By Hilary Rowen, San Francisco
Insurers perform property inspections in connection with underwriting to determine if the property meets their standards for issuing coverage, and to determine the appropriate premium classification. Insurers inspect damaged property to evaluate the extent of the damage, whether the damage resulted from a covered cause of loss and to estimate the cost to repair or replace the insured property.
In the future, inspections of buildings and other insured property by insurers may be done through still photos, videos or data from more sophisticated sensors obtained by an unmanned aircraft. Rather than having inspections done by a person peering up from the ground, on a ladder or walking through a field, the inspections will be done by a person looking at photos taken by a drone or reviewing a computer analysis of data collected through drone-mounted sensors.
Several property-casualty insurers, including State Farm, USAA and AIG, have recently received approval from the Federal Aviation Administration (FAA) to test and use drones in insurance underwriting and claims operations. However, to date, the approvals that the FAA has issued to insurers contain restrictions that effectively limit the insurers to testing drones for use in inspections under limited conditions. Deployment of drones in insurers’ operations will not “take off” until the FAA’s recently issued draft regulation governing commercial use of drones is adopted.
The Regulation of Drones by the FAA: Entering a Period of Rapid Change
After being subject to criticism for its stringent restrictions on commercial use of drones, the FAA announced in March 2015 that it would streamline its process of reviewing “Section 333 exemption” filings for use of drones weighing less than 55 pounds (25 kilograms) in commercial operations. (Section 333 of the FAA Modernization and Reform Act of 2012 authorized the Secretary of Transportation to determine requirements for commercial use of unmanned aircraft systems.) In March the FAA also exempted entities with approved Section 333 exemptions from filing flight plans for each drone use, provided that the drone is flown below 200 feet. The FAA’s move to speed Section 333 approvals and to lift some of the restrictions on commercial drone use is likely to increase insurers’ interest in the use of drones for a wide range of property inspection purposes.
Restrictions in Section 333 Exemption Approval Issued to Insurers
Today, even with the recent changes, the FAA approvals of commercial use of drones have significant restrictions. Although lightweight drones may weigh less than 5 pounds, the operator must have a pilot license (which, under the FAA’s recent relaxation of commercial drone requirements, can be a recreational or sports pilot license). A second observer must be present for all drone flights. The drones can only be operated within line-of-sight of both the pilot and the observer.
Perhaps most significantly for insurers’ use of drones, the FAA’s approvals of insurers’ Section 333 exemption applications contain the following restrictions:
1. A drone cannot be flown within 500 feet of any structure or vehicle without the permission of the owner or person in control of the structure or vehicle; and
2. A drone cannot be operated within 500 feet of a person other than the operator and observer, unless the people within 500 feet are inside a structure that would protect them from debris in the event that the drone crashes.
These limitations impose significant restrictions on testing property inspection drones in real-life situations in urban and suburban areas. The FAA is testing whether to relax some of these restrictions.
On May 6, the FAA announced three drone initiatives: one will allow a drone manufacturer to survey crops in rural areas with drones flying outside of the pilot’s direct line-of-sight; a second initiative will allow a railroad to inspect rail infrastructure beyond line-of-sight in isolated areas; the third initiative will allow CNN to test the use of drones for news-gathering in populated area, under the current line-of-sight restrictions. None of the FAA initiatives involves insurer operations.
The Proposed FAA Regulation
The FAA issued a proposed unmanned aircraft system regulation for comment in February 2015. Under the proposed regulation, a new unmanned aircraft system (“UAS”) airman certificate would be created and the requirement that operators of drones hold traditional pilot licenses would be eliminated. The currently required observer would be optional. The line-of-sight requirement would be modified to provide that either the operator or the observer, if one is present, must maintain eye contact with the drone, rather than the current requirement that both the operator and a mandatory observer maintain a line-of-sight view of the drone.
