Drone, Robots, and Self-driving Cars

Insurance carriers consider the implications of drones

Drone, Robots, and Self-driving Cars

By now you know what a drone is. The Federal Aviation Administration has estimated that by 2020 in the United States there will be approximately 30,000 commercial drones in use and many more civilian devices. Robots are being used in an increasing number of industries, from performing surgeries to providing exoskeletons for warehouse workers. Finally, at least one car manufacturer has promised to have fully automated cars available by the end of the decade. This Letter discusses the insurance issues involved in these newly popular technologies.

NEW TECHNOLOGY AND NEW RISKS

The government is focusing on devising operational regulations for small drones. However, it hasn’t addressed the privacy issues associated with drone use, but it does recognize those issues as an important concern. The Federal Aviation Administration (FAA) has said that it would work with the National Telecommunications and Information Administration to address those concerns.

Robots are being used in more and more industries, but the question remains — if something goes wrong, do you blame the operator or the manufacturer? Some states have passed laws permitting self-driving cars; however, liability and insurance regulations are open issues.

DRONES

Emerging and developing technology in robotics and aviation has pushed the boundaries of drone use in both commercial and personal settings. Who would have thought that we, as a society, would be buying highly sophisticated unmanned aircraft for our children as gifts, or that companies would be contemplating delivering products door-to-door by drones? As a culture, we are having difficulty in defining and understanding what a drone is and how it impacts our lives.

The FAA has defined a drone or unmanned aircraft system (UAS) as an unmanned aircraft and all of the associated support equipment necessary to operate the unmanned aircraft, such as the control station, data links, telemetry, communications, and navigation equipment, etc.

Drones come in all sizes and shapes. They can range from the hobbyist size and fit in the palm of your hand, controlled by smartphone or tablet device, to the major military aircraft, which is the size of manned aircraft. Costs range from $25 to multi-millions for complex drones for commercial and military use. The more complex versions can be preprogrammed and loaded with the most up-to-date GPS systems to operate unmanned for miles at a time.

FAA Suggested Regulations

The national regulatory agency currently responsible for safety requirements for the aviation industry is the FAA. In October of 2015, it held a news conference to announce that it plans to release a new set of guidelines for the operation and regulation of drones for both commercial users and hobbyists. (The agency has become more active because of the recent negative and potentially disastrous incidents of unauthorized and improper use of drone technology.) After reviewing the comments from the public, the FAA will make its final recommendations for regulation of small UAS. Some of the proposed rules are as follows.

  • Unmanned aircraft must weigh less than 55 pounds.
  • The unmanned aircraft must remain within visual line-of-sight (VLOS) of the operator or visual observer.
  • The user must engage in daylight operations only (official sunrise to official sunset, local time).
  • The user must yield the right-of-way to other aircraft, manned or unmanned.
  • The maximum airspeed is 100 miles per hour.
  • The maximum altitude is 500 feet above ground level.
  • The minimum weather visibility is 3 miles from the control station.
  • No operations are allowed in Class A (18,000 feet and above) airspace.
  • There can be no careless or reckless operations.
  • There must be a preflight inspection by the operator.
  • A person may not operate a small unmanned aircraft if he or she knows or has reason to know of any physical or mental condition that would interfere with the safe operation of the small UAS.

The newly proposed regulations also outline some requirements for operator qualifications or testing and equipment inspections or certifications. Operators would be required to: pass an initial aeronautical knowledge test at an FAA-approved knowledge testing center; be vetted by the Transportation Security Administration (TSA); obtain an unmanned aircraft operator certificate with a small UAS rating (like existing pilot airman certificates, which never expire); pass a recurrent aeronautical knowledge test every 24 months; be at least 17 years old; make available to the FAA, on request, the small UAS for inspection or testing, and any associated documents or records required to be kept under the proposed rule; report an accident to the FAA within 10 days of any operation that results in injury or property damage; and conduct a preflight inspection, to include specific aircraft and control station systems checks, to ensure the small UAS is safe for operation.

The above-proposed rules are directed more at the commercial user than the hobbyist. The talk of registration of drone users is a topic for debate and enforcement.

Recreational Drone Use

Recreational drone use is on the rise. You can walk through a mall and see small drones being demonstrated at many kiosk vendors. They are an attractive and inexpensive item for gifts or personal enjoyment. They tend to be toys but have generated a great deal of interest in the tween and teen markets, both male and female.

What the vendor never mentions are the safety issues and perhaps the liability issues. At this point, the smaller drones considered recreational in nature are not in the mainstream of the regulatory discussion. The new FAA regulations will need to address the issue from a hobbyist perspective, separate from a commercial issue.

As far as the insurance issues concerning hobby drones, there are questions regarding what a homeowners policy will cover. If a hobby drone crashes into a neighbor’s house and causes damage, it is likely that the homeowners policy will respond. If the homeowner uses the drone to take photos in violation of another neighbor’s privacy, the situation would be more complicated.

The standard homeowners policy provides coverage for damages the insured becomes legally obligated to pay because of bodily injury or property damage arising from an occurrence to which the policy applies. This broad grant of coverage extends insurance for liability arising from recreational drone operations. However, this broad coverage may be limited by policy exclusions.

