With the use of smartphones and smartphone apps, it has becomepossible to link two previously unknown people together for variouspurposes if the right app exists. This has led to the creation oftransportation network companies(TNCs), of which Uber and Lyft are two of the mostwell-known. These organizations arrange rides between owners ofprivate passenger vehicles and people who either want to use thecar or need a ride. The application allows the parties to makecontact and coordinate the use of the vehicle.

At first this sounds like a great idea; however, there are manyissues still to be resolved. For example, taxis and limousines arehighly regulated services and believe that these regulations alsoshould apply to the TNCs. States have concerns that consumers anddrivers aren't aware of the insurance issues involved and may findthemselves with no coverage if an accident occurs.

Ride-sharing

Ride-sharing is the practice of using a personal automobile topick up passengers and give them a ride to a specific destinationfor a fee. Most TNCs require the driver to be at least 21 yearsold, have a valid driver's license, pass a background and drivingrecord check and have a vehicle meeting certain conditions. Afterapproval, the driver can begin picking up passengers, using theapp.

Proponents of ride-sharing claim that in rural areas or areaswith limited taxi service ride-sharing is providing a much-neededcommunity service. It also removes drunk drivers from the road, ischeaper than a taxi service, and lets the driver make extra moneyfrom a vehicle that otherwise would not be in use.

Related: Will the auto insurance industry be obsolete in 20years?

(Photo: Shutterstock)

The taxi and limousine companies, which are regulatedindustries, see the situation differently, however. State and localgovernments usually require taxis to have a medallion, which givesthem the right to operate a vehicle as a taxi. Medallions can berevoked if the drivers don't follow state or local laws, or thedrivers may be subject to fines. Fares are regulated, and taxis maybe required to have cameras, radios, credit-card readers, farecharts, and decals. TNCs generally aren't subject to any of thesefines or fees.

The National Limousine Association (NLA) is concerned with TNCsperforming similar actions but not adhering to the regulations.Some TNCs:

• Don't independently verify the validity and currency of anapplicant's driver's license or insurance,
• Don't require commercial auto insurance,
• Don't obtain necessary authorities to operate at airports, as ataxi or as chauffeured transportation, and
• Do dispatch drivers using personal vehicles or unauthorizedemployer vehicles.

The NLA points out that state laws vary as to mandatoryinsurance agreements, but some require up to $5 million ofliability for vehicles with larger seating capacity. The NLA isconcerned that TNCs are not providing sufficient insurancecoverage.

State opinion varies. New York, for example, has requiredride-sharing companies to adhere to certain requirements includinginsurance coverage, or be stopped by a restraining order againstthe company. In contrast, Colorado has set up a framework for TNCsto operate in and provide insurance to drivers.

(Photo: Shutterstock)

Car-sharing

Car-sharing is different from ride-sharing. Instead oftransporting a passenger to a destination, someone engaged in carsharing is letting a stranger use a personal vehicle for a fee,similar to a car rental.

Like ride-sharing, the potential driver signs up with a TNC thatchecks the person's driving record, credit report and otherbackground services. Owners sign up to share their vehicles, andthe vehicles must meet certain requirements, although it's notcertain whether the vehicles are inspected by the TNC.

When a match is made, the owner and the renter meet, and keysare exchanged although an electronic access is available throughsome TNCs.

Operating a vehicle for hire

There are three distinct periods with varying insurance issueswhen ride-sharing:

1. The driver turns on the app to indicate that the driver isavailable to give a ride,
2. The driver is matched with a passenger and is en route to thatpassenger, and
3. The driver is actually transporting the passenger to thedesired location.

(Photo: AP)

In stage one the driver is simply available for hire and is notactively driving an individual to a location. Uber providescontingent coverage for ride-sharing for stage one with limits of$50,000 for bodily injury to each person, $100,000 for all bodilyinjury and $25,000 for property damage for each accident, which ishigher than any state minimum coverage. Coverage is contingent on adenial from the driver's personal auto policy carrier, however.Lyft also has contingent coverage for stage one.

