From disaster preparedness and workplace safety to autonomous deliveries and performance arts, companies worldwide increasingly rely on drones as a natural extension of their business. Recent Federal Aviation Administration (FAA) forecasts predict that nearly 4 million drones – over 420,000 of which will be used for commercial operations – will be operating in the U.S. by the year 2021.
As drone usage continues to grow, responsible operators need to ensure they have adequate protection in the unfortunate event that a drone is damaged, or worse, that a drone damages other persons or property. Obtaining adequate insurance coverage for any unmanned aircraft operation should be a priority in mitigating risk. Here is a brief overview of available insurance coverage for commercial drones and several issues to consider when buying insurance.
Drones may be covered either by existing commercial liability policies or by specialized aviation liability policies. While the drone industry is rapidly evolving in technology and use, the insurance market and legal landscape related to potential coverage are developing just as quickly. Operators may address potential insurance risks through endorsements to traditional general liability policies, covering liability of the insured related to drone operations. Alternatively, specialized aviation insurers have developed drone-specific insurance policies addressing both liability for drone operations and property coverage to the drone itself.
Regardless of the type of policy, all drone operators must ask a basic question: Is my existing coverage adequate/appropriate, or is new coverage needed? In response, the major risks to drone operations are (1) liability arising out of the use of the drone; (2) liability arising out of the operator’s actions; and (3) personal injury liability for invasion of privacy claims, such as by publishing a photograph without necessary permission or rights. To a lesser extent, a fourth consideration may be first-party property coverage for damage to the drone itself.
When evaluating these risks, companies should consider the following issues.
Compliance with regulations. Traditional liability policies often exclude coverage for illegal acts, including claims arising out of the violation of any state or federal law, regulation, statute or ordinance. Unfortunately, drone accidents commonly occur in part because the operator was (knowingly or unknowingly) violating FAA regulations. A rapidly changing federal regulatory environment may increase or alter obligations imposed on drone operators – e.g., heightened safety, visibility, registration and testing requirements.
Operating drones internationally may also trigger an entirely different set of aviation regulations (in addition to potentially impacting coverage for accidents occurring outside the U.S.). Policyholders should carefully review policies that exclude coverage when an operator violates applicable state or federal aviation regulations to determine if coverage is going to be barred or significantly limited by such exclusions.
“Aircraft” exclusions. Traditional liability policies often include “aircraft, auto or watercraft” exclusions that bar coverage for bodily injury and property damage arising out of ownership, maintenance, use or entrustment to others of “any aircraft” owned or operated by the insured. The law on when this exclusion applies is sparse, but coverage disputes may arise over application of the “aircraft” exclusion to drones. Obtaining specialized drone policies expressly covering drone operations may mitigate this risk.
Fines and penalties. Certain policies may also exclude coverage for government fines and penalties. Increased emphasis on federal and state regulation may lead to increased risk of government penalties, such as the $1.9 million in FAA fines imposed on SkyPan International in 2015 after the company’s alleged unauthorized use of drones. Fines and penalties are rarely reimbursable via any insurance policy.
Continually evaluate coverage for new operations and equipment. Even where operators have potential coverage in place, they should revisit their policies periodically to ensure they are addressing all business risks. For example, as operators add new drones or consider revising existing operations, drone uses, equipment and territory, they should re-evaluate existing coverage and not assume that additional equipment, operations or risks are automatically covered. Also, do not assume that all operations will be insurable.
Alternatives to directly operating drones. As the drone industry has grown, numerous companies have begun operating as commercial drone operators, hiring themselves out to third parties in need of drone operations. Where businesses outsource operations to commercial drone operators, they should treat such operators like any other subcontractor, including obtaining evidence of insurance. Establishing corporate guidelines for hiring a commercial drone operator is important. You will want to address insurance requirements, as well as the ownership and handling of the images and data collected.
Understand the potential issues of purchasing “on-demand” drone insurance. Where businesses look to on-demand drone insurance alternatives, they should be aware that such services may pose additional coverage issues. For example, coverage is limited by the geographic area and timeframe of operations. If an invasion of privacy or other personal injury claim arises from a drone-captured photograph, did the loss occur when the photograph was taken or when it was published? If the trigger is publication – which can occur hours or even months after the third-party drone operation concludes – then on-demand insurance may create a coverage gap if such coverage is not in place when the alleged loss occurs.
Establish corporate policy for handling images and data. One of the least recognized exposures in drone operations is publishing the data and images collected. Without permission to publish, personal injury liability exposures may be created. The ability to live-broadcast drone imagery can also create additional invasion of privacy issues. Images and data collected by drones should be kept secured until they can be reviewed and edited before publication. Establishing a corporate procedure addressing this issue may be a prerequisite for coverage.
Liability limits. The limit purchased for drone operations will vary based on the exposures of the operations involved. Insurance providers have the ability to offer between $1 million and $25 million in limits for drone operations. Drone liability coverage can be scheduled on umbrella or excess insurance programs, which will likely require that minimum attachment limits be purchased on the drone liability exposures.
The list above provides a summary of some of the insurance considerations drone users should evaluate when obtaining coverage for operations. Retaining experienced insurance professionals and coverage counsel can assist in evaluating and mitigating many risks associated with unmanned aircraft. This includes ensuring that the insurance policies are truly providing the coverage envisioned and will maximize recovery in the event of a claim.
Syed Ahmad is a partner in the insurance coverage practice group at Hunton & Williams LLP. Robert Hopson is a vice president, aviation specialist, at Lockton Cos. Geoffrey Fehling is an associate in Hunton & Williams LLP’s insurance coverage practice group. They can be reached, respectively, at [email protected], [email protected] and [email protected].
