Drone users may lack coverage in CGL policies

A recent California court decision highlights the fact that many policyholders who use drones may be unaware they do not have liability coverage for their use under their commercial general liability policies.

Experts are recommending they obtain the coverage either through a specific endorsement to their CGL policies or separate coverage from a specialty insurer.

Many insurers are denying coverage if policyholders do not have an aviation clause in their policies, said Patti Arthur, of counsel with Anderson & Hughes P.C. in Denver.

Drone operators “who only have a standard market commercial general liability policy should absolutely be worried that they’re going to have the exact same result if they end up with a loss,” said James Van Meter, regional head of aviation programs and product development-North America for Allianz Global Corporate & Specialty SE.

In a ruling earlier this month a federal district court in California held a photography firm did not have coverage in connection with an incident in which a wedding guest lost sight in her eye after being hit by a drone.

The U.S. District Court in Santa Ana, California, held in Philadelphia Indemnity Insurance Co. v. Hollycal Production Inc. et. al. that Tokio Marine Holdings Inc. unit Philadelphia Indemnity, which is based in Bala Cynwyd, Pennsylvania, was not obligated to provide coverage for the incident under an aviation exclusion in its policy.

The firm argued the drone did not fall within the exclusion because a “drone equipped with a camera is not capable of transporting person or cargo,” but is rather “unmanned and operated remotely.”

The insurer was not obligated to provide coverage because the drone is still an aircraft, according to the ruling.

“The ordinary definition of an aircraft does not require the carrying of passengers or cargo,” the court said. “Additionally, that a drone is unmanned and operated remotely does not make it less of an aircraft.”

Drones are dangerous because with propellers that turn at 500 to 700 revolutions per minute, they can inflict severe damage to fingers and facial features, said Bradley A. Meinhardt, Las Vegas-based area president and managing director of aviation at Arthur J. Gallagher & Co.

This ruling “will empower insurance companies to stand” on long-standing exclusions, said Michael S. Levine, a partner with Hunton Andrews Kurth LLP in Washington.

Chris Proudlove, senior vice president at aviation underwriter Global Aerospace Inc. in Parsippany, New Jersey, said, “I think a lot of companies are relying upon their existing (commercial general liability) policies to provide coverage for drone operations, and I think in every case it’s a question of buyer beware” because while there may be an endorsement providing coverage, “there may also be exclusionary language in the policy that could negate some of the coverage that the insured is relying upon.”

While policyholders may not believe a 5-pound object could be considered an aircraft, the Federal Aviation Administration has “deemed drones to be aircraft, so technically under the terms of the policy, the aircraft exclusion would apply,” he said.

“It’s important to see how the actual policy is phrased,” said Tom Karol, Washington-based general counsel-federal for the National Association of Mutual Insurance Companies.

Many policies were written before the proliferation of drones, Mr. Karol said.

“Our biggest issue has been” that the Federal Aviation Administration has exclusive jurisdiction over drone use, while state and local governments may have their own regulations, he said. “It’s not particularly clear at this point what is legal, what is illegal, and how that would be covered or not.”

 According to an FAA statement in July, while cities and municipalities cannot have their own rules or regulations governing the operation of aircraft, “Laws traditionally related to state and local police power — including land use, zoning, privacy, and law enforcement operations — generally are not subject to federal regulation. “

Many times, insurers will add a rider providing drone coverage at no additional cost depending on the company, its use of drones, the drones’ size and the number of drones involved, Mr. Karol said.

With the typical CGL policy excluding aircraft, there will be either no coverage because of an exclusion or coverage granted “because the definition of aviation was ambiguous,” said Robert N. Berg, a partner with Michelman & Robinson LLP in San Francisco.

He suggested policyholders discuss the issue with their brokers, then compare the price of an endorsement with specialized drone coverage. “It’s a business calculation,” he said.

Policyholders should obtain specialized aviation coverage, which they said is readily available at a reasonable price, according to many observers.

While ISO endorsements are available, some insurers “don’t want that on their CGL policy, Mr. Van Meter said.

There’s no uniform approach by carriers as to how they want to deal with” the ISO form, he said. “Some carriers are offering it, but there’s no single answer as to how the non-aviation market is dealing with it.”

Ms. Arthur said she also recommends policyholders obtain specialized aviation coverage because “the regulatory scheme isn’t set up for it yet. There’s a patchwork quilt of laws and regulations” and “there’s just no uniform system of laws for it.”

This makes specialized insurance desirable “because they understand the world of drones” while for “a general insurance company, it’s just something on the periphery for them right now,” said Ms. Arthur.

“I think the laws are eventually going to take shape,” but it’s unlikely to happen before there is a fatal accident, she added.

“We haven’t seen that big case yet, but it will eventually come,” said Ms. Arthur.

Scott Langevin, president and CEO of Lake Mary, Florida-based Avion Insurance Agency Inc., said, “They definitely need a separate, stand-alone policy.” While it is possible to get an endorsement to a CGL policy “it’s certainly not common, nor is it recommended.”