Most homeowners policies exclude liability for injuries or damages arising out of the ownership, maintenance, operation, use, loading, or unloading of “aircraft.” Therefore, coverage may come down to how “aircraft” is defined, or not defined, in the policy. Typically, the exclusion makes an exception for model or hobby aircraft not used or designed to carry people or cargo.

If a homeowner uses his or her drone in a way that invades someone’s privacy, coverage should be available if the policy includes liability for “personal injury,” normally defined as injuries due to false arrest, detention, malicious prosecution, libel, slander and invasion of privacy. Again, the aircraft exclusion may apply. Also, most homeowner policies exclude coverage for injuries expected or intended by the insured or for criminal acts, like trespassing. An insurer might argue that the alleged invasion of privacy with a hobby drone was an intentional act by the insured, as opposed to negligent, and thus, there is no coverage.

Additionally, most homeowners policies exclude coverage for business activities. So if the homeowner uses a hobby drone to take photos of neighboring properties for a real estate business and causes damage or a breach of privacy, he or she will likely not be covered by the homeowners policy.

Hobby drone operators should evaluate their homeowner policy exclusions for commercial operations and intentional torts before grabbing the controls.

Commercial Insurance — What Should Your Policy Cover?

Until recently, the military has almost exclusively developed and operated unmanned aircraft, either for combat use, personnel training, or logistics. The precision agriculture industry is expected to be the largest market for commercial drone technology, helping farmers monitor crops and distribute pesticides to a much higher level of accuracy than currently possible. Additional potential commercial uses for drones include delivering items directly to consumers, inventory management, security and law enforcement, disaster recovery, and journalism.

In the United States, drone insurance is not currently required for either recreational or commercial use. The risks of crashes and incidents caused by drones in national airspace are unknown; however, insurers may be able to approximate loss experience from the aviation industry. This information will need to be adjusted for drone-specific issues such as robotic autonomy in flight and collision avoidance.

Drone insurance policies are usually broken up into two parts: (1) liability (claims by third parties for bodily injury and property damage) and (2) hull damage(damage to the UAS). The broad risks that a drone insurance policy must address include aviation safety, privacy, and cybersecurity.

Drone operators need both first-party and third-party liability insurance coverages for when a drone fails and causes a loss. The policy should cover first-party claims for damage to the drone itself and third-party coverage for damage to the property of others. Operators also need liability coverage for bodily injury to others, as well as third-party liability coverage for damages arising out of privacy intrusions, security breaches, and communication network failures.

If the drone collects, stores, or sends data, the operator needs coverage for damages arising out of the capture and transmission of personally identifiable information, nonpublic personal information, intellectual property, trade secrets, confidential data, etc.

Operators may also want business interruption coverage for drone loss of use or replacement costs, as well as data breach notification costs.

Operators should expect underwriters to be concerned with the training and licensing of the operator; the design of the drone itself, including the quality of its electrical, engine, and propeller systems; and the intended use of the drone and the venues where it will be used (e.g., urban or nonurban environments, over transportation arteries, in what airspace, etc.).

Here are a few questions that an insurer may consider when pricing a drone insurance policy: Have you logged at least 50–100 hours of flight time? Do you keep a maintenance log? Do you own or lease your equipment? Are you able to automatically record your flight log and data? Are you flying over water, or operating indoors (e.g., a concert venue or a trade show)? Have you completed some kind of UAS pilot training? What is the cost of each part of your rig? Do you have a previous history of accidents or loss?

At the end of the day, commercial drone operators should be prepared to demonstrate intimate knowledge of their systems and the environment in which they will be flying.

ROBOTS

The development of robots connected to the Internet, big data, the cloud, and advanced computing technology (e.g., artificial intelligence) means that we’re creating robots that can sense, think, and act based on specific data and sensory input, and make routine decisions. The applications for these robots are occurring in such areas as physical or psychological therapy, education, eldercare, exploration, hostage negotiation, rescue, entertainment, and home security. These applications will both create new liability risks and change or eliminate others.

Robotics in a growing range of industries are increasing efficiency and reducing costs. However, accompanying these advantages are risks, some of which relate to the general public and could, therefore, have serious ramifications for a company’s reputation.

There are two distinct robotics markets and communities: industrial, picture robotic arms on assembly lines, and service, picture humanoid forms in the academic and research communities. The automotive industry is the largest customer for industrial robots, but demand from the food and pharmaceutical sectors is increasing as technology improves. In the service space, because machines can be incredibly powerful, even a slight miscalculation could seriously harm any humans they interact with.

Surgical robots are already commonly found in hospital operating rooms. Robotic-assisted surgery offers a higher degree of precision and promotes faster healing compared to traditional surgery. Further, the miniaturization of technology has led to robots that operate remotely inside the body.

People with disabilities are increasingly using robotics to restore lost dexterity and function through technologies like electronic limbs and robotic wheelchairs. In the future, robots could assist the aging adult population by performing tasks that will keep people in their homes for longer (and out of assisted living facilities).

