Anticipate and Insure Against the Risks of UAVs

Drones, as they are commonly called, are more formally known as unmanned aerial vehicles (UAVs). As the name implies and common sense dictates, UAVs are aerial vehicles that are operated without a human pilot. Their history dates to the 19th century when Austrians attacked Venice with explosive-laden balloons. Drones are no longer limited to military use. They are becoming an increasingly beneficial tool in the farming/agricultural industry as well as for officials in search and rescue efforts, border patrol, and assisting police and fire departments. In the private sector, recreational use is expected to continue their exponential growth, and their future use in mainstream commerce is all but certain. As the technology continues to advance, drones will evolve in shape, size, cost and use.

This increase in the military, recreational and commercial use of drones will bring a parallel increase in liability for accidents, injuries and property damage. Those risks are already being realized. They include noise and pollution liabilities; drones falling and injuring spectators and participants at sporting and promotional events; causing damage to the property of others (including the risk of being ingested by a commercial airliner, which could be catastrophic); and invasion of privacy. Any business that insures a motor vehicle fleet, ship, or airplane/helicopter for claims arising from property damage or bodily injury should be equally familiar with the available coverage for drones.

The application process for a drone policy typically requires the policyholder to disclose whether the purpose of the drone is “business,” “commercial” or “public.” Like a fleet of vehicles, each drone will likely need to be specifically scheduled in the policy and identified by registration number and make/model. Deductibles may be calculated, in part, based on whether the drone is in motion; is “ingested” by another aircraft; or is in mooring at the time of the occurrence.

Like a typical comprehensive general liability (CGL) policy, a drone policy can offer important protection for corporate policyholders, broadly providing defense and indemnity coverage against claims for bodily injury and property damage. Additionally, a drone policy may also provide medical expense coverage for any injuries sustained by any member of the “crew” (which can be broadly defined to include not only pilots and operators, but also visual observers, payload operators, image interpreters and any other person necessary to ensure the safe operation of the drone).

A drone insurer’s “duty to defend” policyholders is a valuable aspect of the coverage. Such a policy’s insuring agreement typically provides that the insurer “will have the right and duty to defend any suit seeking damages [covered by the indemnity provisions of the policy].” A court determines the duty to defend by comparing the allegations of the underlying complaint with the terms of the policy; a duty to defend arises if the underlying complaint alleges facts within, or potentially within, policy coverage. The duty extends to groundless, false or fraudulent allegations in the underlying action, provided those allegations, if later proven true, would fall within coverage. For the purposes of a duty to defend analysis, any doubt about the underlying allegations being covered is resolved in favor of the policyholder. Consistent with this principle, in most jurisdictions the insurer has a duty to defend the entire underlying action provided that any allegation in the underlying action falls within coverage.

In contrast, whether an insurer has a duty to indemnify its policyholder depends on whether the policyholder is legally obligated to pay damages because of bodily injury or property damage to which the insurance applies. A coverage action should not require the policyholder to conclusively establish its own liability in the interest of promoting settlement. Rather, the proper inquiry is whether the claims were not even potentially covered by the insurance policy. Thus, when a policyholder settles a potential liability in anticipation of covered claims, the burden is often placed on the policyholder to prove coverage of the settlement in the first place, but then on the insurer to prove the existence of exclusions barring coverage. Accordingly, coverage should exist so long as a policyholder settles in reasonable anticipation of insured exposures and the insurer cannot show a readily apparent or objectively reasonable basis for attributing any portion of the settlement to uncovered claims.

CGL policy exclusions are also often used in drone policies. For example, coverage may be barred for injury or damage that is expected or intended from the policyholder’s standpoint. Insurers frequently attempt to argue that this language excludes any harm that was reasonably foreseeable to the policyholder – a standard that, if applied literally, would eviscerate almost all coverage because most of the tort liability theories under which a policyholder could be held liable require a showing that the harm was reasonably foreseeable. Most jurisdictions instead apply a subjective test that bars coverage only if the policyholder actually intended the harm or knew that it was substantially certain to take place.

Drone insurers also often attempt to exclude coverage, for example, for bodily injuries or property damage while the drone is being operated or piloted by someone other than those designated in declarations of the policy or if the airworthiness certificate for that particular drone is not in full force and effect at the time of the occurrence.

Like CGL insurance, drone coverage can be a valuable asset that is available to fund the defense and settlement of claims alleging bodily injury or property damage arising from the use, operation or ownership of an unmanned aerial vehicle. However, a policyholder must know that the coverage is available and then be familiar with the scope and breadth of coverage it has purchased. This is so because a policyholder must act promptly when seeking coverage that prevents an insurer from denying a claim as untimely. Businesses that use or contemplate future use of a drone that may be facing these potential liabilities should consult with experienced policyholder counsel who can help navigate these coverage issues, as well as others, and then determine if insurance assets can help defray those costs.

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