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Drone Insurance 101


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On a purchase satisfaction scale of 1 to 10, aviation insurance fails to register even a 1 for most buyers.

Aviation Insurance

There is simply nothing sexy about buying a stack of papers that promise to pay for a future loss that statistically has a low probability of ever happening. For this reason, many UAV owners make the critical mistake of focusing a minimum amount of attention on this vital component of their financial protection system. But since the aviation exposure likely presents THE largest financial exposure an individual or business faces, this can have devastating consequences.

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Drone Insurance 101

  1. 1. PO BOX 899, PINE, COLORADO 80470 PHONE: 720.208.0844 FAX: 720.208.0845 UAS Insurance 101 On a purchase satisfaction scale of 1 to 10, aviation insurance fails to register even a 1 for most buyers. Aviation Insurance There is simply nothing sexy about buying a stack of papers that promise to pay for a future loss that statistically has a low probability of ever happening. For this reason, many UAV owners make the critical mistake of focusing a minimum amount of attention on this vital component of their financial protection system. But since the aviation exposure likely presents THE largest financial exposure an individual or business faces, this can have devastating consequences. “A lot of people don’t understand what’s in their insurance policy until they need to know it – and then it’s too late. Having an understanding of your policy – knowing what coverage you have – is key... This is not a task to give to your least qualified employee to handle, but rather just the opposite." Mike Nichols VP, National Business Aviation Association The most important decision you will make is the selection of the insurance broker. If you do nothing else, getting this right will yield the greatest return, and is considered best practice by financial and legal experts in the aviation industry. But what is there to consider? 1. Hire the Right People Should you allow your general lines insurance broker to handle the transaction? They are probably very good at taking care of your overall insurance needs but if you needed heart surgery, you would hire a heart surgeon, not a General
  2. 2. Practitioner. Business aviation insurance is no different. You need a professional aviation insurance broker on your side. Unlike other lines of property/casualty insurance, which are written on standard forms, UAS policies vary from company-to-company, some are MUCH broader than others. This makes apples-to-apples comparisons extremely difficult. A good UAS specialty insurance broker can help you navigate to the policy that best fits your operation. In addition, these brokers deal with the underwriting companies every day on multiple aviation risks, and have large books of business with each giving them more clout. A UAS specialist broker will know which underwriter at each insurance company is the most reasonable to deal with, what a competitive rate should be on a particular account, what coverages are available at no charge, and knowing when to negotiate - and how hard, to secure a lower premium, broader policy forms or ancillary coverages for their client. If your local broker is sub-brokering your aviation policy through a wholesaler, be careful. This is a red flag. The more hands in the pie, the more chance an important detail will get missed. The fact is; you’re going to pay the same commission either to your local agent or the best qualified aviation insurance broker in the business. That’s like having the option to buy a Chrysler or Lexus for the same price. 2. Credentials, Credentials, Credentials Perhaps I’m convinced I would be best served hiring a UAS insurance broker, but how do I find the best candidate? Credentials, credentials, credentials. If you needed lasik eye surgery, would you pick an eye surgeon based on a marketing promotion? Of course you wouldn’t. The goal is to establish a relationship with a solid UAS insurance broker you can trust. Your first task is to compile a short-list of respected UAS insurance brokers to choose from. Ask operators of similar UAS what specific broker they use, and then research that broker’s website for information. You want a broker that not only has advanced insurance training and experience, but also one that operates UAS. Negotiating with an underwriter from an operator’s perspective is a must. It’s like speaking a foreign language. Other information you can glean from the broker’s website: how long they have been in business, how many other qualified brokers work there in case you have an important matter you need to discuss when your broker is not in the office [you’re looking for bench strength, not a one man shop]. Many brokers post a partial list of their customers to give you an idea of the caliber client that has chosen them. This is very useful information.
