The exponential growth of recreational and commercial drone use has raised significant risk management issues that insurers and actuaries are addressing, according to panelists at a Casualty Actuarial Society (CAS) seminar.
Flying into the New World of Drones featured presentations by Anthony Mormino, senior vice president at Swiss Re, and Tim McCarthy, an Associate of the CAS and actuarial product director for Commercial Liability at Verisk Analytics’ Insurance Services Office (ISO), Inc. The session was conducted as part of the CAS’s Ratemaking and Product Management Seminar & Workshops at Disney’s Yacht & Beach Club Resort in Orlando, March 14 to 16.
Mormino said 1.6 million drones were sold in the United States in 2015, a number which may approach 2.8 million in 2016. The Federal Aviation Administration (FAA) has since December 2015 required anyone who owns a recreational drone weighing more than half a pound and less than 55 pounds, also known as a small unmanned aircraft, to register the drone online with the FAA’s Unmanned Aircraft System (UAS) registry before flying the drone outdoors. Commercial drone operators must register their drones separately with the FAA. Users of UAS weighing more than 55 pounds must register by means of the FAA’s traditional Aircraft Registry process.
“The FAA’s biggest concern is reckless drones,” Mormino stated, pointing to a 2014 incident in Tallahassee, Florida, in which a drone nearly struck a commercial airplane. He also referred to a falling drone earlier this year that nearly struck a downhill skier during a televised athletic competition. Nonetheless, insurers have found beneficial uses for drones, which can generally operate only during daylight hours and within the operator’s line of sight.
“You can use drones to underwrite and visit risks,” Mormino continued, noting how the real estate, agriculture and motion picture industries have benefited from the unique and cost-effective views offered by drones. Insurers have also put drones to good use, using them to assess property damage at either remote or dangerous locales without imperiling the health and welfare of insurance adjusters.
While the FAA, a federal agency, has oversight over U.S. air space, which is deemed to be in the public domain, the images captured by drones can cause legal problems for drone operators, who have on occasion been accused of invading a person’s privacy by photographing them without their permission.
“The law is catching up to the technology, and it cannot happen fast enough,” Mormino stated. There are today 26 U.S. states with laws governing the operation of drones, he added.
Indeed, one of Mormino’s key takeaways was that although drones are simple to operate, they have quietly created complicated legal problems for both drone users and their insurance companies.
Over time, some “drones are going to crash,” McCarthy said, as is inevitable.
Drone crashes can be caused by many different reasons including a drone operator’s error, a drone’s low battery or poor maintenance, as well as its inability to operate in severe weather, McCarthy added. The insurer who covers liability exposures associated with a drone may face claims for either property damage or bodily injury liability after a drone crash. Meanwhile, drone manufacturers could potentially be at risk for product liability claims if the drone were to malfunction and cause damages due to the product’s design, he added.
“The exposure range for drones could stretch from a nuisance to a catastrophe,” McCarthy stated, with claims potentially resulting from trespassing or invasion of privacy or drone collisions with property, people and, in a catastrophe case scenario, another aircraft. Potential coverage today is generally very limited and would depend on the facts related to the incident and the specific policy language at issue, under a commercial general liability (CGL) policy not endorsed to provide such coverage, he said.
ISO has addressed this emerging risk by providing insurers with tools to help develop innovative solutions for businesses that may use drones. Specifically, these options modify coverage under ISO’s Commercial General Liability and Commercial Liability Umbrella/Excess programs. Six core options were made available under each program (three optional exclusions and three limited-coverage endorsements) and can be used to address a number of potential exposures with respect to bodily injury, property damage, and other potential liability related to drones, he noted.
“The problem is there’s very limited data we have on drones,” McCarthy said, noting that, outside of examining how the military deployed drones, insurers have limited information upon which to price coverage for either recreational or commercial drone use. However, actuaries are among the first to have begun gathering data to help price the risk as it emerges in the months and years ahead.
