Drones are finding their way into every corner of life—and insurance. No matter what markets you’re serving, be prepared to address drones with many of your commercial clients in the very near future.

Vikki Stone, executive vice president of Poms & Associates in Woodland Hills, California, received an unexpected call from an insured’s attorney. The client was desperate to find coverage for a drone that would be delivering tacos for one of the largest Mexican fast food chains in the country.

Stone, who has 30 years’ agency experience, was able to quickly arrange coverage. “I grew up watching the Jetsons. The opportunity excited me,” says Stone, whose agency places coverage for manufacturing, distribution and technology risks.

Ultimately, the FAA didn’t clear the taco-delivering drones for takeoff. But since that initial placement, Poms, which places coverage for manufacturing, distribution and technology risks, has received direct appointments from carriers that see evidence of the agency’s commitment to insuring drones.

Clients using drones, technically termed unmanned aerial vehicles (UAVs), “will need support in this area, and we intend to provide that,” Stone says. “We’ve assembled a team and continue to invest in this new technology. We are seeing a lot of activity, but I wouldn’t recommend getting into it without understanding what’s required, how to counsel clients and where to place coverage.”

As the government ramps up safety and compliance efforts in response to the proliferation of drones, Poms isn’t the only agency taking notice. Regulators have set up a national registry for recreational drones, while the number of special exemptions granted by the Federal Aviation Administration (FAA) for commercial use continues to grow.

But although data is pouring in that helps inform the risk selection process, experts say the days of automated underwriting are still a ways off—at least until loss history accumulates.

Commercial Applications

Doug Johnson, president of JSL Aviation Insurance in Loganville, Georgia, likens a drone to “a flying robot” whose relative ease of use has expanded its utility in previously unimaginable ways. This demand has spawned companies that launch drones to inspect utility towers, monitor land arability for agriculture and furnish evidence of completion of construction projects.

One such company is one of Stone’s clients: Unmanned Aerial Surveillance, based in Los Angeles. “A lot of smart people are getting involved in drones because of the myriad of applications,” says COO Ed Rigney, who connected with Poms through a relationship with the agency’s principal. “Silicon Valley is giving it more attention than ever, and it’s changing the game for business.”

Matt Bauer, vice president and producer at InterWest Insurance Services, LLC in Chico, California, says his first time insuring a drone was in 2013–2014 when an independent contractor working with realtors needed a drone for surveillance and aerial photography of high-end properties in Tahoe.

“That sparked our interest in drone usage,” Bauer says. In fact, “we’ve started using them in the insurance world to give our underwriters a view on the larger property risks we insure. Then you start talking to other guys flying them, exchanging information on techniques and software. That’s how I became familiar with different individuals using them for different applications.”

Real estate and agriculture are two of the major industries ripe for drone proliferation. Located in an “agricultural hub,” InterWest has connections with many farmers and ranchers who are discovering it’s more efficient to utilize drone technology to monitor irrigation systems or crops, Bauer says.

But Johnson foresees big changes in safety and risk management as aircraft ownership expands from large enterprises to include anyone with a few hundred dollars to spend on a drone. “Now there’s virtually no barrier to entry, and the FAA is being asked to look at something that’s growing so fast with many manufacturers and almost unlimited uses,” he says.

Those uses now extend to small and midsize retailers that want to compete with Amazon, Wal-Mart and Google by making deliveries by drone. Bauer recalls one client flying drones down ski slopes to make promotional videos for his clients, who were trying to attract sponsors from various ski and snowboard equipment companies.

The most unusual application Bauer has seen? “Golf course engineers and architects flying at regular intervals during one of their projects to show progress to the board of directors of the club that hired them,” he says. “You’re seeing them not only for maintenance purposes, but there are so many applications that really haven’t been adopted yet. They’ll be used and more frequently, and if there are more exclusions for drone liability, it will become cumbersome.”

Industry Response

Some would say it already is. “Aviation in general doesn’t follow the law of large numbers,” Johnson says. “Actuaries aren’t of value because the risks don’t fit a mold or model. Most underwriting is based on past history, and with drones there’s no history.”

When writing drone insurance, aviation underwriters would seem to have a leg up over traditional property-casualty carriers, and many have branched out to drones to meet rapidly growing demand.

“Drones are a natural outgrowth of what we do since we’re exclusively in the aviation business,” Johnson says. “There are p-c companies that will write a single drone if you have a large account with them, but on the aviation side, we can write a whole fleet and the size of the company doesn’t matter.”

Other brokers tend to agree with Johnson’s view. Travis French, aviation broker at Arlington/Roe in Louisville, Kentucky, knows where to go when presented with a relatively uncomplicated risk.

