A growing number of insurance companies envision a large, robust insurance market for liability and property coverage associated with drone use. However, many insurers currently are proceeding with caution in light of uncertainty about how the drones will be used and regulated and the related risks they represent for owners and operators.
According to a white paper prepared by Assurex Global with insurance brokerage Shaw Sabey & Associates and managing general agent Plus Underwriting Managers, businesses and government entities relying on drones face potential liability exposures that may not be covered under standard commercial general liability (CGL) insurance policies. Meanwhile, insurance companies are becoming increasingly concerned about aviation risks the proliferation of drones represents.
Indeed, the potential property and liability exposures for drone operators range from theft of the drone and its related equipment to property damage and bodily injury caused by drones, as well as premises liability at sites used for scheduled flights, malicious damage, system hacking and contractual liability.
According to Assurex Global, larger insurers operating in the U.S. generally have been reluctant to offer specific coverage for drones as they wait for the Federal Aviation Administration (FAA) to finalize and implement the regulatory framework it proposed in 2015. In the interim, several specialty insurers, including many based outside the U.S., have begun offering liability insurance and other commercial coverages for drone-related risks.
The FAA’s proposed regulations “allow routine use of certain small unmanned aircraft systems in today’s aviation system, while maintaining flexibility to accommodate future technological innovations.” The proposed rules address such issues as height restrictions, operator certification and operational limits.
The final rules should be announced soon. Last June, a senior FAA official said the agency expects to finalize regulations within the next 12 months. “The rule will be in place within a year,” FAA Deputy Administrator Michael Whitaker said in testimony before the U.S. House of Representatives Oversight and Government Reform Committee. “Hopefully before June 17, 2016,” he added.
The FAA has estimated that as many as 30,000 commercial and civil drones could be in the skies in the U.S. by 2020. The Association for Unmanned Vehicle Systems International (AUVSI) estimates that between 2015 and 2025, the drone industry will create 100,000 jobs and contribute $82 billion to the U.S. economy.
A 2015 Munich Re survey of risk managers found that the use of drones could become common practice for almost 40 percent of businesses in fewer than five years.
Since last June, insurers have had ISO forms they can use to tailor drone coverage. The ISO options modify coverage under ISO’s Commercial General Liability and Commercial Liability Umbrella/Excess programs. Six core options are available under each program (three optional exclusions and three limited-coverage endorsements) and can be used to address a number of potential exposures with respect to bodily injury, property damage, and other potential liability related to drones.
According to the Assurex Global paper, the market for drones might expand significantly early on and attract many new insurers; however, it could contract dramatically following any large losses. In the event of such a scenario, underwriters already specializing in aviation risk may have the most staying power on the basis of their experience with these types of exposures.
Last June global insurance broker Marsh said that insurance capacity for unmanned aircraft operations is plentiful as insurers seek to “to secure an early foothold in the sector,” while acknowledging that regulatory uncertainty remains the biggest obstacle to the market reaching its full potential.
Meanwhile insurers are doing what they can, according to John Hanslip, senior vice president, Marsh’s Aviation and Aerospace Practice. “Insurers are using their extensive experience of manned aircraft to assess the risks associated with drones and are providing insurance coverage based on size, uses, and values of the aircraft,” he said. :Traditional policies for manned aircraft are being brought up to date and many only need tweaks to be usable for drone technology and deployment.”
Why Buy Insurance
“As the commercial insurance market for drones evolves, businesses and government entities planning to use drones or to expand their deployment should assess their risks and evaluate available insurance coverage,” said Jeffrey McCann, vice president, digital strategy for Shaw Sabey & Associates, a member of The Vertical Insurance Group.
The paper by Assurex Global, which is a partnership among commercial insurance, risk management and employee benefits brokerages, cites some reasons drone operators should purchase insurance:partnerships
- Existing policy exclusions. Most insurance company commercial general liability (CGL) policies contain exclusions for aviation exposures, which are likely to apply to drones.
- Contractual requirements. Business customers eventually may require liability insurance as a condition of doing business.
- Legal environment. The plaintiffs’ bar may be gearing up to bring suits against companies whose drones cause property damage or bodily injury.
- Reputation. Drone insurance signals prospective customers that the insured firm is professional, thorough and reputable.
The Assurex Global authors note that businesses applying for insurance coverage should be prepared to provide extensive details of their drone utilization, including: standard operating procedures; drone operators’ experience, training and certification; flight and maintenance logs; FAA approval or exemption from regulatory requirements for manned aircraft; flight conditions, including travel routes and times (day or night); and accident history.
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