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By: Sharon D. Stuart, Esq. & Deborah Alley Smith, Esq.
Christian & Small LLP
Birmingham, Alabama

This is the second 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.

Click here to read the first installment in the series. The third and final post can be found here.

Insurance Opportunities Created by UAS Development

Among the many hurdles the Federal Aviation Administration (FAA) faces in integrating unmanned aerial systems (UAS) safely into U.S. airspace is whether operators should be forced to carry liability insurance and whether this should be addressed at the state or federal level.

The availability of insurance will be critical to the growth of a commercial market for UAS, because the need for coverage will be great and potential losses high. As the regulatory and legal issues are resolved, new insurance products will be required in order to successfully integrate the technology into our lives. Insurers can play a vital role by facilitating risk transfer, encouraging high safety standards, and helping lay the groundwork for sufficient regulation.

Only about 20 carriers provide coverage to the aircraft industry – a number likely to increase once the FAA regulations are finalized. But for now, the question is: How will insurers evaluate exposure for the “dirty, dull, and dangerous” operation of drones? Although insurers can extrapolate loss experience from the aviation industry, drones are three times more likely to be involved in an accident as manned aircraft, according to a recent study of U.S. Air Force data. Thus, aviation industry data must be adjusted for factors unique to unmanned vehicles—autonomy in flight, autonomy in collision avoidance, and autonomy in decision making when communications links between UAS and operator are lost.

Autonomous and unmanned vehicles transfer control from direct human input to automated or remote control, which poses a key challenge in evaluating potential liability. The good news is that autonomous technology development is linked to other trends in digital technology and the exponential increase in data, which in turn will provide insurers with much more information on risks than previously available.

By using its risk management expertise and the available data extrapolated from drone use and testing to make its own risk assessments and to provide coverage for responsible operators, the insurance industry can participate in the business opportunities resulting from technological innovation. Nonetheless, the industry will not have a lengthy period of time to evaluate long-term liability trends and triggers.

Risk Factors Relevant to UAS Underwriting

The bespoke underwriting for UAS that is currently the norm will become unworkable as the UAS industry, and thus the need for insurance, grows. To successfully meet demand, insurers must set parameters, create standard and quantifiable risk factors, and determine how to allocate and mitigate risks.

At the outset, this involves clearly defining what constitutes a UAS or unmanned aerial vehicle (UAV) and dividing identifiable risks into acceptable and unacceptable categories. Acceptable risks then must be evaluated to determine who is in control of the UAS, the mission of the UAS, and its safety, including reliability of the system and tolerance controls to account for human factors.

The types of coverage relevant to UAS are akin to those for traditional aviation risks, except that passenger liability will not be necessary unless UAS begin to transport passengers. However, UAS do pose new risks, including lack of operator experience. There are four main UAS risks to be considered:

  • Collision is the primary risk. While a UAS collision would not involve on-board passengers or crew, it would risk injury to the aircraft itself, to people and property on the ground, or to manned aircraft. Even in the highly trained U.S. Air Force, the major cause of UAS mishaps is pilot error, followed in decreasing order by component failure, mechanical failure and electrical failure. Although UAS currently must be flown within the operator’s line of sight, that likely will need to change if UAS are to become commercially viable. To make this happen, manufacturers must develop precise capabilities that allow the UAS to reposition automatically to avoid obstacles.
  • Loss of the data link between the vehicle and its operator is a secondary risk. Strength and protection of the data connections and a reliable backup system will be critical. Software programming requiring the drone to return home in the event of loss of connection also will be necessary.
  • Cyber risk of hacking or malware is also important to consider. As the frequency of UAS use increases for tasks such as data collection, they are more likely to become targets for hackers who want to snatch the data or the drone itself. Malware specifically designed to infiltrate UAS has been developed, so the risk is no longer theoretical. Drones can be outfitted with GPS geofencing, which prohibits them from flying in pre-programmed areas such as around airports and government buildings, but currently only one hobbyist drone company is including such technology although many consumers do not want this technology. Moreover, in time the geofencing will be hacked and workarounds will become widespread.
  • Invasion of privacy risks are of major concern to many people. Drones for both personal and commercial uses may be equipped with cameras and other data collection devices that pose a threat to privacy. Whether the data is broadcast from the drone or downloaded later, the possibility exists that drones will capture private or trade secret information that is later made public intentionally or inadvertently or is put to other inappropriate uses. Privacy risks, as well as risks of nuisance and trespass, are complicated by state statutes providing a private cause of action to aggrieved property owners.

