..new insurance coverage endorsements

A few days ago, media outlets released a video of a kangaroo knocking a drone out of the sky.

Apparently, this “privacy loving” kangaroo was less than pleased with the drone following her family.   While the drone obtained impressive footage of the kangaroos, it was clear that this kangaroo had had enough.   As new technologies enter the stream of commerce, companies using such technologies likewise face new risk and exposures – whether from a kangaroo or other source.   

By way of background, in 2012, President Obama signed the Federal Aviation Administration (FAA) Reauthorization Act, which included a requirement that the FAA develop regulations for the testing and licensing of commercial drones by September 2015.   While licensing is still underway, drones are already being used by various governmental entities for border surveillance, scientific and university research, environmental monitoring and public safety.   While current uses involve governmental agencies and entities, the commercial drone market is on the horizon.   Experts opine that the commercial drone market in the United States could be worth hundreds of millions of dollars once the FAA clears their use.   The FAA itself projects that 30,000 drones could be flying by as early as 2020.

The FAA has reportedly received 167 applications for commercial use.  While the FAA may (or may not) meet the September 2015 deadline, it has granted approval for a handful of private (non-governmental) companies to use drones for commercial purposes, including inspecting construction sites and developing surveys for rural areas.   Large companies, such as Amazon, are studying drones for package deliveries.  Other large and small companies are evaluating how the use of drones can increase their competitiveness and bottom line.

The commercial use of drones presents traditional and non-traditional exposures for companies.   Traditional risks include bodily injury or property damage resulting from a drone colliding with a building, car or other object.   Less traditional risks involve privacy-related considerations including both intentional and non-intentional surveillance.  Recently, the Insurance Services Office (ISO) issued a white paper detailing the potential risks, exposures and considerations that the commercial use of drones present to companies and the insurance industry alike.

As the use of drones is expected to increase, insurers are evaluating whether the liability exposures arising from drone use could arguably be covered under existing insurance policies despite the fact that drone-related risks were never contemplated by those policies.   Other cyber security exposures provide an instructive reminder for insurers that with a new and emerging risk, the insurance industry must not only be defensive – by responding to these new risks – but also offensive – by carefully considering these emerging risks when underwriting new policies.   In the cyber security context, while the commercial general liability (CGL) policy was never intended to provide coverage for cybersecurity or data breach exposures – as these exposures simply did not exist when the CGL policy forms were developed – policyholders have attempted (sometimes successfully) to stretch meaning of policy provisions to provide coverage for such exposures.  In response, ISO and insurers alike have developed various exclusions to bar coverage for cybersecurity exposures.   At the same time, the insurance industry has developed specialized cyber insurance policies which provide coverage for, among other things, liability arising out of data breaches.

Given this emerging risk, ISO recently announced that it was seeking regulatory approval of endorsements addressing the liability exposures of drones for commercial purposes.   These endorsements, which modify coverage under a CGL policy, were filed on a multi-state basis for a June 2015 implementation.   As Ron Beiderman, vice president of commercial lines coverage products for ISO insurance programs explained “[p]roviding a range of options can help an insurer better align its product offerings both with its underwriting tolerance and the needs of its clients …Because this is a newly emerging exposure, [ISO] introduced various exclusion and coverage options to give insurers maximum flexibility when writing risks that use drones in their operations.”

As we quickly approach 2015, all companies – public and private – should embrace a “New Year Risk Management Resolution” by identifying and evaluating their risks and exposures.  

While drone use may be out of reach for the vast majority of commercial enterprises, all companies face liability risks and exposures.   These risks should be identified and analyzed with a focus on whether the company intends to insure, retain or transfer those risks.   While this exercise may have been conducted several years ago, new technologies, more complex business structures and a wider geographical spread dictates that companies take a “fresh look” at these issues.    Only by implementing a strong risk management function can business both enhance their reputation and obtain a competitive advantage.