Section 333 exemptions for one-off commercial projects, followed by the release of the Small UAS Rule (Part 107) in 2016, are examples of ongoing progress in Federal Aviation Administration (FAA) rulemaking for commercial drone operations. The improved business environment is encouraging commercial operators to add drones to their product and service offerings, which in turn brings the issue of insurance to the forefront. Are you liable if your drone injures a person or breaks a window? What happens if you accidentally destroy your high-end drone and custom payload?

The proliferation of unmanned aerial systems (UAS), commonly referred to as drones, is creating a new revenue stream in the aviation insurance business. Five years ago, when commercial drone operations started to gain attention, insurance coverage specific to drones was difficult to procure.l The choices were generally limited to manned airplane policies or coverage for remote-control hobby airplanes. Responsible business owners wanted protection and quickly realized the options were less than ideal. To satisfy demand, a number of major insurance underwriters and aviation-related organizations now offer drone-specific insurance.

Managing Risk

The FAA does not require commercial operators to carry any type of drone insurance, and some people feel there is little risk that drones will cause damage to property or people. In reality, businesses have quite a lot to lose if something goes wrong on a flight. Even with an experienced pilot, there are many variables that impact safety, including weather, the terrain, the population density and unexpected obstacles. Ignoring the possibility of an accident subjects a business to the risk of significant financial loss. Although the owners of small startups and new manufacturing firms may feel they cannot afford insurance, the alternative is being out of business as a result of an uncovered liability claim.

Today, there are many options for obtaining commercial drone insurance, including hull, payload and ground equipment damage coverage, and varying levels of liability coverage for operators and manufacturers. The repair cost compared to the premium cost is an important factor in deciding on a comprehensive policy. For example, for a $50,000 drone carrying an expensive payload, damage coverage is probably a good investment. For a $1,200 drone, it may not be worth paying premiums for hull damage, but carrying liability insurance is still advisable in case of an accident. Liability insurance policies are available in any amount — $500,000, $1 million, $5 million or more. The amount needed varies by situation and is sometimes stipulated by the client.

Instead of a conventional annual insurance policy, an operator may choose to purchase insurance only as needed by the hour. This approach might be preferable for businesses that use drones intermittently rather than daily. The flexibility of on-demand insurance also allows the coverage to be specific to current flying conditions and locations, and operators can recoup the expense on a project-by-project basis by including the cost in their fee.

Insurance Needs Vary

For early adopters in the commercial drone industry, obtaining insurance used to be a challenge. Today widespread use and a greater understanding of risk management have resulted in a variety of suitable options.

SolSpec Solutions (formerly Front Range UAS), based in Keenesburg, Colo., started building and flying custom drones when the drone industry was in its infancy. After gaining experience and establishing a solid business reputation, the firm now regularly flies pipeline right of way (ROW), upstream oil and gas and mining projects, as well as agriculture, civic (parks and golf courses), construction, and transportation jobs. Its small UAS (less than 55 pounds) carry RGB and infrared cameras, and are covered by liability insurance but not hull and payload insurance.

"When I started flying my own custom UAS commercially in 2015, I was uninsured because no one would underwrite me — most insurance companies didn't know what to do with drones," says Chris Rice, co-founder of SolSpec Solutions. "Now, not only do I want to have insurance to protect my business, but many of my clients require liability coverage of at least $5 million. I feel that having insurance is an advantage because it establishes credibility and shows that we are experienced professionals."

SolSpec Solutions flies its drones on a daily basis to complete its projects, while other vendors use drones to supplement primary activities. Wohnrade Civil Engineers, based in Broomfield, Colo., originally was interested in drone technology for marketing purposes and to document progress on large civil projects. However, the great potential for high-precision mapping was quickly realized. Now, a 333 exemption and Part 107 holder, Wohnrade Civil Engineers uses drone imagery to enhance engineering-grade ground surveys for residential and commercial land development, flood plain analysis, municipal road and sewer design, CDOT design/build projects, and other assignments.

"Two and a half years ago, we recognized that drones can improve our survey and mapping deliverables, but it was new territory for insurance underwriters," says Mary Wohnrade, principal engineer at Wohnrade Civil Engineers. "We were at the forefront, but now there are many more choices. We have carried a $1-million liability policy on two of our small drones at a cost of about $1,700 annually, but we're shifting to on-demand insurance so that we only pay for coverage when the drones are flying. With Verifly, we can purchase liability insurance for $10 to $19 an hour."

Wohnrade says that the company is in the process of having a higher priced platform built that carries a LiDAR scanner and 42-megapixel camera. "An annual policy for hull and payload coverage in addition to liability will probably make sense in light of what our out-of-pocket repair costs might be."

Recognizing the Demand

The issuance of Section 333 exemptions, although based on very stringent requirements, was a solid stamp of approval for commercial drone operations. As the number of commercial companies operating drones increased, the demand for insurance coverage specific to UAS grew. Manufacturers also recognized their growing risk as sales volume ramped up. The use of drones for a wide range of applications, sometimes by inexperienced operators, is good motivation for manufacturers to mitigate their risk with liability insurance.

"Based on forecasts from the FAA and other UAS entities, it is clear that drones are going to be around a long time," Says Bryant Dunn, assistant vice president at Global Aerospace. "As an aviation-only insurance underwriter since 1924, Global Aerospace already did business with large drone manufacturers and defense contractors, so when commercial drones started becoming more mainstream around 2012, we definitely wanted to use our aviation expertise to be a part of this growing technology."

Unique characteristics of the developing industry are reflected in how insurance companies are interacting with customers. "We recognize that the drone industry has a high number of millennials, and they prefer to do business online and pay with a credit card, which is why we created an online insurance portal," Dunn says. "Also, the drone business is very different from Fortune 500 companies insuring their corporate aircraft. Drone operators need the ability to make frequent changes in their coverage. The desired liability limit and the type of drone often vary project by project."

Drone Technology Trends

Hot topics in the industry include operating drones beyond visual line of sight (BVLOS), autonomous flight with little or no operator intervention, new sense-and-avoid technology, and how to integrate drone operations into the national air space. The technology for these activities either already exists or is being developed rapidly. However, the regulatory support is lagging because the environment is changing so fast.

"The drone market is very dynamic," Dunn says. "We attend a lot of industry shows and try to anticipate what our clients will need as their businesses evolve. When BVLOS operations are allowed, we will be ready to support our clients. We already encourage operators to be educated and follow standard operating procedures, with backup plans in place. By knowing what to expect from their systems, they can reduce the potential for an accident."