Leonard Sarmiento, Esq.
Vogrin & Frimet, LLP.
While the use of unmanned aircraft systems (commonly referred to as “drones”) is not an innovation of the twenty-first century, recent technological advancements have rendered UAS beneficial, if not indispensable, across a wide spectrum of industries. This increased demand for drones has in turn presented numerous issues for the insurance industry, as different sectors attempt to evolve with the technology while at the same time ensuring compliance with current regulations. One of the biggest concerns for insurers is that the current regulations from the Federal Aviation Administration have proven to be obsolete in the commercial sphere.
As the demand for drone use has increased, so have the risks involved with their use. Recognizing this demand, numerous carriers unwilling to wait for federal regulations have already been providing coverage for thousands of drones being flown without government approval. However, the eagerness of the industry to provide coverage in this under-regulated field may present issues because of the uncertainty of the law.
In light of the exponential surge in the use of drones for commercial purposes, the FAA has found it necessary to streamline their exemption process to meet the demand of applications nationwide. Recently, the FAA issued draft rules that specifically address commercial operations of small UAS. If adopted by the FAA, the rules would loosen restrictions considerably for companies seeking to operate drones for commercial purposes and would provide a more concrete framework for insurers seeking to provide coverage for their loss or liability.
CURRENT FAA REGULATIONS
Presently, any commercial use of drones must comply with Section 333 of the FAA Modernization and Reform Act of 2012 (FMRA). The FMRA was enacted by Congress to mandate the safe and expedient integration of UAS into the National Airspace System (NAS). Under Section 333, the Secretary of Transportation is vested with the authority to determine whether a certificate of waiver, certificate of authorization or airworthiness certificate is required in order to operate a drone for commercial purposes in the NAS. Further the Secretary of Transportation determines if an unmanned aircraft system, as a result of its size, weight, speed, operational capability, proximity to airports and populated areas, and operation within visual line of sight does not create a hazard in the NAS or poses a threat to national security.
In order to gain FAA authorization to commercially operate a drone, a grant of exemption in accordance with Section 333 and a civil Certificate of Waiver or Authorization (COA) must be obtained. Exemptions are granted on a case-by-case basis and require strict adherence to the specified restrictions outlined in each decision. Because Section 333 grants limited relief from certain certifications or authorizations, drone operators must comply with all other applicable regulations concerning the operation of aircraft unless otherwise exempted by the FAA. As such, companies seeking to obtain coverage for drones should be required to obtain Section 333 exemptions.
- Petition for Exemption
In order to receive an exemption from the FAA, the company must complete a petition in compliance with the requirements of 14 CFR § 11.81. The following information will be considered by the Secretary of Transportation in making the evaluation of whether to grant the exemption:
- What type of drone is it?
- How big is the drone?
- How fast it can fly?
- What can it do and not do (flight capability-wise)?
- How close would it be flying to airports?
- How close would it be flying to populated areas?
- Will the drone operator be able to see the aircraft at all times?
- Will it create a hazard to the NAS?
- Will it create a hazard to the public?
- Will it pose a threat to national security?
- Grant of Exemption
In a typical Grant of Exemption, the FAA provides relief from obtaining an airworthiness certificate and noise certificate and from testing the subject aircraft. However, Section 333 does not provide flexibility with respect to requiring an operator from holding an airman certificate under 49 U.S.C. § 44711. Therefore, the operator of the UAS must possess the appropriate airman certificate as outlined in 14 CFR part 61 and the appropriate medical certificate as outlined in 14 CFR part 67.
While the Section 333 exemption process provides an avenue for corporations to operate drones for commercial purposes, it still presents significant barriers, as it requires commercial drone operators to possess pilot licenses to fly drones. Moreover, petitioners are instructed to allow at least 120 days for processing and review of any exemption requests.
