Regulatory uncertainty main obstacle to development of drone insurance market
Market Insight 29 November 2021 29 November 2021
While novel uses for unmanned aerial vehicles are growing all the time, the regulatory framework for drone operation is struggling to keep pace, raising concerns about the insurability of these exposures.
Deployment of drones in the medical environment has been growing rapidly – from delivery of supplies and vaccines, to the remote diagnosis and treatment of patients – and there is a compelling case for it to be built into the emergency services framework.
Drones can be used for rapid delivery of emergency supplies as well as providing access to remote or catastrophe-hit areas, and relaying real-time information to rescue teams when overland access to accident/disaster sites is problematic.
Drones can also assist police and other emergency services. They are already in use in operations ranging from search and rescue missions, to disaster response, crowd monitoring, crime scene and traffic accident reconstruction, and for aerial surveillance in active shooter and hostage incidents.
Drone use in the logistics sector is already quite advanced, with some vehicles able to carry 200kg loads over distances of 35km. And there are trials in the ports and terminals sector for ship-to-shore drone services to carry 100kg payloads up to 100km, and even to carry 40-foot shipping containers.
More broadly, the potential for drones as delivery vehicles is vast, particularly in the “last mile delivery” market. Postal services in Croatia and France have successfully used drones for parcel delivery, and Alphabet subsidiary Wing has been licensed in Australia to provide public delivery services in selected regions.
In the medical environment, positive regulatory steps towards enabling drone use have resulted in waivers being issued by a number of regulators in 2020 to allow medical deployment. However, a more permanent legislative framework is pending.
In the law enforcement field, concerns about the erosion of public privacy and the risk of overly intrusive surveillance have persuaded some municipalities to forbid drone use.
Law enforcement agencies must therefore navigate a complicated legal and regulatory web across all levels of government and, where drones are deployed, assess how to balance operational needs against legitimate privacy concerns.
For shipping and logistics, a cohesive legislative framework for drone use is entirely lacking. And while the International Civil Aviation Organization and national aviation regulators have been considering how to safely develop the drone sector, there has been little consideration of potential clashes between existing aviation and marine laws.
Global growth in drone delivery services has been slower than anticipated, largely due to regulatory concerns about safety in urban areas, in shared airspace, and with deployment of drones near airports and helipads. Regulations requiring human control of drone flights would make widespread implementation of delivery solutions more challenging, with deployment from road vehicles for last-mile drone deliveries a more likely short-term outcome.
There is also the potential for litigation resulting from drone accidents to consider, whether for property damage or personal injury.
As well as licensing operators, registration of drones themselves is needed to limit unregulated use, monitor approved users, and assign liability following accidents.
The privacy implications of increasing drone use further complicate their regulation. With many drones equipped with cameras, and more advanced models able to incorporate facial recognition software, thermal imaging cameras, and wi-fi antennae to track mobile telephones, law enforcement use of drones could prove to be more intrusive than existing CCTV camera networks.
In the UK and the EU, the General Data Protection Regulation will require that individuals are informed about the capture (and potential loss) of their personal data, are made aware of drone operations in their vicinity, as well as their right to access, erase, and restrict or refuse processing of their data.
The development of a consistent regulatory and operational framework for drones is also likely to encompass product liability issues, in connection with airworthiness standards and mandated ‘fail-safe’ functions, such as return-to-home functionality and forced flight termination.
The likelihood of litigation involving bodily injury, death, and property damage caused by drone accidents will additionally lead to considerations of how the resulting liability should be distributed among the owners, operators, designers, manufacturers, and distributors of drones.
As a recent Clyde & Co publication Drone Law and Policy notes, the drone insurance market is also a complex and evolving space.
In addition to developing bespoke indemnity products, insurers are also making use of innovative solutions such as on-demand cover and policy add-ons or write-backs for drone exposures.
The growth of drone use will necessitate a more diverse range of products to cover all eventualities, with Big Data set to play a central role in both the pricing of coverage and modelling of exposures.
The use of drones in high density population areas will also focus regulators’ minds on compulsory third party liability cover – particularly for recreational users, who may be less mindful of litigation risks than commercial drone users.
Globally there are differences in opinion or approach in relation to compulsory third-party liability insurance for drones. Inevitably there will be significant variations in drone regulations and insurance requirements from country to country as regulatory authorities struggle to adapt current and prospective laws to new technology and to national social, economic and political priorities.
In many jurisdictions, such as the UK and the EU, compulsory insurance requirements are already in place with commercial and recreational drone operators required to have cover dependent upon the risk their operations pose. Factors such as weight and specifications of the drone and the operation it is intended to undertake determine the level of risk. Conversely, in the USA, Australia and New Zealand, for example, drone operators are not at present required to take-out third-party liability insurance, but such cover is strongly recommended.
Globally a good model for jurisdictions to consider in relation to compulsory third party insurance could be the Automated and Electric Vehicles Act 2018 (UK), which introduced an extension to existing motor accident injury schemes to cover crashes caused by automated vehicles.
A similar treatment to the proposed uses of UAVs could provide a regulatory framework for mandating liability insurance for operators and ensure that members of the public have recourse to compensation in the event of drone accidents occurring.
This article first appeared in Insurance Day on 15 November 2021.