Drone Insurance: IPT Treatment and Location of Risk

James Brown
April 5, 2023

Drone usage has increased significantly in recent decades, far beyond their initial use in the military.

They can be expensive themselves and, equally, can also cause damage to other parties or property, which is why many people and companies choose to insure them. This blog considers the insurance premium tax (IPT) and parafiscal charge treatment of drone insurance.

What is a drone?

Sometimes called an unmanned aerial vehicle or UAV, a drone is an aircraft without any human pilot, crew or passengers on board. People can use drones for either commercial or recreational purposes.

What does drone insurance cover?

Drone insurance is an example of packaged insurance and can include coverage under many regulatory non-life insurance classes.

Although not an exhaustive list, some of the classes of insurance set at the European Union (EU) level that we may see in such insurance are:

  • Class 5 – Aircraft: For damage to the drone in the event that it constitutes an aircraft (see below).
  • Class 7 – Goods in transit: For any coverage relating to the transportation of the drone to and from different locations.
  • Class 8 – Fire and natural forces: For fire-related risks to the drone.
  • Class 9 – Other damage to property: For coverage relating to other damage to or loss of the drone.
  • Class 11Aircraft liability: For the liability of the drone for the damage it causes to third parties in the event that it constitutes an aircraft (see below).
  • Class 13 – General liability: For the liability of the drone for the damage it causes to third parties, e.g. professional indemnity coverage.
  • Class 16 – Miscellaneous financial loss: E.g. any business interruption cover in the event that a drone is damaged.

How do you tax drone insurance?

As an example of a packaged insurance policy, drone insurance is taxed based on each element of cover. Insurers should therefore apportion their premiums and tax each element accordingly, potentially resulting in many different tax rates in a given country.

How do you determine the location of risk?

First and foremost, it is essential to determine the registered territory of the drone – if it has one. If registered, the location of risk is reasonably straightforward under EU rules. Any IPT or parafiscal charges due will be in the Member State of the registration of the drone because it is considered a type of vehicle, namely an aircraft.

The issue is more complicated when a business or individual has not registered a drone in any country. This is the case with most drones used for commercial purposes if they are under a specific weight threshold. Parallels can be drawn with space insurance here, as the policy can have different risk locations for different coverages.

Any liability or miscellaneous financial loss coverage is taxed where the policyholder has their habitual residence or in the case of legal persons where they have their establishment.

Property coverage, including the storage of a drone in a building for more than the market practice of 60 days, is taxed where the property is situated.

Any coverage relating to the transportation of a drone to and from different locations is a goods in transit risk. The location of risk depends on whether a business or individual is using the drone for commercial or recreational purposes.

If used for commercial purposes, the location of risk should be where the policyholder has their habitual residence or establishment. If used for recreational purposes, then – under EU location of risk rules – the drone should theoretically be treated as movable property taxable in the Member State where it is situated – if it is contained in a building there.

Looking for more information on drone insurance? Speak to our expert team.

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James Brown

James Brown is a Consultant at Sovos. His academic background is in Law having studied the subject at undergraduate level, and he has since enjoyed various roles in the IPT Managed Services Department at Sovos.
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