The Drone Explosion: Implications for the Insurance Industry

Audrey C. Parr, Esq.

Corinne A. Taylor, J.D.

Parr Law, P.C. 781-939-0901

www.parrlawpc.com

overview:

– What are drones? – Threats posed by drones – Advantages to drone use by insurers – Restrictions on use – HO3, Auto, and CGL coverage issues

• 1st and 3rd party BI and PD claims – Implications of current language – New policy exclusions/endorsements – FAA Regulations

Traditional Drone Use

– The first unmanned military attack used balloons in 1849 against the Austrian Empire.

– The first modern drone strike took place in Afghanistan in 2002 under CIA control.

– Military use of drones is controversial:

• Technical precision: fewer civilians casualties than other weapons

• “Signature strike” policy allows military to target a profile instead of specific individuals

• Allows gov’t to become “disconnected from horrors of war”

Today’s Use:

Today’s Use:

What is a “drone”?

UAV/UAS: Unmanned Aerial Vehicles/Systems

“The UA is the flying portion of the system, flown by a pilot via a ground control system, or autonomously through use of an on-board

computer, communication links and any additional equipment that is necessary for

the UA to operate safely.”

The FAA’s registration program and jurisdiction cover both:

1) The unmanned aircraft (UA); and 2) All support equipment (S)

concerns:

– Terrorism

– Drones hitting planes

– Drones delivering drugs

– Drones near nuclear power plants

– Arming drones with weapons

– Creepy people doing creepy things

– Stupid people doing stupid things

concerns:

Today’s Use: Insurance

Potential Benefits of Use:

– Eliminates risks of personal physical danger

– Provides access to inaccessible areas

– Expands scope of property inspections - better risk assessment

Today’s Use: Insurance Investigation

Property Damage: Monitors whether paid claims result in repair/replacement

Today’s Use: Insurance Investigation Weather: quickly documents damage, deterring later fraudulent claims.

Today’s Use: Insurance Investigation Crops: easily confirms, assesses, and documents extent of damage, detecting fraudulent claims.

Today’s Use: Insurance Investigation Arson: footage can be utilized to document damage as well as assist in cause and origin analysis.

Today’s Use: Insurance Investigation - Reduces investigator visibility in rural settings

- Increased access/areas of surveillance

Today’s Use: Insurance Investigation – Subject/suspect location confirmation (make/model/license)

– Garaging!!

Today’s Use: Insurance Investigation – Identification (facial recognition)

– Confirmation of suspect relationships

– Pre-investigation planning

Today’s Use: Insurance Investigation

– Use with Google Earth imagery can prove pre-existing damage or pre-loss conditions.

Today’s Use: Insurance Investigation

Potential Benefits of Use:

– Locate hidden property.

Today’s Use: Insurance Investigation

Injury claims??

discreetly confirms and monitors activities of reportedly injured claimants...

Issue: The Public Policy Drone War

The Law: Public Policy Drone War

-Property Owners should decide where drones can’t fly

-Private property is a sacred right

-4th Amendment requires a warrant!

-Drones hover and have cameras (not like planes)

-We should collectively come up with rules

-Innovation is an American tradition

-There’s good reason to allow use:

-Police use for missing persons

-Journalistic use of breaking news

-Companies deliver goods faster

-Regulations inform UAS pilots how, where, and when they are able to fly their drones.

-Drone use is governed by the Federal Aviation Administration (FAA).

-Regulations differ based on use:

Public / Government Commercial Recreational

Hobby/ Model Aircraft

The Law: Public Policy Drone War

Drone Advisory Council (DAC) – Identifies and proposes actions to the FAA about drones

– Headed by Intel CEO Brian Krzanich

– Composed of UAS “stakeholders”: industry, government, research, academia, retail, technology sectors.

• Example: schools and universities now have special rules to allow for learning about drones. (public policy favors education & innovation)

• Next: Special Model Aircraft (AMA) rules?

The Law: Public Policy Drone War

Regulation: Recreational

What is “recreational use”? “Recreational use… is the operation of an unmanned aircraft for personal interests and enjoyment.”

For example...photographs:

– For your own use? Recreational.

– For compensation/sale? Commercial.

