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.”
Pathogens, Allergens and Globalization – Oh My!
In 2014, a particular brand of cumin was used by dozens of food manufacturers to produce everything from spice mixes, hummus and bread crumbs to seasoned beef, poultry and pork products.
Yet, unbeknownst to these manufacturers, a potentially deadly contaminant was lurking…
What followed was the largest allergy-related recall since the U.S. Food Allergen Labeling and Consumer Protection Act became law in 2006. Retailers pulled 600,000 pounds of meat off the market, as well as hundreds of other products. As of May 2015, reports of peanut contaminated cumin were still being posted by FDA.
Food manufacturing executives have long known that a product contamination event is a looming risk to their business. While pathogens remain a threat, the dramatic increase in food allergen recalls coupled with distant, global supply chains creates an even more unpredictable and perilous exposure.
Recently peanut, an allergen in cumin, has joined the increasing list of unlikely contaminants, taking its place among a growing list that includes melamine, mineral oil, Sudan red and others.
“I have seen bacterial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant.”
— Nicky Alexandru, global head of Crisis Management at AIG
“An event such as the cumin contamination has a domino effect in the supply chain,” said Nicky Alexandru, global head of Crisis Management at AIG, which was the first company to provide contaminated product coverage almost 30 years ago. “With an ingredient like the cumin being used in hundreds of products, the third party damages add up quickly and may bankrupt the supplier. This leaves manufacturers with no ability to recoup their losses.”
“The result is that a single contaminated ingredient may cause damage on a global scale,” added Robert Nevin, vice president at Lexington Insurance Company, an AIG company.
Quality and food safety professionals are able to drive product safety in their own manufacturing operations utilizing processes like kill steps and foreign material detection. But such measures are ineffective against an unexpected contaminant. “Food and beverage manufacturers are constantly challenged to anticipate and foresee unlikely sources of potential contamination leading to product recall,” said Alexandru. “They understandably have more control over their own manufacturing environment but can’t always predict a distant supply chain failure.”
And while companies of various sizes are impacted by a contamination, small to medium size manufacturers are at particular risk. With less of a capital cushion, many of these companies could be forced out of business.
Historically, manufacturing executives were hindered in their risk mitigation efforts by a perceived inability to quantify the exposure. After all, one can’t manage what one can’t measure. But AIG has developed a new approach to calculate the monetary exposure for the individual analysis of the three major elements of a product contamination event: product recall and replacement, restoring a safe manufacturing environment and loss of market. With this more precise cost calculation in hand, risk managers and brokers can pursue more successful risk mitigation and management strategies.
Product Recall and Replacement
Whether the contamination is a microorganism or an allergen, the immediate steps are always the same. The affected products are identified, recalled and destroyed. New product has to be manufactured and shipped to fill the void created by the recall.
The recall and replacement element can be estimated using company data or models, such as NOVI. Most companies can estimate the maximum amount of product available in the stream of commerce at any point in time. NOVI, a free online tool provided by AIG, estimates the recall exposures associated with a contamination event.
Restore a Safe Manufacturing Environment
Once the recall is underway, concurrent resources are focused on removing the contamination from the manufacturing process, and restarting production.
“Unfortunately, this phase often results in shell-shocked managers,” said Nevin. “Most contingency planning focuses on the costs associated with the recall but fail to adequately plan for cleanup and downtime.”
“The losses associated with this phase can be similar to a fire or other property loss that causes the operation to shut down. The consequential financial loss is the same whether the plant is shut down due to a fire or a pathogen contamination.” added Alexandru. “And then you have to factor in the clean-up costs.”
Locating the source of pathogen contamination can make disinfecting a plant after a contamination event more difficult. A single microorganism living in a pipe or in a crevice can create an ongoing contamination.
“I have seen microbial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant,” observed Alexandru.
Handling an allergen contamination can be more straightforward because it may be restricted to a single batch. That is, unless there is ingredient used across multiple batches and products that contains an unknown allergen, like peanut residual in cumin.
Supply chain investigation and testing associated with identifying a cross-contaminated ingredient is complicated, costly and time consuming. Again, the supplier can be rendered bankrupt leaving them unable to provide financial reimbursement to client manufacturers.
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet. Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
— Robert Nevin, vice president at Lexington Insurance, an AIG company
Loss of Market
While the manufacturer is focused on recall and cleanup, the world of commerce continues without them. Customers shift to new suppliers or brands, often resulting in permanent damage to the manufacturer’s market share.
For manufacturers providing private label products to large retailers or grocers, the loss of a single client can be catastrophic.
“Often the customer will deem continuing the relationship as too risky and will switch to another supplier, or redistribute the business to existing suppliers” said Alexandru. “The manufacturer simply cannot find a replacement client; after all, there are a limited number of national retailers.”
On the consumer front, buyers may decide to switch brands based on the negative publicity or simply shift allegiance to another product. Given the competitiveness of the food business, it’s very difficult and costly to get consumers to come back.
“It’s a sad fact that by the time a manufacturer completes a recall, cleans up the plant and gets the product back on the shelf, some people may be hesitant to buy it.” said Nevin.
A complicating factor not always planned for by small and mid-sized companies, is publicity.
The recent incident surrounding a serious ice cream contamination forced both regulatory agencies and the manufacturer to be aggressive in remedial actions. The details of this incident and other contamination events were swiftly and highly publicized. This can be as damaging as the contamination itself and may exacerbate any or all of the three elements discussed above.
Estimating the Financial Risk May Save Your Company
“In our experience, most companies retain product contamination losses within their own balance sheet.” Nevin said. “But in reality, they rarely do a thorough evaluation of the financial risk and sometimes the company simply cannot absorb the financial consequences of a contamination. Potential for loss is much greater when factoring in all three components of a contamination event.”
This brief video provides a concise overview of the three elements of the product contamination event and the NOVI tool and benefits:
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet,” he said. “Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.