Recognizing the onerous nature of the exemption process and the increasing demand in the use of drones, the FAA recently streamlined the exemption process by allowing the agency to issue a summary grant when it finds it has already granted a previous exemption similar to the new request. While the FAA still reviews each Section 333 petition individually, they do not need to repeat the analysis preformed for the original exemption. As of June 9, 2015, 584 petitions have been granted under the Section 333 exemption process. The majority of the petitions grant aerial acquisition, photography, filming and research. The industries range from film studios to construction companies. Four petitions have been granted for construction specifically. Accordingly, insureds in the construction industry can now obtain grants quicker than before, as the analysis for the previous construction petitions has already been conducted. This in turn can provide an additional basis for insurers to require insureds to obtain exemptions in order to purchase coverage for drones.
Additionally, as of March 23, 2015, the FAA began to automatically grant “blanket” COAs for flights at or below 200 feet to any UAS operator with a Section 333 exemption, provided the aircraft weighs less than 55 pounds, operations are conducted during the day and are within the visual line of sight of pilots, and remain within a specified distance from airports or heliports. Note that the COA application process is separate from the petition for exemption under Section 333. The COA process makes FAA Air Traffic Control facilities aware of proposed UAS operations. Nonetheless, both COA applications and petitions for exemptions should be submitted under the same name company name.
While the new amendments to the exemption process still require companies to submit petitions, it represents a more efficient approach until the FAA officially adopts the proposed rules for small UAS. The fact that the FAA has quadrupled the grants of exemption in two months (from 137 on 4/9/15 to 548 on 6/9/15) is a clear indication of the efficiency of the new streamlining process.
III. Proposed Rules for Small UAS
On February 23, 2015, the FAA published the proposed regulations for small UAS on the Federal Register. The public was provided the opportunity to comment on the proposed rulemaking for 60 days from the date of publication, which was April 24, 2015. Now that public comment has concluded, the draft rules will undergo further revision before becoming final – a process that is expected to take at least a year.
The proposed rules would apply to small UAS (aircrafts weighing under 55 pounds) operated for non-recreational purposes. The rules would limit flights to daytime and visual-line-of-sight operations. Additionally, they would limit flying speed to 100 miles per hour (160 kph) and the altitude to 500 feet (152 meters) above ground level.
A significant distinguishing factor between the current rules and the proposed rules is that the drone operators would not need to attend flight-training school or undergo the medical tests or flight hours required of manned aircraft pilots. Instead, commercial UAS operators would need to be at least 17 years old, pass an aeronautical knowledge test and be vetted by the Transportation Security Administration.
IMPACT ON THE INSURANCE INDUSTRY
- Present Impact
Notwithstanding the recent streamlining approach adopted by the FAA, numerous companies have proceeded to operate drones without government approval. It is estimated that thousands of drones are operated without governmental approval by real estate companies, film studios and other industries. These entities are purchasing coverage from insurers that have drafted their own safety rules to fill the void left by the FAA. According to the owner and president of Transport Risk Management Inc., they have been insuring drones for over four years. When asked about the proposed FAA regulations, TRM responded that while they welcome the rules, the standards set by TRM in their insurance policies often exceed what the government has proposed.
It is important to note that the current FAA rules do not prohibit the purchasing of insurance for commercial drones. However, obtaining insurance does not legitimize or legalize the operation of drones if an exemption has not been obtained from the FAA. In fact, in November 2014, the National Transportation Safety Board (NTSB) ruled that drones constitute “aircrafts” as defined under federal law and therefore subject to the existing aviation laws.  Accordingly, drones cannot be operated without a formal waiver.
However, critics argue that the even if drones are considered “aircrafts,” the present FAA regulations do not ban drone operations for commercial purposes because the November 2014 decision by the NTSB was limited to Federal Aviation Regulation 91.13(a), which states that “no person may operate an aircraft in a careless or reckless manner so as to endanger the life or property of another.” Accordingly, so long as a drone is operated in a careful and safe manner, they are not banned from operating the drone for commercial purposes.