Underwriters will need to obtain detailed information regarding the aircraft’s size, proposed use (e.g., is it commercial or personal? If the use is commercial, will the UAS be delivering packages, hazardous materials, providing surveillance or collecting data?), its payload, pilot training, whether the UAS will be ground-pilot operated or entirely pre-programmed, whether it is fixed wing or rotor wing, whether it will be “line of sight” only, its range, whether it has control redundancies, how it is launched, its takeoff and landing locations, whether it will be operating over or near populated areas, its flying altitude, how it is retrieved if contact is lost, its ability to recover or land (can it glide back to base?), the state(s) in which it will be operated, how it will be protected when unattended, and its maintenance program. If the UAS will be used to collect data, underwriters must determine how the owner will use the data it gathers and the methods by which it will protect or destroy that data.

To make use of all this information, underwriters must understand the applicable regulations and have a sense of what particular legal issues will be addressed under traditional tort laws and state statutes, and what issues will be governed by federal law. Insurers must also determine when and under what circumstances commercial operations will be eligible for coverage even if the UAS is not approved by the FAA for commercial use. Then, insurers must create effective policy wording to address issues unique to UAS where current policy language is insufficient.

Coverages Implicated

The widespread use of UAS will offer insurers the opportunity to provide a broad range of coverages:

  • Hull Coverage: Owners and operators will need hull coverage for damage to the unmanned vehicle, its component parts and associated equipment, which may include control stations, transmission equipment, cameras and software. Depending on the size and sophistication of the UAS, the equipment costs could vary considerably, along with the amount of hull coverage required.
  • First Party Coverage: Commercial and recreational owners and operators will need coverage for their own personal injury and property damage apart from hull coverage.
  • Liability Coverage: It will be critical for both commercial operators and hobbyists to maintain coverage for personal injury and property damage to third parties. This may include CGL coverage for non-airborne exposures, aviation liability coverage and umbrella coverage. Liability coverage must take into account the size of the UAS, its geographic flight parameters, its purpose, its safety features, and operator expertise. In some areas such as the European Union, UAS must be insured by liability coverage to the same extent as manned aircraft. Drone operators may be sued for their own negligence and wantonness or negligent entrustment if they allow an unqualified operator to use the drone. Coverage will be essential for a range of potential liabilities, including personal injury and property damage, loss of revenue, trespass and nuisance, libel, slander, copyright and trademark infringement, and invasion of privacy.
  • Product Liability Coverage: Manufacturers and component part manufacturers will face liability for alleged defective design, manufacturing, or failure to warn, as well as strict liability, negligence and breach of warranty. Manufacturers, distributors and sellers of UAS may need product liability and personal injury/property damage insurance that is broader than typical product coverage for traditional aviation risks, in the event the operator loses contact, backup safety equipment is inadequate, or to the extent future UAS are developed with autonomous capabilities so that no operator is required. While autonomous capabilities are a future concern, this area will likely see robust growth in the future. Manufacturers must stay on the cutting edge of product development—redundant mechanical and safety systems, geocoding, a common no-fly data base, and technologies to detect the presence of drones will be critical to maintain public safety and prevent manufacturer liability.
  • Cyber and Terrorism Coverage: As the UAS industry grows, cyber risk policies must evolve to suit the needs of operators, systems designers, manufacturers, and infrastructure providers. Cyber coverage may be needed for a number of applications. Users will require coverage for exposure to the costs of investigating data breaches or malicious interference such as hacking or signal jamming, for defending violated privacy, and for repairing damaged systems. Service providers may seek coverage against reputational damage and compensation to those affected by disruption or breaches of their systems. Cyber insurance in this sphere may need to be tailored to cover bodily injury and physical damage in the event of the significant exposure that would result from a cyber-attack on a moving vehicle. The scope and availability of terrorism coverage is likewise worthy of consideration. Cyber and cyber terrorism coverage could be offered separately from other UAS policies, but given the increasing levels of dependence on computerized systems in vehicles, it potentially could become a part of the other coverages. This coverage will be critical to both commercial and non-commercial users. Cyber coverage will likely constitute a significant area of insurance growth with the development of increasingly computerized vehicles.
  • Cargo Coverage: When UAS begin delivering packages, suppliers or purchasers of transported goods will need cargo coverage, which must take into account whether the cargo is an individual item or a batch, the type of cargo being delivered and how it will be delivered (i.e., can it be dropped or must it be securely unloaded?).
  • Other Coverages: Businesses using UAS for commercial activities may also need business interruption coverage. Workers compensation coverage will be needed for individuals working for and in facilities of UAS-related businesses. Peripherally, companies in the UAS industry should consider guarding against corporate exposures by obtaining employers’ liability insurance, D&O coverage to protect against financial loss due to mismanagement, and perhaps Kidnap and Ransom insurance.

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