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May/June 2014  Volume 25, Number 3    
 

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How to Cover a Drone

The Federal Aviation Agency (FAA) expects that some 30,000 drones will be in use for business purposes in the U.S. by 2020. Some businesses are already using them. Do they have the proper insurance coverage?

Drones, or unmanned aircraft, have moved beyond the world of espionage into the world of commerce. Real estate brokers are using them to videotape properties from the air; farmers use them to monitor their crops; insurance claims adjusters use them to view damaged property; the Forest Service is using them to monitor fires; and movie companies are using them in film production. Some businesses, such as Amazon, are even experimenting with using drones for package delivery.

How would you insure a drone? We discussed this topic with risk management expert and RiskEpedia author Dick Rupp. He told us, “My instincts tell me that this is an aviation risk, which most standard commercial insurance policies exclude. I contacted several broker friends and, from some of the couched responses received, I suspect that there are already some reported claims involving drones that have either been denied or are being handled under a reservation of rights basis because of coverage questions.”

These questions concern the regulation and legality of flying drones for commercial purposes in the United States. Civil and public users can only fly drones if they have FAA approval. The FAA approval process includes certification of the aircraft and requires the use of a licensed pilot and approval of the purpose and location where the drone is to be operated. Hobbyists can only fly drones below 400 feet, away from airports and air traffic. In 2007, the FAA clarified the hobbyist rule to specifically exclude individuals or companies flying drones for business purposes.

The FAA’s jurisdiction and rules have recently come into question. After the FAA fined an individual $10,000 for using a drone for commercial photography purposes, the National Transportation Safety Board dismissed the fine. The NTSB judge said that “the FAA has no authority over small unmanned aircraft.” The FAA has appealed the judge’s ruling that the agency does not have the authority to regulate commercial drones. It is scheduled to issue a proposal on the operation of drones weighing less than 55 pounds later this year.

Until the regulatory situation becomes clearer, businesses operating drones could run into insurance policy exclusions that bar coverage for “illegal” activities. Businesses should also be aware of the limitations of basic business coverages when it comes to operating a drone. The commercial general liability insurance policy excludes bodily injury or property damage resulting from the ownership, maintenance or use of aircraft. Commercial property and inland marine insurance policies also have various forms of aircraft exclusions. Some of these policies extend to cover physical damage to the aircraft while on the insured’s premises or on the ground, but specifically exclude coverage while it is in the air.

Businesses operating larger commercial drones, which can range in cost from $250,000 to several million dollars, can buy special inland marine/aviation policies for the property exposure. Unless you have a specific aviation liability policy, however, you would lack coverage for liability exposures.

Commercial drones have been used in Europe and other countries for several years. Regulations and specific insurance coverages have been developed overseas to spell out liability resulting from damage by drones. Overseas insurers have developed specific insurance language for their use. At least one specialty firm in the U.S. is providing drone insurance using aviation insurance forms. This insurance covers drones only for “approved coverage uses” (law enforcement, agriculture, land management, videography, etc.) spelled out in the policy declarations. The forms do not contain FAA Regulations violation exclusions, and claims have been paid under these policy forms. However, risk managers see potential red flags, since aviation coverage forms do not provide coverage for personal injury or invasion of privacy, which could result from inadvertent videography of individuals on their private property.

If you need coverage for drones or other specialized situations, please contact us for more information. And if your coverage needs run to the more mundane, we can also help with those.

The author thanks Richard V. Rupp, risk management expert and author of the RiskEpedia, www.ruppsriskepedia.com, for contributing to this article.

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