An Essay on Unmanned Aerial Systems Insurance and Risk Assessment Jason Knight Brendan Smith, Student Member, IEEE and YangQuan Chen, Senior Member, IEEE Southwestern Law School MESA Lab, University of California, Merced Los Angeles, California 90010 Merced, California 95343 Email: [email protected] Email: [email protected], [email protected] Abstract—UAV technology has begun to integrate into the local legislature. Finally, the policyholder chooses a well suited National Airspace (NAS), at an accelerated rate. Coupled with package and coverage ensues. Unfortunately, this model is not a high demand for civilian UAS applications and decreasing universal to all industries. However, this model may be adapted component prices, more UAS researchers, commercial operators, to the UAS sector. and manufacturers begin to fly. Despite a lack of government mandated insurance requirements and mission profiles deemed Insurance companies rely on a portfolio of risk to mitigate dull, dirty, and dangerous, the UAS industry is gaining mo- cost. Those policyholders engaged in risky activities or inex- mentum. However, as the UAV industry matures, unmanned perienced operators must meet higher certification standards aircraft will inevitably crash. In anticipation of these growing and pay higher premiums. Conversely, those who operate in pains, insurance carriers must be ready. Unmanned aircraft present a unique matrix of risk endemic to the challenges of a noticeably safer manner and have greater experience are flight in the NAS. Underwriters and actuaries will be able to rewarded with lower premiums and potentially better coverage. provide peace of mind to pilots and bystanders alike. Insurers A pool of diversified risk allows underwriters to organize must design policies to properly allocate liability and provide a and prioritize future clients. Insurance companies can then safety net. UAS-tailored coverage will identify and quantify the absorb automotive or marine accidents that lie within coverage unique characteristics of unmanned aircraft. Underwriters have constraints. Firms can then assess risk with some degree of just begun to adapt insurance products to suit the needs of the certainty based on historical data. However, in the aviation nascent sector. This analysis will outline the process of insuring industry, this pool is so small, that actuarial classes and UAS. Further, it will highlight how insurance companies should policyholder risk matrices are considerably less relevant [3]. cope with the dynamic forces within the UAV market. Risk management in the aviation industry is unique because I. INTRODUCTION of the endemic nature of flight. Insurance policies are generally written based on aircraft airworthiness; available accident UAS risk management is a large sector in flux. Though the data; area of operation and pilot certification. These factors FAA has not moved to impose minimum insurance require- are deceptively similar to actuarial classes in the automotive ments, underwriters are rushing to fill the void. Though UAS industry. However, unlike the relatively consistent variables risk assessment may seem trivial, the obvious risks of personal drivers face on the highway, flight conditions change every injury and property damage loom. Like manned aircraft, UAS time the propellers start to turn. Each mission profile should are sensitive and subtle instruments that carry hefty repair and be analyzed independently and within the aircraft envelope [4]. replace costs. Therefore, insurance companies must consider UAS to be comparable to small or ultra-light aircrafts. Since Another differentiation from other sectors is that the federal several factors make up the UAS risk matrix, underwriters will government does not generally require pilots and aircraft take into account who is liable for when a mission fails or owners to carry insurance. Though there is an exception, it causes injury. Problems should be initially divided into two will be discussed later in this paper. The rationale behind the categories of fault, Pilot-In-Command (PIC) and manufacturer lack of a federal insurance mandate is the stringent scheme for (hardware/software malfunction) liability. As the FAA and pilot certification and aircraft airworthiness as well as oversight local legislatures develop a concrete legal framework for these from air traffic control (ATC) at airports across the country. risks, the insurance industry must remain ready and flexible. Under FAA regulations, a pilot must complete a rigorous training regiment to obtain a pilot’s license [5].2 Subsequently, certification maintenance requires that a pilot who wishes to II. WHAT MAKES AVIATION INSURANCE DIFFERENT transport passengers must complete three takeoffs and three Aviation risk is not like