Uber, Airbnb and Insurance
What do Uber and Airbnb have to do with insurance? Sounds like the opening line to a bad joke, but it’s no laughing matter. When each started, Uber and Airbnb wanted as little to do with insurance as possible. It’s not working out that way. The insurance problems each presents are similar, but since they involve two different types of insurance, auto and homeowners, let’s look at them one at a time.
Uber and Insurance
Uber is a smartphone application car service (they’re sometimes called transportation network companies or TNCs) that’s threatening to dismantle the conventional taxi industry. At its simplest, customers register with Uber to get the app on their smartphones and car owners register to drive passengers for a fee. The customer uses the Uber app when he or she wants a ride. When the request is received, Uber sends notices to a few drivers near the customer who have logged in indicating their availability. The driver generally has fifteen seconds to accept before Uber sends the request to others. Payment, in most cases, is made through the credit card the customer has pre-registered with Uber. After deducting its share, Uber pays the driver by direct deposit into the driver’s bank account. Generally, no money changes hands between the passenger and the driver.
Uber is a disrupter. Like other internet start-ups, it challenges the operations of established businesses—think music, books, etc. It has contributed to a substantial decrease in the value of taxi medal- lions—the NY Times reported that the sales price of individual taxi medallions have dropped 25% in the past few months.1 (Medallions, which peaked at more than $1,000,000 in June 2013, are required to cruise and pick up passengers at curbside in New York City.) The value of medallions derives from the low number allowed by law in NYC. There are only 13,237 NYC yellow cab medallions; the last increase in that number was in 1987 when the population was under 7.3 million and Ed Koch was mayor. The population is now over 8 million. According to the Taxi and Limousine Commissioner, New York needs between 15,000 and 17,000 medal- lions to meet demand.2 The political power of the taxi industry has made an increase in the number of medallions unlikely; it would require City Council and State Legislature approval. An artificially controlled market is a prime target for disrupters. There’s a little known fact that further complicates hailing a cab in New York City: yellow cabs are water soluble. When it rains, they disappear!
The insurance issues with smartphone car hailing services were highlighted when an Uber driver killed a six-year old girl in an intersection accident in San Francisco on New Year’s Eve 2014. Her mother and younger brother were badly injured. The driver had dropped off his fare and was logged on hoping for another fare at the time of the accident. Uber says its insurance does not apply because the driver neither had an Uber passenger nor was on his way to pick one up. The attorney for the child’s family says that Uber is responsible because the driver was distracted by the app as he was watching for new fares.
Uber states that it carries insurance: $1,000,000 liability coverage that’s excess over the driver’s insurance, but will drop down if the driver’s insurance does not apply. The California Public Utilities Commission set that required limit for TNCs last year. It also provides at least $40,000 contingent comprehensive and collision insurance covering the driver’s car—more in most cities. In a nice add- on, Uber’s policy provides $1,000,000 uninsured and underinsured coverage; few people have that much in their own policies. But, and as the San Francisco accident shows it can be a big but, coverage only applies while the driver has a passenger or is enroute to pick up a passenger who has ordered a ride.
Uber plays down this gap. Its website says: “As a practical matter, the vast majority of personal insurance policies cover this period (when the driver is waiting for an assignment) either by the plain terms of the insurance policy, or due to the insurance requirements set by state. In the New Year’s Eve case…the driver’s insurance company has offered up the limits of the driver’s personal auto policy.”3
The fact that the San Franciscan driver’s company tendered its limits doesn’t mean that the insurer agrees that the accident falls within its coverage. The combination of a death claim, two other serious injuries and a high profile incident may have motivated the company to pay its limits and get out rather than spend a small fortune contesting the case. Minimum required limits in California are only $15/30/5,000, so there may not have been that much involved in any event.
The interesting question for us is whether personal auto insurance policies do provide coverage when the driver is waiting for an assignment or is returning from drop- ping off a fare. Here’s the pertinent exclusion from the ISO personal auto policy:
“We do not provide Liability Coverage for any…‘Insured’s’ liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance.” (The form states that the exclusion does not apply to a share-the- expense car pool.)
The terms public or livery conveyance are not defined, so the ordinary meanings of those words would apply. Here’s a definition of public conveyance: “Any railroad car, streetcar, ferry, cab, bus, airplane, or other vehicle (emphasis added) that carries passengers for hire.”4 And here’s one of livery conveyance: “The transporting of people and/or goods for hire, such as by a taxi service….”5
Those definitions don’t clearly answer the question of whether the exclusion applies during the time the driver is waiting for an assignment. The driver’s insurer could argue that waiting for passengers is part of the use of a vehicle as a livery. The driver could argue that the exclusion is ambiguous and therefore insurance coverage applies.
What is clear is that this is not an exposure contemplated by personal auto insurance rates. Taxi-type operations present more passenger liability than usual vehicle use and the taxis operate for many more hours a day than a typical car. Taxi insurance rates are substantially higher than family auto insurance. Insurers should clarify the coverage they intend to provide.
Interestingly, Erie Insurance Company is experimenting with a specific endorsement to cover ride-sharing. It’s been introduced in Indiana and Illinois and may be offered in other states depending on consumer response.6
The insurance situation will be different in New York City, where UberX is legal, but UberX drivers in NYC must have livery licenses and livery insurance. It’s the law. In some cities, e.g. Boston and Toronto, standard taxis can respond to Uber calls, which means their insurance will apply.