  3. 3. If there are recognized companies on the list, you can assume these companies are with them for good reason. Do they promote safety and risk management solutions as a way to complement insurance, or are they just about the money? Membership and participation in professional UAS associations such as AUVSI and ASTMI provides vital sources of current information to enhance the ability of the broker handling your account. 3. It's a Small Market Don’t call several UAS Insurance Brokers to get competitive bids. While this tried and true strategy is effective with many other products, it’s normally counterproductive here. Why? The UAS insurance market is very small. Unlike auto insurance where there are over 500 insurance companies writing policies, only 6 UAS insurance companies do business in the United States. No one broker can represent all auto insurance companies. On the other hand, any good UAS insurance broker can, and will represent all UAS insurance companies. As a rule, an insurance company will only work with one agent at a time and it’s strictly on a first come, first served basis. Once a broker contacts an insurer on your behalf, any subsequent broker that contacts them will be blocked from accessing that insurer. If your UAS broker is doing his/her job, they will be shopping all interested aviation insurance companies for terms and will present you with the best proposals. Calling more than one is simply a waste of time for most buyers. By now, you have learned what savvy UAS owners and operators already know. The financial stakes are too high to give anything less than full attention to your UAS insurance program. No one ever thinks it will be their UAS that’s involved in an accident. Unfortunately, accidents can, and do happen - even to the best operators. Take command now before the loss.
  4. 4. The Importance of Liability Coverage Commercial UAS operated by a professional salaried crew provide an impressively safe operational environment. Yet the risk of an accident - although very low - must be considered. Liability Coverage A UAS operator must recognize and defend the loss exposure that a UAS represents. It is imperative they examine, and become familiar with available insurance protection and risk management strategies. Fortunately large liability coverage limits are readily available in the commercial UAS arena with limits of $1m, $2m, or $5m offered by numerous insurers at reasonable premium margins. In this section and the next, we will speak in a broad sense about the two primary insurance coverages - Liability and Hull - and their importance to a company’s overall insurance program. Liability Coverage Focus your closest attention here - this is your lawsuit protection. The potential legal liability for bodily injury or property damage claims arising from a UAS accident are extremely difficult to predict; you won’t know if you bought adequate liability protection until after a loss is settled. Consider an accident involving injury or death. Imagine the potential settlement a jury of your peers might render for pain and suffering, wrongful death, or loss of earnings if an individual is injured or killed as a result of your UAS operations. A UAS operator’s best friend in this field is a knowledgeable, well-respected UAS insurance broker. Not only can he or she help negotiate the broadest insurance coverage (making the protection as bulletproof as possible), but a broker is also a valuable resource in assisting your selection of the appropriate coverage limit. How Much Coverage is Enough? As mentioned, since there is no definitive method available to determine the appropriate liability coverage limit to select, your response to the following questions can help guide you in selecting a reasonable limit, based on your exposure: • Number of people in the immediate area of operations? Obviously, operations near expensive property, large crowds, audiences or work crews presents a greater exposure, and will require a higher liability coverage limit than remote agricultural, pipeline, powerline or mining operations.
  5. 5. • Average number of adjacent persons per flight? Again, if your average number of people in the area of operations per flight is fifty, you would need to carry a higher coverage limit than if it was two. • Composition of adjacent persons (Employee versus Guests)? If the majority of people in the area of operations are employees such as a film set, you may be able to justify a lower liability limit since a properly structured Workers’ Compensation program is often the sole remedy for injuries to employees. Conversely, if the majority of those people are guests or general public, you would need to select a higher liability limit. • What assets need to be protected? Don’t let a holding company give you a false sense of security. Savvy plaintiff attorneys will attempt to pierce shell companies and corporate veils in an effort to get at the “real money” whether it is a larger corporation’s resources or an individual’s net worth. • If you have an umbrella policy that covers the UAS exposure, you will need to make sure your primary UAS liability limit meets the minimum required umbrella limit. Generally speaking, since it is impossible to determine the exact coverage limit you need, it is best to buy as much as you can reasonably afford. Obtain quotes for alternative limits each year, as rating of this coverage can vary greatly year-to-year. The take-away for Board Members is that although corporate UAS operations tend to be very safe, the potential liability arising from an accident must be addressed and the corporation’s insurance/risk management defense must be considered carefully.