“When an insured with a popular UAV made by DJI is looking for a standard million-dollar, liability-only policy with no physical damage, I don’t need to send it to a dozen insurers because there’s no price competition or major coverage differences,” French explains.

But the more complex the potential use, the more challenging the search for coverage, Bauer says. “It was easier when we started placing liability policies for drones in 2013, but it’s now requiring more and more creative underwriting and thinking outside the box,” he explains. “We’re placing more risks in the non-admitted markets.”

Good news: Solutions continue to multiply in the greater p-c market. “As drone use becomes more prevalent, we don’t suspect that all drone operators will be the types of risks you might necessarily consider when thinking about aviation insurance,” says Billy Mauro, director of commercial casualty product development at ISO, a Verisk Analytics company in Jersey City, New Jersey.

For example, “if you have a flower shop risk that wants to compete with others that deliver products via drone, wouldn’t it be nice to have a tool to respond to this exposure under the existing insurance programs in the standard market?” Mauro asks. “We’ve been creating options to address coverage for the varying types of drones and operations we expect to see as the technology and its popularity move forward.”

Mauro adds that ISO has filed six drone endorsements in all states, including options to exclude drones and provide coverage for drones with specific operations, which are currently available for use in all but two jurisdictions. And that should come as welcome news to independent agents.

“As long as the media continues to produce stories about these hazards, underwriters will remain skeptical,” Bauer says. “I hope that in the future, as underwriters become more familiar with the risks and drone use becomes more common, there will be more of a swing to standard market inclusion and ISO coverage forms development.”

“Ultimately, you’ll see a move to automate this—most of the rating could be done online with data input and algorithms,” French adds. “Once we get through the FAA red tape, once regulations are in place and finalized, it will be easier for carriers to incorporate [drone risk] into their existing books or decide not to write it. Right now, we’re doing them like a complex liability risk, evaluating it on case-by-case basis and asking questions.”

Regulatory Atmosphere

According to the National Association of Insurance Commissioners, commercial use of drones is still largely restricted, and operations are authorized on a case-by-case basis. The FAA has started regulating commercial drones with proposed rules including requiring pilots to obtain special certificates, avoid bystanders and adhere to location and time restrictions for flight.

For example, Rigney says the FAA requires his company to file a plan that demonstrates an understanding of the law, their expertise and their skill sets. “They open that up to public comment for 90 days and then they assess your plan,” he explains. “To me, that should be mandatory.”

But since final commercial drone rules have not yet been implemented, they are also not being enforced. The FAA website reports that Section 333 of the FAA Modernization and Reform Act of 2012 currently leaves authority in the hands of the Secretary of Transportation to determine whether a drone requires an “airworthiness certificate” to operate safely in the national airspace system. The authority grants case-by-case authorization for certain drones to perform commercial operations.

Rigney and Mauro believe the FAA’s Section 333 exemption process for unmanned aircraft systems has been enlightening, yielding more than 2,000 clearances to date. “It’s a tremendous benchmark for insurers,” Rigney says. “When you go back and look at who’s been granted the exemptions, what is the history of loss? If someone doesn’t have an exemption, I don’t know how you’d insure it.”

Some carriers, however, will in fact write third-party liability coverage without the exemption, says Camille Knight, assistant aviation broker at Arlington/Roe. “With proper training, if they believe the operator is able to operate the drone safely, we have some insurers who will provide third-party liability coverage without the exemption,” she explains. “It depends on the type of drone.”

“I look at this as an incubation period, where the exemptions issued by the FAA are a bellwether as to where drone usage is heading,” Mauro adds.

Still, as a good risk management practice, Knight advises agents to encourage their commercial clients to get the 333 exemption as soon as possible. “We’re also advising them that no matter what the regulatory environment is, if you’re going to fly a drone, it’s always better to fly it with insurance rather than without,” she adds.

Ask clients if they foresee adopting the technology to do some of the more difficult or value-adding jobs. Or do they anticipate a more whimsical use for a drone?

Mauro cites an incident at a restaurant in Brooklyn, where a drone’s journey to carry a sprig of mistletoe got a bit out of hand—one of its rotors cut a news photographer on the nose. “It’s a poisonous plant flying over people who are eating and drinking,” he says. “Those drones got low enough to lacerate a diner. This was probably the last thing an agent would think about.”

“Aviation is a high-profile business,” Johnson agrees. “You might see one in a million auto accidents, but you’ll see every aviation accident. The same will be true for drones.”

John Novaria is an IA contributor. Jacquelyn Connelly is IA senior editor.