Rise of the Drones
An unmanned aircraft flies over a raging forest fire, alerting firefighters to where the blaze is most dangerous; another hovers over a construction site conducting a building inspection; and a third sweeps through a neighborhood taking photographs that showcase the exterior and interior of a home listed for sale.
While this may sound like some sci-fi movie scene set in the future — it’s not. The use of flying robotics in the form of small unmanned aircraft systems (UAS), also known as drones, is not only happening now, its commercial growth is predicted to significantly increase over the next 10 years.
However, in implementing these new UAS-related business opportunities, a multitude of insurance liability and coverage issues must be addressed, ranging from personal injury and invasion of privacy to aerial surveillance and data collection.
An Expanding Market
The Federal Aviation Administration (FAA) has determined that small UAS are “currently the most dynamic growth sector within the aviation industry.” By 2020, it is estimated that about 30,000 small unmanned aircrafts will be used for all types of business purposes. Currently, the FAA has allocated $63.4 billion for the modernization of the country’s air traffic control systems as well as an expansion of airspace to accommodate the commercial use of UAS.
Total spending for small unmanned aircraft systems worldwide is expected to reach $89.1 billion over the next 10 years.
For added perspective on the growth of this industry, the Teal Group’s 2012 market study forecasts that total spending for UAS worldwide is expected to reach $89.1 billion over the next 10 years, including strong military and commercial demand. The FAA also asserts that civil UAS markets will continue to grow even with the current regulatory constraints. However, once these constraints are modified, commercial markets will quickly develop, and demand for additional UAS and ancillary services will be created. The FAA estimates that this will translate into approximately 7,500 commercial UAS being viable at the end of five years.
For commercial operations, the FAA has approved two flying robotics models; both of which weigh less than 55 pounds and measure four and half feet long. Prior to this, the only way the commercial/private sector could fly an unmanned aircraft in U.S. airspace was with an experimental airworthiness certification.
These small crafts enjoy two distinct features not shared with the aviation marketplace: (1) they are unmanned, having no human pilot/operator onboard, and (2) they are remotely operated by a pilot using data link transmissions.
In addition, these UAS have the ability to house high-powered cameras, infrared sensors, facial recognition technology, and license plate readers. For example, Halstead Property located in Darien, Conn., has been using aerial robotic cameras in its real estate business for almost four years to showcase home listings. The first in the state to use this technology, the company was recently featured on the “Today” show in a demonstration of how images can be captured remotely and then posted on the Internet, showing a home from both inside and out. The use of the technology has increased Halstead’s online listings views by more than three times and clients are impressed by the company’s progressive marketing efforts and use of cutting-edge technology.
Integration By Late 2015
Congress has tasked the FAA with integrating UAS into the national airspace system by late 2015. This accelerated time frame requires the FAA to quickly develop a comprehensive plan focused on the safety of UAS technology as well as operator certification. To meet these objectives, the FAA, in March 2012, created a new UAS integration office which brings together specialists from the aviation safety and air traffic organizations.
In attempting to integrate this new generation of commercial flying robotics, it is clear that the FAA is facing a variety of complex operational, procedural and technological challenges. Specifically, the FAA must develop effective policies and standards addressing the following issues: increasing UAS capacity, efficiency and predictability while enhancing safety; operating globally; creating a flexible paradigm for airspace uses; and mitigating congestion with a concern for protecting both safety and the environment.
Additionally, there are a host of related legal issues that will arise with the introduction of UAS in the skies. Such concerns include whether a property owner may protect his property from a trespassing drone; stalking, harassment, and other criminal laws that could be related to drone use; the applicability of airspace ownership laws; concerns over invasion of privacy and spying; and the extent to which federal aviation law trumps state law.
In 2013, the Drone Aircraft Privacy & Transparency Act was introduced to create a regulatory scheme for the private use of drones, including privacy protection, data collection and enforcement.
Carriers are developing policies to cover exposures, but there is little clarity or guidance in this area.
A Myriad of Challenges
In addition to regulatory and legal challenges, there are a myriad of complex liability and coverage issues related to insuring the use of commercial UAS. Surely, the operation of flying robotics will not be as orderly as presented in “The Jetsons” with all kinds of new and serious problems arising over such things as airspace procedures, types of accidents, and inadvertent eavesdropping.
