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Assessing the compliance, cyber, privacy and insurance considerations of Drones
Drones are no longer just the playthings of technology enthusiasts. Today, the commercial market is set to take off in a big way, but with regulators still catching up, Stuart Collins assesses the risks
Unmanned aerial vehicles (UAVs), or drones, might seem like a novelty, used to spy on celebrities, or to film Hollywood blockbusters and sporting events like Formula One races. Yet these devices are finding an increasing number of commercial and civilian applications.
In Africa, UAVs are saving lives. They deliver medicines, blood and vaccines to people in remote communities – for example, UNICEF trialled a UAV service in Malawi that transports blood samples from new-born babies from a clinic to a laboratory.
Scientists are using UAVs to study volcanoes, monitor shrinking ice caps, and map pollution spills and harmful algal blooms. They are being employed to fight fires, prevent crime, locate earthquake survivors, and even to prevent shark attacks in Australia.
The UAV market is growing rapidly. Research firm Markets and Markets expects the global drones sector to be worth US$21 billion (€18 billion) by 2022.
To date, much of the growth has been in the consumer space. Commercial applications have generally been small scale and experimental, but that may be about to change.
Between now and 2020, Goldman Sachs forecasts a US$100 billion (€84 billion) market opportunity for drones, helped by growing demand from the commercial and civil government sectors, which it expects will spend US$13 billion (€11 billion) on drones over the next three years.
“What we see today is just the tip of the iceberg. New applications for UAVs are emerging all the time, while almost every week we see new innovations,” according to Mark Adams, UKI Senior Underwriter for Aviation at Chubb.
“At present, the commercial UAV market is mostly populated by small specialist service providers,” explains James Gadbury, COO of UAV Protect, a specialist drone insurance provider from Prospect Insurance Brokers. “Large companies have tended to buy in UAV services rather than invest in their own equipment and training, but we expect these companies will develop their own UAV capabilities in coming years, especially as the regulatory environment evolves,” he says.
Agriculture, mining, energy and construction are all expected to use UAVs to perform hazardous or repetitive tasks, like crop-spraying, prospecting or surveying. The shipping industry, for example, is beginning to use UAVs to survey vessels and inspect cargo holds, fight piracy and smuggling, as well as to make ship-to-shore deliveries.
For companies looking to use UAVs, there are a number of regulatory, operational and legal considerations.
Regulatory compliance is probably the biggest challenge for companies using UAVs, according to Raymond L Mariani, an attorney at New York-based law firm Murray, Morin & Herman. In the US, for example, companies face three layers of regulation: federal, state and city laws, he explains.
It is difficult to generalise about UAV requirements, according to Mark. UAV regulation is changing all the time and requirements vary greatly by country, he says. “Operators should seek out local advice and expertise, and at least refer to their national civil aviation authority.”
Unlike commercial aviation, there are no international rules on UAV safety and liability, although the International Civil Aviation Organization (ICAO) plans to publish UAV standards in 2018. At present, there is also no single set of EU rules governing UAV use, and Europe remains a patchwork of differing national rules.
Generally speaking, most countries require commercial UAV operators to obtain authorisation or a licence to operate, especially when flying in urban areas, close to buildings or flying beyond the line-of-sight. Each national authority applies its own safety restrictions, typically based on the weight and intended usage of the UAV. These typically include requirements to stay within a maximum flying altitude and for UAV pilots to undergo training.
In August 2016, the Federal Aviation Administration (FAA) introduced dedicated regulation for US commercial UAV operators under Part 107 of the Federal Aviation Regulations. While a step forward, the regulations include significant restrictions on the use of UAVs, such as a requirement to fly within the line-of-sight, explains Raymond.
Yet many promising UAV applications – such as crop-spraying, delivering cargo or surveying remote pipelines – will suit vehicles that fly beyond the line-of-sight, or even those that fly autonomously.
While regulatory developments have opened the market for lightweight UAV usage within line-of-sight, rules are very restrictive for larger and autonomous UAVs. But pilotless aircraft are being developed to transport cargo and even take passengers. One company already plans to test an autonomous flying taxi service in Dubai by the end of the year. But such ventures face significant regulatory hurdles.
According to Raymond, the FAA is taking a cautious, safety-driven approach to UAVs and is unlikely to relax rules for larger and beyond line-of-sight uses any time soon.
“Restrictions will not be lifted quickly. The FAA will want to get much more comfortable with UAVs’ sense and awareness capabilities, which enable them to avoid collisions with other aircraft, people and objects,” he says.
One big challenge is to manage the integration of UAVs with civilian airspace used by passenger jets, especially as UAV traffic grows. The number of incidents involving UAVs at London airports rose to 36 in 2016, of which 10 were classed as a serious risk of collision.
In Europe, there have been 606 safety incidents (such as airspace infringements) involving UAVs over the past five years, of which 37 have been classified as accidents, according to the European Aviation Safety Agency (EASA) Annual Safety Review 2017.
