Insurance and Drones

COVER STORY

SPECIAL REPORT: INSURANCE

DRONES AND INSURANCE UNDERSTANDING, AND MITIGATING, THE RISKS OF UNMANNED FLIGHT

By James Rosen A Kespry drone kit for insurance flights. Photo: Kespry

In the beginning, man created model aircraft, and they had no cameras.

So man created MIL-SPEC manned and unmanned aerial systems with a broad range of image capture and sensing devices. And those were expensive. So man crafted silicon from sand, and from silicon was born digitization, miniaturization, wireless communication, cloud computing, artificial intelligence and a generation of creative technologists. And Gordon Moore declared Moore’s Law, not in that order, and with a few steps in between.

Fast forward to 2010: The consumer drone market is booming, and people are itching to use their quadcopters for 32

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commercial purposes. Between 2012 and 2016 (the last data the Federal Aviation Administration provides), the FAA approved more than 5,500 Section 333 exemptions, which finally allowed such commercial use.

This is a reminder that commercial use of unmanned aircraft systems is still new. Allowable uses, UAS functionality, and pilot skills are all evolving. All the while, insurers are doing their best to understand and price the risk.

When the FAA issued the Part 107 rule in 2016, it opened wide the door for commercial and civil use: Between August 2016 and January 2017, the FAA reported that more than 30,000 people initiated the remote pilot application process, 16,000 took the exam, and almost 90 percent passed.

The FAA estimates that there could be as many as seven million drones sold in the United States by 2020.

UAS enthusiasts or professionals may be using drones to enable specific functions in an existing business, or building a business around operating a drone. Either way, it is their responsibility to understand the risks they may be taking, and their options for mitigating or transferring those risks. Which leads to the topic of insurance.

Why buy insurance?

Drone operators are flying equipment with moving parts, valuable cameras or sensors, likely a gimbal, some technologies and software to control the whole kit, and a battery for power. While drones can provide amazing aerial footage, things can go wrong, including: the drone can damage property, cause injury to others or damage itself; navigation and control technologies may fail and drones can lose contact with ground control units; the camera can be perceived as an invasion of privacy; the batteries can catch fire; and there can be human error in the air or on the ground.

In insurance terms, Matt White of California-based BWI Aviation Insurance summarizes the liability exposures as damage to public or private property, medical expenses, invasion of privacy claims and personal injury. In addition, users can lose or damage a drone or its payload, hurt themselves or others, or damage property.

So, while the FAA does not require operators to buy insurance, it may be a good business decision, and local governments or your clients may require operators to carry liability coverage.

What’s needed?

The type and amount of insurance will depend on how and where an operator uses a drone, their level of experience, the value of the equipment and the operator’s willingness to accept financial risk — not to mention what clients might require.

Most businesses will begin with liability and personal and advertising injury, or PAI; or hull insurance. Liability and PAI lets businesses protect their finances, specifically the costs associated with injuries caused to others, damage to property, liability for invasion of privacy, legal costs, and more. Most insurance professionals recommend at least $1 million in liability coverage, and consider personal property and PAI coverage as well.

Regardless of an operator’s insurance coverage, insurers and brokers advise that users mitigate their risk through accident avoidance, safe flying and safe ground practices. In addition to the basic knowledge required to earn your Section 333 or Part 107, operators may have taken additional safety classes. Most aviation brokers can put you in touch with additional training resources to encourage skill development, accident avoidance and safe flying, and some insurance providers offer free or discounted education.

AUVSI has partnered with King Schools to deliver a Part 107 prep course, which gets operators prepared to take the FAA UAS Drone Knowledge Test, the required exam to get a remote pilot certificate.

Last year, AUVSI also launched the Trusted Operator Program, or TOP, a UAS community initiative to facilitate best practices, codes of conduct and professionalism for operators of drone services. More information can be found here: http://www.auvsi.org/rpc-top.

While buying insurance may sound straightforward, the coverages an operator wants may require a standalone aviation policy, or may be available as endorsements to an existing policy. This is up to the insurer, but the Insurance Information Institute points out that Commercial General Liability insurance policies commonly contain exclusions for aviation activities. Commercial drone operators can purchase commercial aviation insurance to cover property damage and liability caused by a drone.

Why is this? Transport Risk International explains that UAS insurance is provided by aviation insurance companies because “on Nov. 18, 2014, the NTSB ruled, under Huerta v. Pirker, that UAS are ‘aircraft’ and subject to FAA authority and regulation. Nearly all business Commercial General Liability and homeowner policies exclude aviation and aircraft exposures from coverage provided under the policy.”

In fact, in 2015, ISO (an organization that crafts standardized policy forms and language for insurers to use) released six CGL policy endorsements that exclude UAS coverages in whole or in part, for bodily injury, property damage and/or personal and advertising injury. Carriers were free to adopt or ignore this language, so a range of coverages and related gaps emerged; buyers should compare accordingly.

What would an exclusion look like? Something like this excerpt from a The view from a Kespry drone flying for insurance adjusting purposes.

Photo: Kespry

Hull coverage provides for protection against damage and loss for the drone itself and related equipment. If an operator has a high-value UAS or payload, including expensive cameras and gimbals, they may want to protect it.

Third-party liability coverages may include personal injury, premises liability and non-owned unmanned aircraft liability, which would cover businesses that hire others to fly drones for them. In most cases, this will include the cost of a business’s legal defense, but buyers will need to check the policy language. One coverage that is treated differently across carriers and policies is personal and advertising liability, which protects against claims for invasion of privacy, libel, slander and so forth.

Many drone operators are taking some form of aerial photography, making this a relevant coverage.