Carriers are currently in the process of developing policies to cover insurance exposures presented by these small unmanned aircrafts, yet there is little clarity or guidance in this area.
However, even with the current lack of UAS insurance “experts” or private UAS claims, it is clear that two particular issues are going to raise huge red flags to the insurance industry — personal injury and invasion of privacy. As far as insuring these aircraft, carriers will want to know such things as its function or intent, its takeoff and landing location, whether it will be operating over a populated area, and its flying altitude.
In addition, with the ability to collect massive amounts of unsolicited data, UAS present an enormous threat to individual privacy and a significant challenge for insurance carriers. In drafting policies, it is crucial for carriers to know how such information will be used.
Given the inherently conservative nature of the insurance industry, carriers might require even stricter guidelines than what the FAA may mandate. Regardless, the following general types of coverage will be needed for the use of UAS and ancillary business activities: liability, personal injury, invasion of privacy, property and workers’ compensation.
Liability coverage typically includes protection for personal injury, which therefore also covers invasion of privacy. The scope of coverage will really depend on exactly what the aircraft is meant to do.
Property coverage broadly applies to the production, assembly and wholesaling process, which not only protects the parts being assembled and the finished product sitting in a warehouse, but the machinery as well.
In addition, while whole coverage will definitely be needed, aircraft underwriters are currently exploring how to write such policies as UAS are going to be significantly smaller than standard aircraft, with some even being perceived as little model kit types. At this stage, it’s difficult to predict what they will or will not do.
Workers’ compensation coverage is necessary to protect the people who are working for and in the facilities of UAS-related businesses.
Also, since many of these UAS businesses are going to be entrepreneurial startups funded by investors, there is a risk of financial loss due to operational mismanagement. Therefore, exploring directors’ and officers’ liability insurance might be a prudent option under the circumstances.
Given that the use of UAS is completely new ground for the insurance industry, it is incumbent upon the broker to ask all the right questions and “go deep” in flushing out all the details. For example, brokers should inquire about data collection, storage and usage policies as well as a drone’s particular purpose and other physical specifications as it is information that must be presented to an underwriter. Nothing should be left to the imagination.
Currently, there are about 21 insurance companies that write aircraft products liability policies, whereas in previous years, there were only about nine.
As carriers become increasingly more comfortable with this unfamiliar territory, just as they did with insuring certain employment practices or cyber liability, the capacity to underwrite such policies will also increase.
However, bear in mind that insurance is about the collective, so if carriers get one or two deaths or serious injury claims, they will inevitably start to pull back, which results in less available coverage and higher prices.
While insurance coverage for commercial drones is currently “up in the air,” there is no question that the UAS market is a key growth area for the aerospace sector as well as other commercial businesses. For those insurance professionals who are willing to step in, learn, and not take a passive “wait and see approach,” there are tremendous opportunities in the rapidly expanding field of commercial UAS.
Making the Grade
Taking the time to match a tough job with a worker who can actually do it reduces the potential for costly workplace injuries, employers are now finding.
That concept is leading more employers to study their essential job functions and test the ability of job candidates, particularly when a job requires a new hire to perform functions known to cause injuries.
Increased nationwide hiring, the rising cost of treating workplace injuries and a less physically fit job applicant pool are driving more employers to employ the practice known as post-offer employment testing.
Post-offer employment testing, or POET, involves simulating the lifting, pushing, pulling and other physical activities that make up a job’s essential functions. Employers are increasingly making employment offers conditional upon a job applicant’s physical ability to perform those activities.
And in another recent trend, employers are expanding the strategy to help determine when to return an established employee to their duties following a workplace injury or a non-occupational disability leave.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment.”
–Drew Bossen, founder, Atlas Ergonomics
At Cooper Standard, the Novi, Mich.-based automobile parts manufacturer, for example, workers desiring a strenuous job first participate in “simulated work.” That helps determine whether they are physically capable of performing the real job, said Patricia Hostine, the company’s global manager of workers’ compensation.
A job requiring continual force to press rubber hose into a mold that forms radiator hoses is desirable because it is one of the better paying tasks the auto parts manufacturer offers, Hostine added.
But it’s also one of the company’s most physically demanding roles.
“It’s very hard work,” Hostine said. “That is where a lot of our injuries are found.”