  6. 6. The Importance of Physical Damage (Hull) Coverage It’s considered best practice for an operator to select the correct insured value for their aircraft not only at purchase, but to review and adjust that value at least annually. A common trap for UAS owners is to set the insured hull value at the original purchase price, and then fail to adjust it over the years - even though the aircraft is typically depreciating in value. Three recent losses brought this issue to the forefront as several unfortunate UAS owners learned the hard way the perils of being over-insured. Why does this present a problem from an insurance perspective, though? Unlike many other property policies written on an actual-cash-value basis, UAS policies are written on an ‘agreed-value’ basis. Simply stated, at the inception of the policy, you and the insurance company mutually agree on a ‘hull value’. This amount, stated in the policy, represents the amount you will be paid in the event of a total loss, less any applicable deductible. It is possible, however, to over-insure or under-insure to your detriment. If you over-insure, the insurance company is forced into giving more weight to repairing the aircraft, even when there is major damage – leaving you to deal with significant damage history and associated problems, and no compensation for diminution of value when the aircraft is repaired and returned to service. Examples of Over/Under Insurance As an example, let’s imagine that you have your UAS insured for an agreed-value of $20,000 - but in today’s market, it’s only worth $10,000 with many components obsolete or out of production. Your UAS is unfortunately involved in a collision with a fixed object causing major damage. The repair estimate is $9,000. As part of the claim process, the insurance adjuster solicits, and receives a salvage bid for the aircraft “as is” of $5,000 and is faced with two choices: 1. He/she can elect to total the UAS, pay you $20,000 (the agreed value), and then sell the salvage ($5,000) for a net claim payment of $15,000; or 2. Repair the aircraft for a net claim payment of $9,000 with the responsibility to find possibly obsolete parts, technology and labor falling to you. Unfortunately for the owner, the insurer is left with no real choice!
  7. 7. Now let’s take the same example and substitute $13,000 for the insured value. You’ll see that there is quite a different outcome! There is one, final danger that concerns under-insurance. Although not as common, if you under-insure your company aircraft, the insurance company may opt to declare the UAS a total loss in the event of the above example happening. In this case, it would pay you the agreed value and sell the salvage, causing you to lose your equity. This Section's Take-Away • The proper insured value to carry is the amount of money it would take to purchase another UAS exactly like yours (i.e. similar year, equipment and condition, etc.) in today’s market. • An aircraft sales dealer familiar with your make/model UAS can give you the best estimate of its current value. In addition, your UAS insurance broker may have resources to assist. • Your company’s coverage limit should be reviewed at least annually on renewal and adjusted accordingly. Don’t forget to consider any loan or lease requirements too. You may be forced into over-insuring if you owe more than the aircraft is worth.
  8. 8. Other Coverage Considerations Other Aircraft Coverages When you buy an insurance policy, you are purchasing a legal contract that promises to pay in the event of a covered loss. When a loss occurs, that contract spells out exactly what gets paid, and under what circumstances. There can be over sixty different ancillary coverages that expand the protection provided under any given UAS insurance policy. A dangerous mistake is to focus exclusively on the primary coverages (Liability, Medical Payments, and Physical Damage/Hull) with little or no thought given to ancillary coverages until a loss occurs. Don’t fall into this trap! War Risk Related Perils Coverage When you purchase War coverage, you are removing thirty two (32) perils normally excluded in your UAS insurance policy. In addition to the War peril, you add back coverage for some other significant risks including, Terrorism, Hijacking, Riots, Revolution, Sabotage, Confiscation, Seizure and Appropriation to name a few. A general rule for insurance is this: If you can buy a lot for a little, you should. Often the cost of adding War Risk Related Perils Coverage is nominal. As owners and operators ourselves, we elect to purchase this coverage option on our UAS. You should strongly consider doing the same. Given the current state of the world, buying this should be a no- brainer. Non-Owned UAS Liability and Hull Coverage This extends liability coverage under the policy to protect the named insured while operating a non-owned UAS. Think referring, hiring or renting. There have been several documented losses, where an employee who was a UAS operator operated a private UAS on company business without the company’s knowledge and a subsequent accident entangled the company in a nasty, unanticipated lawsuit. Coverage for such an event is dictated by your policy’s Non-Owned UAS Liability Coverage language. The definition of Non-Owned UAS, approved pilots and deductibles can vary between insurance policies, and most exclude coverage for rotor-wing if the UAS insured is fixed-wing and vice-versa. Your insurance policy can be manipulated to greatly broaden out the protection provided under this coverage and should be carefully coordinated with your insurance broker depending on your particular circumstances.
