Drones, on Demand
When the Federal Aviation Administration eased licensing requirements on piloting drones in late August, conditions ripened for explosive growth in their use. Yet the vast majority of drones are not insured, according to experts.
More than 600,000 drones will be sold this year for commercial use in the skies over the United States, according to FAA estimates. That’s three times more than manned aircraft such as airplanes and helicopters. An additional 1.9 million drones will be sold to hobbyists for recreational use, the FAA forecast earlier this year.
Look ahead to 2020 and the FAA expects there will be more than 4.7 million drones flying worldwide. Each and every one has the potential to crash into buildings, wires or worse, people. The downstream effect of these accidents could be more worrisome than the crash itself.
Increasingly, drones are a standard business tool used to survey crops and construction sites, photograph properties for real estate listings and insurance assessments, and even to deliver goods. Expect them to become much more commonplace as companies discover new and creative uses, and drone manufacturers find ways to make them smaller, cheaper, safer and easier to use.
Yet, 80 percent of all drones in use today may be uninsured, according to one estimate. Many are piloted by neophytes who sat on the sidelines until the FAA’s less restrictive guidelines opened the door for them to soar the skies this year.
“For the first time in aviation history, you’ve got tens of thousands of people bringing flying lawn mowers up into the air without any formal background in aviation training or any understanding of the international air space system,” said Alan Perlman, the founder of UAV Coach, a website offering industry information and training certification to drone pilots.
Swiss Re brought together drone experts, hackers, business leaders and insurance experts to discuss the risks and insurance underwriting of drones.
More drones taking to the skies add new risks and vastly change the insurance business, according to a report by Allianz Global Corporate & Specialty (AGCS): “Rise of the Drones: Managing the Unique Risks Associated with Unmanned Aircraft Systems.” The U.S. drone insurance market may be worth more than $500 million by the end of 2020, according to the report. Globally, it could approach $1 billion.
Global Aerospace Inc., a leading provider of aircraft insurance and risk management solutions, was one of the first to offer drone insurance under an aviation policy just four years ago.
“The sheer volume of requests for insurance is fast becoming overwhelming, and I think it will continue to grow at an exponential pace,” said Christopher Proudlove, senior vice president, general aviation team leader of the Northeast regional office at Global Aerospace.
“Covering the hazards and coming up with the appropriate products is probably the easiest part; dealing with the volume is going to be a challenge.”
Insurers are working to offer affordable products to the growing crowds of drone pilots. Niche brokerages aimed at commercial drone pilots are springing up, as are tech startups offering on-demand insurance apps, Uber-like drone pilot searches and safety features for night or long-distance flying.
On-Demand Drone Insurance
One company, Verifly, developed a mobile application offering on-demand drone insurance at hourly rates.
Verifly was launched in August in a partnership with Global Aerospace. It offers $1 million in liability insurance for as low as $10 an hour on any drone weighing less than 15 pounds and flying up to a one-quarter mile away from the pilot. Users order the insurance on their phones and receive instant approval.
Verifly uses geospatial mapping to assess the risks based on location and current weather conditions to provide a real-time quote. Users can purchase third-party liability insurance instantly. Coverage includes injury to people and property damage, unintentional invasion of privacy and unintentional flyaways.
“We are assessing ways to make the process of buying drone insurance easier because we recognize the fact that the vast majority of operators are millennials who rely on their smart phones,” Proudlove said.
“We definitely have some projects in the works that will help facilitate buying insurance. This is a user group that won’t be walking down to the local insurance office to fill out an application with a pen.”
FairFleet, developed in partnership with Allianz X (which helps develop new business ideas in the insurance space), is another new product that could be described as Uber for the drone business. Currently available in Europe — and planned for the U.S. next year — it connects “drone for service” pilots with nearby businesses in need of one-off jobs.
The FAA Requirements
Under the updated FAA rules, commercial drone pilots must pass a written test to receive certification. In the past they were required to obtain a manned aircraft pilot’s license first and submit detailed logs for each flight.
Now, owners register when they fly an unmanned drone outdoors weighing more than 0.55 pounds but less than 55 pounds. Under FAA regulations, devices can’t be flown higher than 400 feet and should not fly over populated areas, near airports or after dark. The operator must be able to see the device at all times.
