According to a recent Business Insider article, consumer drone shipments reached 29 million in 2021, with the total size of the drone market reaching $ 100 billion. In addition to their recreational use, drones are now used by the agriculture, security, energy, law enforcement, construction and entertainment industries. You can buy a small, sophisticated drone with advanced photo and video capabilities for around $ 2,000, with prices increasing from there based on their specifications.
But how has this new technology altered the insurance landscape? This article offers the basics of drone insurance.
The regulatory environment for drones
In 2016, the FAA released its new rules regarding small drone operations under the terms 14 CFR Part 107 Small unmanned systems (commonly referred to as “Part 107”). Part 107 rules apply to drones that weigh less than 55 pounds and are used for non-recreational purposes. They describe how and where drones can be used and how to become a certified drone pilot.
These rules eased the cumbersome requirements and restrictions that had been in place until then, causing a wave of new pilots and commercial drone operations.
Even for purely recreational leaflets not subject to Part 107, there are several important ones rules and requirements they should be familiar, including passing a safety test.
The drone insurance market
When small drones became popular in the mid-2010s, there was a period of adjustment as insurance companies tried different approaches to providing insurance. There were questions about coverage for commercially operating drones in what would later become Part 107.
Could the coverage come from traditional Non-Life (Non-Life) insurers? Would it come from specialized aviation insurers? In the beginning, the answer was both. Some of the traditional non-life carriers have provided limited general liability (GL) coverage (and continue to do so). Although aviation insurers initially insured drones on conventional aircraft policy forms, most of them eventually developed drone policy modules. Written with such exposure in mind, these policies could respond to a wide variety of exposures unique to drone operators. For this reason, by 2022, almost all drone policies are provided by aviation insurers.
In response to what has become a very high volume of small and generally simple drone policies, several aviation insurers have developed online portals that allow brokers or insurers to enter exposure details and quickly receive a quote. Additionally, some direct purchase options are now available online and via smartphone apps. In some cases, they even offer hourly payment options.
This first step in the drone insurance purchase process is to gather the necessary underwriting information.
This information can be provided via an old-fashioned insurance application via an online portal. The questions focus on six main areas:
- Details about the drone, i.e. year, make, model, value and any information about the payload or ground support equipment
- How the drone will be used and how often it will be flown
- Operator credentials, including license status, drone pilot experience and training. This information is particularly important to Part 107 practitioners
- What limit of liability is required and coverage for physical damage for the drone will be required
- In addition to the insured drones, might third parties occasionally be hired to operate the drones on behalf of the company? Or maybe an employee’s occasional drone use in corporate affairs?
- History of losses / accidents
What are the exposures to consider?
The most significant exposure to the owner / operator of a drone, in terms of the potential size, complexity and unpredictability of complaints, is third party liability. This exposure could be a liability for personal injury or property damage resulting from ownership and use of the drone.
Current regulations help minimize drone operations in populated areas and near airports (with some updates released by the FAA last year). Regardless, the possibility of pilot error or equipment malfunction remains, however small. This coverage is not optional when purchasing a drone policy, and an aviation insurer is unlikely to issue a policy without this coverage in place. For drones, liability limits ranging from $ 1,000,000 to $ 10,000,000 are typical, with the $ 1,000,000 limit common among smaller drones.
Another main component of a drone policy is physical damage coverage for the drone itself, commonly referred to as “hull” coverage. Hull coverage is property insurance for the drone and can be extended to include coverage for payloads and ground support equipment.
Hull deductibles are common. Depending on the value of the equipment, adding hull coverage to the policy can have a significant impact on the overall premium.
The hull cover is optional. For small and cheap drones, it is not uncommon for policyholders to decline this coverage option.
Not to be confused with personal injury liability coverage, personal injury is a major coverage enhancement that can add protection for various risks such as false arrest, libel and slander. However, particularly for drone operations, personal injury also covers unintentional violations of privacy rights.
Owned versus non-owned
As a general rule, drones are insured by their owner. Let’s say an organization buys a drone to take some pictures and possibly record videos of a remote property. That organization will be legally responsible for those drone flights and will have to carry insurance coverage.
There are a couple of other less simple scenarios that can arise:
- An employee of the same organization owns a drone and offers to use the drone for some of the employer’s photo and video flights.
- The company hires a third-party drone service provider to go out with their drone and conduct some of these photo and video flights.
In these two scenarios, the onus rests on the employee and the drone service provider (i.e. drone owners) to insure their drones. So where did the organization that asked them to do this work in terms of liability protection come from? Ideally, the organization should ask the employee or drone service provider for an insurance certificate that provides proof of liability coverage and appoints the organization as an additional policyholder.
In these situations, there may be contracts that involve insurance, but usually not. The organization can then increase the coverage provided by the drone owner by purchasing non-owned coverage, either as a stand-alone policy or as an endorsement of the organization’s owned drone policy.
What affects the cost of drone coverage?
Numerous factors influence the cost of drone insurance, some of which are beyond the control of the policyholder.
Here are the three main drivers of drone insurance premiums:
- Market conditions: The aviation insurance market is notoriously cyclical. Like any other line of insurance, aviation insurance premiums rise and fall over time, and buyers of drone insurance will be impacted by these market conditions.
- Insurance amount: The number of drones to be insured, the liability limit and the amount of hull insurance (if any) will be the main factors of the premium. When physical damage coverage for drones, payloads and ground equipment is added, it can become a significant source of additional premium.
- Using the drone: Will the drone be used exclusively in a remote area or will it be close to people and things? Will the drone be used by licensed pilots with training and experience?
Drone insurance buyers should work closely with their broker to understand how risk will be perceived in the market and identify any steps that can be taken to maximize market interest.
It will be exciting to see the continued evolution of drone technology in the coming years, not to mention the growth of other emerging technologies such as UAM, AAM, electric and other alternative power sources.
As these innovations emerge and become a part of our lives, Woodruff Sawyer will continue to work to identify and reduce business risks through customized solutions, experience and advice.