Stage two is when the insured has accepted a fare and is on theway to pick up a passenger. Uber and Lyft provide $1 millionliability coverage beginning at this stage. Lyft providescontingent comprehensive and collision, and Uber's physical damagecoverage follows the driver's vehicle coverage. Therefore, if adriver doesn't have physical damage on the vehicle when driving forUber and has an accident, the driver won't be compensated for theloss to the vehicle.

Stage three begins when the insured is actually transporting apassenger and continues until the passenger is dropped off. Thesame coverages that took effect in stage two apply in stagethree—that is, when an insured is participating in ride-sharing andis picking up passengers for profit.

In car-sharing, there are no such stages. The car is listed asavailable for rental, and possession occurs when the driver handsthe renter the keys or the renter activates an automatedsystem.

(Photo: Shutterstock)

Insurance gaps

If the TNC driver has an accident, is the driver covered underthe TNC's policy, the driver's personal auto policy, both, orneither? The standard personal auto policy has an exclusion forcoverage when a vehicle is used as a public or livery conveyance.Someone could hire the insured to drive the passenger to adesignated location or could hire the vehicle alone and use it likea rental vehicle. Both uses are excluded, however. The personalauto policy is designed for an individual or family's use, not forcommercial use.

ISO has developed a new endorsement that strengthens the publicor livery exclusion. Known as the Public or Livery ConveyanceExclusion Endorsement (PP 23 40 10 15), it defines the"Transportation Network Platform" and clarifies the exclusion inthe auto policy. The endorsement excludes liability, medicalpayments and physical damage while the auto is being used by aninsured who is logged into a transportation network platform as adriver, whether the insured has a passenger in the car or not. Theendorsement takes effect Oct. 1, 2015, in Iowa, Maine, Montana, NewMexico, Wisconsin and Wyoming. It is effective Nov. 1 2015, inColorado, Indiana and Nevada, and effective Dec. 1, 2015, inDelaware and Idaho.

There is an endorsement for the umbrella policy as well, knownas the Personal Umbrella Liability Policy Public or LiveryConveyance Exclusion Endorsement (DL 99 12 10 15). Currently onlyAlabama, Iowa, Maine, Montana, North Carolina, New Mexico,Wisconsin and Wyoming have adopted this umbrella form as of itseffective date, Oct. 1, 2015, while Colorado, Indiana and Nevadahave adopted it effective Nov. 1, 2015. Its principle is the sameas the auto endorsement: to clarify and strengthen the liveryexclusion. The form defines a transportation network platform as anonline-enabled application or network that connects passengers withdrivers using their own vehicles for the purposes of providing aride. The form then excludes coverage anytime an insured is loggedinto a transportation network platform, whether a passenger ispresent in the vehicle or not.

(Photo: Shutterstock)

Underwriting concerns

Both ride-sharing and car-sharing create underwriting issues.With car-sharing, when the vehicle is driven by the insured, thecarrier has rated the policy based on the individual's drivingexperience. When the vehicle is available for hire by others,however, the vehicle is used significantly more and is at greaterrisk of accidents. The carrier has no way to review driver historyor the experience of those unknown drivers and can't develop a ratefor the exposure. Rates can then be actuarially unsound, thuscausing the carrier's loss and expense ratios to rise.

Coverage provided by the TNCs can be either primary orsecondary; many of those TNCs whose carriers provide excesscoverage maintain a reserve in order to handle issues as theyarise.

With ride-sharing, insurance commissioners are concerned thatpeople are exposing themselves to losses without being fully awarethat they may have no coverage. Many states have issued consumeralerts warning owners of vehicles, potential riders and potentialrenters that there may not be insurance coverage in anaccident.

(Photo: Shutterstock/Freer)

Workers' compensation issues

Not only are there gaps in the personal auto policy, but therealso are workers compensation issues to be addressed. TNCs oftenstate that the drivers are independent contractors who use theirown equipment, set their own hours and are invested in the vehiclethey drive. Counterarguments are that the TNCs are providing workfor the driver and are providing a driver for hire. Concern centersaround what happens in event of an injury to the driver while onduty. If the driver is incapacitated and loses wages, there is nocompensation for the driver.

