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Drone risks take off amid holiday buying blitz

Manufacturers could be targets in liability claims

Drone risks take off amid holiday buying blitz

Drone sales that could top 1 million this holiday season have lawyers warming up for a wave of claims, with differing views on the insurance industry's readiness for the risks that commercial and consumer drone operators will bring.

With hundreds of drone incursions already reported in commercial air space, the Federal Aviation Administration and a task force of stakeholders released guidance in late November calling for registration of drones to hold operators accountable for any wrongdoing.

Those stakeholders include Inc., Google Inc. and Wal-Mart Stores Inc., which want to use drones for deliveries in the next year.

“The commercial use of drones isn't going to be incremental,” said William Walsh, Seattle-based member of Cozen O'Connor focusing on aviation law. “It's going to be one day you drive to work and don't see any and the next day you are seeing them everywhere. From a risk management and insurance standpoint, I feel we are way behind the wave of what's about to happen in terms of drone use.”

That usage could rise rapidly. The Consumer Electronics Association projected some 700,000 drones will be sold this year. The FAA projects that number could reach 1 million, a spokesman said.

With the ability to trace drones back to manufacturers, “it just heightens the risk for manufacturers who need to realize that they are now in the aircraft business,” Mr. Walsh said.

“Manufacturers definitely have liability exposure,” said Chris Proudlove, Mountain Lakes, New Jersey-based senior vice president and manager of the Northeast regional office and unmanned aircraft systems risk at Global Aerospace Inc. “We insure many of them. Whether a school, software designer, vendor or manufacturer, there is liability arising out of the service provided that is most likely excluded from any other type of insurance policy.”

“UAS manufacturers and distributors absolutely have a products liability exposure when they are selling or distributing unmanned aircraft or accessories,” said James Van Meter, Atlanta-based aviation practice leader of Allianz Global Corporate & Specialty S.E. and a founding member of the recently established UAS Insurance Association. “This exposure is present anytime products are being sold under a variety of tort and products liability theories.”

The FAA has not yet determined what training to require of commercial and consumer drone operators, though commercial operators must have at least a sport pilot license.

“We don't seem to want to overregulate drone use, and I think it is unfortunately going to take a catastrophic event that can be partially attributed to the operator that is going to make us want to change that culture,” Mr. Walsh said.

Regulations that are to be finalized next summer may require a new certification for commercial drone pilots, said Katherine Swain, a Houston-based commercial pilot, flight instructor and vice president of insurance with drone operator Measure, which has more than 250 FAA-approved drone platforms.

“Just because you are a good manned pilot doesn't translate into being a good drone pilot,” Ms. Swain said.

And for commercial drone operations, the current “option is to navigate through the FAA 333 exemption process,” said Mr. Proudlove.

There already are more than 2,000 FAA 333-approved operators and 600 to 800 drone manufacturers and distributors, Mr. Van Meter said.

A report, “Contracting With and Between UAS Operators,” published in October by Global Aerospace and Dentons, a Chicago-based international law firm with drone expertise, found that many business, including several insurers, are outsourcing their drone operations to professional operators to transfer the risk.

“The technology is moving so quickly that to go and invest in a fleet of drones today that may be redundant next year doesn't make sense,” said Mr. Proudlove, a co-author of the white paper.

Mr. Proudlove said he believes the commercial insurance market is quickly coming to terms with the rapid increase in volume and will be ready to write the exposures.

“There is a distinction that needs to be made between commercial UAV operators and hobby/recreation users,” Mr. Van Meter said. “The aviation insurance industry is very active in the commercial side of the UAV industry and currently insures commercial operators, manufacturers and educational institutions.”

But recreational users “have yet to develop a defined demand for insurance. As the number of drones sold increases, we expect the demand for hobby/recreation insurance products to increase as well,” he said.

Jim Schmidt, Boise, Idaho-based educator at PCS Inc., said the company's drone specialists and educators are working with the FAA to establish a drone education program that includes addressing insurance coverage to protect against loss, property rights, airspace intrusion and other potential lawsuits.

The company plans to release a self-paced “drone-ology” training app later this month that addresses safety and liability issues, Mr. Schmidt said.

“It could be something that an insurer could ask an operator to complete to be insured,” he said.

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