FAA’s New Drone Rules Ready for Takeoff

The commercial use of drones, or unmanned aircraft systems (UAS), has been widely discussed in the insurance industry. There is much to speculate upon as the technology is still emerging, with any number of possible applications and concerning reports of injuries. While drones bring the promise of efficiency, there is also the uncertain risk profile that comes with this most exciting technology.

With new Federal Aviation Administration (FAA) rules ready to take off (pun intended) in August, there will be improved visibility into the procedures and practices used by drone operators. The FAA recently finalized the first operational rules for routine commercial use of drones and, while the total risk picture is still unknown, we can now evaluate the strength and appropriateness of safety controls employed by UAS operators.

Drones are being used in many industries, from construction to utilities to agriculture, and these industries will need to prioritize compliance and risk mitigation. Some of the new operational limitations from the FAA include:

  • At all times the drone must remain close enough to its remote pilot in command and the person manipulating the flight controls must be capable of seeing the aircraft with vision unaided by any device other than corrective lenses.
  • Drones may not operate over any person not directly participating in the operation, or under a covered structure, or inside a covered stationary vehicle.
  • Drones may only operate during daylight hours or 30 minutes before sunrise or 30 minutes after sunset with appropriate anti-collision lighting.
  • Drones cannot operate from a moving vehicle unless it is over a sparsely populated area.

These rules appear to provide sound guidelines, but most regulations are only as good as the ability for them to be enforced. For example, under the rules’ operational limitations section, it is stated that most of the new restrictions are waivable if the applicant demonstrates that his or her operation can be safely conducted under the terms of a certificate of waiver. How often will these waivers be allowed and how will the FAA conduct investigations? Insurers will be watching to see how the rules are implemented and enforced.

Clearly, we should take note of this important moment for drones, as implementation of federal safety standards for emerging risk drivers has spawned or grown new insurance business lines that are now viewed as essential coverages. For example, environmental regulation in the late 1970’s and 80’s created the need for environmental coverage. State and more recent federal cyber laws are the backbone of cyber policies as insureds must comply with standards to prepare for and respond to breaches. Most recently, the FDA’s Food Safety Modernization Act is driving insureds to take a fresh look at product recall insurance.

Risk managers should expect operating rules to drive new coverages that support the insured’s risk evaluation process. This will allow for a spectrum of outcomes from exclusionary wording for UAS operations to distinct coverage grants for safe and compliant operators. Loss control and consulting services from insurers could be helpful to guide the risk management surrounding drones. The federal rules also enable additional objective underwriting questions tied to compliance. Expect to see these questions incorporated into specific UAS underwriting application questions.

The risk manager can readily imagine the Coverage A risks that can arise from UAS operations. Those could include but are not limited to third party bodily injury resulting from aircraft failure, a wildfire resulting from a crash and potential catastrophic terrorism uses. Privacy risk under Coverage B is also a risk easy to imagine and well-documented even in the early stages of this new commercial risk driver.

Insurance brokers or consultants can also offer guidance on the various ISO endorsements in circulation seeking to clarify the commercial general liability aircraft exclusions to include unmanned aircraft. ISO endorsements provide options to include Coverage A and/or schedule-specific aircraft for coverage. I do not believe that ISO has plans to amend the currently available endorsement in response to the aforementioned FAA operating rules.

There is no question the use of drones is only going to expand in its application and, with that, operational safety will improve as exposures grow. The industry should expect increased regulations, including flight worthiness certification as well as possible insurance requirements. According to a Goldman Sachs analysis, total global spending on drones in the commercial market is estimated to be around $100 billion over the next five years. Of that, about $11.2 billion will be generated by the construction industry.

Risk managers should anticipate liability exposure for those that fail to comply with the new regulations. The uses are vast, and given the diversity of users the levels of knowledge and awareness of compliance obligations will vary. Education will be key to ensure users understand their responsibilities and the consequences for not meeting regulatory standards.

As the technology and uses continue to advance, catastrophic loss examples will likely arise in the future. I am hopeful that the new FAA regulation will be a useful tool to mitigate the unknown risks to both drone operators and third party premises owners that might be exposed to drone-related accidents.

FAA Announces Drone Testing Partnerships Beyond Current Regulations

Drone regulations FAA

Yesterday, the Federal Aviation Administration announced three partnerships with companies to expand the operation of unmanned aerial vehicles (UAVs) in an initiative the agency is calling the Pathfinder program.