There are other TNC car services; Lyft and Sidecar are most similar to Uber. Lyft says this about insurance on its website: “Lyft is the first to provide drivers with additional insurance, including a $1M liability insurance which applies as primary to a driver’s personal automobile insurance policy when matched with a passenger (emphasis added). If you already carry commercial insurance, Lyft’s policy will continue to be excess to your commercial insurance coverage.”7 Notice that the coverage is primary to the driver’s insurance. That means the driver and the claimants won’t be caught in the middle of a squabble between insurance companies. But, the coverage only kicks in when the driver is matched to a passenger — no coverage while waiting for a passenger and none after the passenger is dropped off. Lyft also says it will be excess to the driver’s commercial insurance coverage. Is that a tacit admission that a personal auto policy is not appropriate?
Airbnb and Insurance
Airbnb is to hotels and motels what Uber is to taxis. Using Airbnb, you can book everything from a shared room for one night to an entire home with 4 bed- rooms or more for months. (Just as there are other sites that are similar to Uber for autos, there are other sites similar to Airbnb for finding accommodations.)
I don’t know of any headline stories about Airbnb insurance claims,8 but Airbnb’s website says that, effective January 15, 2015 it will provide liability coverage for hosts. The coverage will apply in the US for bodily injury or property damage claims by a guest injured in the listed property or elsewhere in the building during a stay. Airbnb’s insurance will be excess over any insurance that the host carries. Airbnb also provides direct coverage for the host for damage to the host’s property caused by a guest.
As with auto insurance, homeowners and tenants policies are not totally clear about coverage for a host who rents to Airbnb guests. ISO’s homeowners and ten- ants forms exclude business use of the property, but do cover, via an exception to the exclusion, the occasional rental of the entire property or unlimited rental of the entire property to no more than two roomers or boarders. Clearly there’s no coverage for renting the property to others for a year, but just where do you draw the line on “occasional”? A New York Times columnist posed the question to several insurance agents and companies and received conflicting answers. One agent at first said there was no coverage at all. The company said that occasional rental would be covered. The article didn’t discuss what’s meant by occasional.9
The columnist was told by one company, Chubb, that it has a different approach to the problem. He reported that Chubb provides coverage for incidental business activities that do not yield more than $15,000 a year in gross revenues. What he didn’t mention is that Chubb’s policy only covers when the use conforms to local, state and federal laws. According to a study by the NY attorney general’s office, as many as 72 percent of the private, short-term New York City rentals it reviewed were illegal.10 So much for that solution. (If the liability coverage is pro- vided to the hosts by Airbnb—this is being written prior to 1/15/15—that will close the gap for many hosts.)
In some locales, there’s a lot of Airbnb activity. The attorney general’s study found 23,711 listings in Manhattan that handled, in total, 328,729 reservations. That’s a lot of potential claimants. Insurance companies should clarify the exclusions for Airbnb-type use. This will be good for the insurers, but will also work to the advantage of those who don’t rent their homes. If the claims are not excluded, the losses will factor into the calculation of premiums, thereby increasing the premiums for all homeowners and tenants, including those who don’t rent their abodes.
E&O Loss Prevention Suggestion
In 2009, Quincy Mutual reduced replacement cost coverage for its home- owners policy from unlimited to 25% more than the policy limit. In 2010 Paul Valentine’s house in Rockland County, insured with Quincy, went up in flames. His claim to replace the house was much more than 25% greater than the policy amount. Quincy said the new wording applied and turned down the claim for the excess over 25%. He said he’d never been notified of the change.
Quincy had sent the 2010 policy to Valentine’s broker, Tim Sheridan Insurance, with a notice detailing the change as required by NY insurance law. Sheridan did not forward the notice to Valentine.
Valentine sued Quincy. He also sued his broker and Quincy sued Sheridan for not sending the notice to Valentine. The case wound up in the Appellate Division of the NY Second Judicial Department.11 The court decided that Quincy had an obligation under the law to provide notice to the insured and that having failed to do so, it could not enforce the limitation. It also decided that Sheridan, as an insurance broker, did not have such an obligation and dismissed the case against Sheridan.
Nevertheless, I think Sheridan made a mistake. Even though he wasn’t obligated to notify his insured, it’s good E&O risk management to do it. Not only did he wind up with an E&O claim on his record, but he created tension with one of his insurers and ill-will with one of his clients.
I’d urge producers to send on the notice of changes directly, even if they believe the insured received the notice from the insurer. It’s an inexpensive loss control technique and it can demonstrate your desire to serve your insureds. Who knows, it might even generate a sale to close the gap created by the change in coverage.
Pay the Ransom?
In my column about cyber/data breaches in the November 22, 2014 issue of the Insurance Advocate12, I discussed two people who suffered “data-kidnap- ping.” That is, their computer files were encrypted by a hacker who demanded $3,000, in Bitcoin, to unlock the files. I wrote: “IT people generally feel that making a payment will not generate any response other than, possibly, a demand for more payments.” The lead article in the New York Times this morning (January 4, 2015) tells the story of the reporter’s mother whose data was kidnapped. Her mother paid the ransom and her files were unlocked. The kidnappers even reduced the price when she explained why she was late in making the payment!
