The technology related to drones, or unmanned aircraft systems, is advancing at a rapid pace.

A staggering 1.6 million drones were sold in 2015, and an estimated 600,000 will be sold this year for commercial use alone, according to James Van Meter, J.D., aviation practice leader at Munich-based Allianz Global Corporate & Specialty.

Will your company or clients be exposed to potential liability from drones? How can insurance protect them?

At the recent RIMS 2016 conference, Van Meter and Mark Lauderbaugh, director of risk management for Houston-based mobile communications infrastructure company Crown Castle International Corp., presented a session titled, "Managing Unique Risks Posed by Unmanned Aircraft Systems."

"Independent agents need to be on the lookout for drone exposure with every account they work on," said Van Meter. "I have spoken with numerous risk managers who were shocked to discover their companies were flying drones or had hired a drone company to work for them. They were the last to find out and had to scramble to assess the exposure and obtain coverage."

Here are 14 things insurance agents need to understand about the risks associated with the commercial use of drones, as well as information about basic technology, evolving insurance products and the changing regulatory environment:

Drone delivering mail and package in San Francisco. (Photo: iStock)

1. Recreational vs. commercial use of drones

As of Dec. 21, 2015, the Federal Aviation Administration (FAA) requires all owners of small unmanned aircraft, or drones, weighing between 0.55 pounds and 55 pounds to register online before taking to the skies.

The recreational use of drone is defined as the operation of an unmanned aircraft for personal interests and enjoyment. For example, using a drone to take photographs for your own personal use would be considered recreational, according to Know Before You Fly, an informational website produced by the Arlington, Va.-based Association for Unmanned Vehicle Systems International and the Muncie, Ind.-based Academy of Model Aeronautics.

Using a drone to take photographs or videos for compensation or sale to another individual would be considered a commercial operation.

Related: Your kid just got a drone. Should you get insurance?

Drone inspecting pipeline. (Photo: iStock)

2. What constitutes a commercial use?

The FAA currently authorizes the use of drones for commercial or business purposes on a case-by-case basis. Activities that are defined as commercial use include:

• Selling photos or videos taken from a drone.
• Using drones to provide contract services, such as industrial equipment or factory inspection.
• Using drones to provide professional services, such as security or telecommunications.
• Professional real estate or wedding photography.
• Professional cinema photography for a film or television production.
• Providing contract services for mapping or land surveys.

Related: 5 risks that threaten the drone industry

In this Oct. 15, 2014, photo, the Yamaha RMax unmanned helicopter sprays water over grapevines during a demonstration of its aerial application capabilities at the University of California, Davis' Oakville Station test vineyard in Oakville, Calif. Researchers at UC Davis have been studying the effectiveness of the drone's ability for spraying pest control and nutritional materials on the test vineyard. (Photo: Rich Pedroncelli/AP Photo)

3. FAA commercial drone exemption.

The FAA views any drone operation that supports the functions of your business as a nonrecreational use. Currently, any nonrecreational use of an unmanned aircraft requires a Section 333 exemption from the FAA. 

In September 2014, the FAA began awarding grants of exemption to companies looking to use drone to support their business. This process, allowed by Section 333 of the 2012 FAA Modernization and Reform Act, is currently the only way for businesses to circumvent the airworthiness requirement and other conditions that were established for manned aircraft.

In the 2012 Act, Congress also mandated that the FAA develop rules for integration of drones into the national airspace. However these rules, which would provide anyone who follows the rules access to the airspace, are not expected until at least June 2016. Until then, the Section 333 exemption process is the easiest way for businesses to save time, money and lives using drones.

Pilot navigating a commercial drone. (Photo: iStock)

4. Pilot licensing requirement.

Commercial drone operation requires one of the following pilot licenses:

• Air transport: Pilot for a scheduled airline.
• Private: Can fly day or night most single engine planes for pleasure or personal business.
• Recreational: May fly aircraft up to 1880 horsepower and 4 seats in daytime for pleasure only.
• Sport: Only fly light sport aircraft during daylight hours.
• Commercial: With some restrictions, may fly for hire.

An appropriate medical certificate is also required.

Drone with camera taking off from platform. (Photo: iStock)

5. Exemption 333 verification requirements for commercial drones.

To obtain a Section 333 exemption for commercial drone activity, the following requirements must be verified by the FAA: 

• Certificate of authorization that defines the specific activity.
• Insurance covering damage to the aircraft and legal liability.
• Registration of the individual aircraft (tail number).
• Non-owned Aviation Liability insurance.
• Be aware that insurance only applies when a specific pilot is in command.
• FAA requires that all accidents involving aircraft be reported to the National Transportation Safety Board.
• A visual observer is required for all drone flights.

Related: FAA complexity, but opportunity with drones

Drone inspecting concentrated solar panels. (Photo: iStock)

6. Purchase drone vs. contract for services.

"The inexpensive purchase price for this technology means that almost any business can either purchase a UAV or hire a UAV company to do work for them," Van Meter says. So, should a company purchase a drone or contract for services?