After performing the simulated work, more applicants decide against taking the job than the company disqualifies. That’s because the testing showed them they couldn’t do the job anyway.
Cooper Standard also requires a functional evaluation, conducted by physical therapists, for any worker who has been away from work either because of a workplace injury or a non-occupational disability.
That requires employees who normally form radiator hoses to show that they are once again physically capable of performing the work after returning from an absence.
Employers that have benefited from conducting POET evaluations for newly hired employees are increasingly adopting a similar worker evaluation as part of their return-to-work programs, several experts said.
“Historically, these [physical evaluations] have been used at the point of offer, at the point of employment,” said Drew Bossen, a physical therapist and founder of Atlas Ergonomics. “But in the last 12 months, we have clients formulating methodologies to use them for return to work as well.”
Data from an initial POET exam can also provide a measured baseline of an employee’s abilities that can be reviewed post injury to help determine when the worker has regained their ability to return to their original job, or whether they should take up other duties.
Using data that way can reduce return-to-work durations by providing support for a doctor’s determination to release their patient.
Most employers using a POET system, however, still use it only to test newly hired workers.
Evaluating whether potential new hires have the physical ability to perform certain tasks can substantially reduce a company’s injury rate because newer workers typically account for a greater number of injuries than their more-experienced counterparts, POET advocates said.
Data compiled by the National Council on Compensation Insurance Inc. showed that workers on the job less than a year in 2007 accounted for nearly 34 percent of injuries although they made up only 23 percent of the labor force.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment,” Bossen said.
Now, as the U.S. Labor Department reports increased hiring across the country, vendors that provide physical ability testing programs said they are seeing increased demand, which had dropped off during the recession.
“We have seen a big uptick in companies interested in doing this across all industries,” including transportation, mining and health care, said Connie Vaughn-Miller, vice president of business development for BTE Technologies.
The testing may be more beneficial for the most strenuous types of work.
Hostine at Cooper Standard said, for example, that she does not see a cost/benefit advantage for testing workers engaged in light production jobs.
Most employers adopting a POET strategy do so for certain positions and many start with a pilot program, experts said. It’s best to decide which job categories to include in a pilot program by reviewing the company’s claims history to pinpoint where injury frequency and severity are problems. Or, they recommend starting with the company’s most physically demanding jobs, then add others if the pilot results warrant doing so.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
–Libby Christman, vice president of risk management, Ahold USA.
Making Work Safer
“One of our company promises is to be a better place to work,” said Libby Christman, vice president of risk management at Ahold USA.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
Ahold is a retailer with about 120,000 employees operating stores under the names of Stop & Shop, Giant Food Stores, Martin’s Food Markets, and Peapod, an online grocery ordering unit.
Late last year, Ahold launched a pilot program for Peapod delivery drivers and for certain strenuous jobs in two warehouses, Christman said. The warehouse jobs require pushing, pulling, bending and lifting.
Since September, Christman has found that about 25 percent of job applicants could not pass its physical demands test. Screening for an employee capable of doing the job, though, not only reduces injuries, but improves productivity.
“We know that obtaining an accurate assessment of an applicant’s physical abilities can help us place him or her in a suitable job, potentially eliminate injuries and ensure efficiency and performance on the job,” Christman said.
Stepped-up hiring is not the only factor driving employer demand for POET services, observers said.
Employers — continually pushing for more sophisticated safety measures in the face of an aging, more obese, and less physically fit U.S. workforce — are also driving the demand, BTE Technologies’ Vaughn-Miller said.
The Discrimination Question
Employers cannot discriminate when hiring, but they can legally ask a worker to demonstrate that they can meet the physical demands of a job’s essential functions, experts said.
That requires careful analysis, however, to clearly understand a job’s essential functions, so the designed test measures just those functions and does not go beyond evaluating a worker’s ability to perform those specific tasks.
Employers have run afoul of the Equal Employment Opportunity Commission when implementing POET programs that evaluated for abilities beyond those required by the job.
If employees must lift 75 pounds only once a year, and can use a mechanical lift assist to help them when they do so, then testing to see whether a worker can lift 75 pounds is not a fair test, advised Colleen M. Britz, managing director and ergonomics practice leader for Marsh Risk Consulting.
Employers may also face discrimination complaints if they do not require a POET evaluation of everyone seeking a specific job, experts warned.
