A mechanical failure would make it an aircraft in distress. An aircraft
in
distress has the right-of-way over all other air traffic.

Under the existing definition, sure--but this definition presupposes that
such an aircraft has human occupants. To my thinking, unmanned hardware
can't exactly experience "distress"; therefore, right-of-way shouldn't be an
absolute in this instance. Manned air traffic should never be jeopardized
by unmanned aircraft, irrespective of any malfunction such hardware may
experience. "Safety" always pertains to the human element, never machinery.

A related thought: rockets always have a human-controlled self-destruct
capability to protect lives and property on the ground should the vehicle
experience a loss of control. Maybe UAVs should have this cabability too.