Got Drone? Great. Got Insurance?
In February of this year, the FAA released its Notice of Proposed Rulemaking (NPRM) regarding unmanned aerial systems, or drones. It appears to have been a pivotal moment for corporations and entities that had previously adopted a wait-and-see approach about investing further in drone manufacturing and operations. At Global Aerospace, we have observed an increase in inquiries regarding insurance for commercial drone operations.
As applications for unmanned aerial vehicles (UAV), also known as drones or unmanned aerial systems (UAS) increase, so do concerns about privacy and safety. As a result, managing and insuring against risk will be crucial to success for UAV manufacturers and operators.
From an insurance perspective, the proliferation of the small commercial drones covered by the NPRM present a new set of challenges, not least of which is the lack of available industry data. While commercial airline and general aviation accidents are hard to predict using even the most sophisticated modeling tools, insurers at least have a good sense of the premium they need to charge to cover the likely loss activity in any given year.
However, with commercial UAVs, there is little data upon which to make similar predictions. Most models of UAVs have not existed long enough for insurers to acquire an understanding of the particular features that could influence the likelihood of an accident or system failure. Another hurdle to address is the wide range of experience that drone operators (pilots) have when they start in the UAS business.
One primary risk management tool for UAVs that insurers will be looking at is training. Without effective training in the hazards involved, UAV operators will never be able to operate at optimal safely. The NPRM indicated that operators would have to pass an aeronautical knowledge test. It is likely that this will include the need to demonstrate an understanding of aeronautical charts, meteorology, aerodynamics and more.
Training for all levels of drone operation is becoming widely available, from an online course for approximately $200 offered by organizations including the Unmanned Safety Institute (unmannedsafetyinstitute.org), to custom training for a corporation’s team of operators. Some insurance providers already require operators to undertake some type of formal training. Expect training to ultimately become mandatory by insurers.
Another issue related to safety training is the quality of the operating manual and after-sales support. Currently, it varies enormously. Important information, such as the relative battery deterioration in cold weather, is missing from many instruction manuals.
At Global Aerospace, we applaud the manufacturers who are taking a proactive position on safety training. It is our perspective that the UAS manufacturers who take an integrated approach to both sales and safety will achieve the greatest long-term success.
Safety Management for UAVs
Safety documents such as pre-flight checklists, logbooks and a Standard Operating Procedure (SOP) are established components of manned aviation at all levels. These documents come under the general heading of a Safety Management System (SMS). At Global Aerospace, the belief in the importance of SMS documents as a risk mitigation tool led us to commission a SOP manual from the Unmanned Safety Institute. We are making this manual available to all Global Aerospace UAS customers. This SOP covers issues that will affect UAV operators, including:
- Interaction between the operator and observer
- Weather and environmental issues
- Maintaining a safe distance from the UAS
- Ensuring airworthiness of a drone
- Pre-flight and post-flight checks
The FAA’s NPRM outlined the need for UAS to be maintained in a suitable condition for safe operations. Comment was invited on the maintenance and inspection proposals, and we may yet see a requirement for mandated periodic inspections by approved facilities. Regardless of how the final rules are drafted, the responsibility will fall on the operator to ensure the drone is inspected prior to each flight and is in a suitable condition for safe operation.
The NPRM outlined the need for drones to avoid flying over people not directly involved in the operation. The failure rate of small drones is still too high to take such chances where the risk of serious injury exists. Many start-up technology companies are working on solutions for these UAV-related risks. Geo-fencing, or the ability to build technology into the software to prevent a drone from flying in restricted airspace, will soon be available to the mass market. Some manufacturers are already integrating it into their products.
The final key UAS risk factor to consider is respecting people’s privacy. Using drones in a responsible and ethical manner will ultimately lead to a lower risk profile as well as greater public acceptance of this controversial new technology. Simple precautions can be taken to avoid breaching an individual’s reasonable expectation of privacy. These could include gaining the person’s consent to being filmed and taking care not to publish any images or material captured without their consent.
