The Challenge of Drones
By Stuart Hope, as published in AvBuyer Magazine
A recent drone accident that caused injuries to a bystander increased pressure on the FAA to regulate this exploding technology and raised questions regarding how the insurance industry should address the risks presented by unmanned aerial vehicles.
Lyrics from the 1970s hit song by Stealer’s Wheel, “Stuck in the Middle With You”, aptly describes the position the FAA and the insurance industry find themselves in with regard to drones. Anyone with $100 or more can buy a drone with a camera and be flying it the next day thanks to the sophisticated technology incorporated within these units.
Your company might not own or operate a drone, but you should be concerned that unmanned aerial vehicles are allowed to have access to the airspace used by your company aircraft. In spite of their diminutive size, beware that these popular devices are another “aircraft” to see and avoid when operating at low altitudes.
There is no requirement for operators to have any flying experience or knowledge of rules governing the use of airspace before they go outside and launch their new toy. There will always be reckless operators in a given population of motorized vehicle owners, and drones are not exception. With the only barrier to entry being the price tag, you can and do have children of all ages flying these highly capable machines, possibly near airports where you might be operating.
To date, the FAA has only addressed commercial drone operators, remaining silent on non-commercial operations – classifying them as hobby/recreational activities and mostly out of their area of responsibility. A crash here or there would not get much of their attention, but evidence is building that this segment cannot be ignored for long considering the exponential growth of drones (over 1 million sold in the last two years) and the resulting accidents that have occurred.
Recent reports of drones crashing in sports stadiums (US Open), smuggling contraband into prisons, spying on neighbors, and – most menacing – creating near misses with aircraft, have increased public awareness of a potential problem. There have been over 650 close calls reported by pilots in 2015, compared to 238 for all of 2014.
Many insurance companies are experimenting with, and investing in, this emerging technology. They have created new policy forms for drones in an effort to “not get left behind.” One of the perils of an insurer being a pioneer in a disruptive technology is evaluating unknown or unanticipated losses. Many exclusions to all insurance policies were created after an insurance company paid a loss that was never anticipated nor intended to be covered.
One of the big hurdles to underwriting drones is the ‘pilot’. With conventional aircraft, there are FAA certificates and ratings that must be acquired by an individual in order to operate in US airspace. With a drone, however, literally anyone can buy one and start operating (non-commercially) with very few restrictions. An underwriter accustomed to rating a risk based on a pilot’s experience is lost when dealing with most drone ‘pilots’.
How do you determine which drone operator is a good risk without any reliable way to obtain qualified information on who is actually flying the vehicle? (Of course if we own one, our friends will also want to fly it.) Most insurers have resolved the pilot issue for now by not offering coverage on the physical drone, only liability insurance.
They do not restrict who the owner can allow to fly the drone under the theory since there is no physical damage coverage, the owner will be careful with whom he allows to fly it since it is his money at stake. In addition, insurers only offer low limits of liability for this class of business.
With insured values as low as $100, how can an insurer charge enough money to make drone insurance profitable and worthwhile? The early players are banking on handling much of the processing electronically. If a human is to be involved in the underwriting, the policy will need to reach a much higher premium level to make sense. Insurance companies have chosen to stay out of the single ship drone market (there’s no money in it) and instead will consider a possible fleet policy for a large operator or insuring the products liability of the drone manufacturer.
Work To Be Done
Much remains to be sorted out, and although I am normally against further government intervention to sort out our problems, with the “clowns to the left of me, jokers to the right” who are flying these units, hopefully the FAA will create some structure of control and enforcement of ALL drones without a tragic accident occurring to motivate them.
So how should you respond to the potential threat of drones? Consult your broker at your earliest convenience to be sure that your firm is covered for risks that a drone might present.
Terrorism Risk Insurance Act
A primer on the Terrorism Risk Insurance Program Re-authorization Act of 2015, and how it impacts business aviation.
With passage of the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIA), the Act is now extended to expire December 21, 2020. With the exception of a few changes, TRIA continues to provide a backstop for domestic insurers required to offer terrorism coverage on specified lines of commercial insurance. But what are its origins?
In the wake of 9/11, insurance companies who were already providing terrorism coverage to aircraft owners under the War Risk Perils endorsement immediately cancelled that coverage per the cancellation provisions of the endorsement. Other insurers who wrote commercial insurance for building developers, construction companies and related industries ceased providing terrorism coverage forthwith. Meanwhile the banks stopped offering loans where they could not get terrorism insurance to protect their investments.
Within a few weeks of 9/11, the War Risk [for aviation] market again offered the coverage but a greatly increased premiums. Most aircraft owners had to purchase the coverage due to the contractual insurance requirements contained in the loan agreements on their aircraft.
In late November 2002, Congress signed into law the Terrorism Risk Insurance Act of 2002 whichrequired domestic insurers to offer terrorism coverage to commercial clients. In return the Federal Government would provide a financial backstop (similar to reinsurance) for any terrorism losses incurred that exceeded a certain threshold.
This coverage must be offered to this specified class of commercial clients (which include aircraft owners) every year and the client has to accept or reject it.
As mentioned above, most aircraft owners already carried coverage for terrorism which is an included ‘peril’ under the War Risk Perils endorsement. With subsequent passage of the TRIA act, aircraft owners were met with a dilemma…
Since they already had terrorism coverage under the War Perils endorsement, it appeared to be an easy decision to decline the TRIA coverage every year since it would apparently amount to double coverage for the same peril, and therefore not be needed. However, there are some differences in coverage which complicates the decision.
Aggregate vs Occurrence
Terrorism coverage provided under the War Risk Perils endorsement provides the same liability limit carried on the aircraft policy, but is provided on an aggregate basis. This means regardless of the number of claims submitted during the policy term, once the policy limit has been paid cumulatively, the coverage is exhausted and the owner would have to re-load its limit by purchasing additional liability coverage limits.
Terrorism coverage provided under TRIA is written on an occurrence basis, meaning each separate occurrence during a policy term is provided the full policy limit. In addition, if the aircraft owner carriers a liability limit of $300M, the War Risk Perils carries a sub-limit of $50M for all bodily injury and property damage claims – except bodily injury to passengers. You can purchase excess third party war coverage to amend to an occurrence basis and delete the $50M sub-limit if desired.
The War Risk Perils coverage trigger is governed by the insurance policy contract language. If the claim is determined to be terrorism per the policy and there are no applicable exclusions, then the policy will respond. In order for coverage to be triggered under TRIA, the loss must be certified by the Secretary of Treasury – in consultation with the Attorney General and the Secretary of Homeland Security – to:
- Be an act of terrorism;
- Be a violent act or an act that is dangerous to human life, property, or infrastructure;
- Have resulted in damage with the US, to an air carrier, US-flagged vessel, or the premises of a US mission; and
- Have been committed by an individual(s) as part of an effort to coerce the civilian population of the US or to influence the policy or affect the conduct of the US Government by coercion.
The take-away is the trigger for TRIA is not controlled by contract language but rather by three individuals.
Terrorism coverage provided under the War Risk Perils endorsement has numerous cancellation options. TRIA coverage cannot be cancelled except by the US Government.
Should You Buy Both?
If you don’t already have it, buying the War Risk Perils coverage is a no-brainer. You pick up coverage for roughly 25 excluded war perils for a small premium. If the premium to also include TRIA coverage is not expensive, I would certainly recommend buying it for the advantages it offers (occurrence basis, coverage trigger, and cancellation provisions).
In any case, you should speak to your aviation insurance broker about your particular situation.