Ride sharing and insurance issues

Auto insurers are flexible and use sophisticated methods to track and adapt to industry trends, be it usage-based rating, autonomous cars, or integrated mobile technologies. One such trend that has recently risen to the forefront is the growth of ride sharing, i.e., the use of personal autos to earn money by carrying passengers.

A brief background

Up until recently, ride sharing was a term reserved for activities such as company car pools or hitching a ride with a friend—people sharing a ride to a common destination. However, technology has shifted the paradigm of ride sharing. Companies such as Uber, Lyft, and Sidecar use technology to match prospective drivers (operating their own vehicles) and passengers with little advance notice. The new paradigm has changed ride sharing so significantly that the California Public Utilities Commission (CPUC) coined a new term “Transportation Network Companies” (TNCs) to differentiate this system from the common destination, share-the-expense “carpooling” type of ride sharing.¹

TNCs now offer on-demand shared rides in over 100 cities and are continuing to grow.² Financials leaked from Uber in December 2013 showed the company averaging about 800,000 trips per week.³ Ride sharing is here to stay and appears poised for significant growth.

As with other emerging industries, TNC arrangements have been initially difficult to regulate and insure. Cities and states are still scrambling to put into place regulations to ensure passenger safety and adequate insurance coverage in the event of accidents because these services do not fall under existing government regulations for transportation services. Some cities and states have tried, with limited success, to block TNCs from operating in their cities until their regulations were in place. California and Colorado were the first states to enact laws to regulate TNCs, spelling out requirements for driver background checks and commercial insurance requirements, but even these laws have yet to go into effect. Other states have proposed regulations but have yet to pass the legislation. Pennsylvania Senate Bill 1457 proposes liability cover of at least $1 million from the time the driver turns on the TNC app until the app is turned off or a passenger exits the vehicle, whichever is later.⁴

This is a completely new industry that is changing the way people travel. Because drivers providing rides via TNCs are using their personal autos, insurers need to consider how to adapt their claims handling, policy language, and pricing to this new type of personal vehicle usage. We discuss these new risks to be managed and new opportunities for innovative insurers in the next sections.

New challenges for claims handling

One of the central ambiguities in ride sharing is the question of who pays when there is an accident. Most personal auto policies include language that excludes coverage with respect to “liability arising out of the ownership or operation of a vehicle while it is being used as a taxi or livery conveyance” (except for “share the expense” carpools). Personal auto claims adjusters need to be aware when a claim involves a ride share driver and be clear about when the personal auto coverage should apply. To answer the coverage question, it is helpful to break down the vehicle use into four different categories:

There is general agreement that accidents arising in the first category would be covered by the personal auto policy, but the second category has been more controversial. The question of coverage while a driver is logged in was brought to the public eye in an unfortunate way on December 31, 2013, when an Uber driver struck and killed a 6-year-old girl in San Francisco. The driver was logged in to the UberX app at the time of the accident, but because the driver was not on his way to pick up a passenger, nor did he have a passenger at the time, Uber argued that it bore no responsibility for the tragedy.⁵ California’s new regulation AB-2293, which was signed into law in September 2014 and goes into effect on July 1, 2015, requires that TNCs carry limits of $50,000 per claimant/$100,000 per claim and excess coverage of $200,000 for the period during which the app is on until the driver is matched with a passenger. According to the CPUC, Lyft, Sidecar, and Uber already have insurance coverage that meets the California requirements. The Colorado regulation requires contingent coverage at the minimum personal auto liability limits that applies if the personal auto policy denies coverage. In jurisdictions without regulations in place, the TNC companies may or may not be providing coverage for this stage, which could lead to additional litigation until clarified by new regulations. The trend appears to be that the question of coverage while the app is on will be up to the personal auto carriers—if they do not cover these claims, the TNC companies will be required to do so.

There also seems to be agreement that the personal auto policy livery exclusions include the period when the driver is en route to the pickup and during the ride itself. Most of the TNCs already have policies that cover this activity, and new regulations are spelling out the minimum coverage requirements, which are very similar to the coverage requirements for taxi companies. (For example, the California and Colorado regulations require $1 million in liability coverage from the time a ride request is accepted until the passenger exits the vehicle.) However, if these claims are first filed with personal auto carriers, claim adjusters may mistakenly pay these claims unless they incorporate questions about ride-sharing activity in their adjustment processes. It is imperative that claims adjusters check whether the vehicle was being used for ride sharing, and either deny the claims or subrogate against the TNC insurance carriers.

Updates needed for policy language, underwriting, and pricing

Even insurers that are denying claims related to ride sharing are concerned about covering the personal usage of vehicles also used for ride sharing. One approach is to underwrite against vehicles engaged in any ride-sharing usage. For example, one Lyft driver who had an accident while driving a passenger was notified that she would not be renewed unless she demonstrated that she is no longer driving for Lyft.⁷ Another step is to clarify the policy language to add or clarify the exclusion of accidents related to ride sharing. In October 2013, the Insurance Services Office (ISO) released PP 23 16 10 13, “Personal Vehicle Sharing Program Exclusion Endorsement,” which excludes all personal auto coverage while the covered auto is enrolled in a vehicle-sharing program.⁸

Without access to standard personal auto coverage, though, ride-share drivers are in need of new products and/or rating plans. Today’s typical rating plan varies rates by pleasure, work, and business usage, and mileage is difficult to capture accurately. To address concerns that the ride-share vehicle personal usage risk might be higher than expected under current rating plans, carriers could introduce a new variation of business usage for ride-sharing vehicles. Carriers could also perhaps require ride-sharing vehicles to enroll in usage-based rating programs in order to ensure the most accurate data about vehicle usage to get appropriate rates for the personal use of these vehicles.

But there are still potential gaps in coverage that present opportunities for insurers to offer new products/endorsements. According to the California Department of Insurance, at least five companies are exploring new products for ride-sharing drivers.⁹ These products would provide coverage for the period before the $1 million TNC policies kick in, while the app is on but before the drivers are on their way to pick up passengers. These will probably be in the form of an endorsement to the personal auto policy.

Another potential issue/opportunity is coverage gaps for drivers under the TNC commercial policies. Under the California and Colorado regulations, TNCs are not required to provide any coverage for the driver’s injuries and/or damage to their vehicles, and any personal auto coverage there might have been would not apply either. Some TNCs, such as Uber, are providing physical damage coverage for drivers who have those coverages on their personal auto policies.¹⁰ However, because they are not required to do so, this is another opportunity that insurers could address through new products.

Conclusion

Change brings both new risks and opportunities. While the emergence of ride sharing has been challenging for regulators and insurers, insurers need to continue to be innovative and adapt to this new industry.