Companies Arrive Ahead of New Liability Rules and Insurance Products
The past year has seen a boom in the number of peer-to-peer rideshare companies that allow customers to order rides on demand using apps on their smartphones. Private drivers use their personal automobiles to pick up the customers and drive them to the desired destination in exchange for a negotiated fee. The passengers then write reviews, similar to other peer-to-peer online services. More than $100 million in venture capital has been invested in a handful of these new companies, which have the potential to disrupt the traditional transportation industry. A recent poll shows that 77 percent of Californians support this new form of ridesharing.
On September 19, 2013, the California Public Utilities Commission (CPUC) voted unanimously to allow these services to operate in California as a new category of business called transportation network companies (TNC). Licenses will be issued to qualifying TNCs, subject to new regulations that require drivers to undergo criminal background checks and vehicle inspections, receive driver training, follow a zero-tolerance policy on drugs and alcohol, and carry insurance policies with a minimum of $1 million in liability coverage. Companies that are expected to receive new TNC licenses include Lyft (www.lyft.me), SideCar (www.side.cr) and UberX (www.uber.com).
The CPUC has responded to rapidly evolving disruptive technology and its decision will likely set an example for cities and states across the country. Its decision is also expected to preempt ongoing efforts by some California cities to regulate or ban peer-to-peer ridesharing under their authority to license taxi companies. The City of Los Angeles, however, is currently considering a possible appeal of the CPUC decision and implementing additional regulations to TNC drivers, which have been referred to as “Bandit cabs” by some on the City Council. Other cities across the country are also now looking at new regulations for rideshare companies.
Concerns and Challenges
This new business model is not without its opponents. Some raise concerns about public safety and the potential for abuse or unintended consequences, while others question whether the new regulations require additional enforcement capability. The taxi industry, which is less than pleased to see this new competition, has criticized these rideshare apps as operating essentially like unlicensed taxi cabs. Since the new technology uses GPS to measure the distance of a ride and the corresponding fee, the taxi industry believes that it works similarly to a taxi meter and should therefore comply with local taxi ordinances.
Some of the primary concerns raised by skeptics include how liability will be allocated between the TNC and its independent contractor driver, and how the insurance industry will adapt to this new business. With respect to liability, TNC drivers need to understand the heightened duty of care with which they must comply. Most states hold common carriers to the highest degree of care. This is quite different than the reasonable care standard applied to most drivers. Proper hiring practices, training and oversight by the TNC also will be necessary to ensure public safety. The extent to which the TNCs will be inspected and the new regulations enforced is still unclear, but this will be an important means by which the public may judge the safety of this new industry.
The Insurance Dilemma
With regard to insurance concerns, the new regulations require the TNC to provide insurance coverage for claims regardless of whether a TNC driver maintains his or her own insurance adequate to cover any portion of the claim. Lyft recently announced that it will provide its drivers with excess liability coverage of $1 million for any incident that occurs while a passenger is in the car. The policy, however, does not cover collision damage, and it is only excess to the driver’s own liability policy.
The dilemma is that there does not appear to be an insurance product currently on the market that fits the parameters needed by a TNC driver who uses his or her personal automobile. Commercial fleet policies that cover limousine and taxi companies typically require all covered vehicles to be registered as a commercial vehicle. Personal auto policies, on the other hand, exclude coverage for losses incurred when the insured automobile is used as a livery or for-hire vehicle.
The Personal Insurance Federation of California (PIFC), which represents six of the nation’s largest insurance companies (State Farm, Farmers, Liberty Mutual Group, Progressive, Allstate and Mercury) that collectively write a majority of personal lines auto insurance in California, publicly commented to the CPUC as follows, “In situations where a vehicle is insured as a private vehicle and is used to transport passengers for a fee, no insurance coverage would exist. Tracking if accidents have occurred involving such vehicles is difficult as the insured will not always have the knowledge the passenger paid for transport.”
An Important Distinction
The PIFC also clarified, “The issue before CPUC is not ridesharing, but instead using a private passenger vehicle in a livery service. This is clearly not covered under a standard policy; if an accident occurs, coverage would not exist.”
This is an important distinction because true ridesharing does not involve commercial profit. Several states have recognized this difference. For example, California’s “personal vehicle sharing” law became effective on January 1, 2011, pursuant to California Insurance Code Section 11580.24. The law encourages car-sharing programs so long as the owner does not earn from the program more than the annual cost of owning the vehicle. The law shields private passenger car insurers from liability by shifting the responsibility for coverage to the private vehicle ridesharing program. One ridesharing startup, Tickengo (www.tickengo.com), considers itself outside the scope of the new CPUC requirements because it claims to be a true ridesharing service that does not provide commercial transportation. Tickengo limits the amount of money its drivers can receive to the costs to operate a vehicle. Its drivers merely share rides and expenses without commercial profit.
What Lies Ahead
Because most personal auto carriers will likely deny coverage for accidents that occur in a TNC setting, it appears that there is a strong incentive for many current TNC drivers to conceal their activities from their carriers. For the time being, this lack of full disclosure likely benefits the nascent TNC industry because without their drivers being able to obtain personal auto coverage, these businesses would never get off the ground.
As usual, the fast-moving marketplace is ahead of the insurance industry. Any changes to existing insurance products or the creation of new insurance products in California may be subject to review by the Department of Insurance, which takes time. While the insurance industry catches up, many drivers and members of the public will continue to take the risk of legal liability for the chance to participate in this new and growing industry.