April 1, 2017 by Jeffrey McCann, Vice President, Digital Strategy, Shaw Sabey & Associates
There is no question that drones are taking off. Right now, most commercial drones are used for taking photographs and video, but that is going to change quickly.
A May 2016 report issued by Pricewaterhouse-Coopers notes that the emerging global market for commercial drone services will replace human labour valued at more than US$127 billion, only US$8.8 billion of which will be in entertainment and media.
The areas that will see a larger disruption from unmanned aerial vehicles (UAVs) “in the near future” are infrastructure (US$45.2 billion), agriculture (US$32.4 billion) transport (US$13 billion) and security (US$10 billion).
Another report from Gartner Inc., released earlier this year, has predicted that the global drone market revenue will rise 34% to as much as US$6 billion in 2017, and more than US$11.2 billion by 2020.
As technology adapts and ever more uses are found for these highly adaptable flying machines in a growing market, regulators and their insurance and legal counterparts are struggling to keep pace.
In Canada, drones are regulated by Transport Canada. There are two ways to legally fly a drone commercially. The first is to adhere to all of Transport Canada’s exemption requirements, requirements that come in two categories: one for UAVs that weigh one kilogram or less, and one for drones that weigh up to and including 25 kilograms.
Some examples of exemption requirements include flying safely, only operating at least eight hours after consuming any alcohol, being at least 18 years of age, completing ground school or related training, and notifying Transport Canada before each flight.
These ground schools are not yet regulated themselves, although a sample curriculum has been provided by Transport Canada as a guideline.
A second option is to obtain a Special Flight Operations Certificate (SFOC) from Transport Canada. The contents of the SFOC application are intended to show that the user understands how airspace works and that he or she is a competent pilot. The application must also include where and when the flights will occur.
Most importantly for brokers, whether a pilot is flying commercially under the exemptions or with an SFOC, he or she must be able to present proof of carrying a minimum of $100,000 worth of liability insurance for flying the drone. Although this is the minimum requirement, $1 million or more of coverage is often appropriate.
In December of 2016, Transport Canada released updated exemptions that include the following:
One example of a change that may impact insurance is that the exception requirement for UAV weight changed from “0 to 2.5 kilograms” to “0 to 1 kilogram.”
The insurance policy generally refers to flying in compliance with Transport Canada. As such, if the pilot is no longer exempt because of this regulation change, there are implications for how that policy responds. When the rules change, so does the policy.
Changes like these have been occurring more frequently with the increase in drone popularity over the past five years, and more are on the way. Federal transport minister Marc Garneau announced just in March that Transport Canada will be overhauling all rules around recreational drones this summer.
The new rules will mean recreational drone operators may not fly higher than 90 metres; at night; within 75 metres of buildings, vehicles or people; or within nine kilometres of the centre of any airport, heliport, aerodrome or water aerodrome where aircraft take off and land.
One thing that is not likely to change, though, is the insurance requirement.
UAV RISKS AND SOLUTIONS
Because drones are technically categorized as aircraft, it makes them tricky to insure. Most commercial insurance policies, and almost certainly all homeowners policies, have aviation risks specifically excluded. What are the liabilities for a new company offering drone services? What about an established real estate or road building firm adding drones to create efficiencies? Or a golf course with dozens of wedding clients all asking about drone photography? These are the kinds of questions that brokers are now fielding.
UAV FLYING LIABILITIES
As soon as the rotors are turning, a standard general liability policy no longer responds, and either an aviation policy or an endorsement is required. The risks are third-party bodily injury and property damage from the drone crashing.
Some managing general agents (MGAs) are offering UAV liability policies backed by an extension of aviation capacity, while a few domestic markets have also introduced their own versions. The UAV liability policy is sold standalone, which can be easier for a broker to place, and MGAs generally do not require contracts to deal with on a one-off basis, removing barriers for smaller brokerages to access the product.
The more common solution emerging in the Canadian market is a simple general liability (GL) policy with an endorsement carving back the aviation exclusion. This can be complicated if a client, such as a road builder, has an existing GL and the carrier is not prepared to take on the UAV liability exposure.
For home-based photographers, though, this is a simple way to address both UAV flying operations and the day-to-day exposures of operating a small business.
Most often when people hear drone insurance, they think about physical damage coverage. Many of the MGAs offer physical damage as an option, but unless the value of the drone is more than $5,000, physical damage coverage does not make financial sense for the client.
To illustrate, consider a drone that retails at around $1,300. To insure for $1,000 premium and $1,000 deductible is not practical.
The insured value does include payload, so if that same drone was equipped with an expensive camera or mapping equipment, physical damage policy should be recommended.
UAV programs are mostly in their infancy and underwriters are careful to manage their ratios as they grow in volume, so physical damage is sparse.
Even when companies are not using drones directly, they may inherit the exposures. For example, many golf courses, ski resorts and destination hotels host weddings and events where the booking requests to contract a drone photographer. The venue’s insurance policy would exclude aviation liability, leaving them exposed.
It is critical for the venue to obtain certificates with proof of UAV liability coverage, a copy of the SFOC and appropriate training certification; become additional insured on the pilot’s policy; and set clear rules and guidelines for flying at its property.
It is also important to note that without the SFOC or proof of exemption, the insurance policy likely is not valid.
Firms in other industries – such as agriculture, construction, building maintenance, forestry and mining – seeking to subcontract drone pilots should implement the same risk management procedures to ensure the appropriate coverage is in place.
This highlights the critical role brokers will play as trusted risk management advisors to this rapidly expanding industry, even if they are not required to put a UAV liability policy in effect.
-Jeffrey McCann, Vice President, Digital Strategy, Shaw Sabey & Associates
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