Drones are all over the news lately, but what exactly are they? The Federal Aviation Administration (FAA) refers to them as Unmanned Aircraft Systems (UAS). They are robots with the ability to hover, which makes them useful for using video cameras to record data; hence their use in firefighting, surveillance, and traffic monitoring. They can also be used for delivering smaller packages or spraying crops. They can be controlled remotely similar to how remote hobby aircraft are controlled, but they can also be programmed to fly independently using GPS navigation. The online retailer Amazon plans to use drones for delivery of smaller packages, and hobbyists use them for aerial photography. Some insurance companies are investigating using drones for claim handling and investigations; drones could be extremely helpful in catastrophe situations, keeping adjusters safe and quickly handling claims for insureds.

Airspace

Airspace is one of the first things to become an issue. Being airborne, drones do not travel over roads, but through the air. There are two types of airspace, controlled and uncontrolled. Controlled airspace is at flight level for full size airplanes or surrounding airports at various heights above the surface and requires certain communications with the tower. Controlled classes are A,B,C,D, and E; class G is uncontrolled air space. Controlled airspace has various requirements concerning visibility, distance from clouds, distance from the surface, pilot licensing, equipment requirements, and air traffic control requirements.

Uncontrolled airspace is what has not been designated class A,B,C,D,or E, and extends from the surface to the overlaying areas of class E space. This is considered class G. Classes C,D,E and G have no pilot requirements, and classes E and G have no equipment requirements. Equipment required would be two way radios and transponders. Air traffic control has no responsibility or authority to control air traffic in class G; however, visual flight rules apply. Visual flight rules are standards for flying that have certain visibility requirements that correspond to altitude, class of airspace, and distance from clouds. Drones can fly in space G as there are no pilot, equipment, or entry requirements. Entry requirements are when the pilot must contact air traffic control for permission to enter the airspace.

There is special use airspace within which certain activities must be confined or other aircraft not involved are prohibited. These areas generally consist of prohibited, restricted, warning, military operations, alert, and controlled firing areas. Likewise there are other areas consisting of military training, temporary flight restrictions, parachute jump operations, national security areas, and other areas.

Drones can be operated in space from ground level to above 50,000 feet, depending on the specific type of aircraft. However, drone operations are currently not authorized in Class B airspace, which is from the surface to 10,000 feet surrounding the nation's busiest airports. Class B space also includes airspace over major urban areas and contains the highest density of manned aircraft in the National Airspace System (NAS).

Drone Operations

The FAA defines three types of drone operations: civil, public (governmental), and model aircraft. Civil operators must obtain a special airworthiness certificate in order to operate a drone in the NAS. The certificate is for experimental craft and states that the operator has proved that the drone can operate safely within an assigned flight test area and cause no harm to the public. The application requires the description of the design, construction, manufacture, including engineering processes and software development and control, along with configuration management, and quality assurance procedures. The applicant must also identify how and where the drone is to be flown. The carrying of people or property for a fee is not allowed in civil airspace, but research and development, flight and sales demonstrations, and crew training are allowed.

For public entities that want to fly a drone in civil airspace, a Certificate of Authorization (COA) is required. This is considered public (governmental) use of drones. COAs can be issued for drones and give the organization permission to operate a particular drone in a particular area for a particular purpose. The FAA works with organizations requesting a COA to ensure that conditions and limitations for drone flight ensure the safety of other aviation operations. COAs are generally for a defined length of time, in some cases up to two years. This is to ensure that UAS provide a similar safety level as manned aircraft. Usually the drone is not allowed to operate in populated areas, and drones are to be observed either by someone in a manned aircraft or on the ground. Most COAs require coordination with air traffic control and may require a transponder on the drone to operate in certain types of airspace. Currently COAs are most often used for law enforcement, firefighting, border patrol, search and rescue, and other such governmental operations. COAs have been granted to six aerial photo and video production companies, paving the way for the film industry to begin using drones in filming. Recently four companies that perform aerial surveying, construction site monitoring, and oil rig flare stack inspections have been approved, as have one for real estate photography and one for crop scouting. Many insurance companies are hoping to be able to use drones in the future, especially in catastrophe situations, to examine damages while keeping adjusters safe and out of the way of debris removal and other crews.

Hobby and recreational aircraft do not require FAA approval but must meet safety guidelines. Safety guidelines dictate that hobby or model aircraft not be flown near manned aircraft, do not weigh more than fifty-five pounds unless certified by a model community-based organization, do not fly contrary to model community based safety guidelines, do not fly beyond sight of the operator, and do not fly for payment or commercial purposes. Hobby aircraft must also stay below 400 feet, be flown away from populated areas, and away from noise sensitive areas such as schools and churches, not be flown in front of spectators unless the craft has been flight tested and proven airworthy, and give right of way to and avoid flying in proximity of full size aircraft. When flown within five miles of an airport, the operator must contact air traffic control and advise that the craft is going to be flown nearby.

