January 3, 2018
What’s on the Liability Landscape Horizon for Drone Manufacturers?
The Economist reported in June
that 110,000 drones were sold for commercial use in 2016 with those numbers expected to rise to 174,000 for 2017. The “Age of Drones” is upon us. The possibilities are endless, and as money pours into the drone manufacturing industry, technology is advancing at a rapid pace. But with the rapid rise in commercial use comes the inherent liability risk associated with it. In order to properly evaluate the liability landscape going forward, we need only look back some 60 years ago to a similar rapid advance occurring in commercial aviation and take heed to the substantial liability risks that developed in that industry and what has worked (and not worked) to lessen them.The Advent of Commercial Flight
With the development of super-heavy bomber airframes for use in World War II, the technological groundwork was laid for the development of large, long range commercial passenger aircraft. In 1952 the British de Havilland Comet hosted the first commercial flight. By 1958 Pan Am had initiated a New York to London route utilizing a Boeing 707 and by the close of the decade American Airlines began to offer a domestic New York to Los Angeles route. Commercial flight was in business in a huge way.
The problem was that insurers (particularly at Lloyd’s of London) were now faced with underwriting not only aircraft manufacturers such as Boeing, but also all the manufacturers producing engines and component parts for those aircraft in an area of huge uncertainty and potential for risk. While creative group insurance programs such as the Aircraft Builders Council, together with a willingness by leaders in the industry (on both sides) to both create and to pay for it, ultimately helped establish an aviation insurance framework to handle the risk that was coming, no one in the industry could have imagined the massive exposure that would result over the next decades through involvement in the very lucrative commercial aviation manufacturing business.The Rising Cost of Risk
Beginning with the Turkish Airlines DC-10 crash north of Paris in March of 1974 killing 346, the cost of defending and paying settlements in commercial aviation accidents has sky rocketed. As an example, the 1996 Valujet DC-9 crash in the Everglades killing 103 cost the insurance industry an estimated $266 million and the 2000 Alaska Airlines MD-80 crash near California’s Channel Islands killing 88 had an estimated cost of a whopping $300 million. These cases are now two decades old with the industry cost getting bigger with the loss of larger aircraft involved in air disasters such as Air France Flight 447 which killed 228. With larger aircraft, comes larger risk with insurers now regularly offering aviation liability cover of $1 billion and more.
It’s also not just large commercial jets that have exposure but smaller aircraft with higher value individuals. Even though a jury ultimately cleared Learjet of liability for golfer Payne Stewart’s death in 1999 (who had won the U.S. Open just months before), his wife’s $200 million lawsuit raised the bar in the valuation of a human life faced with someone like Stewart who at 42 was still making significant money on the pro golf circuit, but whose earnings potential might actually have increased at age 50 when the Champions Tour would have opened up to him.
UAV manufacturers may believe themselves immune from these huge value cases, but with the increase in commercial flight with higher permissible airways and larger unmanned aircraft, the risk of a commercial UAV either destroying property or killing someone on the ground, or worse yet, taking out another aircraft is substantial.
With this increased potential for liability risk, comes a boon to aviation plaintiff’s attorneys who have made an industry out of the potential for large verdicts in commercial aviation accidents litigated in the United States. These well funded and specialized counsel often target not only Boeing and Airbus, but any and all manufacturers who can be identified as placing parts on the aircraft. With the competition to gain clients and lead the ship, aviation lawyers bring lawsuits very early in the investigation process, often before much is known about the cause of a crash. Further, the intense motivation to get a case into a U.S. court (in light of the jury system, liberal discovery rules and estimated per passenger value now estimated at between $5 and $6 million in aviation cases), has lead international aviation lawyers to partner with U.S. lawyers to “roll the dice” in U.S. Courts (a favorite being Chicago State Court) by alleging a U.S. connection to an international accident through naming U.S. manufacturers with parts on the aircraft as defendants.Why Should UAV Manufacturers Pay Attention?
With an 8 year run of safety in the commercial aviation industry without any deaths in U.S. certified aircraft, and an absence of any large losses involving drones, why should UAV manufacturers worry about risk with actual liability issues only being a seemingly remote possibility? The answer – the current landscape in drone manufacturing with such a rapid advance in technology and demand for bigger and longer range aircraft is eerily similar to what was occurring in the same period at the advent of commercial aviation in the mid to late 1950’s.