Insurance for Unmanned Aviation
As with any aerospace operation, insurance is an integral part of risk management. It is there to provide financial compensation when the safety management system has failed to prevent an accident or a loss has been suffered due to an unforeseen event. While the regulatory situation continues to evolve and change, the subject of insurance is increasingly important within the UAS community. Owners and operators, as well as manufacturers and other service providers, are all interested in insurability and the cost of premiums. Many in the UAS industry are looking to insurance carriers to be the driving force and ultimate arbiter of the various risk management initiatives currently in development. Common questions that come up regarding UAV insurance include:
- Do I need insurance for my drone?
- How much does UAS insurance cost?
- Do I need to be approved by the FAA to obtain UAS insurance?
- What would commercial UAV insurance cover?
Mandated Minimum Insurance
While the FAA’s NPRM made no mention of insurance requirements, any commercial UAV operator should assume that their customers and partners will eventually require them to certify that they are insured. In any event, we anticipate that most professional drone operators will purchase insurance for legal liability and to protect their assets.
The Insurance Market for Drones
Aviation insurance carriers in the U.S. that are active in the UAS sector offer different solutions and levels of coverage. Some, such as Global Aerospace, have drone-specific policies and coverage. The insurability of an operation depends upon a number of factors including:
- Choice of platform
- Experience of the operators
- Intended use
Perhaps most of all, insurers assess the likelihood of an accident involving people, as that is where the possibility of expensive litigation and indemnity payments exists.
If liability limits higher than a few million dollars are required, the insurance marketplace is reduced to just a handful of available carriers. The higher the limit, the more questions about safety and operating procedures will be asked. Insurers routinely mandate higher safety standards than those set by the FAA for traditional aviation risks.
Insurance without FAA Approval
Lack of FAA approval in the U.S. is not proving to be a barrier to obtaining insurance. Of critical importance is the professionalism of the UAS operation requesting insurance cover. Has a Standard Operating Procedure been developed? Are the pilots trained and experienced? Is a spotter employed for all flights? Is a safe distance always maintained from persons and property? All these factors will play into insurability and pricing, regardless of FAA approval.
Not only will the choice of carriers increase, but also the availability of higher limits. Additionally, coverage options are likely to expand and the underwriting process becomes simpler with a Section 333 exemption.
Why Buy UAS Insurance?
Most general commercial insurance policies exclude aviation exposures, including those for drone operators, manufacturers, dealers or service providers. Aviation is a litigious environment. Drone operators may not consider what they are doing to be dangerous (some don’t even consider it to be aviation) but operators of UAVs could be exposed to legal action if damage is sustained to property or injury to persons.
This is where professional providers of insurance are so crucial. In the aftermath of an accident, UAS operators will need the support of a trusted insurance provider. Liability insurance doesn’t represent a big cost when considering that the livelihood and reputation of the insured parties are at stake.
What Will a UAS Insurance Policy Typically Cover?
Aviation insurance falls into two basic categories: 1) legal liability and physical damage (otherwise known as hull) for the owner/operator; 2) and product liability for the manufacturer.
An operator should consider legal liability insurance as a minimum. This covers the cost to property repair or injury to persons. Additional coverage may include personal injury (invasion of privacy), non-owned (if you crash someone else’s drone), medical expenses, premises liability and war perils such as damage sustained from a malicious act.
Additionally, coverage is available against physical damage to the UAS system itself. This covers the cost to repair equipment, or cover the total loss of either the platform, payload or ground equipment.
For the manufacturer or service provider (e.g., training facility, consultant, dealer, software designer), product liability is available. This would provide coverage in the event the insured product is considered to have caused or contributed to a loss. (It would not cover claims that fall under a warranty scenario.) It is important to note that even if a UAV operation is just getting started and is not yet commercially viable as a business, it still risks exposure in the event of an incident, and should have the appropriate insurance coverage.
The Benefits of Working with a UAS Insurance Specialist
While some non-aviation general liability carriers may now be considering the expansion of existing policies to include drone liability, it is our position at Global Aerospace that a UAS-specific insurance policy, with the ability to include physical damage and expanded coverage, is a far better route to take. Insurance providers who offer aviation-specific claims management are better able to offer the customized UAS insurance solutions that operators will need in the months and years ahead.
Finding an Insurance Broker
Once the need for insurance has been established, drone operators should contact either their existing insurance broker or one of the many aviation insurance brokers (some of whom are beginning to specialize in unmanned aviation risk). They will assess exposure, make recommendations for appropriate coverage and limits, and invite quotes from various insurance carriers.