Nonetheless, the uncertainty of the legality of commercial drone operations has not reduced the necessity of insurance coverage for property loss or damage and liability. While it is important to remain competitive in the market, it is also important to recognize the risks involved if insureds exceed the scope of legal drone use. As such, insurers should consider including provisions in their policies that require insureds to comply with current FAA regulations, such as obtaining Section 333 exemptions. In light of the recent amendments to the exemption process, companies such as those in the construction industry can obtain exemptions much quicker and without significant restrictions. This in turn will ensure safety and compliance with FAA regulations. Of course, once the FAA officially adopts the proposed rules, compliance with the FAA regulations should become compulsory in every policy.
- What Kind of Risks Are Presented by Drone Use?
- Personal Injury and Property Damage
As the use of drones has increased exponentially in the past couple of years so have the potential risks they present. It is estimated that as many as 7,500 small commercial drones could be in operation by 2018. More common risks involve the liability for property damage and bodily injury to third parties. A recent example of the potential liability posed by drones to third parties occurred in Australia after a triathlon sustained head injuries from a drone collision. While the injuries were not significant, it raised an important question – who is responsible when a commercial drone injures a third party?
In the case of the Australian triathlon, the Civil Aviation Safety Authority (an Australian agency akin to the FAA in the United States) launched an investigation to determine who was at fault. However, unlike in the United States, where commercial drone use falls into a gray area, Australia requires all operators of commercial drones to be certified. Because the drone operator and his business were not officially certified by the Australian government for commercial use, the drone operator was fined $1,700.
At another event that same month, a drone collided into several spectators at Virginia Motorsports Park during the Great Bull Run. While there were three to four minor injuries, there is no record of any lawsuits being filed, which could indicate an out-of-court settlement was reached between the parties.
Most recently, a drone crashed into the face of a customer at a TGI Fridays located in Brooklyn during one of their holiday promotions called “Mobile Mistletoe,” whereby it carried mistletoe above diners prompting them to kiss. The drone clipped the end of her nose and chin.
Other examples of drone crashes that did not involve personal injuries include: a drone crashing into the Grand Prismatic Spring at Yellowstone National Park, a drone nearly crashing into an Airbus A320 as it was taking off from London’s Heathrow airport, a drone crashing in front of German Chancellor Angela Merkel during a Christian Democratic Party campaign, a drone crashing on the White House lawn, and a drone crashing on the roof of the AT&T Stadium in Arlington, Texas.
- Invasion of Privacy
Apart from personal injury and property damage, invasion of privacy has become an increasingly important factor to consider. Liability coverage typically includes protection for personal injury and therefore it also covers invasion of privacy. As such, insurers should consider the implications involved with the use of drones and privacy concerns.
Police blotters across the nation have already received numerous reports of small drones hovering outside the window of private homes. For example, on June 22, 2014, a Seattle woman witnessed an unusual apparatus hovering outside the window of her 26th floor apartment as she dressed. She immediately called the concierge in her building, who went outside and noticed two men operating a drone. After police were notified, it was later revealed that the men were taking a photo of the Seattle skyline for a client. The owner of the company, Joe Vaughn, apologized and assured that he was not in possession of any pictures of the Seattle woman.
While the Seattle case ended up being a “false alarm,” a woman in San Jose, California did not share the same fate. It appears that sometime in September 2014, a woman by the name of Elsvette Buenaventura contacted the police after she a noticed a drone hovering outside her 10th-story window. In the days that followed, it returned at least three more times. Ms. Buenaventura was unable to discern the purpose of the drone but she indicated that she felt her privacy had been violated.
Stories such as the San Jose case have prompted at least seven states to outlaw the use of drones to violate privacy. Further, every state already criminalizes voyeurism in some form or another. While intentional conduct is usually excluded in CGL and homeowner policies, unintentional invasions of privacy may place carriers “on the hook.”
