Focus On: Drones and the
Commercial Sector
Businesses have set their sights on new applications
for drones (unmanned aircraft) that could speed product
delivery, monitor crops or capture claims data among
dozens of other uses, but technical, legal, regulatory
and risk management issues could present challenges.
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Approximately 30,000 commercial
and civil drones could be circling
the skies in America by 2020,
according to the Federal Aviation
Administration (FAA). The
Association for Unmanned Vehicle
Systems International (AUVSI)
estimates that between 2015 and
2025, the drone industry will create
100,000 jobs and contribute US$
82bn to the US economy.
Technically referred to as unmanned
aerial vehicles (UAVs) or unmanned
aircraft systems (UASs), drones can
be classified by:
Navigational autonomy that includes:
– Piloted devices under human
control via a sophisticated ground
control system
– Unpiloted devices with autonomous
capabilities using advanced
software systems and Global
Positioning System (GPS)
navigation systems
Type of operation, which the
FAA describes as:
– Public uses performed by
governmental agencies
– Civil uses of non-governmental
entities which must provide detailed
information on design and use
of the device in order to obtain
a special airworthiness certificate
– Recreational uses that are limited
to 400 feet above ground level and
barred from certain populated areas
Physical characteristics include:
– Micro/small multi-rotor drones
– Large multi-rotor and
helicopter drones
– Small fixed wing drones
– Large fixed wing drones
Emerging uses
The list of potential uses for drones
in the commercial sector seems to
encompass an ever-growing list
of possibilities.
According to AUVSI, precision
agriculture is expected to account for
80% of the commercial drone market.
The association estimates that in the
first three years after the FAA allows
commercial use, agricultural drones
will be a US$ 3bn market. Over the
next decade, this market could be 10
times as large.
The advantages of precision
agriculture stem from efficiencies
that drones can deliver in three areas:
– Distribution of fertilizers
and pesticides
– Irrigation levels
– Crop health
With drone capabilities, farmers
may be able to reduce the amount
of pesticides and fertilizers sprayed
over fields and therefore reduce the
cost and environmental impact of
these substances. Drones would
also be a more cost effective
alternative for crop imaging than
manned aircraft.
but have run afoul of the FAA’s ban
on commercial usage of drones.
Drones may play a role in casualty
underwriting but they might be
even more useful in property
underwriting where they could
provide high resolution imagery
of the exterior condition of a property.
Drones equipped with infrared
cameras also could detect leaks and
other sources of water damage or
provide a bird’s-eye view of a
building’s heat signature.
Real estate
Real estate agents are using drones
to show homes as well as to provide
an overview of the neighborhood and
routes to local schools among other
amenities. Land and farm brokers
also see drones as a relatively
inexpensive way to show potential
buyers their properties.
On the claims side, drones could
capture aerial surveys of a
neighborhood after a catastrophe,
which could be used by claims
professionals to evaluate ground
conditions and develop cost efficient
response plans. On a smaller scale,
a drone could be deployed to a traffic
accident to capture photos of the
automobiles and road debris.
Drones could also be used for
surveillance to detect fraud and
validate claims, though some privacy
issues might have to be resolved.
Drones may also be the answer to
two critical challenges journalism
faces today: a growing appetite for
original, cost-effectively produced
video and the difficulty of obtaining
footage or even access to obstructed
or dangerous areas. Equipped with
high definition 3-D video cameras
and global positioning devices, drones
could go into disaster-crippled or
battle-ridden areas that would be
dangerous to photojournalists.
Some journalists have experimented
with small camera-equipped drones
Drones have also appealed to
videographers who have used them
to film weddings in the US. Although
not sanctioned by the FAA, drone
aerial photography is currently
offered by many photographers.
Converted military drones have
already been used by the National
Aeronautics and Space
Administration (NASA) to track
hurricanes and provide data to better
understand how storms intensify.
Drones’ ability to collect evolving
meteorological data could improve
weather forecasts and lengthen
advance storm-warning times.
Drones could be used to track the
progress of a large project, identify
potential hazards or inspect hard-toreach places.
The drone industry has identified oil
and gas companies as a key sector
for its products, which are highly
suited to survey pipelines, monitor
wells, inspect fuel emission and
detect offshore leaks. The FAA has
granted permission to several oil
and gas companies to utilize drones.
Environmental monitoring
Agile ‘eco-drones’ or ‘conservation
drones’ that produce quality imaging
of difficult-to-access areas may be
used as a mapping tool for
environmental monitoring.
At this point, retailers’ plans for using
drones for delivery is logistically
hampered by a lack of advanced
systems that are needed to prevent
midair collisions or flight failure.
The future of drones however
is not without its challenges.
Technical limitations
Drone communication for
command, control and transmission
of data requires a portion of the
electromagnetic spectrum. This
spectrum is already overtaxed by
other forms of communications,
which could be interrupted by the
additional demand of drone signals.
Munich Re America 2015
Drones Survey
Which of the following do you
think poses the greatest concern
with the adoption of drones for
commercial use?
