“If it’s dull, dirty or dangerous, use a drone.”

That catchphrase is gaining popularity in the insurance industry as unmanned aircraft systems, more commonly known as drones, continue to develop innovative commercial uses.

By now, most people are aware that major online retailers have plans to begin delivering packages with drones. “But we have also seen reports of many other industries beginning to explore drones' potential,” says Ron Beiderman, vice president of commercial lines coverage products at ISO. “From the perspective of these insured businesses, requesting insurance for drones and drone-related operations could become as routine as a contractor’s insurance for mobile equipment.”

Why Drones?

Drones will “drop the price of admission” to achieve a variety of business goals, says Doug Johnson, president of JSL Aviation Insurance. Potential uses range far and wide:

• Agriculture: crop health or livestock monitoring
• Construction: land conditions and mapping
• Inspections and patrol: power lines, pipelines, traffic, oil rigs and more
• News: aerial reporting
• Real estate: aerial photography
• Insurance: claims and underwriting operations
• Entertainment: movie and television production
• Delivery: flower shops, drycleaners, pharmacies and more
• Service: table service at restaurants and bars

“And that’s really just scratching the surface—all these things we usually require actual aircraft to do now have the potential to be done with a drone instead,” says Travis French, aviation broker at Arlington/Roe. “It’s quite expensive to operate a large turbine helicopter compared to a four-pound drone.”

In addition to significant cost savings, drones offer safety advantages for many industries. “If you own a construction firm that’s inspecting a bridge, do you send a drone to the top beams to survey conditions, or do you send a human being?” Beiderman points out. “If you’re a farmer with a blockage in a grain silo duct, do you send a worker up to the top of the silo to see what's causing the blockage, or do you send a drone? In this regard, drones have enormous potential for preventing worker injuries.”

Coverage Concerns

Although some risks using a large fleet of drones may require coverage traditionally available in aviation policies, many may not be candidates for that type of insurance. For businesses that have only a few drones involved in limited operations, for example, “modifying an already existing property or liability policy might be appropriate,” Beiderman says.

But currently, non-aviation coverage for drones is limited. “The Federal Aviation Administration (FAA) has made a very specific point of saying drones are aircraft,” Johnson says. “That being the case, they’re clearly excluded in 99% of the CGL policies you see out there.”

To assist clients with drone insurance, then, agents might need to seek out specialty aviation coverage. “The parts that have to be tweaked are coverages that don’t really apply when we’re talking standard aircraft vs. a drone,” such as non-owned aircraft liability and pilot warranties, French explains.

Johnson points out that on an aviation policy, “purpose of use” is an integral element: Does the client plan to use the aircraft for private use? Flight instruction? Aircraft charter? Rental? Pipeline patrol? Drone uses are likely to differ significantly from aircraft—and that will have an impact on more than just policy language.

“The operating environment and the purpose of use will also determine rating,” Johnson says. “As these uses develop and as loss patterns develop, then the insurance companies will be able to get a handle on what the rates should be for various classes of drones.”

French notes that while the first carriers to attempt drone coverage started around the 10% range for physical damage, as competition continues to heat up, he’s seen that number “trickle down” closer to 7-8% for drone values between $2,500 and $10,000. In French’s first drone-related claim, for example, a drone malfunctioned and crashed in an open area. The client was insured for $4,000 of physical damage coverage and submitted a repair bill for about $1,200.

“It’s going to change with instances like these where we actually start to see some claims and can find some data,” French says. “Maybe now they’ll start to refine rates and even differentiate them, because they’re sort of hitting it with a broad brush”—regardless of brand, specs and usage details.

What’s next? ISO has already responded with a range of endorsements, filed on a multistate basis for June 2015 implementation, to help insurers better align drone product offerings both with their underwriting tolerance and the needs of clients. Six core options will be available under both the general liability and umbrella program: three optional exclusions and three coverage options.

According to Beiderman, the options provide the tools to either grant coverage or exclude drone-related liability under Coverage A (bodily injury and property damage) only; Coverage B (personal and advertising injury) only; or Coverage A and B together under a single endorsement.

“The exclusionary endorsements preclude liability arising out of the ownership, maintenance, use or entrustment to others of any unmanned aircraft,” Beiderman explains. “Each of the coverage options contains a similar exclusion, but with an exception to allow for limited coverage for designated drones, with respect to scheduled operations or projects.”

Ultimately, “from a loss history perspective, the industry is very green,” says Chad Trainor, vice president of Arlington/Roe. “Everybody’s shooting from the hip right now. Once loss data starts flowing in and the FAA tightens regulations, that will help drive underwriting parameters.”

For details on potential FAA drone action in 2015, keep an eye on IAmagazine.com and upcoming issues of the Markets Pulse e-newsletter.

Jacquelyn Connelly is IA senior editor.