Drones: An Emerging Market Quickly Taking Flight
So what is all the buzz about? Lately it is about unmanned aerial vehicles (UAV) or drones, which are emerging as a valuable component in a vast array of American businesses and markets. While UAVs are generally associated with their military uses, the smaller and non-lethal variety are just now trickling into mainstream consumption channels revealing their many commercial applications and benefits. As these applications give rise to substantial opportunities for commercial use in the years ahead, the emerging insurance markets will need to adapt to the ever-morphing technology.
Growth of Drones in Commercial Settings
What are the opportunities for the commercial use of UAVs? Today, numerous industries are utilizing UAVs to expand capabilities and minimize costs. The increasing commercial utilization of UAVs in the agriculture, real estate, cinema, energy construction, and insurance industries underlie conservative estimates that the commercial UAV market will have an $80 billion economic impact (globally) within the next 10 years. Commercial UAVs are now routine in filming and photography, and are also becoming essential tools in transportation infrastructure maintenance, energy facility inspections, border control, emergency response, wildlife preservation, and insurance claims adjusting and risk analysis.
The widespread use of this technology in such varied ways is a product of both pragmatism and economy. UAVs offer low-altitude and detailed views that were previously reserved to the feather winged creatures. Unlike more traditional forms of low-altitude aviation, UAVs offer new analytics at a fraction of the cost of a gas-guzzling plane or helicopter and with little risk to the pilot-in-charge.
These present benefits aside, aerial inspection may only scratch the surface on the commercial applications of this technology. Although the current regulatory environment only allows commercial UAV use within the visual line-of-sight of the operator, many predict that widespread UAV delivery services may be on the horizon as UAVs become safer and more autonomous. Many in the instant delivery space are betting big on this futuristic vision becoming reality.
The commercial benefits aside, UAVs also hold enormous promise for impacting our lives in such areas as hunger and health. UAVs will undoubtedly impact hunger issues by providing domestic agriculture unparalleled and cost-effective analytics into the factors affecting crop yield with many experts projecting significant yield upswings as a result. Also consider the possibility of a UAV delivering a defibrillator in a congested urban or remote rural setting to a cardiac arrest event before professional first responders are able to arrive. For the individual in peril, it may prove to be the most important delivery they ever receive and one that is only possible with the assistance of a UAV.
Risk Exposures in Commercial Operations
As many benefits and applications as there may be for this technology, there are also various risks attendant with UAV operations – both obvious as well as obscure.
General property damage and liability are certainly primary concerns for underwriters. As with general aviation, UAV operations raise the potential for first party loss of property, including damage to the aircraft, loss of payload, and harm to other critical system equipment (camera, LiDar equipment, etc.). Given the velocity at which UAVs operate commercially and the fact that they routinely fly at high altitudes, there is also significant exposure associated with property damage to sites owned by the owner, operator, or lessor of the UAV equipment in the event of power loss or a malfunction. Of course, there is also the risks associated with bodily injury and property damage to persons not involved in the UAV commercial operation.
Any number of scenarios are possible as UAVs are complex pieces of hardware requiring routine maintenance and seasoned handling for more complex commercial operations. Operator error- whether in flight preparation or mission execution – can cause injuries or property damage that likely will result in negligence, recklessness, or even strict liability claims.
Product liability claims based on negligence, strict liability and breach of warranty of any number of manufacturing or design defects are also realistic exposures. UAV and parts manufacturers will face risk exposure in the event of a cataclysmic hardware malfunction.
Since UAVs rely heavily on software for the multitude of passive autonomous functions, programmers face exposure as well in the event operational or safety features fail to perform as intended.
Underwriters and market participants must also be mindful of exposure resulting from privacy violations, trespass and data breaches and the use of data retrieved. While generally small in size, UAVs have substantial capabilities to collect images and data from the most intimate of vantages. This will undoubtedly spawn a variety of privacy related claims, such as (for example only) intrusion upon seclusion or common law or statutory trespass.
In the absence of federal preemption on these UAV specific privacy issues, many states and localities have already taken steps to regulate and criminalize various UAV activities in light of the privacy concerns of their citizens. Indeed, in some states and localities, laws already on the books: (i) prohibit UAVs from electronically recording information about “critical infrastructure”, (ii) criminalize the use of UAVs for “peeping tom” activities, and (iii) create civil liability for capturing an image or other information of a person or privately owned property without consent.
Additionally, given the fact that sensitive business information may be transmitted from the UAV to the operator or cloud, cyber security risks are of material concern. While today there can be no certainty or agreement on the full breadth of risks associated with commercial UAV use, what is certain is that there will be a panoply of considerations that underwriters will face as this technology proliferates.
The Emerging Insurance Market
Although insurance is not mandated by current or proposed Federal Aviation Administration (FAA) regulations, the reality is that commercial operations will be supported by insurance protection purchased by operators, owners, lessors and manufacturers. As the insurance market develops, it becomes more obvious that there are unique challenges and considerations involved in the commercial operation of this technology such as the intended uses, the experience of operators, and the limited data relative to the operational risks. Underwriters can expect a robust market to evolve that they will likely satisfy with aviation and hull coverages, commercial general liability (CGL), or other specifically tailored offerings developed based on the specific risks of the account.
Aviation policy forms are now being adapted to meet the demands of the drone market and stand-alone UAV policies are becoming more common. Coverage is available for first party damages, including physical damage to the UAV, payload, and ground equipment, and third party liability exposures for property damage and bodily injury relating to losses arising out of operation of a scheduled UAV. Some policies may address certain circumstances, such as hijacking risks, through endorsements and additional premium requirements, and sub-limited for separate damage categories (such as cargo).
As for CGLs (which generally include an “aircraft” exclusion in Coverage A), the Insurance Services Office (ISO) recently developed optional Unmanned Aircraft Endorsements for use in CGL and other general liability policies. Various optional endorsements can be added to the CGL to address exclusions of UAV operations (e.g., from Part A or Part B, or both), or to clarify the limited coverage under CGL policies in relation to scheduled projects and UAVs.
Important coverages to consider beyond property damage and bodily injury include, among other things, personal and advertising injury (e.g., wrongful intrusion upon right of privacy by owner or landlord, also e.g., oral or written publication of material that violates a person’s right of privacy), in light of the unique capabilities of UAVs.
Looking Ahead
Even considering these recent safety developments, tomorrow’s risks will undoubtedly look vastly different than today’s. This is especially true when considering the possibility of a complex aerial highway of UAVs traveling long distances, autonomously, and beyond the visual line of sight of any operator. Such a highway would be utilized by varied UAV models offering a host of different commercial services to those above and below its aerial roadways.
While some might perceive this as overly “Jetsonian,” many in the UAV industry would strongly disagree. Indeed, while this future is nowhere near regulatory approval, large technology companies are investing significantly in preparing the hardware and logistics to take advantage of a commercial UAV highway. As this future becomes a reality – and in the opinions of these authors this is more eventuality than possibility – underwriters will continue to analyze the risks and will partner with clients to support the commercial growth of an exciting and versatile technology to capitalize on the vast opportunities.
Matthew Grosack in an associate in the Miami office of DLA Piper. He focuses his practice on complex commercial litigation and arbitration matters. Carl H. Poedtke III is a partner in the Chicago office of DLA Piper. He has a broad range of litigation experience in domestic and international insurance, reinsurance and insurer receivership matters, including state and federal court litigation, arbitration and mediation of disputes.