- Coverage Issues
In the context of homeowner policies, there is a question as to whether the aircraft exclusion can bar coverage for liability resulting from drone use. A standard ISO homeowner’s policy defines an aircraft as “any contrivance used or designed for flight except model or hobby aircraft not used or designed to carry people or cargo.” While the definition may suggest that coverage for third-party bodily injury or property damage would not be eliminated by the aircraft exclusion, a recent Swiss Re report explains that the language of the policy may not be so clear. According to the report, a drone designed to carry only a video camera may qualify as “designed to carry cargo” and therefore fall within the aircraft exclusion. As such, this could be a source of future coverage disputes under homeowner policies.
With respect to liability for invasion of privacy, on the other hand, the lack of coverage under a homeowner’s policy may be clearer. ISO homeowner’s policies do not provide coverage for personal and advertising injury and as such, liability for drone use that does not arise from bodily injury or property damage would not be covered. Accordingly, there would not be coverage for drone liability arising from trespassing, stalking, harassment and other criminal laws that do not implicate bodily injury or property damage.
Commercial general liability and umbrella policies, on the other hand, typically provide coverage for personal and advertising injury. Personal and advertising injury coverage is generally defined as:
- False arrest, detention or imprisonment;
- Malicious prosecution;
- The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;
- Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;
- Oral or written publication, in any manner, of material that violates a person’s right of privacy;
- The use of another’s advertising idea in your “advertisement”; or
- Infringing upon another’s copyright, trade dress or slogan in your “advertisement”.
This presents a myriad of situations where CGL coverage could be triggered. For example, under “false arrest, detention or imprisonment,” a person could use a drone in a “menacing” manner that may, at least temporarily, prevent someone from leaving an enclosed area. As alluded to previously, there is clearly a risk that a drone could invade the “right to private occupancy” or violate a person’s “right to privacy.” With respect to the rest of the definitions, they are all concerned with libel, slander, publication, copyright, advertising, etc. The scenarios that could fall within one of these definitions are endless. As such, a way to minimize exposure and assure safety in the operation of drones is require insureds to follow the current FAA regulations. Further, CGL and umbrella policies can seek to exclude coverage for personal and advertising injury if arising out of the use of UAS.
In light of the growing liability exposures of commercial drones, ISO has begun to offer options for new and versatile policy language. The new endorsements would clarify coverage for commercial drone use and provide insurers with maximum flexibility when writing risks that use drones in their operations. According to ISO, the options that modify coverage under CGL and commercial liability umbrella/excess programs were developed and filed on a multistate basis for a June 2015 implementation.
III. Use of Drones by the Industry
While the interest in drones has been primarily focused on coverage, the use of drones by the insurance industry itself has been increasingly gaining attention. Most recently, on May 5, 2015, Travelers Companies, Inc. received a grant of exemption to use drones for both adjusting claims and assessing risks. The exemption will provide Travelers with the opportunity to integrate drone technology into its catastrophe response strategy, wherein it will be able to inspect, photograph and assess the nature and extent of damage to private property following a natural disaster. Drones will be able to reach areas on property that were inaccessible and/or dangerous to inspect on foot.
Additionally, timing will be an essential factor, as insurers will be able to assess claims at a much more rapid pace. Drones will be able to assist in speeding up the time of the investigation so that proper claims could be paid in a more efficient and timely manner. They could also avoid paying for claims that could have been excluded had the response been quicker. A primary example of this was in the aftermath of Super Storm Sandy. Shortly after the storm hit, a Nor’easter was expected to make landfall in the metro north area. Because numerous properties remained to be inspected, state regulators issued a directive to insurance companies to accept an inventory and photographs as proof of coverage. This proved to be costly for various carriers, as they were precluded from inspecting and verifying the damage to properties affected by Super Storm Sandy.
Further, drones will be used to perform risk assessment, risk control and underwriting evaluations of elevated portions of structures including roofs and high-rises under construction.