To minimize the risks of using robotics products, companies should develop risk management measures to control the three main causes of robot accidents: engineering errors, human mistakes, and poor environmental conditions. Engineering errors include programming bugs, faulty algorithms, and loose connections across parts and faulty electronics. Human errors, such as inattention, can be minimized by installing stringent company training programs and regularly reviewing procedures. Adverse environmental factors refer to extreme temperature, poor sensing in difficult weather, or improper lighting conditions, which can lead to incorrect responses by the robot.

Robots in the Workplace

Employers are covered by existing workers compensation statutes if a robot were to cause a workplace injury or fatality, the same as they would be in the event of an injury or death caused by any other piece of equipment or a coworker. The employer could also proceed with a products liability claim if there was an issue with the robot’s design or manufacture.

Employers should also consider, however, that robots in the workplace could potentially lower workers compensation costs. For example, robotic exoskeleton suits could dramatically reduce injury risk for workers with physically intensive jobs, potentially enhancing productivity at the same time.

For workers who have suffered temporary or permanently disabling injuries, exoskeletons could eventually open the doors for new means to keep injured workers on the job. Even severely disabled employees could potentially be returned to productive and essential work, increasing the quality of life for injured workers while saving employers millions in partial and total disability payments.

What about if a robot injures a customer or a vendor? In the event of a robot-related accident, the investigation will center on determining the root cause. Was it the environment, the hardware or firmware manufacturer, the application software, or the operating system manufacturer? Or was it human error? Questions of liability will become more complicated in many situations.

Claims may implicate various types of coverage, including CGL, technology professional liability, or other specialty coverage. Moreover, coverage disputes are certain to arise. So, it’s particularly important to design an insurance program with technology exposures in mind.

SELF-DRIVING AUTOS

Unmanned vehicles can be defined as vehicles controlled remotely by an operator, or autonomously operated. Autonomous vehicles are vehicles capable of driving themselves. In order to do this, the vehicle must be able to perceive its environment, make decisions about where it is safe and desirable to move and do so. It can also be possible for a vehicle to be only partially autonomous so that some decisions are made by a human driver and some by the machine itself. This has implications for the determination of liability in the event of an incident and will be a key factor in the pricing and structure of risk transfer.

Most accidents are caused by human error. Therefore, if this factor can be minimized by taking control of the moving vehicle away from the driver, accident rates should fall. Data from the Institute for Highway Safety (IIHS) and Highway Loss Data Institute (HLDI) already show a reduction in property damage liability and collision claims for cars equipped with forward-collision warning systems, especially those with automatic braking.

As the use of automated vehicles becomes more widespread, it is likely that the concept behind no-fault auto insurance laws will become an attractive alternative to tort-based laws, according to a 2014 RAND Corporation study. Collision and comprehensive (wind, vandalism, theft, etc.) coverages are less likely to change but may become cheaper if the potentially higher costs to repair or replace damaged vehicles is more than offset by the lower accident frequency rate.

Some industry experts predict the end of personal auto insurance altogether (or at least a drastically diminished auto insurance industry) as all the liability in case of an accident would be transferred to the car’s manufacturer, the software creator, or other third parties.

During the transition to entirely autonomous driving, insurers may try to rely more on telematics devices to monitor driver activity. These black boxes could help estimate the percentage of driver’s fault in case of an accident and distribute the liability between the person and the machine, putting insurers in a better position to subrogate against the automaker.

Acknowledgment

Jim Schmidt, Ed.D, wrote most of the drone discussion in this Letter. He has been a technical educator for the past 15 years, with an additional 25 years of educational experience and background. He is currently consulting for PCS Edventures as an educational consultant with the development of educational and STEM (science, technology, engineering, and math) related curriculum. Schmidt is a professor with Idaho State University in Meridian, Idaho. He holds a license as a professional counselor in the state of Idaho. He has served on many statewide workforce development projects for the state of Idaho and on national committees. Schmidt is also chair of the Drone Advisory Committee for the development of a drone app for the safe operation of the hobbyist drones.

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Melinda Martin

Account Executive

Melinda began her insurance career in 1985 with Alexander & Alexander where she received her Property & Casualty and Life & Health license. Since then she has worked at various agencies in the New Orleans area and in California as a senior account manager for Employee Benefit Plans.  While in California, she was also the Membership Director for the Burbank Chamber of Commerce. Melinda joined the AWS team in July of 2015.

Michael A. Seeling

Vice President

Graduated from the University of Louisiana at Lafayette with a B.A. in Insurance Risk Management and is a graduate of Archbishop Rummel High School in New Orleans. He joined AWS in October of 2008 and has been awarded the Patient Protection and Affordable Care Act Certification (PPACA). Additionally, he is working towards his Certified Insurance Counselor (CIC), Registered Health Underwriter (RHU), and Registered Employee Benefits Consultant (REBC) designations. He is also a member of the National Association of Health Underwriters (NAHU), National Association of Insurance Financial Advisors (NAIFA), and is an active member of the Fore!Kids foundation.