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Drone flights present risks, rewards

Insurance market reacts to new exposures


The first commercial drone package delivery approved by the Federal Aviation Administration has caught the attention of risk managers, brokers and insurers.

Aviation brokers and underwriters see insuring drones as an opportunity, but the latest technology also poses risks such as pilot error and product liability. Risk managers already see drones, the common term for unmanned aerial vehicles, among their top risks.

On Friday in Wise County, Virginia, the first FAA-approved drone package delivery service carried medical supplies to a remote medical clinic where volunteers provided medical care to residents in the poverty-stricken area of Appalachia.

“Access is a challenge. Some of the people live on top of mountains with no access to medical care. I don't believe people are as aware that we have issues like this in the U.S. They see it in other countries, but it is here as well,” said Rose Mooney, Baltimore, Maryland-based executive director of Mid-Atlantic Aviation Partnership at Virginia Tech, which co-sponsored the delivery with NASA via the drone that was covered by an undisclosed insurer.

“This is opening up a whole new area in the United States,” Ms. Mooney said. “There are a lot of safety and logistical issues that our research at FAA-designated test sites is addressing.”

While the FAA recently issued rules for the personal operation of drones, it may be another year or so before it issues rules for commercial drone operators. It has, however, already granted more than 700 exemptions to commercial operators.

“These exemptions are granted on a case-by-case basis because there's currently a prohibition on commercial unmanned aerial systems use in the U.S,” said a spokesman for the Association of Unmanned Vehicle Systems International based in Arlington, Virginia.

Insurance buyers' interest has soared.

“We have seen a 100-fold increase in commercial insurance requests in just over 90 days. We are handling 150 submissions for insurance a week,” said Terry Miller, president of Conifer, Colorado-based Transport Risk Management Inc.

The aviation brokerage provides manufacturer, owner and operator coverage for nearly every type of commercial drone, from those that patrol power lines and agricultural fields to those that survey damage after a catastrophe.

“We see media looking into it, film news coverage, we are seeing energy and infrastructure looking into drone insurance, real estate companies,” said Patton Kline, Marsh USA Inc.'s New York-based senior vice president of aviation and space. “There is a huge spectrum of companies and industries looking into it because it is more cost-effective to operate (unmanned aerial vehicles) than typical aircraft, and they're looking for insurance at the same time.”

Drones are on risk managers' radar as well.

In an April survey by the Risk & Insurance Management Society Inc., risk managers ranked drones as being among their three top emerging casualty risks, along with cyber security and product recalls.

As far as insurance offered to cover commercial drones, Mr. Miller said the coverage includes up to $100 million in third-party liability limits and up to $10 million in hull physical damage limits. With about 2,700 commercial drones insured, there have been about 30 hull physical damage claims, but no liability claims yet, he said.

“The insurance policy is a helicopter policy, more or less, but since it does not have an airworthiness certificate, we re-define it as a UAV. We look at aircraft type, aircraft use and the pilot to see if it will be an insurable risk,” Mr. Miller said. “One of the largest causes of crashes has been pilot error,” he said.

Marsh's Mr. Kline agrees.

“From a liability standpoint, pilot error will remain a risk,” Mr. Kline said. “Underwriters typically have a list of pilot requirements. It's a little bit like typical aviation insurance for pilots; the underwriters want to see something similar for drone pilots.”

“We think there will be a fair amount of product liability associated with drone use, and we are working with our clients to avoid that risk,” he said. “A lot of people are focused on the operations, but we are also focused on the product's liability, and we see that as something that should be a concern in the industry.”

Should a faulty component cause a drone accident, “it's very easy to go after the operator. But if they don't have deep pockets and if the deep pockets are with the manufacturer, then that is something that should be a concern to people in the business,” Mr. Kline said.

However, the unmanned vehicle association argues that drones “could actually reduce liability concerns by making traditionally dangerous tasks, such as bridge, power line and cell tower inspections, safer and more efficient,” the spokesman said.

“If a drone is operated properly, it takes out a significant exposure factor,” said Peter Schmitz, New York-based CEO of Aon Risk Solutions' global aviation specialty practice.

As the number of drone users increases, so do the incidents of drones being flown into restricted areas, such as over fires or airports, that could put pilots of standard aircraft at risk.

From an insurance industry standpoint, Mr. Schmitz feels drones are a good thing “as long as it's not something that gets tarnished by the enthusiastic amateur. That's the issue the FAA is struggling with right now.”