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April 8, 2016

Insurance Industry Catching Up With Increased Use of Drones

With drone technology and use escalating at a speed much faster than the drones themselves, the aviation insurance industry has lagged behind a bit in figuring out how to offer coverage for drone risks in the commercial sector.

Risk Advisory Director Greg Jones of Western Growers Insurance Services, said more drones are coming into use in all industries and more people are asking questions with regard to their liability.  In addition, a significant number of Western Growers (WG) members use owned and non-owned aircrafts in their operations in one way or another.  In the past, WG has not ventured into the aviation insurance sector, but with risks associated with drones on the rise, the WG insurance division has taken some proactive steps to offer this type of coverage.  Recently, WG joined forces with Aviation Risk & Consulting Inc., a firm that, as their name suggests, specializes in aviation insurance.

Robert Burchard, president of that company, told WG&S in early March that the risks associated specifically with the use of drones is on the aviation insurance radar and is actively being evaluated.  That said, insurance companies have been a bit slow in offering coverage, as there is no historical database that can be used to model what kind of losses might occur.  However, in the past year, he said several insurers have started to write policies, and he predicted that within a year, many more companies will join that market.  “The use of drones is the flavor of the month,” he quipped.  “Typically we would get two or three inquiries a year (about insurance for drone usage).  Now we are getting two to three inquiries a month and it’s increasing.”

His firm’s expert on drones and the potential liability risk is Assistant Vice President Timothy Gortman, who noted that presently drone policies are limited to third party liability, specifically bodily injury and property damage coverage.  Initially, he noted that the policies had very low liability limits and were very expensive, but with increased business and experience, prices are dropping and coverage is increasing.  “Two years ago, we would write a policy with a $1 million limit for about $4,500,” Gortman said.  “Today that same policy for a single drone is down to about $800 annually.”

And he said companies with multiple drones to insure can get those annual premiums dropped to as low as $600-$650 per drone per year.  Burchard believes that is a reasonable level at the current time, but expects actual marketplace claim experience to drive either an increase or decrease in the cost moving forward.  “At this point, there is very little loss experience,” he said.  “There is no track record.  Over time, there will either be a negative experience or a positive experience which will cause the price to go up or down.”

Gortman explained what is specifically meant by bodily injury and property damage, with each being fairly self-explanatory.  The most well-known case of damage caused by a drone involved singer Enrique Iglesias, who injured his hand when reaching out to grab a drone being used to film his concert.  He had to have reconstructive hand surgery and the liability issues have yet to be hashed out…or at least haven’t been publicized.

In the ag sector, one could imagine a drone being operated mapping a field and crashing into field, resulting in crop loss or hitting a person or a truck or a harvester.  A typical policy would cover those damages up to the liability of the policy.  At the current time, drones are relatively small and so the perception is that damage, in most circumstances, would be limited, though as the Inglesias case shows, serious bodily injury could occur.

One can also imagine scenarios that could result in significant damage.  For example, it’s possible a drone could hit a school bus, causing an accident and extensive damage, not to mention a public relations nightmare.

Currently, in the agricultural sector it is, for the most part, commercial companies that are operating drones and selling services, such as mapping, to growers.  While it is the commercial company that would most likely carry the primary or initial insurance, Burchard said that in our litigious society those damaged “are certainly going to go after the deep pockets.”

Jones said it is for this reason that the insurance team at WG will be working with Burchard’s company to offer coverage to growers.  Jones said growers who are hiring companies operating drones should have appropriate liability insurance covering any potential damage.  In some cases, agricultural firms might already have non-owned aircraft insurance to cover potential damage that could be caused by a crop duster that they have hired.  In those instances, the policy should be updated to include drones.  At the very least, Jones said every grower company should examine their contracts with aviation vendors and their policies to see what type of coverage they might have that could mitigate a drone accident.

For the most part, Gortman said drone accidents have occurred because of either operator mistake or a battery malfunction.

While this might just seem all too risky to take a chance on using this new technology, Burchard said the path drones are on is similar to many other new technologies.  He is confident that both self-regulations and government regulations will catch up with the technology very quickly.  For example, he said the insurance industry itself is developing regulations to go along with the insurance coverage it is writing.  It is obviously to the insurers’ best interest if they make sure operators of drones are properly trained and licensed, just as they want tractor drivers to be properly trained and licensed.

And the Federal Aviation Administration is also currently in the process of writing regulations concerning drone use.  Some rules have already been established with regard to operating a drone near an airport.  In these circumstances, drone operators must file a flight route with the airport tower if they plan to operate within five miles of that airfield.

While there are risks, Burchard said the technology is upon us and has the capability of offering services at a rate much less expensive than previous methods.  He believes growers should not shy away from using this technology, they should just be properly covered.