  9. 9. Guest Voluntary Settlement Coverage: This coverage, also known as GVS, is very similar in scope to Accidental Death and Dismemberment coverage. It allows the Named Insured to offer a specified amount of monetary compensation to third parties for certain injuries arising from your UAS operations, regardless of any negligence. It’s basically ‘no fault’ coverage. GVS Coverage amounts normally range from $25,000 up to $100,000 each person. In exchange for receiving this compensation, the injured party must relinquish their right of recourse (the lawsuit) against you, the operator, for the bodily injury they suffered. The loss of one eye or one limb results in a payment of half the GVS coverage limit, while the loss of life, permanent disability, or the loss or two eyes or two limbs (or a combination thereof) results in payment of the full coverage limit. Extra Expense for a Temporary Substitute UAS: This coverage pays the extra expense for renting/hiring a substitute UAS while your UAS is out of service due to a covered loss. This coverage does not respond like your auto policy, which typically pays the full cost of renting a substitute vehicle while yours is being repaired. This coverage only pays the difference between the normal operating cost of your UAS and the replacement UAS you are hiring or renting. Let’s say for example, your normal operating costs are $150 per hour and the costs for the replacement UAS are $250 per hour. Under Extra Expense for Temporary Substitute UAS, the insurance company would pay $100 per hour for the excess cost you incurred. There are maximum daily benefits, a maximum time period for this coverage and deductibles, all of which can be negotiated. In Essence... It is imperative to fully review your policy from time to time to make sure the ancillary coverages are tailored to match your unique coverage requirements. We are currently in the softest aviation insurance market in history. Underwriters are willing to offer broad coverage endorsements, reduce or eliminate deductibles and increase coverage limits for little or no additional premium. If you haven’t already, consult with your broker to make sure you strike while the iron is hot!
  10. 10. Insurance for the UAS You Do Not Own You’ve worked hard to get the insurance coverage just right on your UAS. Well done! But, just as my drivers’ education teacher always warned, “watch out for the other guy,” you too need to watch out for the “other guy” who owns or operates a plane that might impact your liability protection program. UAS Insurance For example, one of your employees at a remote office earned his wings and accumulated good experience flying around in search of the infamous perfect shot. He recently however realized the true utility of flight demonstrations and decided to take the family Phantom 2 Vision+ to the next sales meeting. In the event of an accident, what do you think will happen when an injured party’s attorney discovers the flight was conducted on behalf of your company? Or consider the implications when you need temporary use of a UAS while yours is down for maintenance. Whether you hire an outside company or you have access to another UAS, will the insurance coverage be “just right” for those jobs too? There are steps you can take to help protect your business in all of these scenarios. Employee Use of Personal UAS on Company Business When it comes to employee use of personal UAS on company business, the first line of defense is the fundamental risk management strategy of risk avoidance. In other words, “don’t do it.” This is the advice most companies receive since viable business enterprises typically have more assets to protect than what an individual UAS owner’s insurance policy covers – if it even covers the employer at all. Many companies that carry appropriate non-owned UAS coverage still prohibit employees from operating private UAS on company business because the liability risks often outweigh the rewards. Having a formal prohibition may help mitigate liability in the event an employee breaks that official policy. Other reasons not to allow this use include the difficulty in keeping up with an employee’s personal UAS insurance program and the lack of operational control over his or her personal flying habits (experience, currency, training, etc). Some businesses also fear their employees may inadvertently void their own insurance coverage, leaving the company completely exposed.
