Underwriting drones

What is a drone?

The term 'drone' describes an aircraft without a pilot on board. Drones are often equipped with video recorders, live feed cameras and digital cameras, sensors, scanners, thermal imaging, and GPS equipment. A drone can be a toy purchased for strictly recreational use, a mini-helicopter used by a media or construction firm, or a large plane-sized aircraft sent to a war zone.

Drones are also referred to as Unmanned Air Vehicle (UAV), Unmanned Air System (UAS) or Remote Piloted Aircraft Systems (RPAS). The International Civil Aviation Organization (ICAO) has recommended that drones be referred to as RPAS, which will soon become the recommended term internationally as ICAO moves towards developing standards for its member states.

This article is focuses only on the insurance issues that arise when a company choses to use or hires someone to operate a drone as part of their business operations. We will refer to such devices as drones.

Let the drones eliminate the 4Ds

Swiss Re has been monitoring the rise of drones for several years and believe they will have the biggest impact where they can eliminate the 4Ds –work that is dangerous, difficult, dull or dirty will eventually be done via drones. 

Construction - The construction industry has embraced drone technology and is using it to plan, build and improve projects. Drones are being used to scan building sites and relay the data to teams during the building process and to provide real time feedback on health and safety at the site. Workers will no longer have to dangle from ropes or climb ladders to assess conditions. 

Farming - Optimisation and efficiency are crucial to feeding the world's growing population. Previously farmers used expensive helicopter and fixed wing aircrafts to spot differences in crop conditions and diseased areas not easily seen from the ground. Today, many farmers use drones to gather aerial data on crop and field conditions. Drones allow farmers to manage resources and expenses such as pesticides more accurately which will eliminate overuse and minimize environmental impacts.  

Motion pictures - The action packed motorcycle chase over the rooftops in the James Bond thriller "Skyfall" was filmed in Istanbul with a drone and the first exemptions permitted the use of drones which the United States Federal Aviation Authority (FAA) issued were to film companies. Drones can obtain aerial footage quickly and safely reducing both work place injuries and costs.

Energy & transportation - Hundreds of thousands of miles of oil and gas pipelines as well as railroad tracks and crossings can be inspected by drones. Drones can be cheaply and easily sent to hard–to- reach location such as oil rigs or off shore wind farms. The sensors and cameras on drones can detect and measure defects far more accurately than the naked eye.

Disaster relief - The Red Cross and other logistical companies are evaluating how drones can support first responders during times of crises. The ability to deliver small packages of lifesaving antibiotics, or vital surgical components to remote areas without risking further loss of life makes drones and ideal tool for humanitarian aid.

Law enforcement search & rescue - Many police departments are using drones for search and rescue missions where a low flying aerial view is more powerful than using a 'bird in the sky' or helicopter, or 'boots on the ground', often consisting of tens or even hundreds of officers patrolling an area on foot. Police drones are also being used to document crime scenes more accurately, helping to solve cases more quickly and helping to preserve more details that prosecutors can use to help convict criminals.

Consumer delivery – While Amazon and Google's plans for fleets of drones, which will deliver packages to customers' homes, have generated a great deal of interest in the media such services are, in our opinion, still several years away from widespread use due to the challenges of developing algorithms and software that will keep a drone flying in the event of signal loss and be able to avoid birds, trees, buildings, etc and satisfy the regulatory authorities.

Drones and insurance

Drone owners and operators will need insurance coverage for three areas of risk: safety, privacy, and cyber security.

Scope of coverage

Property and liability underwriters might want to focus on identifying and quantifying any specific hardware weaknesses of the drone they are insuring. Underwriters may want to ask drone operators about their training, licensing or permitting. What is their experience with respect to aerial vehicles, both manned and unmanned? How experienced are they with the components and systems that make up and operate the drones? Do they understand the privacy and data liability issues which arise if the drone gathers data for any purpose? 

A significant challenge for underwriters in all lines of business will be the lack of historical data for an actuarial approach to underwriting and the highly regulated nature of the aviation industry.

A. Property damage

Drone owners will need coverage for first party claims for damage to the drone itself and third party coverage for damage to the property of others, including both fixed property such as buildings, homes, and land, and mobile property, such as automobiles, livestock, and other aerial tangible objects such as telephone lines and electric wires.