Like WW II, the war on terror has driven the development of aircraft to support the effort with drones taking more of a leading role in air power for the first time. America’s armed forces now have a fleet of over 11,000 UAV’s and growing from surveillance drones like the Raven and Global Hawk to the deadly Predator and Reaper. With the FAA’s issuance of FAR Part 107 in August of 2016 allowing conditional commercial use of drones, the race is on for larger and longer range unmanned aircraft with the technological advances in military applications leading the way. While driverless cars have been the headline in recent years, pilotless passenger flight is on the horizon. With the advances in “Glass Cockpit” aircraft, the new generation of commercial passenger aircraft already take-off, fly and land by computer. The next step is not that far away.
As in the early days of commercial aviation with minimal flight hours and brand new aircraft, absent an unusual occurrence, it is unlikely that we will see a large number of loss cases involving commercial drones in the next few years, but it is wishful thinking to not believe that the time is coming soon when risk and liability exposure will be an integral part of the development and cost in the UAV manufacturing arena. Here are some of the reasons to take heed now.
What Should You Do?
- It is inevitable that accidents will happen. Like it or not, with the anticipated number of commercial UAV’s in the air over the next decade, coupled with an aging fleet, and human error, it is only a matter of time before we will see not only the loss of individual aircraft, but mid-air collisions between drones as well as with other aircraft, property damage and loss of life involving a manufacturer’s aircraft or a component part made for another company.
- Litigation is coming! With accidents will come the well-funded and experienced plaintiff’s aviation bar which is poised and ready to jump in and apportion blame (and cost) to manufacturers whose products are involved in the loss of property or life. While military drone manufacturers believe themselves immune from this world, the rise of aviation cases involving military aircraft has grown rapidly over the last two decades even with the shadow of the Military Contractor Defense established by the US Supreme Court in 1988. With the huge potential for large damage awards, aviation plaintiffs’ counsel have shown a willingness to take on the immunity defense to the appellate court level and have been somewhat successful in opening holes. With this willingness comes the necessity for military manufacturers and their insurers to spend millions in defense of cases even if they ultimately are deemed not liable. In other cases, military contractors have been forced to fund large settlements or judgments in a case they once thought themselves totally immune from. The same is sadly but inevitably true for military drone manufacturers.
- The Potential Cost is Staggering. For reasons only trial consultants can fully explain, the value of a personal injury or death involving an aircraft (particularly a commercial flight) is valued exponentially higher than in practically any other area. The value of one aviation case can often far exceed the profit margin of the aircraft involved. Furthermore, the availability of punitive damages in the United States not only puts a manufacturer’s profit at risk, but also the value of the entire company, and provides leverage to the aviation plaintiff’s bar in settlement negotiations. Finally, even if the risk never actually comes to fruition through a settlement or judgment, the cost (in terms of legal fees as well as company time lost) of litigating a complex aviation case is immense.
In light of the looming landscape, what can UAV manufacturers do to prepare themselves for this next season?
- Talk to a Broker About Aviation Insurance – Although immature and untested at the beginnings of commercial flight, the aviation insurance industry is now very mature, well-funded, and specialized now with over 60 years of loss and claims experience. With the availability of large first dollar coverage specifically designed to meet the risk of aviation claims, having an aviation policy is essential to risk management as a UAV manufacturer whether commercial or military.
- Don’t Ignore Your Contracts – Companies often fail to focus serious attention on indemnity and insurance provisions in contracts (to either procure component parts and raw materials or to sell those parts or materials to an aircraft manufacturer) until faced with a substantial lawsuit. In those cases, the ability to contractually shift risk or, better yet, be an additional insured on someone’s insurance policy, are golden. Ask a lawyer either internal to your company or from an outside firm to review your contracts both up (selling) and down (buying) looking for a consistent company approach in contract negotiations with an eye toward risk.
- Assess Your Risk and Act Accordingly – Through either an internal or external risk audit, perform a realistic assessment of your risk in the event of an accident involving your aircraft or component part. A close look at document preparation and control, interaction between sales, design, manufacturing, legal and management, product traceability, as well as the tracking and analysis of warranty claims/issues with your products in the field, among other areas, are essential to not only avoiding problems, but being prepared when litigation hits your company. Such an assessment, coupled with a well considered strategic plan in the event of an accident could save your company from some of the brutal realities of facing an aviation lawsuit at some point in the history of your product.
This is an exciting time in aviation! By the end of this decade commercial UAV flight should be in full swing with all the opportunities
that come with it. While celebrating this new era in flight, let us also learn from history and be ready for the risk as well.