The FAA is working with companies such as CNN (on using drones for newsgathering in populated areas) and BNSF Railroad (on using drones in rural/isolated areas out of sight of the pilot) to test safety technology under a program called Pathfinder.
While operators must have a drone pilot certification, there’s currently no rules on the actual drone, unlike the rigorous requirements the FAA places on manned airplane manufacturers.
“Certainly a great distinction can be drawn between that and manned aircraft,” Proudlove said.
“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.”
It’s an interesting dilemma for insurers who have to consider the safety of the drone in the absence of any federal oversight. If just one commercial drone crosses into the path of an airliner, the collision damage could exceed $10 million, not to mention the potential loss of lives.
“I see a lot of people missing a lot of steps and this is where insurance is really important,” said Perlman of UAV Coach.
“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.” — Christopher Proudlove, SVP, Global Aerospace.
Far too often, he said, people watch a “cool video on YouTube and think they can buy a drone, get unmanned pilot certified, and instantly have a profitable business.”
“There’s a lot of work to do,” he said.
“That’s where the industry is now; helping to facilitate that path for drone pilots,” Perlman said, noting that his drone insurance guide is the most popular page on his website.
Insurers routinely mandate higher safety standards than those set by the FAA for traditional aviation risks, Global Aerospace said in a report. Merely meeting the legal safety requirements to become a pilot may not be enough to guarantee that a new operator will be a safe operator.
“The minimum FAA standard is a great starting point and new commercial operators may need additional training to be proficient and safe,” said James Van Meter, an aviation practice leader at AGCS who helped to write the AGCS study.
“We are used to dealing with certificated pilots, certificated aircraft, a different level of sophistication and sort of a shared fate; if we insure a pilot in an airplane, his fate is in his own hands when he’s operating his own aircraft.”
With drone use, the pilot may be minimally trained and newly certificated, and operating equipment that cost under $1,000, so “there’s no shared fate,” Van Meter said.
“There are some challenges there, but the new regulation provides good basic training on air space, risk management and some introductory safety issues,” he said.
Alexander Sheard co-founded Skyvuze Technologies LLC, a brokerage specializing in drone insurance, after he had trouble figuring out how to insure the drones he used in an aerial photography business.
Sheard said Skyvuze bridges the gap between drone entrepreneurs and the underwriters that offer unmanned aviation policies. He helps other drone pilots figure out what insurance they need and additional safety measures they should take.
“It’s really looking at all the risk and exposure and coming up with a complete package for these new operators that are popping up every day,” Sheard said.
Any commercial drone operator should assume that their customers and partners will eventually require them to certify that they are insured, Sheard said. Many experts also expect to one day see a type of vehicle registration similar to that required on cars.
“The ones that recognize there are risks as a key part of their business every time they bring this bird up into the sky, those are the ones that are going to be successful,” Perlman said.
“Those are the ones insurance companies are going to want to work with because they are mitigating their risks anyway and they have a ‘safety first’ mind-set.”
“We don’t yet truly understand the hazards, we don’t understand the capabilities of the system, how long they’ll last, what type of experience an operator needs to safely operate a certain make and model of drone,” Proudlove said.
“We are learning all this as we go. It’s really unbelievable what we are going to see over the next couple of years as far as the drone pilots and continued innovations,” Perlman said.
“That’s really exciting but I’m worried for that one operator who loses control for whatever reason and, maybe it’s cynical, but these things are dangerous.” &
Cyber Security’s Latest Buzz
Insurers, here’s a pop quiz. How secure are you that you fully understand all the risks you have accepted on behalf of your clients? That your book of business contains no surprises?
My guess is that you think you’re pretty secure, and my other guess is that you’re really not. One example should suffice, but before I explain, a trigger warning to decent folk: The subject is sex toys.
Right. Now that I have your attention … are you prepared to pay out when hostile forces take over your client’s love machines?
Far-fetched? Far from it. One vibrator on the market reports back to its manufacturer on the behavior of the toy’s owner. Worse, it can be commandeered by hackers.
Full disclosure: I know nothing of sex toys. In fact, I’m mortified just writing about them.