other types of risk. Insurance landings every 90 days, in the same category, class and type in other sectors use actuaries1 to identify and manage risk. for the certification issued [7]. Furthermore, a pilot must For example, in the automotive industry, actuarial classes are maintain minimum health requirements for a biannual medical used to determine what level of coverage is necessary for a examination. prospective policyholder. Currently, automotive underwriters Aircraft airworthiness is also subject to strict scrutiny. Any use two classes, vehicle and driver, to determine coverage. defects that may affect performance of an aircraft must be Vehicle data points include the manufacturer, model and value. documented, reported and repaired for continued airworthiness Driver data points are comprised of gender and driving record [8]. Underwriters have responded to this rigid structure by among other factors [2]. An underwriter then plugs in the issuing policies with strict exclusions. Courts have held that respective client information and a tiered coverage package matrix is generated. The underwriter then applies relevant 2An applicant must complete a specified number of hours of ground school minimum coverage requirements, usually mandated by the or class room training for a certain type rating. The applicant must then complete the relevant written test for the rating. The applicant must then 1a person who compiles and analyzes statistics and uses them to calculate complete a specified number of hours of flight instruction and pass a practical insurance risks and premiums [1] flight exam to receive a certificate [6]. 978-1-4799-2280-2/14/$31.00 ©2014 IEEE TABLE I. AIR CARRIER -MINIMUM SINGLE LIMIT OF LIABILITY policies with exclusions that withhold coverage for accidents WITH 16 PASSENGERS caused by certification and airworthiness issues are valid $3,600,000 = [(16 passenger seats) × (:75)] × $300; 000 (Liability Per Occurrence) [9], [10]. Insurance firms enforce such exclusions and argue + $2; 000; 000 (property damage per occurrence) that forfeiture of coverage due to faulty pilot certification or airworthiness is not an exclusion. Instead, the coverage never = $5; 600; 000 Minimum Coverage Requirement existed in the first place [11]. TABLE II. AIR TAXI -MINIMUM SINGLE LIMIT OF LIABILITY WITH 16 Unmanned aerial vehicles and systems occupy an even PASSENGERS smaller pond in the risk pool. Currently, underwriters do not $900,000 = [(16passenger seats) × (:75)] × $100; 000 (Liability Per Occurrence) have a legal framework to rely on. Because so few UAS + $300,000 (non-passenger liability per occurrence) and UAV operators have approval to fly in the United States, + $100,000 (property damage per occurrence) insurance firms must innovate to accommodate them. = $1; 300; 000 Minimum Coverage Requirement So far, insurance firms that write policies for UAS rely on two methods to mitigate risk for pilots. The first method is to require the PIC to maintain a minimum private pilot’s to provide air transportation and who has control over the op- license (PPL) certification rating. The second is to require erational functions performed in providing the transportation” the PIC to attend a mandatory FAA private pilot ground [17]. As required by FAA CFR 205.5(a), “these requirements school, as to ensure education on the consequences of flying apply to bodily injury or property damage, resulting from the in the National Airspace (NAS) [12]. However, some speculate carrier’s operation or maintenance of aircraft in air transporta- that the FAA will require a baseline ground school for both tion. ” [16]. PICs and Visual Observers (VO) (individuals who are critical FAA minimum requirements are calculated based on to mission operation through communication with the PIC, commercial aircraft capability and capacity. Under 14 CFR but do not directly control the aircraft). However, until this 205.5(b), the FAA discriminates between aircraft that can requirement emerges, underwriters must rely on the existing transport 60 people or more then 18,000 pounds of cargo [16]. general aviation certification scheme. The minimum requirements for coverage is illustrated above Furthermore, insurance firms face a challenge for UAS in Table I. The FAA maintains a different scheme for air taxis aircraft airworthiness. The FAA requires that all airworthy [16]. An air taxi is an aircraft that transports passengers, prop- aircraft have a serial number [13], also known as a tail erty, or mail in small aircraft [18]. The minimum requirements number. The serial number allows manufacturers, pilots, and for air taxi coverage is illustrated above in Table II. the government to monitor accident data and reliability. This Although the manned aircraft scheme may not be directly