The tests themselves, however, vary substantially, depending on the vendor or employer providing them.
Some resemble gym equipment with electronic systems for measuring a worker’s strength and agility. Those results can then be compared to computerized measurements of a task. Other tests may be as simple as requiring a worker to lift bags of sand.
“I do consider it a best practice to have a well-designed post-offer employment test that truly is measuring an employee’s capacity to meet physical demands,” Britz said. “It’s a matter, from my perspective, of whether some of the methodologies are truly testing that.”
The wide variation in testing methodology has hampered the collection of data on POET’s impact on overall employee injury rates across industries or multiple employers, experts said.
But individual employers have experienced success, Britz said.
“I don’t know of any company that has stopped doing POET after starting — because they are seeing a positive return on investment,” she added.
A physical abilities test helped Prince William County in Virginia mitigate a double loss driven by candidates seeking to become firefighters.
The county was losing tens of thousands of dollars on hiring and training costs each time a job candidate washed out of a 26-week training course simply because they could not perform the physical challenges firefighters face in the line of duty, said Tim Keen, assistant chief for the county’s Department of Fire and Rescue.
Because firefighting is a tough job, a lack of physical capability also contributed to recruit training injuries.
“Not only is it a hard job, but when you add all the gear they wear, their air packs, as well as the functional movements that it takes to accomplish certain tasks, it puts strains on the body,” Keen said.
Those strains became costly workers’ compensation claims when recruits could not return to an existing job as would occur after an established firefighter suffered an injury, added Lori Gray, the county’s risk management division chief. That forced the county to continue paying workers’ compensation benefits to recruits who did not have a job to return to.
So in 2003, the risk management and fire department helped the county establish its own facility where applicants wanting to become firefighters must first participate in a standardized Candidate Physical Ability Test.
The International Association of Fire Fighters and the International Association of Fire Chiefs developed the CPAT test the county licenses.
The test used by fire departments across the country requires candidates to climb stairs while wearing weight vests, drag hoses and simulated bodies, simulate forcing their way into a building, and conduct other physical feats within a certain time period.
“There are a variety of firefighting tasks they must go through in this course,” Keen said. The course tests their aerobic capabilities, their flexibility, core strength, and upper and lower body fitness.
The test’s standardization ensures it is true to the firefighter’s actual work role and that is legal and fair to all candidates, he added.
“Regardless of age or gender the course is the same for everybody,” he said.
“The test is appropriate so you are not losing people due to injuries, especially early in their careers, Keen said. “It’s the right thing to do, making sure they are physically capable of doing the job.”
The screenings have resulted in fewer recruits lost due to a lack of physical ability.
“We have also seen a huge reduction in the number of injuries that were occurring because recruits are coming in more physically fit to do the job,” Keen said.
POET advocates said the screening results have other applications as well.
In some cases, post-offer physical test results provide employers with a defense in permanent disability cases, Britz said.
In states allowing employers to apportion responsibility for permanent disability claims, for example, the baseline results from the initial post-offer exam can limit an employer’s liability by showing that a worker lost only a certain portion of their functional ability during their employment tenure.
Britz added that she expects to see more large, sophisticated employers counter rising claims severity driven by factors such as aging and obesity by integrating their ergonomics, wellness intervention and physical ability testing programs.
For example, an employee returning from a leave might undergo a fitness for duty exam to evaluate their ability to perform the job without injuring themselves.
Simultaneously, the employee could be referred to the employer’s wellness program to address health-related issues such as high body mass index or to learn exercises that would strengthen certain body parts, such as their shoulders, if frequently used in their daily work routines.
“That is the evolution of post-offer employment testing into fitness-for-duty programs,” she said.
“Not so they lose the job, but to recognize that this person needs to work on shoulder strength. So we create an opportunity to increase shoulder strength. I think that is going to be the wave of the future.”
A Renaissance In U.S. Energy
America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor.
Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter.
“As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe.
Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.
Aging Infrastructure, Aging Personnel
The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.
“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”
In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.
Increasing Frequency of Severity
Current financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.
Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.
“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.
“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”
On its own, the domestic energy bonanza presents complex risk management challenges.
However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.
A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.
In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.
Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.
“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.
Back to Basics
Has the time come for a reset?
Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.
He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.
It’s something the industry used to do and got away from, but needs to get back to.
“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”
As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.
According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.
After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.
Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.