Insurers must cope with unknowable change while providing insureds with good vibrations.
Here are some facts, to steady the ship.
“Two years ago, someone had the good idea to put a Bluetooth connection inside a vibrator,” The Guardian newspaper reported. The vibrator can be linked to a smartphone app that controls it remotely. One party tells the vibrator what to do, and the other party, well, I dunno.
At a hacking conference, two independent hackers from New Zealand reported that the link between the vibrator and the app is not secure. A hacker could take control of the vibrator at a crucial moment and, well, I dunno.
Two million hackable vibrators have been sold. People could be unaware that they’re having virtual sex with total strangers, although in some circles that might be considered a good thing.
Sooner or later, though, hackees must surely come to the conclusion that advantage has been taken of them and demand recompense. Does your company cover vibrator hacking?
The app reports the temperature of the vibrator to its manufacturer every minute, and also reports changes in the intensity of the vibrations.
“What are the implications of who they’re going to give that data to?” asked one of the hackers.
In a statement, manufacturer Standard Innovation said the information was for “market research purposes, so that we can better understand what settings and levels of intensity are most enjoyed.” So that’s alright then.
If the readers of this magazine, the world’s smartest insurance people, were asked to list 100 utterly bizarre risks, not one of them would have written down “vibrator hacking.”
Insurers must cope with unknowable change while providing insureds with good vibrations. By the time the unimaginable becomes imaginable and then becomes hard fact, the risk is routinely covered and insurers are worrying about even more absurd risks that they might one day be asked to cover.
That’s why insurance is so fascinating to the observer — no one ever has any idea what’s coming next. &
From Drones to Defects: Planning for Construction’s Top Challenges
The construction industry is firing on all cylinders. New projects spring up every day, but not all go according to plan.
Three out of every four construction projects fail to finish on time. Every party involved – owners, designers, contractors and subcontractors – expects perfection, with the final product delivered on schedule and on budget. Those expectations leave little room for uncertainty, so even a small hiccup can have ripple effects that disrupt a project for everyone.
“There’s often a big disconnect on the front end of project planning,” said Doug Cauti, Senior Vice President, National Insurance, Chief Underwriting Officer, Construction, Liberty Mutual.
Proactive risk mitigation is also important to manage emerging challenges facing the construction industry ‒ drone regulations are evolving, commercial auto losses are rising, and so is uncertainty about which party might be held responsible for a construction defect. Without the proper planning, these issues can easily be overlooked and result in major losses and project disruption.
Liberty Mutual’s Doug Cauti discusses key challenges facing the construction market.
“Key risk management strategies have to be aligned among all parties from the beginning to minimize these uncertainties.”
Before construction begins, there are actions that project owners, designers and contractors can take to address these challenges and better protect their projects and businesses:
Drones can be useful tools on construction sites, providing an extra set of “eyes” for large commercial projects or tall buildings. They provide a real time aerial glimpse of works in progress, giving supervisors an added perspective to spot potential flaws, assess safety hazards, and check on workers. But many challenges remain in the safe — and legal — operation of drones.
Liberty Mutual’s interactive infographic highlights risks related to managing drones at construction sites, and also includes a pre-planning drone use guide and a pre-flight checklist that includes making sure to review the latest drone regulations.
How construction buyers can manage the insurance implications of using drones in their operations.
General contractors and project owners need to stay up to speed on FAA regulations, which changed in August, 2016.
“For one thing, operators need to have the drone in sight at all times,” Cauti said.
“And you need to make sure any operators are appropriately licensed and trained, that the drones are regularly maintained, and that the machines don’t impede on others’ safety and privacy.”
Clear flight paths and work zone boundaries can minimize the risk of a drone striking another property, or worse, a person. Operators should also know how to conduct an emergency landing if the drone suddenly loses power. It’s also important to consider how you are going to manage and use drone footage. Advertising liability can be a concern if third party images are captured and released. Know who is in charge of the data collected, who has access to it, and how you are going to protect it.
“If the contractor owns the drone, it takes on more liability. The contractor should review its insurance policies to make sure the coverage will respond to that risk,” Cauti said.
“As an insurance carrier, we may have a role to play in those proactive discussions. We are uniquely positioned to help project stakeholders see their risks and work to minimize them.”
