All I Want for Christmas is a Drone!

All I Want for Christmas is a Drone!

By Amy Stewart Law

I buy my son a remote-controlled helicopter every Christmas. It’s just one of many quirky traditions in my family. Because my son is now officially an adult (if 30 years old qualifies as adulthood), I thought he might enjoy an upgrade this year. So, I investigated drones. I was surprised to find a varied selection of drones equipped with different technological abilities like high-powered cameras, infrared sensors, facial recognition technology, license plate readers, and complex autonomous anti-collision systems.  The latest generation of drones are equipped with sophisticated systems capable of collecting, storing and transmitting vast amounts of data and information. They are very cool, expensive gadgets -- much more than remote-controlled toys.

Many companies are considering using drones in their businesses, including the energy, agriculture, real estate, commercial photography, and delivery industries. It is no secret Amazon and Facebook intend to use drones. Even insurance companies are using drones to investigate losses involving fire, flood and natural disasters to avoid exposing their adjusters to hazardous conditions and reduce the amount of time to investigate claims. 

Because I am an insurance nerd, my mind droned on about all the types of claims and insurance issues that could arise from using drones. The risks fall into three broad categories: safety, privacy, and cyber risk.

Insurance is a vital necessity for the drone market, especially with the continuously evolving uses, technological enhancements, and regulations of the drone. First- and third-party property damage coverage is necessary and required to cover damages to the drone itself, as well as damages the drone causes to other property. In Europe, regulation requires most operators of aircraft, irrespective of the purposes for which they fly, to hold adequate levels of insurance to cover their liabilities in the event of an accident. [EC Regulation 785/2004] Undoubtedly, in the United States, the Federal Aviation Administration will eventually do the same.

Liability insurance is necessary to insure drone manufacturers, distributors, data/avionics companies, owners, operators, consultants, and customers for claims of bodily injury, invasion of privacy, nuisance, security breaches, products liability, and damages caused by system failures. Because the drone may also be used to collect, store and send personally identifiable data, drone operators and owners can anticipate exposure for claims alleging libel, slander, invasion of privacy, and copyright or trademark infringement.

It is the general consensus a drone is not an airplane. It is an unmanned aircraft system (“UAS”) or unmanned aircraft vehicle (“UAV”). Standard general liability policies exclude damage/injury arising out of the use of aircraft. It is likely general liability insurers will begin to include manuscript endorsements amending the definition of “aircraft” to specifically include a UAS or UAV so liability arising out of the use of a drone will be excluded. They may even include manuscript endorsements specifically excluding coverage for damage or injury arising out of the use of a UAS or UAV.

No need to worry, though. Liability coverage for the use of drones can be written on aircraft liability policies, which typically insure personal injury and third-party property damage claims. Unfortunately, those policies rarely cover data breach or cyber liability.  To remedy this coverage gap, privacy-related claims may be covered by errors and omissions or cyber liability policies. The bottom line is, because safety and privacy are the predominant risks associated with UAS and UAVs, a new insurance market could emerge, combining the expertise of aviation, cyber security, and media liability underwriting.

Underwriting these policies will be difficult because the risk and liability exposure of the UAS and UAV is difficult to assess due to the lack of historical data. Insurers may consider historical military accident data for incidents that occurred in national airspace. Further, the drones market is already becoming a highly regulated industry to ensure safety, privacy and civil liberties. The more regulation, the more complex the underwriting process will become as insurers will be required to draft policy terms in strict compliance with statutory mandates that affect the ownership and use of the UAS and UAV, which in turn will affect the policy terms and premiums. 

These are issues that must be weighed when considering a drone for business or personal use. While a drone would be an awesome gift, it is not likely my son will find one under the tree until the price comes down, the regulations are in place, and all the necessary insurance can be purchased in one affordable package.