69% Invasion of privacy
12% Inadequate insurance
Personal injury
Property damage
The study was conducted on–site at the
Risk and Insurance Management Society
(RIMS) Conference in New Orleans, LA
on April 27, 2015. It is intended to
represent the sentiments of 100 risk
manager attendees who participated
through in–person interviews, primarily
from large and mid–size companies.
Integration into the US National
Airspace System (NAS)
The influx of drones into today’s
crowded air space is expected to
place demands on the current air
traffic control system, which is
already facing challenges in
integrating an anticipated increase
in traditional manned flights over
the next 20 years.
In response to the growing
demands of manned aircraft, the
FAA launched a project to replace
the country’s aging radar-and-radio
communication traffic control
system with a satellite-based digital
communications system, known
as NextGen. Plans for the new
system did not include provisions
for integrating drones. Making the
needed changes to incorporate
drones into NextGen greatly
complicates the project, which
is over budget and years overdue.
Training is comprised of various
programs offered by several
colleges and universities, for-profit
organizations or drone makers that
provide original equipment
manufacturer (OEM) training. Many
drone training programs are based
on Department of Defense (DOD)
training, international training or
observed best practices that do not
meet any US accreditation or FAA
standards which are not expected
to be finalized until 2017.
Some believe that unlike traditional
fixed-in-place surveillance systems,
drones with their greatly expanded
range of vision can compromise the
privacy of individuals who may find
it difficult to move out of the line of
sight of a device. But others reason
that drones are no more intrusive
than other traditional aircraft.
Responding to this debate, the
White House announced plans to
issue an executive order aimed at
developing privacy guidelines for
commercial drones.
Legal environment
Insurance implications
In 2012, Congress passed the FAA
Modernization and Reform Act,
which requires the FAA to develop
a plan to safely integrate drones into
domestic airspace. But according
to a 2014 audit report by the US
Department of Transportation,
unresolved technological, regulatory
and privacy issues have caused the
FAA to fall “significantly behind
schedule” in meeting the deadline.
Key elements of underwriting drones
will include consideration of:
– First party exposures to equipment,
hull and payload
– Third party exposures including
bodily injury and property
damage, personal injury
arising from invasion of privacy,
professional liability and
director and officers liability
– Other exposures such as
cyber risks, terrorism and
workers’ compensation
According to the AUVSI, as of May
2015, fifteen states have passed bills
regarding the use of drones. Eleven
states have bills pending.
Munich Re America 2015
Drones Survey
When do you think drone use
will become common practice for
businesses (>60% of US companies
using drones)?
48% 5–10 years
37% Less than 5 years
10% More than 10 years
The drone insurance market
is still evolving. Both aviation
and property/casualty carriers have
shown interest in providing coverage.
Aviation insurers are primarily
focused on larger drone users who
provide drone services to other
entities. Property/casualty insurers
are seeking ways to provide coverage
for traditional industry segments
that own and operate drones as an
incidental part of their operations.
Insurance Services Office (ISO)
has released a series of optional
endorsements to address some
liability issues.
The lack of credible loss information
is also a critical issue for insurers.
The study was conducted on–site at the
Risk and Insurance Management Society
(RIMS) Conference in New Orleans, LA
on April 27, 2015. It is intended to
represent the sentiments of 100 risk
manager attendees who participated
through in–person interviews, primarily
from large and mid–size companies.
Risk management techniques to
mitigate the possibility of crashes
include ballistic parachutes systems
to reduce energy impact, redundant
electrical power paths, distinct flight
operator training and certification
for recreational and commercial
operations, maintenance standards
and anti-hacking software.
Exposure Checklist
Use of drone
hat is the intended use and frequency of use of the drone? Is the indicated use consistent with
the specific equipment?
– I n what airspace will the drone be operating and under what legal authority? Is the flying height
greater than 400 feet? Is the distance capability in or out of line of sight?
ere applicable state laws reviewed where the drone will be flown, prior to issuing the policy?
hat security and safeguards are in place to protect against software/hardware failure and
third-party system intrusion/disruption of the equipment?
ill the insured provide drone service to others?
id the operator receive proper flight training for the drone?
oes the operator have a certificate of compliance to fly the drone that is approved by the FAA?
ow many hours has the operator logged flying the drone? What proportion of those hours have been
accident free? Outline any prior accidents and losses.
hat is the make, model and manufacturer of the equipment?
– I s the manufacturer financially sound and do they provide an equipment warranty?
as the drone been properly examined to determine the quality of the electrical, engine and propeller
systems? If so, by whom?
oes the insured formally restrict the drone’s flight operations to only preapproved and flight certified
company personnel i.e., no permissive use?
oes the equipment meet all federal, state and local government requirements for its intended use?
How many drones will be operated from a single ground control station?
re regular maintenance routines performed and recorded for the drone? If serviced by outside
parties, are appropriate hold harmless agreements obtained?
Focus On: Drones and the Commercial Sector
Transfer of liability
oes the insured contractually assume liability from others or provide insurance coverage
to such parties?
as the insured contractually transferred liability to others or are they protected by third-party
insurance coverage by such parties?

Focus On: Drones and the Commercial Sector