Safety concerns mean that small UAVs must stay below 400ft (120m) in the UK, while large UAVs are only allowed to fly in special test locations that exclude other airspace users.
Similar rules exist in other European countries. New rules introduced this year in Germany, for example, restrict UAV usage to a height of 100m without special permission, while units weighing in excess of 250g cannot be flown over residential areas.
The EASA is currently consulting on the regulation of small drones in the EU. The rules will cover technical and operational requirements, such as when and where a UAV can be flown, registration and pilot training.
One possible solution will be the creation of UAV lanes or corridors, something that is being explored by authorities in the UK, US and Singapore. Techniques to disable UAVs are also being developed, ranging from hunter-killer UAVs to specially trained birds of prey. Developments in technology could also improve safety in the longer term, believes Mark. For example, better collision avoidance systems are needed, as is improved cyber security, he says.
Other than regulatory compliance, the principal risk of operating a UAV is that of a collision, which can result in the loss of the UAV or, even worse, bodily injury or damage to third-party property. The value of most UAVs is relatively small, but more complex and larger drones can be worth upwards of US$500,000 (€420,000), according to Mark. And as they get larger and find more sophisticated uses, such as 3D mapping, values are likely to climb, he predicts.
More concerning is the potential to cause bodily injury or damage to property on the ground. The risk of a collision with an aircraft is an obvious concern, as is flying over crowds or urban areas.
Drones have crashed at several big sporting events, including the US Open, while another crashed at the 2016 Skiing World Cup, narrowly missing skier Marcel Hirscher.
According to Mark, technical faults are a common cause of UAV accidents, but human error is also a factor. “Safety remains a concern. Even with trained pilots, UAVs can still fail or stray into sensitive locations or urban areas,” says Mark.
To date, claims seen by insurers have been relatively low value (such as damage to parked cars), reflecting the low value and lightweight nature of most UAVs. However, as they become more complex and heavy, exposures are expected to increase.
“For now, we mostly see smaller UAVs of low value and restricted use. But a shift to larger, more valuable UAVs, operating in urban areas and beyond the line-of-sight, would clearly lead to much larger liability and exposures,” according to James.
As UAVs become more prevalent, insurance is likely to become an important mechanism to compensate for third-party damage. While passenger aircraft are required to carry aviation insurance, this is not the case for UAVs in all countries.
Commercial UAV operators in the EU are required to hold third-party liability insurance with a limit of no less than €1 million. But UAV operators in the US, for instance, are not currently required to do so, explains Raymond. Insurance regulation in the US is state-based, and while some states (like California) have proposed mandatory insurance, these have been rejected, he says.
The Unmanned Aerial Vehicle Systems Association advises all commercial UAV operators to purchase appropriate third-party insurance. It is concerned that too many UAV operators do not have appropriate third-party liability insurance in place, while many of them rely on public liability insurance, which typically excludes aerial work.
Best practice and contractual requirements are already driving the need for UAV insurance, according to James. “Companies typically require vendors to demonstrate that they hold appropriate insurance,” he says.
Privacy and cyber risks
In addition to risks associated with collisions, UAV operators face other liabilities. Privacy has emerged as a big issue in recent years. The Information Commissioner’s Office in the UK warned in 2014 that commercial drone operators are subject to data protection laws and would need to conduct a privacy impact assessment.
Unintentional privacy breaches are a real risk for commercial operators, for example when they are filming in public or surveying buildings in public, explains Mark.
There have already been lawsuits in the US around privacy, as well as noise and trespass, according to Raymond. “While there are only a few cases at the moment, we will see more over time,” he says.
Cyber security is another consideration for operators. Ground-to-air signals can be deliberately jammed or interfered with, while UAV cyber security has shown to be wanting. Security researchers have hacked into UAVs, including high-end drones used by the police and industry.
Operators may also be exposed to professional liabilities, according to James. For example, errors or omissions in data sourced by a UAV – such as in 3D mapping – could result in a financial loss to the client, he explains.
Operators need to be careful when purchasing insurance, advises Mark. Almost without exception, aviation risks are excluded from public liability and general liability policies, he explains.
According to Raymond, commercial operators would be wise to purchase general aviation cover or specialist UAV insurance. “The growth in the UAV market has been accompanied by exclusions,” he says. “General liability insurers do not look to pick up this type of exposure and have added specific exclusions for aviation risks to general liability policies.”
The need for appropriate cover has also caught the attention of regulators. The UK’s Civil Aviation Authority (CAA) recently clarified its insurance requirement, specifying the need for commercial UAV operators to purchase aviation cover.
In response to demand, the aviation insurance market has developed insurance specifically for UAVs. This is a specialist area and has not been an easy product to develop, explains Mark.
“UAV insurance combines a number of areas of aviation and general liability expertise. At Chubb we have taken a measured approach to UAV insurance, and aim to provide good cover in a difficult and changing regulatory and technical environment,” concludes Mark.
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