Drone Technology is Taking Off – Are Insurance Companies Ready for It?
Given the explosion of drone technology in recent years, it was only a matter of time before a coverage dispute arose over the use of drones. On December 7, 2018, that time came when the United States District Court for the Central District of California issued an opinion on whether an aircraft exclusion applied to damages sustained by a wedding guest when she walked into the photographer’s drone. See, Philadelphia Indemnity Insurance Company v. Hollycall Productions, Inc. et al., 2018 WL 6520412 (C.D. Cal. Dec. 7, 2018).
In Hollycall, the photographer’s liability insurer agreed to defend the photographer in a lawsuit brought by a wedding guest against a photographer after she became blind in one eye after walking into the photographer’s drone. In defending the underlying lawsuit, the insurer reserved the right to challenge its coverage obligation including its right to seek reimbursement for the defense costs it incurred. The insurer filed a declaratory judgment action and moved for summary judgment on the basis that the aircraft exclusion in its policy precluded coverage for the injuries to the wedding guest. Under the aircraft exclusion, the policy did not apply to bodily injuries “arising out of the ownership, maintenance, use or entrustment to others of any aircraft, ‘auto’ or watercraft owned or operated by or rented to or loaned to any insured”.
The policyholder argued that the aircraft exclusion did not apply because a drone cannot transport persons or cargo and thus, does not constitute an “aircraft”. Because the term “aircraft” was not defined in the policy, the court turned to the Merriam-Webster dictionary which defined “aircraft” as a “vehicle (such as an airplane or balloon) for traveling through the air”. The court concluded that the term was unambiguous and did not require the carrying of passengers or cargo. The court further noted that the fact a drone is unmanned and operated remotely does not make it any less of an aircraft. Thus, the court found the aircraft exclusion applicable, and that the insurer did not have a duty to defend or indemnify the photographer and was entitled to reimbursement of the defense costs incurred.
The Hollycall case demonstrates just one of the many types of coverage issues that will arise with the increased use of drones.
Standard first party property policies do not provide coverage for commercial use of drones. The Insurance Services Office, Inc. (ISO) 2011 form CP 00 10 10 12 states that “covered property does not include personal property which is airborne”. Depending on the size and sophistication of the drone, the amount of first party coverage needed by operators will vary.
Typical third party liability policies do not specifically reference drones, other than through the aircraft exclusion. As discussed in the Hollycall case, Coverage Part A includes an aircraft and watercraft exclusion which does not distinguish between manned and unmanned aircrafts – “no coverage for liability arising out of the ownership, maintenance, or use of aircraft or watercraft that is owned, operated by, rented to, or loaned to an insured.” However, Coverage Part B (personal and advertising liability) does not contain an aircraft exclusion. In order to address new drone liabilities, ISO has developed several drone-specific endorsements which extend or exclude coverage for drone liabilities. These forms allow an insurer to insure or exclude Coverage A and Coverage B exposures. Under these endorsements, the drone must be scheduled and the operations site must be designated. The endorsements allow for a separate drone liability aggregate limit.
The Unmanned Aircraft exclusion found at form CG 21 09 addresses drone liability in the following ways: 1) excludes bodily injury, property damage and personal and advertising injury arising out of the ownership, maintenance, use or entrustment to others of an unmanned aircraft; 2) replaces the aircraft and watercraft exclusion with a bifurcated exclusion to address a) unmanned aircrafts and b) aircraft (other than unmanned aircraft), auto or watercraft; 3) adds an exclusion under Coverage B for unmanned aircrafts and 4) adds a definition of “Unmanned Aircraft” to the definitions section of the policy (“an aircraft that is not 1. Designed; 2. Manufactured; or 3. Modified after manufacture; to be controlled directly by a person from within or on the aircraft.”)
Other ISO endorsements stem from the language of form CG 21 09. Endorsement CG 21 10 contains the bifurcated exclusion in Coverage A but does not modify Coverage B; CG 21 11 contains the Coverage B exclusion but no exclusion in Coverage A; CG 24 50 provides limited coverage for drone operations or projects described in the schedule and allows an aggregate limit specific to the endorsement, and CG 24 51 and CG 24 52 provide limited coverage under Coverage A only and Coverage B only.
Homeowners’ policies will also be impacted by the increase in drone claims. Homeowners’ policies typically cover physical damage to drones used for personal use as a hobby. They may also cover third party claims of bodily injury and property damage. However, they are unlikely to cover liability arising from the personal use of drones that involve trespass, stalking, harassment or other criminal laws.
Other policies will need to evolve with the increase in drone use, including cyber liability and drone-specific policies. Drone operators will need cyber liability policies to cover the cost to investigate data breaches, defend privacy claims and repair damage to systems caused by hackers. Drone operators may even look to cyber liability policies for coverage of bodily injury and property damage claims caused by cyber attacks on moving vehicles. At this point in time, several insurers are offering drone-specific policies. Coverage currently available under these policies include third party liability, physical damage to the drones and product liability. The drone-specific policies do not typically provide coverage for invasion of privacy, nuisance or trespass claims.
Hollycall may be one of the first drone insurance coverage cases, but it certainly will not be the last. As drone technology and usage continues to expand, so will the losses and the lawsuits. Whether insurers will provide coverage for such drone-related injuries will depend primarily on the terms and conditions of the policies at issue.