The FAA makes a distinction between hobby aircraft and aircraft used for commercial use—the following chart outlines the distinctions. The FAA plans to issue regulations on the commercial use of drones by September 2015. Currently, legislation has been enacted in twenty states, with legislation pending in fifteen other states concerning drones.

Drones versus Hobby Aircraft

What exactly separates a drone from an aircraft or a hobby aircraft? There are many radio-controlled (RC) model aircraft clubs and pilots who fly their crafts on a regular basis without any problem. What is the difference? This is a difficult question. Recreational drones are similar in many ways to RC aircraft but are not required to abide by operating conditions for RC aircraft. The insurance for the Academy of Model Aeronautics (AMA) does not apply to drones. Drones must adhere to some of the same regulations as commercial aircraft.

This chart highlights the differences and similarities between drones and hobby aircraft, as well as commercial aircraft. What then becomes important is the insurance policy language; how does this fit with the aircraft industry definitions?

Insurance Definitions

Aircraft are generally excluded in most insurance policies, although some policies have exceptions, particularly the homeowners policy. “Aircraft liability” is a defined term in the Homeowners 3 Special Form, HO 00 03, and means liability for injury or damage arising out of the ownership, maintenance, occupancy, use, loading, unloading, entrustment to others, failure to supervise others, or vicarious liability for a child or minor involved in the aircraft. “Aircraft” is defined as “any contrivance used or designed for flight except model or hobby aircraft not used or designed to carry people or cargo.”

Drones are not designed to carry people, so in that capacity they do not fit the definition of “aircraft.” Cargo is another matter; the policy does not define “cargo,” and courts generally refer to a standard dictionary when a term is not defined. Merriam Webster Online defines “cargo” as “the goods or merchandise conveyed in a ship, airplane, or vehicle” or “freight.” This implies product to be delivered, not equipment such as cameras and sensors to take photographs or detect chemicals. Therefore, unless a drone was carrying packages to be delivered, again they do not fit the policy definition of “aircraft” and would not be excluded. However, the exception applies to hobby aircraft; if an individual is using a drone to view his crops that would become business use.

Commercial policies are less specific. The Business and Personal Property form, CP 00 10, does not define “aircraft” and excludes aircraft along with vehicles and self-propelled machines operated away from the described premises. However, an exception exists for aircraft that the insured manufactures, processes, warehouses, or holds for sale. So, if the insured is manufacturing, storing, or selling drones, those would be covered, as well as drones the insured uses on the insured premises.

The Commercial General Liability form, CG 00 01, does not define “aircraft.” In case of a claim that goes to court, a dictionary definition of aircraft may be used. Merriam Webster Online defines “aircraft” as “a vehicle (as an airplane or balloon) for traveling through the air.” This is a broad definition with no differentiation between hobby and commercial aircraft.

The Businessowners Coverage form, BP 00 03, is similar to the CGL in that aircraft are not defined and a standard dictionary definition could be used. Aircraft and any computers to be used in aircraft are excluded in the property coverage section. Liability is of course excluded.

Coverages

In the homeowners policy, aircraft are excluded from physical damage except for model or hobby aircraft not used or designed to carry people or cargo. As was seen in the definitions, drones can easily be seen as hobby aircraft depending on their use and what, if anything, they are carrying. Therefore, they would be covered as personal property and covered for damage from named perils.

Aircraft liability is excluded completely with one exception: injury to a residence employee arising out of and in the course of that employee's employment by an insured. However, since not all drones will fit the definition of “aircraft,” there is some coverage.

Liability coverage under the homeowners policy is excluded as defined under the aircraft liability definition. As mentioned previously, not everything is included in the definition of “aircraft liability,” so injury or damage from hobby aircraft or drones would be covered.

As mentioned previously, the Building and Personal Property Coverage Form excludes aircraft operated away from the premises, but craft the insured manufactures, sells, stores, processes, or uses on premises are covered. Drones used to monitor the property for security would be covered.

The Commercial General Liability policy excludes injury or damage arising out of the ownership, maintenance, or use or entrustment to others of any aircraft that is owned, operated, loaned, or rented to any insured. This broadly excludes aircraft of any type. An exception exists for liability assumed under an insured contract for the ownership, maintenance, or use of an aircraft. The policy states that coverage is excess over any other insurance for any aircraft that are not excluded.

The Businessowners policy excludes aircraft and computers that are permanently installed or designed to be permanently installed into aircraft. Similar to the CGL, injury or damage arising out of the ownership, maintenance, use, or entrustment to others of aircraft owned, operated, rented, or loaned to the insured is excluded. The same exception for liability assumed under an insured contract applies.

In December 2014, Insurance Services Office (ISO) filed Unmanned Aircraft Endorsements for commercial umbrella and general liability policies. There are exclusions and limited coverage for designated drones. Form CG 21 09, Exclusion for Unmanned Aircraft, defines “unmanned aircraft” as “an aircraft that is not designed, manufactured, or modified after manufacture to be controlled directly by a person form within or on the aircraft.” Therefore, any drone or radio-controlled aircraft is considered unmanned. The form specifically excludes coverage for injury or damage arising out of the ownership, maintenance, use, or entrustment to others of unmanned aircraft. This exclusion includes negligence or other wrongdoing in hiring, training, supervising, or monitoring others by the insured if an unmanned aircraft was involved. Personal and advertising injury arising out of the ownership, use, maintenance, or entrustment to others of an unmanned aircraft is also excluded.