Many cases are being filed to determine whether drivers areemployees or independent contractors. Carriers are providingdefense costs outside of policy limits because the cases aresignificant for the long term, and the carriers want to establishprecedents beneficial to the industry as a whole.

In an Aug. 25, 2015, settlement, for example, Uber paid thestate of Alaska a $77,925 fine for unpaid Workers' Compensationinsurance for its drivers. Uber admits no wrongdoing and has ceaseddoing business in the state, agreeing not to return until it's incompliance with state workers' compensation laws. However, a billthat would exempt TNCs from classifying their drivers as employeeshas been sent to the Alaska House Labor and Commerce Committee tobe reviewed when the committee reconvenes in January of 2016.

Uber was accused in a recent class action suit of failing toprovide Workers' Compensation insurance for its drivers [Zinev. Uber Technologies Inc. et. al. [No. BC591351 (Cal. Super.Ct., L.A. Cnty. Aug. 14, 2015)]. An Uber driver was assaulted andclaimed loss of income while recovering and permanent disability.The named plaintiff argued that drivers were not independentcontractors because they don't have their own customers, they can'tbook rides outside of Uber's application and they can't generatebusiness for themselves.

(Photo: Shutterstock/PrinceOfLove)

Insurable interest

If the TNC does provide insurance for the vehicle, what is itsinsurable interest? The TNC doesn't own or maintain the vehicle andminimally stands to lose financially if the vehicle is out ofcommission. TNCs state that their interest is in public safety byensuring that drivers are covered, and they're stepping into theshoes of the owners and drivers of the vehicles.

Sidecar drivers are allowed to advertise extras provided intheir vehicle to riders, such as water and snacks. This could turninto a product liability issue: If a driver provides homemadesnacks that make someone ill, is the driver or Sidecar responsiblefor the medical bills?

One insurance program that is offered provides limited productsexposure as long as the driver or owner of the vehicle is notpreparing the food that is offered. The carrier does, however,require drivers to carry a food handler's license. If the TNC has asystem that maintains a database of the licenses of drivers andshows that they perform license checks quarterly, a small sublimitis available. Generally, the policies state that the drivers are attheir own risk if they provide food, drinks or legal marijuana andthat the TNC is not responsible for any illnesses that may resultfrom the purchase of said products.

(Photo: Shutterstock)

Cell phone use

A related concern is the use of cell phones and texting whiledriving. In one recent case pedestrians were crossing the streetwhen an Uber driver collided with them. Although the driver wasn'tcarrying a passenger at the time, the driver was logged on to theapp and was actively looking to pick up a rider. One of thepedestrians died, and the family sued the driver, Uber, and RasierLLC, a subsidiary of Uber and parent company Rasier CA-LLC, theinsurance certificate holder for the coverage carried by Uber.

The plaintiffs argued that Uber owed the public the duty of carein hiring, training and supervising its drivers, and that Ubernegligently developed, implemented and used the app in a way thatled drivers to be inattentive or distracted while driving. Thisviolates many states' texting and cell phone regulations.

The plaintiffs also argued that Uber is strictly liable for theapp and its interface, and either knew or should have known thatthe use of the app would violate state law regarding the use ofcell phones and texting while driving. The court ruled for theplaintiffs and a tentative settlement has been reached. [AngJiang Liu v. Uber Technologies, Inc., No: CGC-14-536979 (SanFrancisco Sup. Ct.)]

This case could have a significant impact on a burgeoningindustry, and it's especially important for Uber as it provides itsdrivers with cell phones. Uber is now offering cell phones thatrestrict the use of texting. It's virtually impossible to controlthe judgment of drivers when they're on the road, however; unlessthey are grossly negligent, assigning liability may bedifficult.