Recreational Users must register:

– .55lbs to 55 lbs. (incl. payload/camera)

– 13 years or older to register (pilots may be younger)

– $5.00, valid for 3 years

– Name, email, home address

– Receives Cert. of Aircraft Registration/Proof of Ownership

• May use same ID no. on all UAVs

– Registry is public information

Regulation: Recreational

Hobby users (model aircraft users)

– May operate under “recreational” rules

– Under 55 lbs.

– May encourage interest in drone use at educational facilities or community-sponsored events

– Must use community-based safety guidelines within programming of nationwide organization

– Cannot fly for compensation

• Including honors or cost-reimbursement

Regulation: Hobby

Recreational registry acknowledgment:

I will fly:

• below 400 feet

• within visual line of sight

• aware of FAA airspace requirements

• not directly over people

• not over stadiums and sports events

• not near emergency response efforts

• not near aircraft/airports

• not under the influence

Regulation: Recreational/Hobby

CLAIMS

CLAIMS

PERSONAL INJURY

WIRETAPPING

What are the risks? •• HO3

•• Auto Policies •• Commercial general liability

•• Directors and officers liability

•• Errors and omissions (E&O)

CLAIMS

HO3 Policy Probably not...

Coverage C - Personal Property PERILS INSURED AGAINST: 1. Fire Or Lightning 2. Windstorm Or Hail 3. Explosion 8. Vandalism Or Malicious Mischief

(shotgun vigilantism anyone?) 10. Falling Objects

(Damage from the drone falling, itself, is not included)

What if I smash my shiny new $1,200 drone into my house? Will my insurance cover a new drone??

Replacement...maybe even for business. Coverage C - Personal Property 1. Covered Property

We cover personal property owned or used by an insured while it is anywhere in the world.

3. Special Limits Of Liability i. $500 on property, away from the

residence premises, used primarily for business purposes...

4. Property Not Covered We do not cover:

d. Aircraft... We do cover model or hobby aircraft not used or designed to carry people or cargo;

HO3 Policy

Come to think of it, it WAS a windstorm! *cough* What kind of coverage is available??

Probably the house…but not the bushes… SECTION I - PERILS INSURED AGAINST Coverage A - Dwelling Coverage B - Other Structures 1. We insure against risks of direct physical loss to property... E. Additional Coverages

3. Trees, Shrubs And Other Plants We cover trees, shrubs, plants or lawns, on the residence premises, for loss caused by...

d. Aircraft…(model aircraft is the exception TO this exception!)

HO3 Policy

…sooooo...what about my house? It gashed up my window and my bushes pretty bad…

SECTION I - EXCLUSIONS Aircraft not listed in exclusions!

…and even if it was… Definitions (B)(1)(b)(1) “Aircraft means any contrivance used or designed for flight except model or hobby aircraft not used or designed to carry people or cargo…”

8. Intentional Loss Intentional Loss means any loss arising out of any act an insured commits or conspires to commit with the intent to cause a loss...

HO3 Policy

Calling all drafters!

Re-write your “Aircraft”

definition & Intentional Acts

provision!!

HO3 Policy

What if it also injured me and a couple of my cousins. We live together. Do we have coverage?

HO3 Policy

HO3 Policy

No…y’all are excluded.

Coverage E - Personal Liability If a claim is made or a suit is brought against an insured for damages because of bodily injury…

Coverage E does not apply to: 6. Bodily injury to:

a. You and residents of your household who are: (1) your relatives; (2) other persons under the age of 21 and in the care of any person named above;

b. A student enrolled in school full time…provided the student is:

1. Under the age of 24 years; or 2. 21 and in your care or the care of a

person described above.

HO3 Policy

No…y’all are excluded.

Coverage F - Medical Payments To Others We will pay the necessary medical expenses...

2. ...off the insured location, if the bodily injury:

b. Is caused by the activities of an insured;

Coverage F does not apply to bodily injury:

4. To any person… regularly residing on any part of the insured location.

Probably covered, if it’s used recreationally. SECTION II - LIABILITY COVERAGES A. Coverage E - Personal Liability

If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, we will [pay]...