  11. 11. What if risk avoidance is not an option - is there an effective solution? Well, maybe. It involves a collaborative effort on the part of the employee, the company, insurance advisors and perhaps others. Here is the ideal scenario for an employee- owned UAS: • Employee places primary coverage with an insurance carrier satisfactory both to the employee and the employer. A limit of liability is selected on this primary policy acceptable to all parties, including the employer’s own UAS insurance underwriter (assuming the employer carries separate non-owned aircraft liability coverage for additional protection). • The employer is named as additional insured under the employee’s policy. This is confirmed via a certificate of insurance along with a copy of the endorsement evidencing the coverage, including a provision to notify the employer in the event of policy cancellation. Keep in mind the employee’s primary limit is shared between the two parties! If the liability coverage is $1,000,000 then the aircraft owner shares that limit with the employer for any given occurrence – it’s not $1,000,000 for the UAS owner and another $1,000,000 for the owner’s employer. • The employee’s UAS insurance policy properly addresses any cost reimbursement flowing to the employee from the employer. • An effective process of follow-up is implemented to assure proper coverage arrangements remain in place going forward on future insurance policy renewals. • Operational safety parameters are established (in writing) to govern under what conditions a flight will be allowed to take place on behalf of the company. This can be developed with the employer’s own personnel or through the guidance of a UAS safety consultant. These conditions should be specific between the employee and the employer and should also function as part of the employer’s published corporate policy on the use of UAS. • The employer attains additional liability coverage through an extension of its owned aircraft policy or through the purchase of a specific non-owned UAS insurance policy. The use of rented or borrowed UAS by employees on company business presents additional challenges because the employee has little or no control over the primary insurance coverage on the rented or borrowed UAS. It is difficult to verify coverage particulars and often impossible to coordinate coverage among the UAS owner, employee and employer.
  12. 12. Temporary Use of Other UAS on Company Business Hiring and outside operator is perhaps the most common, straight-forward exposure and one of the main reasons non-owned aircraft coverage is part of many corporate UAS policies. If your flight department has temporary access to another UAS that is not an outright hire or referral, both the exposure and the appropriate coverage is a bit more complicated. Since the devil is in the details and each policy has varying degrees of non-owned protection for this particular use, it is very important to discuss this exposure in depth with your UAS insurance broker for proper protection. In Conclusion... Watching out for the other guy goes a long way in helping to make sure your coverage is indeed just right - even on the planes you don’t own!
  13. 13. Insurance Coverage for War Risks, Hijacking and Other Allied Perils War is not an insurable risk under the traditional role of insurance. As we have all witnessed, war and warlike acts are unpredictable, intentionally inflicted, and have the propensity to cause multiple widespread losses over a short period of time that, if insured, would jeopardize the viability of insurance as an effective means of risk transfer. Insurance Coverage Insurance as a means of risk transfer provides many benefits to a modern society. Benefits like peace of mind, support of lending credit for business growth, and the efficient use of capital resources, to name a few. However, insurance as a mechanism for risk transfer was never intended to cover fundamental risks. Examples of fundamental risks include nuclear detonation, unemployment, drought, earthquakes and floods. The losses from these types of exposures are so great the federal government often accepts the burden of the loss through social insurance programs and subsidization. The Acts of War exclusion in all insurance policies exists for this reason. Insurance companies are not unlike other businesses that exist to make a profit and must of course make sound strategic decisions in order to survive. It is their fundamental responsibility to be able to underwrite risks at a fair price. The insurance industry, although regulated, operates in the free market. At moments in history when insurance premiums trend higher, market forces tend to be self-correcting. This is because new companies with additional capital will enter the marketplace to take advantage of increased premiums. As the availability of insurance increases and insurance companies quantify the new reality of domestic terrorism, premiums should begin to stabilize. Because of the catastrophic nature of war and related perils, most standard insurance policies explicitly exclude all war perils. In those instances where the war perils coverage is needed, the insurance company purchases a separate and distinct coverage form through a war underwriter to cover this risk. In the past, a war risk endorsement supported the financing and leasing areas of the economy. Through the availability of this coverage, lenders did not need to maintain costly loss reserves and were able to pass the savings along to the consumer. The loss frequency was low and coverage could be provided for a relatively modest additional premium.