(Photo: Shutterstock/Andrey Popov)

Fraud

There's a large potential for fraud and cyber-crime with ride-and car-sharing. With the TNCs providing insurance up to $1 millionduring various stages of the ride, it's easy to see how tempting itwould be to log into a system after the accident and claim that thedriver was actively looking for a fare in order to use the TNC'sinsurance coverage. Adjusters will want to receive time stamps andother information from the TNCs in order to establish thelegitimacy of the claim.

The TNCs themselves also are excellent targets for hackers: Theyhave so much personal information about drivers and riders that thedata is a hacker's paradise. Not only are background checks,criminal records, and credit card numbers stored in the system, butriders' destinations and pickup points are stored as well. If aregular user's data is obtained, patterns are easy to see.Uber washacked in February 2015, with as many as 50,000 drivers' names andlicense numbers potentially exposed. Uber has since hiredwell-known security experts to prevent further breaches.

City and state regulation

A number of states and local governments have consideredlegislation for ride-sharing companies. Nevada recently approvedlicenses for Lyft and Uber as transportation network companies,which will allow the companies to operate within the state. Pricingwill be set, with both companies allowed to adjust pricing forprime time (peak times when the provider can raise rates) or usedynamic pricing. Lyft can raise rates up to three times the baserate, and Uber has uncapped levels for dynamic pricing. Bothcompanies are working with officials to speed business licenseapproval for contracted drivers.

Austin, Texas, has proposed legislation that would require a taxof $1 per ride, state background checks for drivers and autoinsurance. Ride-sharing companies are against it, and taxis are forit as well as even stronger regulations.

Seattle, Wash., has proposed legislation that would allow Uberdrivers to unionize, even though they're considered independentcontractors. (Taxi drivers are already doing this in some cities.)Under the proposal drivers would vote on a nonprofit organizationto act as their "exclusive driver representative," which would thennegotiate a contract with the company. If the two sides fail toagree, arbitration would be required. The resulting contract wouldbe enforced in court.

Related: Geico expands rideshare product toPennsylvania

(Photo: Shutterstock/Gustavo Frazao)

In May 2015 Tennessee enacted legislation that allowsride-sharing companies to operate statewide. The law definesride-sharing as the prearranged transport of persons whentransportation is incidental to another purpose of a volunteerdriver, and it includes car, van and bus pools. Workers'compensation doesn't apply to ride-sharing, employers are notliable to passengers and others from the use of the vehicle, citiesand towns may not impose taxes or require additional licenses forride-sharing providers, and no additional fees may be charged toride-sharing providers.

Los Angeles has voted to allow Uber and Lyft to pick uppassengers at the Los Angeles International Airport. Airportpickups are a bone of contention among taxi drivers, as they areheld to stricter requirements and see the ride-sharing competitionas unfair. There are some limits for ride-sharing pickups at theairport:

• The ride-sharing companies will be charged $4 for ridesentering and leaving the airport,
• Only 40 vehicles are allowed to circle the loop at any onetime, and
• Passengers may be picked up only at the upper departure level,where traffic is lighter.

The companies also must apply for permits to pick up passengersat the airport.

Uber is fighting legislation in Broward County, Fla., that wouldrequire drivers to be fingerprinted and would implement newinsurance standards. Although Uber uses a security company to checkfor local, state and federal criminal records, without fingerprintsit's easy for individuals to change names and hide criminalhistories.  

Related: Everything you need to know about California's new rideshareinsurance law

Summary

Ride-sharing and car-sharing have great potential for changingmethods of transportation as a whole. Although they're similar totaxis, limousines, and rental car services, there are manydifferences that set them apart. The rides and vehicles areprovided by any interested person who has passed the company'sspecifications as to driving history, background, maintenance ofthe vehicle, and other parameters. As outlined, insurance issuesare some of the largest and most pressing issues. Various courtcases are under way, and how those are settled will be significant.States are enacting and considering legislation as the ride-sharingapps become more popular with consumers. The climate is rapidlychanging, so stay tuned.