Definitions 8. “Occurrence” means an accident...which results, during the policy period, in:

b. Property damage

HO3 Policy

So what if it was…uh… actually my neighbors’ house…

HO3 Policy Probably covered, if used recreationally.

SECTION II - LIABILITY COVERAGES A. Coverage E - Personal Liability

If a claim is made or a suit is brought against an insured for damages because of bodily injury…

B. Coverage F - Medical Payments To Others

We will pay the necessary medical expenses... 2. ...off the insured location, if the bodily injury:

b. Is caused by the activities of an insured;

What if my neighbor got injured by my drone?

But...

SECTION II - EXCLUSIONS Coverages E and F do not apply:

1. Expected Or Intended Injury Bodily injury or property damage which is expected or intended by an insured even if the resulting bodily injury or property damage:

a. Is of a different kind, quality or degree than initially expected or intended; or b. Is sustained by a different person, entity, real or personal property, than initially expected or intended.

2. Business a. Bodily injury…arising out of or in connection with a business...

HO3 Policy

Probably not... SECTION II - LIABILITY COVERAGES A. Coverage E - Personal Liability If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage... Definitions “Bodily injury” means bodily harm, sickness or disease, including required care, loss of services and death that results. “In short, “emotional distress is not a bodily injury” for insurance coverage purposes.” Richardson v. Liberty Mut., 47 Mass. App. Ct. 698 (1999).

**UNLESS DRONE ALSO CAUSES PHYSICAL INJURY

HO3 Policy

Ok so I was just trying to check out Enrique by his pool and now he’s all like “you invaded my privacy” …whatever… will I be covered?

And... Some endorsements (below is HO 24 82) expand Personal Liability: SECTION II – LIABILITY COVERAGES A. Coverage E – Personal Liability The following is added to Coverage E – Personal Liability: Personal Injury Coverage... Including:

3. ...wrongful entry into, or invasion of the right of private occupancy...(some states dismiss landlord/tenant distinction) 5. Oral or written publication of material that violates a person's right of privacy.

** CONSIDER: Expected Or Intended Injury Exclusion!!

HO3 Policy

The law Maine

Laws against filming of others in “private place.” Bill in process to make unlawful flying drone over

land without consent.

New Hampshire Law against drone video

surveillance of hunters, fishers, and trappers.

Bill in process to make unlawful drone surveillance of individuals

and to limit police use.

Vermont Law against recording

persons without knowledge and consent inside home.

Bill in process re police limitation

Connecticut Voyeurism laws make filming others without

consent a felony.

Massachusetts Bills in process limiting

drone use by police and the prohibition of drone

weaponry.

Rhode Island Bills in process regarding filming others inside an

occupied dwelling

The Law JUDGE UPHOLDS FREEDOM-OF-PRESS CLAIM IN SUIT OVER DRONE USE AT ACCIDENT SCENE Rivera v. Foley et al., No. 3:14-cv-00196, 2015 WL 1296258 (D. Conn. Mar. 23, 2015).

Personal auto Policy

So what if my shiny new drone hits a car?

Personal auto Policy

– Drone hits & damages vehicle – Drone hits & injures MV occupant – Drone causes MV operator to swerve and hit tree

– Drone causes MV operator to swerve and cause major multi-car accident

– Drone hits motorcycle operator

PIP? MedPay? UM? Collision?

Personal auto Policy

Compulsory Coverage

Part 2: Personal Injury Protection

We will pay PIP benefits to or for:

1. You, or any other person, if injured while occupying your auto with your consent.

We will not pay PIP benefits to or for:

1. Anyone who, at the time of the accident, was operating or occupying a motorcycle, any motor vehicle not subject to motor vehicle registration...

Personal auto Policy

Optional Coverages

Part 7: Collision

We will pay for any direct and accidental damage to your auto caused by a collision...it does not matter who is at fault.

Part 6. MedPay

We will pay for expenses resulting from bodily injuries to anyone occupying your auto at the time of the accident. We will also pay for expenses resulting from bodily injuries to you…if struck by an auto or if occupying someone else’s auto at the time of the accident.