As perhaps the most significant change with respect to insurers’ use of drones, the proposed regulation eliminates the requirement that drones remain at least 500 feet from structures, vehicles and people, although drones may not be flown directly over people other than the operator and observer. Under the proposed regulation, the operator is responsible for taking measures to mitigate risk to persons and property in the event that the operator loses control of the drone. The Notice of Proposed Rulemaking for the proposed regulation provides an example of a mitigation measure: Where the drone is operating in a residential area, the operator could ask that people in the area of operation remain inside while the drone is flying.
The proposed UAS regulation creates a separate and more relaxed set of requirements for drones weighing less than 4.4 pounds (2 kilograms) that fly at low speeds and at low altitudes. Operators of these very small drones would need to obtain a “microUAS” operator certificate from the FAA. Unlike the larger drones weighing up to 55 pounds, microUAS drones could be operated directly over people.
The proposed regulation requires that any accident involving injury to persons or property (other than the drone itself) be reported to the FAA.
It is unclear when the FAA regulation on the commercial use of small drones will be issued and whether it will be significantly modified based on comments from interested parties. However, the FAA is under pressure to create a regulatory environment more favorable to commercial use of drones, in part because testing and deployment of small drones is moving to other countries with less restrictive requirements.
The Evolution of Insurers’ Use of Drones
It is likely that insurers’ use of drones will move from the testing stage to operational use within the next few years. Possible developments include:
On-Site Inspections Will Be Severed From Data Evaluation
As a general matter, the person performing an insurance underwriting or claims inspection will have the expertise to evaluate the state of the property. The person on-site will usually provide a written assessment of the state of property in underwriting inspections, or the extent of damage, nature of the damage and the likely cause of the damage in claims inspections. These reports typically will include photographs and, sometimes, videos as documentation of the findings. However, the assessment is made by the on-site inspector.
As insurers start utilizing drones in inspections, it is likely that the expertise needed to perform a given underwriting or claims inspection will be split among several individuals. The on-site “inspector” will need to hold an FAA drone operator license and will need to have sufficient insurance training to collect the data relevant to the underwriting or claims evaluation. The drone operator will not need the substantive expertise in building construction and maintenance currently needed for underwriting inspections or the expertise in extent of damage, loss causation and other issues currently needed for claims inspection. Some insurers may outsource the drone inspections to companies that specialize in flying drones, rather than have drone operators on staff. Instead of having experienced claims personnel in the field, insurers will likely perform the analytic portion of the inspection remotely, using personnel who rarely, if ever, go into the field.
Drone Inspections Will Collect Different Data Than Current In-Person Inspections
In contrast to a human on a ladder checking for dry rot with a screwdriver, drones in the near future will not have capabilities to physically probe buildings or take samples. The type of sophisticated instrumentation utilized in space probes will not be practical for drones used for insurance inspections.
While on-site physical inspections will remain an option for insurers, it is likely that as inspection operations change in response to increased use of drones, physical inspections will become a rarity only performed in unusual circumstances where physical sampling is essential.
Current inspections, whether of buildings, crops or other insured property, tend to utilize visible light. The Mark 1 human eyeball, supplemented by photos and, sometimes, videos, is the primary inspection tool. Devices such as infrared detectors generally are only employed where there is some indication of a problem.
It is possible, although by no means certain, that insurance inspection drones will routinely collect data using non-visible light sensors. This could lead to more sophisticated analyses of the condition of buildings and the extent of damage. With a wider range of data, insurers may increasingly utilize computer algorithms to evaluate the inspection data. The use of a range of drone-mounted sensors may prove to be an effective substitute for a diminished reliance on physical probing of buildings.
