aircraft system flight operations are in place, McMahon of the unmanned vehicle systems association anticipates a growing segment of start-up companies.

“Many of the firms may be new to the aviation business and will need a readily available insurance solution from a trusted and experienced provider,” he says. “Additionally, we believe that it will be important for all operators — particularly those with less aviation experience — to complement their insurance protection with well-designed safety and risk management programs.”

Proudlove said he has found a tremendous growth in demand for drone coverage. “Two years ago we saw two to three risks a week. Now we see about 500 submissions a month.”

The FAA is still issuing specific exemptions on a one-by-one basis, and operators are working in a temporary legal environment. “Now that there is a final FAA rule, hundreds, if not thousands, are waiting to jump into using drones,” Proudlove says. He expects a spike in the number of operators because they don’t have to go through the exemption application process.

For now, Lotter says, the primary client for a program like DroneGuard is a company that buys and deploys dozens of drones to service multiple industries, for example, crop surveillance and energy exploration. He and his team are currently assessing the outlook for small businesses that could purchase the insurance on a credit card for a limited use, such as a photographer hired to take pictures for one real estate company.

Related: Drones are proving to be a valuable tool for adjusters

Drone

Insurance agents should ask their clients if they use drones, especially if the client's business is centered on photography, real estate or construction. (Photo: iStock)

Best practices

Ram’s advice — especially for small and midsize businesses — is to “get the contract right.” There’s value in insurance, he says, “but be sure you’ve protected yourself in the contract or you could put yourself out of business. Limit your liability with your clients, and be sure you have the correct coverage before you start using the drone.”

The first step for a drone operator is to contact a professional aviation insurance broker, says Proudlove. The broker would have access to the main markets that provide this kind of coverage, and the broker can also provide professional advice to ensure that all risks are addressed.

“Coverage depends on the drone operator’s practices and procedures that are in place to mitigate risk,” Proudlove adds. You need to be sure the operator has the correct training and licensing, and is operating in a legal manner. He notes Global Aerospace provides clients with sample standard operating procedure manuals and safety services including training.

Insurance agents should ask about drone use, particularly when the client is a photographer, real estate broker or construction contractor. It could be added to the agent’s checklist when reviewing the client’s insurance program. “The drone itself may only weigh a couple of pounds,” Proudlove says, “but it has enough inertia behind it to cause significant damage.”

Proudlove also recommends joining a professional association for commercial drone operators. The associations provide value in training, as well as updates on best practices and regulations. Currently, the Association for Unmanned Vehicle Systems International is the first association to have established a specific insurance program for its members as an added benefit.

Canada

The Canadian government has its own set of regulations for the commercial use of drones. (Photo: iStock)

Similar rules in Canada

Lisa Willenegger, CFA, liability underwriting specialist at Zurich Canada, sees the drone industry market exploding in Canada as it has in the U.S., especially in energy, agriculture and construction. Primarily large enterprises are using drone technology, she says, for example, engineering companies that are inspecting bridges. Drones allow them to inspect the structural integrity of the bridge while limiting risk to their employees.

Transport Canada, the agency that regulates drones as well as other aircraft, has made drone operation relatively easy, Willenegger says. Under the regulations, a drone can be operated commercially provided it weighs less than 25 kilograms (about 55 pounds), is in the line of sight, is 8 kilometers (about five miles) from an airport, is 15.24 meters (about 50 feet) away from people, buildings and roads and carries liability insurance.

Drone operators must carry a minimum of $100,000 (Canadian) but Willenegger recommends higher limits because the minimum usually isn’t enough to cover possible claims. Zurich Canada’s insurance policy also includes endorsements for premises liability and personal and advertising injury.

Writing drone insurance and exploring the use of drones is one way to attract new, young talent to the insurance industry, Willenegger says. She sees newer employees looking for new ways to use emerging technologies to better serve clients. “They’re learning that insurance companies enable innovation by providing coverage for new technology,” she explains. “Everyone is learning together.”

Related:14 things you need to know about commercial drones and insurance  

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