Rise of the Drones

The commercialization of drone technology is rapidly evolving and has created new insurance coverage issues that were not considered when current primary insurance policy language was originally developed.

Various industry estimates indicate that global spending on drones is projected to exceed US$100 billion in the next decade, with more than 10% of that spend expected to come from commercial (non-military) applications.

This rapid growth in drone use will require an insurance industry response as policyholders will be looking to their insurers for property and liability coverage options.

The top current and potential commercial applications are from the agricultural and crop management industries. Currently, 90% of aerial agriculture spraying in Japan is done by drones, notes information from the Association for Unmanned Vehicle Systems International (AUVSI).

The United States will lead all countries in commercial drone unit sales once the Federal Aviation Administration (FAA) develops regulations assimilating them into their airspace. AUVSI reports that in the next decade, the market is expected to reach 160,000 units sold per year in the U.S. alone, with more than 80% of the units being used in agriculture.

DRONE USE IN CANADA

Canada has quietly allowed the use of commercial drones since 2007, and drone use here has been largely uncontroversial. Commercial drone use in Canada is regulated on a federal level by Transport Canada, governed by the Canadian Aviation Regulations. A Special Flight Operation Certificate (SFOC) must be secured from Transport Canada prior to operating a commercial drone in Canada and a commercial operator must have $100,000 of liability insurance in place regardless of the size of the drone and its use.

Recent developments

There were a couple of recent developments at the end of last year in Canada with respect to drones. First, the Government of Canada launched a new campaign that is designed to educate Canadians on safe drone use to ensure they are compliant with relevant laws. Second, Transport Canada has announced a couple of exemptions that will make it easier for small drones to operate by waiving the requirement for a certificate to be obtained for commercial drones under a certain weight class and for certain uses.

These new regulations were meant to streamline the process and reduce wait times required in obtaining a SFOC for large drone classes and to allow non-commercial and small-weight class drones to operate with a minimum of government interference.

Future developments and uses

The impact of drone technology is significant and has made a number of companies consider new applications for drones, such as agricultural monitoring/spraying, disaster management and claims evaluation.

The United Services Automobile Association (USAA) and State Farm Mutual Automobile Insurance Company have both recently applied to the FAA for approval to use drones in the United States to assist in accelerating claims adjudication.

Imagine how useful drones would have been during the 2013 Alberta flood event. An increased volume of claims could have been assessed in a shorter period of time instead of the delays customers and adjusters experienced as a result of access restrictions in the days following the flooding.

Thermal infrared power line surveys, law enforcement (Ontario Provincial Police currently uses drones to expedite scene investigations), television news coverage, sporting events, movie-making and oil exploration are other present applications for drone usage that enable increased efficiencies in Canada.

In 2014 in the U.S., the FAA provided six film production companies with exemptions to commercially operate drones. This was only the second time that the FAA has granted exemptions for commercial drone use.

By way of contrast, 945 SFOCs for commercial drone use were approved in 2013 by Transport Canada.

Figures from the Canadian transportation and airspace regulator show applications for SFOCs have increased 500% since 2011, when 155 certificates were issued.

ISSUES OF CONCERN

Personal privacy

Individual citizens’ privacy is one of the principal concerns with the private and public use of drones in national airspace. In Canada, the federal government has taken the lead in regulating privacy relative to drones. A drone operator may face a legal attack under the Personal Information Protection and Electronic Documents Act (PIPEDA) if he or she takes photos or videos of an individual in a private setting without consent.

Civil or criminal liability

There are also a number of potential legal issues involving the use of drones that could trigger civil or criminal liability for a drone operator. Physical damage and bodily injury are the two biggest exposures faced by commercial drone operators.

There have been a number of incidents reported in Canada and the U.S. over the last couple of years involving drones coming relatively close to commercial aircraft in flight.

Trespass and nuisance

Trespass and nuisance are other legal risks a drone operator faces in Canada, coupled with the failure to obtain a SFOC when required, which could lead to an enforcement action, including fines by Transport Canada.

Anyone operating a drone without a required SFOC may be subject to a fine of up to $5,000 for an individual and $25,000 for a company. If an operator does not comply with the requirements detailed in their respective SFOC, the Canadian regulator can issue fines of as much as $3,000 for an individual and $15,000 for a business.

DETERMINING COVERAGE

The drone industry is in its infancy and the property and casualty industry’s understanding of this emerging risk continues to evolve. There are myriad complex liability and coverage issues, any of which are further hampered by complicated operational, procedural and technological challenges.

Current insurance contracts may be inadequate to address all of the issues posed by this rapidly changing technology. Conventional insurance coverage may have to be re-crafted in order to provide meaningful and sustainable coverage for the consuming public.

Insurers will have to decide whether they want to design insurance policy forms and endorsements, craft an application, and develop underwriting guidelines and manuals and rates based on current drone requirements. The biggest hurdle from an underwriting perspective is the lack of historical data from that insurers can draw to branch into this new territory.

Who within the industry should insure this new product? Does coverage fall under the purview of aviation insurers or would the consumer be better served by traditional p&c insurers?

There is a certain expertise within the aviation insurance industry needed to provide coverage for conventional aircraft. Some of that will, no doubt, be used to insure against the liabilities that will arise from flying these drones once their use or operation, take-off and landing location(s), whether or not they will be operating over populated areas, and their flying altitudes, have been established. However, this is only the proverbial tip of the iceberg.

Conventional p&c insurance coverage can certainly address bodily injury, property damage and lost income arising from the ownership, use and operation of a drone(s). That said, concerns about privacy and cyber liability posed by this technology may have to be separately addressed.

All lines of business may need an adjustment in contract language and coverage terms, including, for example, homeowners/tenants package insurance.

Since personal-use drones of less than 35 kilograms are not regulated by Transport Canada, they may be insured under a conventional personal property policy as long as there are no intended commercial uses of the equipment, and the drones are not operated with premeditated or illegal uses.

Liability insurance coverage under these policies may be inadvertently triggered if contract language is unclear, thus providing legal liability from a trespassing drone. stalking or harassment, and other infractions that could be related to drone use. As carriers become increasingly more comfortable with this, just as they did with insuring certain employment practices or cyber liability in its infancy, the capacity to underwrite covers for drones will most likely increase.

REMAINING COMPETITIVE

Canada is leading the way in permitting commercial drone use at a higher rate than almost any other country globally and mandating that insurance protection be purchased. As drone technology marches forward, it will become critical for insurers wishing to write commercial businesses engaged in drone use to adapt their underwriting appetite and develop insurance products and services that cater to drone operators or risk losing business to rival companies that are more aggressive in addressing these needs.