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Commercial General Liability Policy: “This insurance does not apply to: G. Aircraft, Auto or Watercraft (1) Unmanned Aircraft “Bodily injury” or “property damage” arising out of the ownership, maintenance, use or entrustment to others of any aircraft that is an “unmanned aircraft.” Use includes operation and “loading or unloading.”

The key takeaway is that drones present specialty risks, and may require a specialty policy for coverage.

Where to buy?

A large enterprise is likely working with one of the large insurance brokers, such as Marsh, Aon or Willis.

“Buyers that are utilizing drones have a pretty steep learning curve to learn what is needed to operate in a commercial space,” says Mark Hammer, senior vice president of the

The data from a Kespry roof flyover for insurance purposes.

Photo: Kespry 34

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U.S. Excess Casualty Placement group at Marsh, the global insurance broker and risk management advisory firm. “Many larger accounts are tapping into the aviation market. Larger accounts may have an aviation policy but limits may not be as high as our clients require [caps at $2-25 million], so they have drone coverage scheduled to commercial umbrella policies.”

Hammer acknowledges that there is “an underserving of the small commercial market.”

Just to check how some small business insurers would handle the risk, this writer contacted several large writers of small business insurance: Insureon, Hiscox, State Farm, Allstate and Farmers. None of them offer any coverage for commercial UAS, even by endorsement. I heard things such as, “We don’t have a market for anyone using a drone,” and “most companies and policies exclude anything to do with drones, including us.” The local Allstate and State Farm

agents did suggest that I find a commercial broker that might be able to find coverage.

So, while operators may want to speak with their existing insurance agent/broker, they may find that a UAS specialist can best guide you through the decision process. A broker such as Transport Risk Management can provide a wide range of coverages and limits from a range of insurers..

Operators that know what they need may be able to buy from an agent or broker online or via an app. Under any scenario, Hammer advises, “you have to understand what your coverages are. You need to have someone who understands insurance to ensure that your coverages align. Furthermore, you need to follow the FAA regulations, with Part 333 or Part 107 licensing, and ensure that the drones that you or your employees are operating are following the guidelines and are properly registered.”

A Kespry drone prepares to inspect a roof. Photo: Kespry

How much?

Most insurers will assess the liability risk based on a combination of the pilot’s profile, intended use and equipment. At the low end, operators can purchase insurance by the hour starting at $10 an hour. An annual $1 million liability-only policy will generally cost a few hundred dollars for a single UAS. Hull coverage is generally driven by stated value. Premiums will increase as operators increase their policy limits, reduce deductibles, add more aircraft/UAS, operators, adopt riskier uses (such as flying over crowds), more expensive drones and payloads.

Terry Miller, president of Transport Risk, notes that some drones are more prone to incidents, driving higher deductibles or premiums. A few companies, including Verifly, stand out in their approach, as they assess risk primarily on the environment — where and when operators are flying, and for how long, and price accordingly.

While it may be just inside baseball for those who think about insurance underwriting, this may translate into material differences in the application process from carrier to carrier.

Verifly has streamlined the application process to a few questions on a smartphone app, which aligns with their underwriting philosophy, business model and focus on the recreational and light commercial user. On the other end of the spectrum, this writer spoke with one underwriter who insures commercial users that fly with greater frequency.

The underwriter uses the application process to ask for highly detailed background information on the pilot, training and certification, the UAS, claim history, etc. The information is reviewed in detail to assess the risk and determine pricing.

In addition, the burden of the application process itself serves to screen out those pilots that are not serious or experienced. This is a good fit for this carrier and MGU. Most agents, brokers and insurers fall somewhere in between.

The application is designed to capture the information they consider most relevant to their assessment, and any questions raised may result in a follow-up call. Not infrequently, a midsized company may have someone applying for insurance that just isn’t familiar with drones, and doesn’t fill the application out correctly or completely.

A relatively quick phone call with the right person can clarify the nature of the risk.

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Verifly’s app can time flights and notify operators when it’s time to come down. All images: Verifly

A screen shot of Verifly’s insurance drone app.

What are people actually buying?

Many agents report that more companies purchase $1 million in liability insurance than anything else, with higher limits driven by specific client needs. While those with more expensive drones and payloads may purchase hull coverage, many with less expensive drones will self-insure the hull, or buy a maintenance plan through the manufacturer to mitigate some of the risk to the actual drone, gimbal and camera.

Consider a situation where the drone’s rotor causes damage to property and injures a third party. Alec Roberts of insuremydrone.net says regardless if the cause was operator error or a true malfunction of the technology, the initial liability will generally fall primarily on the operator. This is one example where it is important to the operator that their insurance includes a “duty to defend” for litigation protection. If there was a question about underlying product liability, the insurance company would then subrogate to the manufacturer.

An exception to this approach is Kespry. Kespry stands out as a manufacturer which provides $1 million in liability cover

The Verifly app gives an insurance quote for drone flights.

for operators of a Kespry drone. This means that the operator may only need to purchase umbrella coverage, rather than a primary liability policy. It also neatly eliminates the need to assign responsibility to the operator or manufacturer.

Going forward, the industry should expect change: UAS functionality, uses and users will increase as regulatory constraints and prices decrease. When this happens, expect mainstream insurers to grow more comfortable with drone risks and relax some of the exclusions in place today. This will lead to a more competitive market and more options for insuring your drone, possibly at a lower cost.

Here’s to clear skies and safe — and adequately insured — flying.

Jim Rosen is the president of Ridgeline Consulting, and specializes in creating value for insurers, InsurTech companies and their clients. He can be reached at jrosen@ ridgeline-consulting.com or +1 917-754-9938.