Determining what kind of drone is needed is a key starting point, especially from a risk management perspective. Will the aircraft be flown over vacant land or over people? How safe is it?

Many drone manufacturers will not allow the product to leave the factory without the operator completing specific training. In addition, many centers are opening around the country that offer drone training.

If a company decides to use a drone contractor, there are companies  many run by former military personnel  that understand the complex FAA rules and regulations and have highly trained pilots.

Close-up of a drone camera and sensor pod module. (Photo: iStock)

7. Contractual transfer of risk when using a drone vendor.

When engaging a vendor, use a contract to define obligations and specify the services to be provided. The agreement should contain an indemnity clause in favor of the contracting party. The contract should also contain the insurance requirements.

"Expertise in this area is very important," notes Allianz's Van Meter. "Locate a knowledgeable partner to help you navigate coverage issues and ensure your clients are adequately protected."

A commercial business, even if using a drone contractor, needs insurance as a backstop if the contractual terms break down. The additional insurance is necessary to transfer any foreseen and unforeseen risks.

Be sure to purchase adequate limits to protect what matters most.

A Phantom 3 quadcopter drone on a cliff near Carr, Colo., ready to take off for an aerial photography mission. (Photo: iStock)

8. Drone insurance coverage products.

"The aviation insurance marketplace offers UAS specific coverage for all exposures related to drones," said Van Meter. And the market for drone insurance is competitive, robust and evolving.

Aviation specific insurance products designed for drone operations, include:

• Physical damage (hull), which includes the drone, cameras, sensors, ground station.
• Liability.
• Aviation Commercial General Liability.
• Aviation Products Liability.
• Non-owned Aviation Liability.

High limits are available:

• Hull/physical damage up to $1 million.
• Liability up to $300 million.

ISO and coverage on standard market policies:

• ISO forms released June 2015 include exclusions and write backs.
• Used on standard market forms (very narrow and full of exclusions).
• Unknowledgeable companies are adding drone cover to regular Commercial General Liability policies.

Related: Drone industry taking off, thanks to insurers' willingness to write cover

Pilot flying a drone over an onion field. (Photo: iStock)

9. Safe and responsible operations.

Safety should be the number one priority for all drone operations. It's imperative that a commercial enterprise develop a training program for all employees, with ongoing training a key component of the plan.

Companies should be sure to follow all regulatory drone guidance from the Occupational Safety and Health Administration, applicable federal and state laws and regulations.

Hundreds of realized and unrealized uses for drones — border patrol, filming, news gathering, crop dusting, search and rescue, power line patrol and land surveying — pose unique challenges. 

Futuristic warehouse. (Photo: tiero/iStock)

10.  Indoor use of drones.

The indoor use of drones is not governed by FAA jurisdiction.

Be aware that flying drones indoors means the aircraft is more likely to collide with other property or bystanders. In addition, signals can fail or be blocked and the GPS location services are almost impossible to obtain.

Police drones with blue emergency lights flying over New York City. (Photo: iStock)

11. Geofencing technology.

Most commercial drones contain technology that allows parameters to be set to prevent the drone from straying beyond predetermined boundaries. The geofencing technology is especially useful in limiting exposures to claims for invasion of privacy.

Related: Here's how drones are going to transform the insurance industry

Security drone. (Photo: iStock)

12. Electronic Log Book (black box).

Technology is available to log with pinpoint accuracy the location of a drone at any given time. The electronic tracking is another type of drone technology beneficial as a risk management tool.  

Aerial iceberg probe. (Photo: iStock)

13. Standard operating procedures requirement.

An electronic or paper manual/document holding procedures to be followed before, during and following every flight is required by the FAA.

Lia Reich, director of marketing with PrecisionHawk, holds up their agricultural and insurance drone, the PrecisionHawk Lancaster, after an event with the Small Unmanned Aerial Vehicles Coalition, Jan. 20, 2015, at the National Press Club in Washington. (Photo: Jacquelyn Martin/AP Photo)

14. Value of drones to P&C insurance.

A number of insurance companies and drone operators have recognized the potential value of drones to property and casualty insurance and have obtained Section 333 exemptions from the FAA.

The primary business cases for P&C insurance use of drones are for routine property assessment and disaster management, according to the Washington, D.C.-based National Association of Mutual Insurance Companies.

Rather than subject its personnel to undue risk, an insurance company can use a drone to examine property with limited access. This can provide data more quickly and with fewer hazards to company employees.

Insurance companies are now exploring the use of drone in claims appraisals in major disasters, where the extent of the damage may exceed the number of available inspectors and be inaccessible.

Drones can also play a key role after regional natural events or disasters that may not cause widespread damage, but still affect the property of hundreds of policyholders. In the wake of events such as tornadoes or hailstorms damaging small towns, drones can provide a more rapid response to assess damage, leading to faster payment of claims.

Related: A look at emerging risks the insurance industry is facing