Underwriting considerations

An underwriter will consider the following questions before covering a drone: How is the drone designed? How much does it weigh? What are its range, capacity, and payload? What is the cost of the drone? How much will it be to repair or replace? What are the available upgrades? What kind of maintenance schedule will the device be on?

B. Personal injury & third party loss

Drone owner and operators will want liability coverage for personal injury to themselves and others, as well as third party liability coverage for damages arising out of privacy intrusions, security breaches, and the failure of communication networks.

Underwriting considerations

Underwriters will need to evaluate the type of drone, its intended uses, and where it will be used: Will the drone operate in urban or rural environments? Will it fly from or over transportation arteries or densely populated areas? Will its flight path be on or near public waterways? In what airspace, and under whose legal authority will it operate? Many American states have passed laws which purport to regulate the use of commercial drones but they are unlikely to survive a pre-emption challenge since aviation has long been the exclusive domain of the federal government.

Underwriters will pay close attention to the regulatory requirements for use of the drone(s) to be insured and the client's ability to comply with them, including drone licensing and permitting, authorised situational environments, and attendant duties of care. They will ask whether the anticipated risks to be underwritten are negligence, strict liability, or ultra-hazardous activities and how these will affect the premium, scope of coverage, and potential exclusions. For example, a drone live streaming the Super Bowl for a television network presents a different risk than a drone monitoring a pipeline in a remote area of Saskatchewan.

C. Data liability

Unlike planes, drones can be outfitted with an array of software, sensors, and cameras that capture large amounts of data. This creates special risks related to the software running the systems and the data captured during a drone's flight.

Market standard property and liability policies provide coverage for damage to tangible assets such as physical objects or property. Electronic and or digital data is considered an intangible asset and is typically excluded from coverage. It is very likely that the next generation of drone liability insurance will need to provide coverage for emerging risks related to digital data.

If the drone has the potential to collect, store, or send data, a drone owner or operator will want to buy liability coverage for claims arising out of the capture, storage, and transmission of personally identifiable information/personal health information (PII/PHI), non-public personal information (NPPI), business PII and NPPI such as intellectual property, trade secrets, or sensitive data.

The failure of software to perform as intended could cause a drone to crash, resulting in personal injury or physical damage. Software can also fail by becoming corrupt, losing connectivity, or crashing, rendering itself unusable. The software could mistakenly send legally protected data to an unintended recipient resulting in breach notification liability. Software data in transit could be hacked by a criminal who steals the data, or the drone itself could be hacked and taken over remotely.

A drone could further be hijacked/skyjacked by hackers to their own ends. This is a particular worry for the industry, as drones have been proved very effective in war; and could be exploited to significant effect by terrorists.

Underwriting considerations

Data privacy and cyber security is a complex area of risk. Underwriters may want to focus on the data, for instance asking about the type and sensitivity of the data and its intended use. What data practices, procedures, and security measures have put in place? Who will have care, custody, and control of the data? Who are the drone vendor's manufacturer, and component parts suppliers? What are their data protection policies? What third parties will be involved in on- and off-boarding of data? How will they protect against unauthorised access? 

A best practice might be to try and review the service contracts and licensing agreements that the drone owner /operator have with its vendors. With any new technology it's very likely the contracts will be drafted so as to pass liability onto the drone operator and away from the original equipment manufacturer or the component part supplier.

Data risk can include requests, demands, or compliance orders from law enforcement and other government agencies, which may impose another aspect of operator liability in need of evaluation by underwriters before issuing a policy. It is possible that drone operators may in certain cases be given the same immunity from civil litigation which American telecommunication companies received through the passage of the Foreign Intelligence Surveillance Act in 2008.

The issue of skyjacking is generally treated as an exclusion by insurers issuing drones policies. The issue of liability in a skyjacking case would rest with the drone or software manufacturer only if it could be proved they were negligent in providing a solution to a known problem that would make their drone vulnerable. In cases of suits filed against institutions for terrorist hijackings, US courts have stated that product or service suppliers cannot be expected to make their facilities or products 100% terrorist proof.