This is the third and final post in our three-part blog series on unmanned aerial systems and their potential impact on the insurance industry – which is a condensed version of an article published in the Spring 2015 edition of the Defense Research Institute’s (DRI) In-house Defense Quarterly. The full article, including reference citations, can be found here.
Unmanned Aerial Systems Coverage Currently Available
A few insurers have already developed specific products providing third-party liability, physical loss or damage and transit coverage for unmanned aerial systems (UAS) operating in a commercial, governmental, environmental or emergency services setting. Coverages currently being offered in the marketplace (often through a coverage extension) include hull coverage for physical loss or damage to UAS, components and spare parts during operation, testing or transit; liability coverage for direct loss or damage resulting from UAS failure (excluding coverage for consequential losses of third parties); non-owned UAS liability coverage; premises, hangar keepers and product liability coverage; hull coverage for war, strikes, riots, malicious damage and hijacking expenses; war liability coverage; and fellow employee coverage.
Some companies are offering endorsements providing limited coverage for damages arising from the ownership, maintenance, use, or entrustment of UAS that do not exceed a certain size and weight. Others are now including an endorsement covering agriculture customers utilizing drones. ISO offers an endorsement that excludes from coverage personal and advertising injury arising out of the ownership, maintenance, use, or entrustment of unmanned aircraft. Additional ISO endorsements covering bodily injury, property damage, and personal and advertising injury liability for scheduled unmanned aircraft under ISO’s CGL and commercial liability umbrella/excess forms reportedly will be available in June.
Coverage Questions Likely to Arise
With this emerging technology, many question marks exist regarding available causes of action, who can sue whom, who will pay, and for what. The answer will often boil down to available insurance and that will give rise to numerous coverage questions, especially in relation to policies that are not specifically tailored to UAS.
First and foremost, the definition of the insured vehicle will be key to coverage. For example, most standard CGL policies exclude coverage for bodily injury and property damage resulting from the ownership, maintenance, or use of aircraft or from aviation operations. The ISO Business Owners and Commercial Umbrella forms use the same language, as do typical agribusiness policies. However, the CGL and Business Owners forms do not contain an aircraft exclusion for covered personal and advertising injury. Whether a unmanned aerial vehicle (UAV) is an “aircraft” and whether operation of a UAV constitutes “aviation operations” will undoubtedly be litigated, particularly in the absence of policy definitions and adequate regulations.
Likewise, most CGL policies cover only commercial activities on the ground at the registered premises and limited manual work away from these premises. Many companies or small operators may be relying on the products and public liability clauses in their general public liability insurance without regard for the applicable exclusions. At least one trade group recommends that UAV or UAS operators engaged in aerial work obtain a specific insurance policy for that work.
Similarly, contractors using UAS at construction sites should examine their policies and confirm whether their UAS constitutes an aircraft the “ownership, maintenance or use” of which is excluded under the standard CGL policy. According to the International Risk Management Institute, one can make a strong argument that a UAV with a camera attached qualifies as an aircraft. Thus, contractors may need to negotiate an exception to the exclusion or buy a specific aviation policy or manuscript endorsement to cover UAS exposure. Potentially, contractors could use an insured subcontractor for the job because the CGL exclusion “does not reach an insured’s liability for a subcontractor’s use of an aircraft that is not owned, rented or maintained by the insured.”
One of the questions individuals ask most frequently is whether their homeowners coverage protects against damage or other loss caused by a drone. Some insurance companies suggest that such damage may be covered if the drone is put to personal use. Again, a key question will be whether the policy excludes the drone as an aircraft. “Aircraft” is defined in a standard ISO homeowner’s policy “as any contrivance used or designed for flight except model or hobby aircraft not used or designed to carry people or cargo.” Whether a UAS falls within the “model or hobby aircraft” exception will depend on the type of UAS and the circumstances of use (e.g., personal or commercial), and may depend on whether and to what extent hobbyist vehicles are covered by the long-awaited Federal Aviation Administration (FAA) rules.
Even if a homeowner’s policy covers physical injury or property damage caused by the drone, the policy may not cover liability for invasion of privacy, disclosure of private, confidential or proprietary information gathered by the drone, or trespassing or stalking claims that do not implicate bodily injury or property damage. To the extent coverage for these additional risks is available, it may be too expensive for the average homeowner. However, there may be affordable alternatives. For example, the Academy of Model Aeronautics offers as a benefit of its $58 yearly membership excess general liability coverage of $2.5 million for damage caused by its members’ UAS. This may be an attractive option for hobbyists seeking coverage.
Exclusions for illegal activities may come into play in cases of alleged invasion of privacy, illegal surveillance or filming, or where questions exist as to whether a UAS was being operated in violation of FAA Regulations at the time of an accident. For example, if adopted, the Proposed Rule will prohibit operation over any persons not directly involved in the operation” of the drone. When a non-operator is injured by a drone, questions undoubtedly will arise as to whether the operation was in violation of the FAA Regulation and therefore constitutes an illegal activity.
It will be crucial that insureds and their brokers evaluate coverage carefully as standard policies may leave significant gaps in coverage. While coverage forms for traditional aviation risks will provide a starting point, liability coverage for UAS with autonomous functionality will need to be broader. Commercial operators may need an aviation liability policy, but these coverage forms may not include personal injury or invasion of privacy and almost certainly will not address cyber liability. Owners and operators will likely need special property coverage for their UAS and related equipment, for example, as business property policies often exclude coverage both for aircraft and for computers permanently installed in aircraft. Digital data is often considered an intangible asset typically excluded from standard property and liability policies.
Incidental Effects of Drones on the Insurance Business
Apart from coverage issues, UAS will have many secondary effects on the insurance business. Data collection and weather monitoring by insurers will result in more effective underwriting and improve the consistency of modeling.
Underwriters can use drones to assess the condition of roofs, siding, and exterior details. Drones will find practical application in claims adjustment by following storms, interpreting data and assessing damage in real time, investigating building envelope and roof conditions, and assessing burn patterns and debris fields in fire and explosion investigations. Drones can be used to reach inaccessible or dangerous areas for claims handling and might simply be used to reach accident scenes more quickly and inexpensively than a human adjuster could.
UAS technology offers the potential for safe, quick, and inexpensive claims handling which would benefit insurers and their customers during difficult times. In order to put drones to effective use in claims adjustment, however, insurers must develop a platform for use of UAS in claims and then test that platform at approved test sites or FAA operations centers. State Farm and USAA have sought exemptions to allow operation of unmanned aircraft at test sites and during actual catastrophes.
UAS could even be used for security purposes to protect risks like events or buildings. UAS could be used by insureds for claims submissions. In fact, some farmers already use drones to gather historical data on their crops to help validate crop loss or animal damage when applying for crop insurance. Although privacy issues may create hurdles, insurers might one day use drones to survey claimants who allege that they are disabled.
What the Future Holds
The more closely integrated the virtual and physical worlds become, the more interesting and complex these issues will be. Indeed, the bounds of unmanned technology are seemingly limitless. However, the opportunity for vast economic growth presented by UAS will be dependent not only on adequate regulation and safety standards but also upon the existence of insurance to cover a wide variety of risks, some already understood and others yet unimagined, from this emerging technology.
At this juncture, there are many more questions than answers regarding acceptable uses of UAS and how the risks associated with their use will be insured. However, by analyzing and quantifying the risks and successfully pricing coverage for a wide range of potential commercial and private uses, insurers will play a critical role in the safe integration of unmanned systems into our ever-changing world.