An exclusion is available for coverage A only, form CG 21 10, Exclusion-Unmanned Aircraft (Coverage A Only). The definition of ”unmanned aircraft” and the exclusion have the same wording as the CG 00 09 except that this form applies only to coverage A. CG 21 11, Exclusion Unmanned Aircraft (Coverage B Only) contains the same wording, just applicable to coverage B only.

Another new form provides limited coverage for drones: CG 24 50, Limited Coverage for Designated Unmanned Aircraft, which allows the insured to schedule a particular drone, used for a specific operation or project, with a selected limit onto the CGL policy. The definition of “unmanned aircraft” is the same as that in the exclusions. The exclusionary language appears and applies to all drones except those scheduled. Coverage is for coverage A and B. If an aggregate limit is listed on the schedule, the aggregate is the most paid for damages under coverage A, B, and C. If a limit is listed for coverage under personal and advertising injury, an each occurrence limit, damage to premises rented to you limit and medical expense limit, there is coverage. There are separate forms for coverage A only, CG 24 51, and coverage B only, CG 24 52, with the same language, just coverage for only coverage A or coverage B.

There are exclusions and a limited coverage form for the Commercial Umbrella Policy. They have the same wording as do the exclusions and coverage form for commercial liability coverage; the definition of “unmanned aircraft” is the same, as is the exclusion and coverage wording. These forms are CU 21 71, Exclusion Unmanned Aircraft; CU 21 72, Exclusion Unmanned Aircraft Coverage A only; CU 21 73, Exclusion Unmanned Aircraft Coverage B only; and CU 24 50, Limited Coverage for Designated Unmanned Aircraft.

Issues

Safety and privacy are two large concerns involving drones. Many people are concerned about neighbors spying on neighbors since cameras are readily available on drones. This would make stalking someone incredibly easy, and sex offenders could watch children while still being at a proper distance from the school or playground. In September 2014 a New Jersey man shot down a neighbor's drone that was flying over his property; the neighbor was taking photos of the shooter's home, which was under construction. While the shooter was arrested and charged with possession of a weapon for an unlawful purpose and criminal mischief, the shooter's right to privacy is still an issue. What if instead of flying over the house the drone flyer was using the drone and camera to look inside the window? While the FAA stated that it is legal to fly drones over private houses unless the drone is operated in an unsafe manner, at what point does a drone with a camera become a peeping Tom? This is a huge privacy issue that has yet to be resolved.

Safety is an issue depending on the responsibility and carefulness of the pilot. The FAA levied a $10,000 fine against Raphael Pirker, who was hired to obtain aerial photos and videos of the University of Virginia. Claims were made that the pilot flew recklessly, very low to the ground, through tunnels with moving vehicles, and close to railway tracks and individuals. Pirker fought the penalty, and a National Transportation Safety Board (NTSB) administrative law judge agreed that the FAA at that time did not have the authority to levy the fine under existing authorization. The FAA's appeal of the ruling is still pending.

Others have also filed suits regarding FAA authority, and many claim the FAA policies are too restrictive and harm business and that the FAA does not have the authority to impose such regulations. A group of universities filed suit stating that the new FAA rules are a threat to research, science, education, and innovation. A group of business owners and the AMA have filed challenges in the District of Columbia court of appeals over FAA regulations that they say severely limit who can fly camera-equipped drones. These are just the start of suits, and more are bound to occur as more and more drones are out in public.

There have been instances of commercial airliners encountering drones in flight, and the FAA has serious concerns about such activities. Airspace control is crucial to the safely of pilots, crew, passengers, and cargo, and reckless drone flyers could cause havoc. The FAA stated that since June 2014 there have been twenty-five instances where small drones came within a few seconds or a few feet of crashing into much larger aircraft. Many of these close calls were during takeoff and landing. Many reports drones at heights of 2,800 or 4,000 feet. The near misses are only part of the issue; pilots and air traffic controllers have reported 175 incidents of drones near airports or in restricted airspace. Drones are too small to show up on radar and by the time they become visible to pilots, there is no time to change course.

Summary

Drones are fascinating aircraft and can be outfitted with a vast array of equipment that can perform a wide variety of tasks. This being said, there are many concerns over drone operation, who is allowed to fly, where drones are allowed to fly, who has regulatory authority, and what drones can be used for. Many states are already trying to legislate the use of drones. Legislation often defines “drone,” lists prohibited uses and exceptions, states how long information can be retained, and provides other restrictions and permissions. How legislation and actions by the FAA ultimately impacts the insurance industry is yet to be seen; more endorsements and policy changes may appear in the future.