UAS insurance salvage, the next new opportunity

From La Brea to Boothbay Harbor, aviation claims department storerooms are bursting at the seams with all manner of drone rubble, accessories, parts and pieces. Some to the point of spilling into hallways, employee break rooms and any other inconspicuous empty cavity with enough room for an overwhelmed claims adjuster to inconspicuously shove some parts without being noticed.

Such is the reality and the aftermath of five years of insuring drones for hundreds of flights cut short by unforeseen (or some we suspect, foreseen) and unexpected incidents, accidents and crashes.  And we’re not only talking about drone parts and components either.  When UAS are insured for physical damage, the coverage often also extends to gimbals, payload and ground support equipment.

The insurance contract contains agreements between an insured and the insurance company that outline how a loss is handled.  One of those agreements states that when the insurance company pays for the damage, they own the rubble also known as salvage.  Possession, title and ownership of the salvage go to the insurance company in exchange for the claim check they’ve agreed to write.  That means that insurance companies have some growing piles of salvage that they will eventually have to deal with.

Traditionally, insurance companies have turned to established salvage markets to sell or otherwise dispose of salvage.  Auto insurers go to auctions or sell to salvage yards while aviation insurers have usually handled their own salvage sales through a network of salvage buyers, online auctions or closed-bid sales format.  With rare exception, none of the aviation insurance salvage sites currently include any inventory of UAS or drone salvage for sale.  In fact, only one site, AIG’s, includes any type of UAS salvage at all and none of those salvage lots involve any type of third party gimbal or payload.

Some examples of insurance company aviation salvage sales sites are linked below:

• AIG’s Aviation Salvage sales site can be found here and includes a DJI  Inspire 1 and a DJI Phantom 3 Professional. http://www.aigaviation.com/aviationsalvage/SalvageList.aspx
• Global Aerospace: http://www.global-aero.com/claims/salvage/
• GAB Robbins: http://www.aviationls.com/en/Salvage.aspx
• Kern Wooley/W. Brown:  http://www.kwsalvage.com/list.asp
• USAIG: https://www.usau.com/caf_claims_salvage.php
• Old Republic Aerospace – http://www.aircraftsalvageonline.com/

Having the ability to recover some portion of the loss from the sale or disposal of salvage is important on a number of levels but to the insured, it means that any recovery of loss revenue serves to offset the claim and expense amount incurred by the insurance company on behalf of the insured.  That recovered revenue will reduce the insured’s loss ratio and help keep their own insurance costs down in the future. Whether that recovery stems from sale of salvage or through subrogation against a third party such as a manufacturer of a defective product, it benefits the industry and the individual by reducing loss amounts.

So how are insurance companies going to handle the sale or disposal of UAS salvage?

Because no real established salvage market exists, the sales or disposal of UAS insurance salvage represents a new and completely untapped market desperate for an organized solution. There is no question that significant salvage value exists in these piles of rubble but where is the value and how does an insurance company recover it?  There are two value propositions that we see;  one much less complicated than the other.

First, the payload and ground support equipment. Make no mistake; there are very valuable pieces of damaged payload and undamaged ground support equipment that make up UAS salvage. From RED Epic cameras to Lidar, Flir infrared cameras, computers, tablets, transmitters and gimbals, it’s all there and many parts are usable and carry substantial market value.  Those components can be sold with little concern for future product liability or exposure to third party legal liability.

The second is a bit more complicated in that it involves the resale of aircraft and/or aircraft components.  Because there is no airworthiness certification or inspection requirement for UAVs, their parts or components, there is no real means to ensure that the salvaged parts are airworthy and selling non-airworthy parts to inexperienced users and that will ultimately end up in the National Airspace, is a recipe for disaster and must be avoided.

The manned aviation industry has dealt with this issue and has a process in place known as “tagging” and there is no reason why the same type system cannot be used for UAS. Tagging, especially “yellow tag,” is a term used in aviation to indicate that a part is serviceable and airworthy as evaluated by an FAA certified repair station.  It is important to note that this term is an industry term and is not an FAA requirement or even mentioned the Federal Aviation Regulations.

Other tags are:

• Red Tag: component is scrap or unusable
• Green Tag: component is not airworthy but is repairable

In Canada, a green tag is used for a serviceable and airworthy part but as in the US, the presence of the tag does not guarantee that the part is legal for use in certificated aircraft.

So how will insurance companies deal with the conundrum of insuring UAS for hull physical damage without having a means to recover some of their losses through the sale or disposal of the salvage?

One insurance company, Allianz, includes a coverage endorsement that gives the insured the first right of refusal to buy back their salvage.  In other words, the adjuster will give the insured the option to make an offer on the salvage prior to the insurance company taking possession and disposing of it later.  That endorsement and coverage has proven to be very popular since many insureds have a difficult time letting go of some payloads, particularly those that include proprietary or sensitive technology, and undamaged components such as ground support equipment.  But that only goes so far.  Not all will want to buy back the salvage.

First and foremost, companies with a long aviation repair and service history like Robotic Skies, could be used to research and develop a “tagging system” for UAS.  Robotic Skies could develop a system and standard means of testing and determining airworthiness of salvaged parts and components.  With that system in place and with comprehensive insurance industry support, Robotic Skies would be the first stop for those boxes of rubble.  Once they arrive at Robotic Skies, or a certified member of the Robotic Skies network, those repair stations will test, process and tag the components with a report going back to the insurance company.  From there, the serviceable components could be sent to the resale market through a central sales, bid or auction site and the remainder disposed of properly.

One other important area of concern are the batteries that go down with almost every crashed drone. We have a sneaking suspicion that those same overburdened insurance claim department storerooms have a damaged and leaking battery or two buried in the rubble.  That is not only dangerous, it’s stupid. The ability to properly inspect, test and dispose of batteries takes special knowledge and experience. Companies with the knowledge and experience necessary to safely and responsibly deal with LiPo batteries, companies like Venom Power , could (must) be brought into the chain to assist with the testing, tagging, sale or disposal of the batteries.

It’s not often that an industry as large as the insurance industry has a problem of this magnitude without any type of solution in place to deal with it.  But just because it’s not in place does not mean the solution does not exist.  Like many other new solutions under development in the UAS industry,  we have to stop and ask why?  The aviation industry is mature and has solved many of the problems that confront the UAS industry many times over many years.  The system is in place, and the industry only needs to use it appropriately.

Now is the time to develop, reuse, re-purpose and resell old UAS, damaged UAS, and salvage.  As technology advances, the millions of UAS already in use, are going to need the parts a lot more than our landfills do. An Insurance UAS Salvage Certification and Sales System (IUSCSS)  is good for everyone.

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