— Doug Cauti, Senior Vice President, National Insurance, Chief Underwriting Officer, Construction, Liberty Mutual Insurance
Contractors and project owners can protect themselves through enhancements to their commercial general liability policies or through separate aviation policies, he said.
If a general contractor leases a drone through a third party, “they bear the responsibility of making sure the vendor is fully insured,” Cauti said. Vendors should have “non-owned” aviation coverage with limits suitable to handle the size of the risk.
Commercial auto losses challenge many business sectors, and construction is no exception.
More vehicles on the road and more miles driven, combined with fewer experienced commercial drivers, are driving up the frequency of accidents. On construction sites in particular, congestion created by closed roads, piles of materials and roving heavy machinery may lead to work zone accidents. Rising medical costs and repair and replacement costs of high-tech vehicles increase claim severity.
“I don’t see this trend reversing any time soon,” Cauti said.
Mitigating commercial auto losses begins with driver hiring practices.
“Pay attention to who you put behind the wheel,” Cauti said.
“Motor vehicle reports (MVRs) and driving history can alert employers to previous accidents or tickets. But there also needs to be regular communication with the drivers you do hire, and clear protocols in place that define expectations of how the job should be performed,” he added.
Ways construction buyers can manage rising commercial auto loss costs and better protect their fleets and employees.
Those protocols include requiring the use of seat belts, prohibiting cell phone use while behind the wheel, mandating scheduled breaks, outlining maintenance procedures, defining if company vehicles can be used for personal use, and establishing crash report procedures that delineate who to contact and what information to collect in the event of an accident.
Contractors can also monitor fleet performance through telematics systems. These on-board systems can track unsafe driving behaviors like hard braking, sharp turns, and speeding. But the data is only as good as the person analyzing it. Contractors and project owners should partner with an insurer who can use fleet telematics data effectively to pinpoint common causes of accidents and recommend specific risk mitigation strategies.
Liberty Mutual’s Managing Vital Driving Performance is one tool that leverages insureds existing telematics data to identify unsafe driving behaviors and accident patterns.
“Our risk control consultants can drill deeper into the data and interview drivers to identify patterns and find out the root causes of bad driving behaviors in the first place,” Cauti said.
For example, a post-accident interview with a driver could reveal that he had been skipping breaks and spending too many hours on the road, leading to fatigue and inattentive driving.
Identifying those connections enables consultants to make specific risk mitigation recommendations, such as adjusting drivers’ schedules and workloads to reduce overtime, or adjusting dispatch protocols so employers can ensure drivers aren’t working too many shifts in a short period of time.
Another uncertainty project owners, designers and contractors have to face is how insurance coverage will apply should a project end up in a dispute. “The struggle is around the definition of ‘faulty workmanship’ and who is responsible for the defect. Is it in the design or the build?” Cauti said.
“There can be a lot of finger pointing involved. This reinforces the need for contractors to have a systematic quality assurance (QA) program that adheres to best practices, and for every party to have a role in it.”
Elements of a QA program could include testing of construction materials, conducting regular walk-throughs and obtaining approvals from the owner at key phases, and final sign-off by the owner at the project’s completion.
How construction defects and the current legal climate are affecting projects.
Construction defect claims can affect a business’s reputation, profits, and ability to maintain insurance coverage. That’s why it’s so important to be vigilant about avoiding construction defects, whether you’re a designer, developer, owner or general contractor.
Ultimately, though, these risks should be addressed before ground is broken. Discussing these challenges and collaborating on loss prevention strategies up front reduces the likelihood that any “hiccups” will throw off project timelines or increase costs for the various stakeholders.
Pre-planning discussions also offer the opportunity for these parties to take advantage of carrier partners’ risk control services.
“As an insurance carrier, we may have a role to play in those proactive discussions,” Cauti said.
“We are uniquely positioned to help project stakeholders see their risks and work to minimize them.”
To learn more about Liberty Mutual’s solutions for the construction industry, visit https://business.libertymutualgroup.com/business-insurance/industries/construction-insurance-coverage.
 Managing Uncertainty and Expectations in Building Design and Construction SmartMarket Report
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.