  14. 14. American courts traditionally allow a standard insurance policy war exclusion to be applied only in situations involving damage arising from a genuine warlike act between sovereign entities. For instance, in the 1974 case Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, the court ruled the hijacking and subsequent destruction of an aircraft by a political activist group did not constitute an act of war. The reasoning was a radical guerilla group not operating on behalf of any state does not constitute a sovereign entity and therefore does not constitute war. With such a narrow practical application of the standard war exclusion, aviation insurers now rely on more definitive policy wording that typically excludes the following: 1. War, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power. 2. Any hostile detonation of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter (this coverage is simply not available at any premium). 3. Strikes, riots, civil commotions or labor disturbances. 4. Any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting there from is accidental or intentional. 5. Any malicious act or act of sabotage. 6. Confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government (whether civil, military or de facto) or public or local authority. 7. Hi-jacking or any unlawful seizure or wrongful exercise of control of the aircraft or crew (including any attempt at such seizure or control) made by any person or persons on board the aircraft acting without your consent.
  15. 15. Aviation insurance prices in recent years have been relatively stable with companies competing for premium dollars to invest during a robust economy. Aviation insurance companies were compelled to offer attractive policies bundled with broad coverage that included many of the above war perils in order to attract policyholders. Since there had never been a significant warlike loss within the United States, underwriters felt little need to charge a premium for an exposure they perceived as minimal. Reinsurance companies – companies that agree to accept a large part of the aviation insurers’ claims in exchange for a portion of the premium - primarily cover this aviation war risk exposure. These companies work to spread risk over an even larger group, enabling the insurance company binding the policy to control their overall exposure. In the wake of the attacks on the World Trade Center and Pentagon, these same insurance carriers had to re-examine this coverage and reassess their potential exposure. On September 17, 2001, the London insurance market (where most of the reinsurers are represented) rescinded this war risk coverage on virtually all aviation insurance contracts. Once the insurance companies had a chance to review the new exposure and threat scenarios, war coverage was again offered.
  16. 16. Glossary of common terms used in Unmanned Aerial Systems (UAS) Insurance • Additional Insured - a person or persons other than the original named insured, who are protected under the terms of a policy. • UAS Liability Insurance - protects insureds from claims by other parties ("third parties") for bodily injury or death and property damage. The claim has to result from an occurrence related to the operation of the UAS. • Guest Voluntary Settlement - also known as admitted liability, provides coverage to a passenger who suffers certain forms of bodily injury whereby a settlement is offered on a predetermined basis in exchange for a release of liability. • Hull Insurance - coverage for physical damage done to the UAV. It is not liability coverage and is therefore triggered by a covered event, regardless of the reason for the damage or loss. • Industrial Aid - refers to corporate-owned UAS that are used for the business of the corporation and which are flown by full-time professional pilots. • Medical Payments - coverage that pays medical, surgical, hospital and funeral expenses up to the applicable limit, regardless of the liability of the insured. • Named Insured - the actual policyholder who is specifically named on the policy. Named insureds are responsible for premium payment, have the authority to cancel or make changes to a policy, will have a say in the claims process, and are included on any claim checks that are issued. • Open Pilot Warranty - a clause in the policy that will state the minimum qualifications for a pilot to meet who has not been previously listed by name on the policy as a pilot. A pilot who is named on the policy or who "meets the open" simply affirms to the named insured that the pilot's legal and proper use of the UAS will not void the named insured's coverage. It does not necessarily mean that the named pilot will be covered under the liability protection of the policy. • Pleasure & Business - refers to UAS that are owned and/or operated by pilots who are not employed as full-time professional pilots and are not operating commercially or for compensation. • Smooth Limit - a limit of liability that offers a combined single limit of coverage that applies to all bodily injury and property damage claims. A specified maximum amount can be paid out from a covered occurrence in any combination - passenger bodily injury, other person's bodily injury or property damage.
  17. 17. • Sub-Limit - usually a combined single limit of coverage that applies to all bodily injury and property damage claims, however, a reduced amount of coverage from the single limit is available to pay for claims resulting from bodily injury. • Subrogation - a doctrine that gives an insurance company the right to attempt to recoup some or all of the money they have paid on behalf of insureds. They do this by proving that another party was legally responsible for the loss and that the party has the financial ability to reimburse the insurance company.