Insurance & The Sharing Economy – As State Laws Close Ridesharing Insurance Gap, New Opportunities Open For Insurance Companies
Recognizing a potential gap in insurance for transportation network companies (“TNCs”), several states, such as Pennsylvania, have passed laws requiring that TNCs and/or drivers carry certain levels of insurance. These new laws create opportunities for insurance carriers who can provide products to meet these new laws.
Uber and other TNCs provide taxi-like services. The most significant difference from traditional taxis is that, instead of hailing a cab on a street corner, passengers and drivers connect through an “app” on their mobile devices. The TNC provides the connection infrastructure (i.e., the mobile app), payment processing, and branding that drivers rely on to attract passengers. Drivers are not employees of Uber, but are instead, independent contractors.
TNCs are the most visible example of the new sharing economy. The sharing economy alters traditional property ownership, as assets (including cars and homes) are used by multiple individuals. The sharing economy presents unique issues for insurance companies, as it tears down the traditional walls between personal and commercial use.
The blurring of commercial and personal use of assets can also create insurance coverage issues. This is particularly evident for TNCs and their drivers. For example, most personal automobile policies have a “livery” exclusion, which bars coverage when the driver is transporting people for hire. In the pre-Uber days, this did not create much of an issue, because there were dedicated taxis that were covered by commercial policies. However, many TNC drivers use their cars predominately for personal use, but also drive occasionally for a TNC for extra money on the nights and weekends. Traditional commercial insurance options, such as policies that cover traditional taxi and limousine companies, are likely not affordable for TNC drivers who only drive part-time.
One of the potential insurance gaps can be demonstrated by dividing the typical TNC transaction into four stages (often also referred to as “periods”):
- Stage 0 – Driver is driving for personal reasons and the app is closed.
- Stage 1 – The driver opens app and is logged onto the system, waiting for a passenger match.
- Stage 2 – Driver receives and accepts a ride request and travels to pick up the passenger.
- Stage 3 - Driver picks up the passenger, drives the passenger to the destination, and the passenger exits the vehicle.
Most agree that Stages 2 and 3 are commercial use, and would not be covered by a personal insurance policy. Instead, they would be covered under a TNC’s commercial policy. While Stage 0 is personal use covered by a personal lines policy, a problem arises with Stage 1. It is not as clear whether driving in Stage 1 is commercial or personal use.
The potential insurance gap existing in Stage 1 came to light from an unfortunate incident involving the death of a child in California. Sophia Lue was killed by an Uber driver who had turned on the Uber app, but had not yet accepted a match. The Uber driver’s personal automobile carrier denied coverage because it claimed that the driver was working for fees. Uber denied coverage because it claimed that the driver simply had the app open, and had not yet been hired.
Several states have passed laws to close these potential insurance gaps. For example, Pennsylvania requires that the driver or the TNC provide the following insurance for Stage 1:
- Primary automobile insurance that provides $50,000 for death and bodily injury per person, $100,000 for death and bodily injury per incident, and $25,000 for property damage.
- First-party medical benefits, including $25,000 for pedestrians and $5,000 for a driver.
For Stages 2 and 3, the driver or TNC must have insurance meeting the requirements below:
- Primary automobile liability insurance that provides at least $500,000 for death, bodily injury and property damage.
- First-party medical benefits, including $25,000 for passengers and pedestrians and $5,000 for a driver.
Either the driver or the TNC may provide the coverage, but if the driver’s coverage lapses, the TNC’s insurance policy must provide coverage. This required coverage must be primary over any personal insurance policy. Furthermore, under Pennsylvania law, personal automobile insurers may exclude all or some coverage for drivers logged on to a digital network, providing prearranged rides, or transporting passengers for compensation.
Obviously, these insurance requirements present opportunities for carriers willing to write the necessary coverage. TNCs are just one example of how the sharing economy is creating a new marketplace for insurance products.