U.S.-based drone maker PrecisionHawk will be exploring the possibilities of flights over agriculture while testing tracking and a system for drones and planes to remain aware of each other in flight to avoid collisions. CNN will be testing the use of drones for newsgathering in urban areas where drones will remain in the line of sight of operators. BNSF Railroad, owned by Warren Buffet’s Berkshire Hathaway, received permission to test drone operations outside of the operator’s visual line of sight. The company will “explore command-and-control challenges of using UAS to inspect rail system infrastructure,” the FAA reported.

“Government has some of the best and brightest minds in aviation, but we can’t operate in a vacuum,” said U.S. Transportation Secretary Anthony Foxx. “This is a big job, and we’ll get to our goal of safe, widespread UAS integration more quickly by leveraging the resources and expertise of the industry.”

To that end, Pathfinder will allow these corporate entities to research operations that push the boundaries of the recent draft rules released regarding small unmanned aircraft, namely by operating both within and without the visual line of sight requirements currently mandated by the FAA.

“Even as we pursue our current rulemaking effort for small unmanned aircraft, we must continue to actively look for future ways to expand non-recreational UAS uses,” said FAA Administrator Michael Huerta, who announced the initiative at a conference held Wednesday by the Association for Unmanned Vehicle Systems International. “This new initiative involving three leading U.S. companies will help us anticipate and address the needs of the evolving UAS industry.”

This effort is also the first step in realizing some companies’ grander aspirations for drone use, such as the package delivery applications being pursued by Amazon. That being said, the information gathered by these companies will merely provide data to inform future FAA regulations, which are still pending and may only approve broader operations in a few years. Other companies looking into similar applications that are beyond the scope of current draft regulations would still need to apply for and receive a Section 333 exemption from the FAA. While about 300 of these requests have been granted, the agency has received repeated criticism for an exceptionally slow and sometimes mystifying review process.

“The impact of the Pathfinder Program could be profound for several reasons — perhaps most importantly, it shows the FAA is serious about moving quickly to safely and practically integrate commercial drone use in the U.S.,” said Anthony Mormino, senior legal counsel at Swiss Re. “Allowing drone flights beyond the sight of a drone operator is considered the key to unlocking the true potential of commercial drone use.  This collaboration could impact the future rules promulgated by the FAA regarding the line of sight requirement for commercial drones.”

Such developments could also significantly impact insurers. As discussed in “Drones Take Flight,” the April cover story of Risk Management magazine, one of the most promising near-future applications for UAVs could be in the insurance industry in the wake of natural catastrophes or other major claim events. “Reducing or eliminating the visual line of sight limitation on commercial drone use will allow insurance companies to employ UAVs to their fullest extent in insurance underwriting and claims management,” Mormino said. “Consider that the FAA has already granted a number of insurance companies permission to test and use UAVs for insurance inspection purposes. These companies include AIG, State Farm, Erie Insurance Group, and USAA. They plan to use UAVs, for example, to more quickly process insurance claims after natural disasters by allowing them to inspect damage —especially in remote locations—in real time. Insurers also plan to use UAVs to obtain imagery and data for use in underwriting, such as roof inspections. Until the FAA mitigates the visual line of sight limitation, however, the foregoing insurance uses for UAVs will remain drastically limited. Success for the FAA’s new Pathfinder program would open the door to potentially even larger scale use of UAVs by insurance companies.”

The implications for insurers also extend to the products and pricing offered. “First, the current dearth of UAS loss data makes it difficult for insurance companies to properly price insurance policies covering drone use,” said Carol Kreiling, senior claim manager at Swiss Re. “It is therefore no surprise that only a handful of insurers actually issue stand alone drone insurance coverage, such as Zurich Insurance in Canada, and Tokio Marine in the Lloyd’s of London market. An increase in commercial use of drones in the US could provide a steady flow of data that would allow more insurers to price and issue coverage for use of UAS. On the other hand, if the Pathfinder program’s goals are fulfilled—to find ways to safely use UAVs outside a pilot’s visual line of sight—increased remote use of drones could raise risk profiles for insurance coverage.”

At the conference, Huerta also announced a new smartphone app called B4UFLY, designed to help model aircraft and UAS users know if it is safe and legal to fly in their current or planned location by pairing geolocations with the relevant restrictions and requirements.

For more about drones, UAV regulations, and the potential impact these machines may have on the insurance industry, check out “Drones Take Flight,” the April cover story of Risk Management magazine.