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Paul Zimmerman
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New FAA Rules on Commercial Drone Use: Insurance Considerations

New rules promulgated by the U.S. Federal Aviation Administration (FAA) went into effect on August 29, 2016, clarifying what is acceptable commercial usage of small unmanned aerial vehicles (UAVs), also known as drones.

As a result of the new safety rules, the FAA estimates that there will be 600,000 commercial drones operating in the United States by the end of the year. If these growth projections materialize, the estimate for the U.S. drone insurance market is $500 million by the end of 2020.

New FAA Regulations

Under the new FAA rules, commercial drones must weigh less than 55 pounds, fly up to a maximum of 400 feet in altitude, at a speed of no more than 100 miles per hour, and can only be operated during daytime and up to 30 minutes before sunrise and after sunset. Drone operators must also qualify for flying certificates and be at least 16 years old. The FAA considered, but did not adopt, mandatory insurance requirements. Instead, insurers are left to continue addressing the risks and coverage issues associated with the proliferation of drone use without the benefit of uniform standards.

Value vs. Risk of Drone Use

Drones have the potential to both solve problems and save costs across a number of industries.  They have already been put to use in aide of construction, surveying, agriculture, firefighting, search and rescue, conservation, academic research, film and video production and countless other fields. The new FAA rules all but ensure that the commercial uses of drones will grow at an exponential rate. This carries with it even more risk of drones or drone operators causing third party bodily injury, property damage or personal injury – including claims for nuisance, trespass, or invasion of privacy. As civilian and commercial use of drones rapidly increases and continues to evolve, the potential for misuse or incidents grows as well.

Drones raise two priority safety concerns: mid-air collisions and the loss of control. A collision can occur if the pilot cannot see and avoid manned aircraft in time. Most at risk are manned aircraft which fly below 500 feet, such as helicopters, agricultural planes, and aircraft landing or departing from airports. Loss of control can result from system failure or the operator flying the drone beyond signal range.  Drone operation also raises significant “personal injury” concerns, such as nuisance, trespass and invasion of privacy. To compound this problem, drones are subject to hackers “spoofing” the drone’s radio signal potentially leading not only to a crash, but also to theft of sensitive recorded data.

The Insurance Industry Plays “Catch-Up”

While many insurers are specifically writing policies for commercial drones, or issuing drone-specific exclusions, the insurance industry is largely playing “catch-up” with this quickly developing technology and the risks, insurance needs, and pricing concerns associated with it. The new FAA regulations lower the barriers for entry for commercial use of drones, but do not address the insurance issues arising out of such use. As a result, the insurance industry is coming up with its own solutions. While policies vary from carrier to carrier, most offer first-party property damage for the drone itself and certain third-party liability coverage.  Coverage under the standard Insurance Services Office (ISO) commercial general liability (CGL) policy, however, remains unsettled.

Among the exclusions in the standard form of CGL policy is one for bodily injury and property damage (but not personal injury, which is governed by a separate part of a CGL policy) “arising out of the ownership, maintenance, use or entrustment to others of any aircraft owned or operated by or rented or loaned to any insured.” While the FAA considers a drone to be a type of aircraft, this is not dispositive to the interpretation and intent of the aircraft exclusion of a CGL policy. Indeed, arguments over whether drones fall within the aircraft exclusion to bodily injury and property damage claims have already begun. Insurers have quickly responded by introducing endorsements that clearly disclaim coverage for drone risks under a CGL policy, and offering endorsements to provide specific coverage to those insureds who need and are willing to pay for it. In addition, ISO recently introduced a stand-alone drone insurance policy that adds features of a standard CGL policy to the structure of an aircraft insurance policy form.

Drones present both a positive and a negative for the insurance industry. On the one hand, the coverage issues under historical GCL policies associated with drone use are something that insurers will have to grapple with in courts over the next few years. On the other hand, the FAA’s lowering of the barriers to commercial drone use and resulting growth projections offer a tremendous opportunity for those insurers who quickly develop drone specific products and solutions to grab a share of the estimated $500 million U.S. drone insurance market. 

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.