Best Practices and Potential Liability for Drone Use in the Insurance Industry

Defense Digest, Vol. 23, No. 4, December 2017

By Douglas J. Kent, Esq.*

The United States has experienced major hurricanes Harvey, Irma and Maria this year. When a catastrophe hits, Unmanned Aerial Systems—UAS or drones—can provide a bird’s eye view of inaccessible and unsafe areas to evaluate claims and losses both quickly and effectively. Hurricane Harvey was one of the first catastrophic storms to hit the United States since the Federal Aviation Administration began allowing commercial industries to operate drones. Several large property insurers successfully utilized drone technology to capture images to develop their responses to the destruction Hurricane Harvey left behind. It is easy to see how drone technology can drastically change the life of an insurance claim. The increased use of drones continued with subsequent hurricanes this year. Many insurers are expecting to expand their use of drones in the future. Drone use is highly regulated with potential liability for the operator and their company.

Rules and Regulations for Drones

The United States Government has the exclusive power to regulate the National Airspace System to protect individuals and property in the air and on the ground and has directed the Federal Aviation Administration to perform this function. Recent developments from the FAA have made it feasible for insurance companies, independent adjusting companies, engineers and experts to obtain commercial licenses to operate drones by way of the FAA Modernization and Reform Act of 2012. All commercial industries must apply for and receive the necessary waivers from the FAA before operating a drone. At least 17 insurance companies have received permission to operate drones in connection with the underwriting of policies, loss control, risk management and the investigation of claims.

Effective August 29, 2016, the FAA implemented UAS Rule Part 107, which sets forth extensive rules regarding the operation of drones. These regulations require, in part, that drones: (1) weigh less than 55 pounds; (2) are operated only in the visual line-of-sight during daylight or civil twilight; (3) have a pre-flight inspection by the Remote Pilot in command; and (4) generally operate at altitudes of only 400 feet above ground.

Similar to the federal government, state and local governments have enacted laws and/or implemented regulations regarding the operation of drones. Los Angeles prohibits the operation of drones after sunset, and Charlottesville, Virginia bans drone use entirely.

The Game of Drones: Liability Concerns

While drones provide a technological advantage to insurers and many major industries, they certainly also present liability concerns. Two major liability issues are bodily injury or property damage caused by the operation of the drone, and another is the potential for invasion of privacy. As drone use increases, drone-related claims are expected to increase in the insurance industry.

Media reports indicate that numerous people have been injured because of faulty drone operation. Drones have caused injuries by crashing into performers and spectators at various public events. They have also crashed into private property, resulting in property damage. Concerns have been expressed regarding the nightmare scenario of a drone hitting a commercial airplane and causing it to crash. In these foreseeable types of incidents, theories regarding negligent operation, training, inspection and maintenance will likely be asserted.

Product liability claims for accidents or damage caused by drone defect or malfunction can also be expected. Such claims will arise against manufacturers, sellers or suppliers. Advances in drone technology may be used to argue that older drones are defective. For example, newer drones have automatic crash avoidance systems to prevent accidents.

In addition to bodily injury and property damage claims, drone owners and operators also face potential exposure for invasion of privacy under both common law and state statutes, such as Florida’s Freedom from Unwarranted Surveillance Act (FUSA). Florida’s FUSA applies to any individual, state agency, or political subdivision and, it prohibits a person from using a drone “[t]o record an image of privately-owned real property or of the owner, tenant, occupant, invitee or licensee of such property with the intent to conduct surveillance on the individual or property captured in the image in violation of such person’s reasonable expectation of privacy without his or her written consent.” The statute further provides that “[a] person is presumed to have a reasonable expectation of privacy on his or her own privately-owned real property if he or she is not observable by persons located at ground level in a place where they have a legal right to be, regardless of whether he or she is observable from the air with the use of a drone.” This appears to address the use of drones for the use of claimants. In property claims, written notice and/or permission can limit one’s exposure. One might also be able to rely on one’s property policy provision regarding authority to investigate claims. Many states, including Florida, provide exceptions that must be examined. However, Florida’s FUSA allows successful plaintiffs to recover civil damages, injunctive relief and reasonable attorney’s fees with a potential multiplier. Other states have enacted statutes regarding drones and invasion of privacy by drone operators, such as Idaho, North Carolina, Oregon, Tennessee and Texas.

Companies continue to analyze whether to operate drones by way of their own employees or to hire vendors to collect the data. A thorough investigation of the vendor and their operation of drones will be necessary to ensure that there is compliance with all federal, state and local laws. If hiring a vendor for drone operation, a written contract should be entered into that requires, at a minimum: (1) compliance with all laws and best practices; and (2) the shift of all risk to the vendor through a hold harmless agreement that also ensures that company is made an additional insured under the insurance policy as evidenced by a Certificate of Insurance. Consider a vendor’s endorsement in one’s favor from the manufacturer for any large purchases of drones.

New Heights: Best Practices

Each insurer should establish best practices for drone use. This is critical whether the drone is being operated by the insurer, its employees or an outside vendor. Some practical guidelines are:

1.      A drone operator must be in full compliance with the FAA’s Part 107 guidelines and all applicable laws, including federal, local and state, which must be monitored for changes, while limiting any images to the specific claim or property at issue.

2.      The operator and/or crew should complete a pre-flight checklist to evaluate any risks for each particular operation.

3.      Detailed maintenance logs should be kept regarding each inspection and all maintenance performed.

4.      Consider sending written/verbal notices to the surrounding property owners to the extent necessary for your drone use.

5.      Your drone should be analyzed for any potential data security issues.

6.      The drone operator should be wearing proper and professional attire, such as a helmet, safety glasses and a high-visibility safety vest. Warning or caution signs should be placed in the area.

Turbulence or Clear Skies Ahead for Drone Operators?

The most common use of drones by insurance companies involves the investigation of a variety of bodily injury and property damage claims, which can range from the simple accident claim to a catastrophic disaster claim. The use of drone technology offers many safety, cost and service advantages. Drone usage: (1) reduces the chance of injury to the inspector by avoiding the risk of ladder displacement and slip and falls; (2) eliminates potential damage to the building or roof that the inspector may cause by walking on the material (clay, tile and metal roofs); and (3) expedites and enables more cost-effective coverage of larger areas. While drone technology can improve cycle time and cut costs, it does not come without risks and limitations, such as, property damage, bodily injury, cyber breaches, privacy violations and flight-time restrictions, which must be considered in connection with the use of drones in the insurance industry. Best practices should limit or eliminate your exposure.

*Doug is a shareholder in our King of Prussia, Pennsylvania office. He can be reached at 610.354.8281 or at djkent@mdwcg.com.

**A lengthier version of this article appeared in the Summer 2017 issue of Construction Claims, a publication of the Claims & Litigation Management Alliance (CLM). That article may be found at this link: http://clmmag.theclm.org/home/article/360-degrees-hot-construction-drones.

***We thank law clerk, Addison Fontein, who greatly assisted in editing this article. 

_{Defense Digest, Vol. 23, No. 4, December 2017. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2017 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}