In additional to Travelers, Insurers AIG and USAA recently received approvals from the FAA to test drones for their businesses. Previously, USAA was only allowed to test flights at FAA-approved sites. With the approval, USAA can now fly drones during the day within the line-of-sight of trained pilots and air crew. Unlike an exemption, these approvals are limited to testing drones and not for actual use in assessing claims. However, AIG and USAA, along with numerous other insurance carriers, have already filed petitions. In light of the new streamlining approach and the fact Travelers has already obtained an exemption to use drones in their business, theses carriers are expected to receive a grant of exemption in the near future.
It is clear that the advancement in drone technology has created unprecedented advantages across a wide spectrum of industries. However, the risks they pose have proven to be equally unprecedented. While regulators in the United States have attempted to provide a framework for the use of drones in a safe manner, the rules continue to lag behind other developed nations. In light of the onerous nature of the exemption process, numerous companies have purchased insurance without obtaining an exemption. To fill this void, insurers have developed safety guidelines of their own in order to minimize their exposure. Nonetheless, the fact that the FAA has streamlined the exemption process is a clear indicator that they recognize the flaws in the system and are willing to work with companies to expand the use of drones for commercial purposes in a safe manner.
As incidents involving drones continue to unfold, carriers will become better equipped to anticipate risks and minimize exposure. Like other technological advancements in the past, the insurance industry has been at the forefront of developing lasting standards. Additionally, while still in its infancy, drone use will revolutionize every aspect of the industry, including risk assessment and claim adjusting.
 “U.S. Issues Draft Rules on Commercial Use of Drones; Insurers Welcome”, by Alwyn Scott for Insurance Journal, February 16, 2015 available at: http://www.insurancejournal.com/news/national/2015/02/16/357536.htm
 “Insurance Market Evolves for Drone Pilots Unwilling to Wait on Federal Regulations”, for Insurance Journal, March 6, 2015 available at: http://www.insurancejournal.com/news/national/2015/03/06/359737.htm
 “Current U.S. Drone Law”, by Peter Sachs, Esq. for Drone Law Journal, March 26, 2015 available at: http://dronelawjournal.com
 “When Drones Fall From the Sky”, by Craig Whitlock for The Washington Post, June 22, 2014 available at: http://www.washingtonpost.com/sf/investigative/2014/06/22/crashes-mount-as-military-flies-more-drones-in-u-s/
 “Triathlete Injured as Drone Filming Race Falls to Ground”, by Sarah Taillier for ABC News, April 7, 2014 available at: http://www.abc.net.au/news/2014-04-07/triathlete-injured-as-drone-filming-race-drops-to-ground/5371658
 “What Happens When a Drone Crashes?” by Neal Ungerleider for Fast Company & Inc., April 9, 2014 available at: http://www.fastcompany.com/3028781/what-happens-when-a-drone-crashes
 “Woman Nearly Has Her Face Destroyed by a TGI Friday’s Mistletoe Drone”, by Caroline Moss for Business Insider, December 8, 2014 available at http://www.businessinsider.com/tgi-fridays-mistletoe-drone-accident-2014-12
 “12 Drone Disasters that Show Why the FAA Hates Drones”, by Conner Forrest for Tech Republic, March 20, 2015 available at: http://www.techrepublic.com/article/12-drone-disasters-that-show-why-the-faa-hates-drones/
 “Should We Freak Out About Drones Looking in Our Windows?” by Christina Sterbenz for Business Insider, September 24, 2014 available at: http://www.businessinsider.com/privacy-issues-with-commercial-drones-2014-9
 “Creeps Embrace a New Tool: Peeping Drones”, by Michael B. Marois for Bloomberg Business, May 5, 2015 available at: http://www.bloomberg.com/news/articles/2015-05-05/creeps-embrace-a-new-tool-peeping-drones
 “Self-Flying Drones May Increase Risks”, for Carrier Management, April 5, 2015 available at: http://www.carriermanagement.com/news/2015/04/05/137671.htm
 “Cuomo: Clean Up Debris in Advance of Nor’easter”, for CBS New York, November 5, 2012 available at: http://newyork.cbslocal.com/2012/11/05/cuomo-clean-up-debris-in-advance-of-noreaster/