Impact of the Relaxed FAA MicroUAS Requirements
If the proposed FAA regulation is promulgated with the relaxed requirements for drones weighing less than 4.4 pounds, insurers—and many other commercial users of drones in urban and suburban areas—may favor micro drones. Where it is not practical to get pedestrians, neighbors and other bystanders under cover before launching a lightweight drone, there will be significant incentives to use drones below the 4.4-pound threshold. Absent a set of “safe harbor” guidelines from the FAA regarding what set of precautions, other than moving everyone other than the operator and the observer under cover, is reasonable, commercial users of drones will probably favor microUAS.
It is unclear whether inexpensive microUAS will be able to carry sensors more sophisticated than a camera, given the 4.4-pound weight limit. Many current microUAS use the relatively inexpensive ultralight camera technology in smartphones. However, there is no comparable off-the-shelf source for ultralight, non-visible light sensors. Insurers alone would not be able to generate enough demand for such equipment. In the future, it is possible that there will be enough demand from all commercial uses for microUASs to spur the development of such sensors. Alternatively, the FAA may create an intermediate
category between drones weighing 4.4 pounds and drones weighing 55 pounds that allows less stringent deployment requirements for drones that can carry somewhat heavier payloads than the microUASs.
Drones and Disaster Response by Insurers
Much of the discussion of insurers’ use of drones has focused on handling disaster claims. It has been suggested that use of drones in damage assessments after disasters will allow insurers to handle claims more quickly. This is likely to be true in some disaster scenarios, but not all.
Large-scale disasters, whether hurricanes, earthquakes or Western wildfires, often strain insurers’ claims adjusting resources, even with the reassignment of claims inspection personnel from other regions of the country and the use of independent adjusters. Drones may alleviate at least part of the post-disaster claims resource crunch. As claims inspections increasingly are performed remotely, the need to redeploy claims personnel will diminish and the insurer’s ability to handle a surge in claims in one geographic region will improve. However, a limited supply of drones and qualified drone operators may simply replace a limited supply of claims adjusters as a key post-disaster claims adjusting resource issue.
Potential Issues Relating to Insurers’ Use of Drones
Any change in insurer underwriting or claims handling practices is likely to trigger charges that the insurer is treating policyholders and claimants inappropriately. Potential issues arising from insurer use of drones include:
Failure to Properly Inspect and Investigate a Claim
A shift from in-person inspections to remote inspections based on drone-collected data will inevitably lead to allegations that a claim was improperly denied due to the failure of the drone to collect necessary information or the misinterpretation of the data by a remote claims center. In many ways, these likely future complaints are not materially different from garden-variety challenges to in-person claims inspections. However, it is possible that regulators could impose a requirement that drone inspections be supported by in-person inspections whenever there is a challenge to the drone-collected data, at least where the in-person inspection does not pose a risk to the adjuster. It is unclear whether such a requirement would deter insurers from utilizing drones in adjusting claims; although if challenges became frequent, the cost of duplicate inspections would reduce the use of drones.
Flawed Computer Algorithms for Underwriting and/or Claim Damage Evaluation
If the use of drones is combined with the use of computer algorithms to assess the drone-collected data, there may well be challenges to the accuracy of computer-driven claims review. Challenges to computer models used to estimate replacement costs and other uses of computer programs in claim adjusting have been common in recent years. These lawsuits typically have been brought as class actions. Future litigation over computer algorithms used to assess drone-collected data are also likely to be framed as class actions, increasing insurers’ potential exposure.
Use of drones in insurance inspections will start as a fairly minor supplement to the traditional in-person inspection, primarily used to examine inaccessible portions of structures and other property. As lightweight sensors and the computer software needed to evaluate drone sensor data are developed, drones may trigger a more fundamental reorganization of insurers’ property inspection operations—with the collection and evaluation functions severed from each other.
Whether this more seismic shift occurs will depend both on technological developments and on the legal infrastructure for commercial use of drones. It is a fairly safe bet that the technology will be developed. The only question is whether the legal infrastructure creates an environment in which widespread use of drones makes sense for insurers.
This article was originally published in the Bloomberg BNA’s Daily Report for Executives on May 14, 2015.