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The Challenge of Drones


A recent drone accident that caused injuries to a bystander increased pressure on the FAA to regulate this exploding technology and raised questions regarding how the insurance industry should address the risks presented by unmanned aerial vehicles, says Stuart Hope in the November issue of AvBuyer Magazine.


Lyrics from the 1970s hit song by Stealer’s Wheel, “Stuck in the Middle With You”, aptly describes the position the FAA and the insurance industry find themselves in with regard to drones. Anyone with $100 or more can buy a drone with a camera and be flying it the next day thanks to the sophisticated technology incorporated within these units.

Your company might not own or operate a drone, but you should be concerned that unmanned aerial vehicles are allowed to have access to the airspace used by your company aircraft. In spite of their diminutive size, beware that these popular devices are another “aircraft” to see and avoid when operating at low altitudes.

There is no requirement for operators to have any flying experience or knowledge of rules governing the use of airspace before they go outside and launch their new toy. There will always be reckless operators in a given population of motorized vehicle owners, and drones are not exception. With the only barrier to entry being the price tag, you can and do have children of all ages flying these highly capable machines, possibly near airports where you might be operating.

To date, the FAA has only addressed commercial drone operators, remaining silent on non-commercial operations – classifying them as hobby/recreational activities and mostly out of their area of responsibility. A crash here or there would not get much of their attention, but evidence is building that this segment cannot be ignored for long considering the exponential growth of drones (over 1 million sold in the last two years) and the resulting accidents that have occurred.

Recent reports of drones crashing in sports stadiums (US Open), smuggling contraband into prisons, spying on neighbors, and – most menacing – creating near misses with aircraft, have increased public awareness of a potential problem. There have been 650 close calls reported by pilots so far this year, compared to 238 for all of 2014.

Many insurance companies are experimenting with, and investing in, this emerging technology. They have created new policy forms for drones in an effort to “not get left behind.” One of the perils of an insurer being a pioneer in a disruptive technology is evaluating unknown or unanticipated losses. Many exclusions to all insurance policies were created after an insurance company paid a loss that was never anticipated nor intended to be covered.

Underwriting Challenges

One of the big hurdles to underwriting drones is the ‘pilot’. With conventional aircraft, there are FAA certificates and ratings that must be acquired by an individual in order to operate in US airspace. With a drone, however, literally anyone can buy one and start operating (non-commercially) with very few restrictions. An underwriter accustomed to rating a risk based on a pilot’s experience is lost when dealing with most drone ‘pilots’.

How do you determine which drone operator is a good risk without any reliable way to obtain qualified information on who is actually flying the vehicle? (Of course if we own one, our friends will also want to fly it.) Most insurers have resolved the pilot issue for now by not offering coverage on the physical drone, only liability insurance.

They do not restrict who the owner can allow to fly the drone under the theory since there is no physical damage coverage, the owner will be careful with whom he allows to fly it since it is his money at stake. In addition, insurers only offer low limits of liability for this class of business.

With insured values as low as $100, how can an insurer charge enough money to make drone insurance profitable and worthwhile? The early players are banking on handling much of the processing electronically. If a human is to be involved in the underwriting, the policy will need to reach a much higher premium level to make sense. Insurance companies have chosen to stay out of the single ship drone market (there’s no money in it) and instead will consider a possible fleet policy for a large operator or insuring the products liability of the drone manufacturer.

Work to be Done

Much remains to be sorted out, and although I am normally against further government intervention to sort out our problems, with the “clowns to the left of me, jokers to the right” who are flying these units, hopefully the FAA will create some structure of control and enforcement of ALL drones without a tragic accident occurring to motivate them.

So how should you respond to the potential threat of drones? Consult your broker at your earliest convenience to be sure that your firm is covered for risks that a drone might present.


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