Personal auto Policy

Today’s Use: Commercial

Insurance Adjustment

Consumer Services

CGL policies Now

COVERAGE A - BI & PD LIABILITY

Section V - Definitions

3. “Bodily Injury” – means bodily injury, sickness or disease sustain by a person, including death resulting from any of these at any time.

17. “Property Damage” means:

a. Physical injury to tangible property, including all resulting loss of use of that property...

CGL policies Now

COVERAGE A - BI & PD LIABILITY 2. Exclusions

g. Aircraft, Auto Or Watercraft

"Bodily injury" or "property damage" arising out of the ownership, maintenance, use or entrustment to others of any aircraft...owned or operated by or rented or loaned to any insured.

** Note the lack of “model aircraft” distinction, as in HO3!

COVERAGE B - Personal and Advertising Injury

“Personal and advertising injury" means injury, including consequential "bodily injury", arising out of one or more of the following offenses:

c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy...committed by or on behalf of its owner, landlord or lessor; (again, some states ignore this)

e. Oral or written publication, in any manner, of material that violates a person's right of privacy;

CGL policies Now

CGL policies Now

COVERAGE B - Personal and Advertising Injury 2. Exclusions This insurance does not apply to:

a. Knowing Violation Of Rights Of Another "Personal and advertising injury" caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict "personal and advertising injury".

d. Criminal Acts "Personal and advertising

injury" arising out of a criminal act committed by or at the direction of the insured.

New CGL endorsements

"Unmanned aircraft" means aircraft that is not:

1. Designed;

2. Manufactured; or

3. Modified after manufacture;

to be controlled directly by a person from within or on the aircraft.

Coverages Implicated: Coverage A – BI and PD Coverage B – Personal & Advert. Inj.

New CGL endorsements

Unmanned Aircraft Exclusion

CGL – Excludes coverage for Unmanned Aircraft: CG 21 09 – (Coverages A & B)

CG 21 10 - (Coverage A Only) CG 21 11 - (Coverage B Only)

Commercial Umbrella - CU 21 71 – (Coverages A & B) CU 21 72 – (Coverage A Only) CU 21 73 – (Coverage B Only)

Commercial Excess Liability - CX 21 71

Owners & Contractors Protective - CG 29 60

Unmanned Aircraft Limited Coverage Provides coverage for specific unmanned aircraft, and specific operations or projects.

Limited Coverage –

CGL & Commercial Umbrella

CG 24 50 - (Coverages A & B) CG 24 51 - (Coverage A Only) CG 24 52 - (Coverage B Only)

New CGL endorsements

Commercial/Gov. Users MUST apply:

– ALWAYS.

• 2 step process (no cost):

• Petition for Exemption (Sec. 333)

– To perform commercial operations in low-risk, controlled environments

• Civil Certificate of Authorization (COA) – think warrant!

Regulation:

– Allows flight up to 400 feet

– Must fly 500+ feet of persons/ vehicles/structures, UNLESS:

» Persons directly participating & informed of risk* (new to 2016)

» Person not dir. participating & “sufficiently protected” from debris or hazardous materials

» Owner of structure/vehicle consents (each flight)

– No operation beyond line of sight

– Only daytime hours

333 Exemption:

Sec. 333 Exemptions (post Mar. 2016)

– Must have pilot’s license to fly drone* (although 333 may be processed without)

» Can be Sport Pilot license

» ~ 20hrs training

» FAA exam

» Flight instruction

» ~ $4,000-$5,000

* Likely to change in late 2016

Regulation: Exemptions

Civil Certificate of Authorization (COA)

– 2nd step, after 333 exemption approved

– defines the scope of operations

– Commercial/Civil COAs are “blanket” COAs giving generic license

– Public/Government COAs are limited to specific areas, specific purpose, etc. (think warrants)

Cert. of auth.

vendor liability?

Am I liable for my vendor who uses drones in investigations?

– Probably! – Best Practices:

» CONTRACT, CONTRACT, CONTRACT » Assumption of liability; » A 333 exemption; » An appropriate COA; and

»DRONE-SPECIFIC INSURANCE

vendor liability?

Thank You!

Audrey C. Parr, Esq. Corinne A. Taylor, J.D.

781-939-0901 www.parrlawpc.com