The Breakdown

Explaining Southern California's economy

Proposed insurance rules bad for ridesharing companies' bottom line

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One of the reasons ridesharing companies are able to charge significantly less than taxis is that up until now, companies have been able to shift much of the liability and cost of insurance to their drivers, who then shift it to their insurance companies, which often don't know they're insuring a car for hire.

That lucrative business model could begin to change if the California Public Utilities Commission [CPUC] approves a set of new regulations, which it's scheduled to vote on Thursday.

“Insurance is an important piece for us, no doubt,” Uber's Head of Global Operations, Ryan Graves, told me Tuesday night, while declining to say whether Uber supports the proposal or not. “We’re going to work with the commission to try to understand what structures are reasonable and my hope is that they understand that reality as well, and we find something we’re mutually agreeing upon.” 

Ridesharing companies – officially classified as Transportation Network Companies [TNC's] by the CPUC – would be required to provide $1 million in commercial liability insurance under the new rules. The good news for these companies is that they can meet these requirements by using a combination of their own insurance and drivers', as long as the policy is "specifically written for the purpose of covering TNC services."

Problem is, as the California Insurance Commissioner recently pointed out, no such policy exists. 

"TNC's are under the mistaken impression that personal automobile insurers cover now, planned to cover, or will cover the risk of TNC-related for-hire transportation," Dave Jones, California Insurance Commissioner, wrote in an April letter to Michael Peevey, President of the CPUC.  "The only solution to cover this insurance gap, short of mandating personal line insurers cover it, is to have the TNCs bear this risk. [The California Department of Insurance] concludes that personal auto insurers should not be mandated the cover a risk which is associated with the business model of the TNCs." 

TNC's want their insurance to be secondary and they believe drivers' policies should be the primary insurer. But as KQED's Jon Brooks points out, this is a problematic arrangement:

Both the insurance industry and the state Department of Insurance have now taken the position that this set-up is based on a fiction, contingent on the erroneous view that drivers’ personal insurers will be happy to or at least tolerate paying claims for individuals who drive commercially for TNCs, an activity that has not been factored into the price of their policies. If it is a fiction, though, it’s one that makes TNC insurance less expensive, because it assumes drivers’ own policies will pick up at least some of the liability cost for accidents.

Uber, Lyft and Sidecar, another TNC, all insist drivers’ personal insurers have paid claims for accidents occurring during a paid ride. The insurance industry says that’s because the drivers’ insurer didn’t know the accident happened on a TNC call.

A bill, AB 2293, is working its way through the California legislature that would require TNCs to buy primary insurance to cover accidents from the time a driver's app is switched on. (Uber derides the bill as “a back-room deal by insurance companies and trial attorneys.")

The CPUC's proposal doesn't go as far as AB 2293 but Jerry Sullivan, who runs an insurance brokerage business, told KQED that if the CPUC's proposal is approved, TNC's will have to pay much higher premiums.

“People who write livery [policies] are prepared to write the kind of exposure these guys will have,” Sullivan said. “But it’s going to cost them 30 to 35 percent more than they are now.”

The new proposed CPUC rules also try to clear up when exactly a driver is, in the words of the original rules established last Fall, "providing TNC services."  When an UberX driver hit and killed a six year old child on New Year's Eve in San Francisco, the company said because the driver was waiting for a fare he wasn't working for Uber at the time and thus wasn't covered by the company's insurance.

The CPUC makes it clear that a driver becomes a TNC driver whenever he or she has the app open. 

Uber already changed its policy – followed by Lyft – to cover accidents during this "gap" period – when a driver is logged-on but not carrying passengers – though the companies' insurance only kicks in once a driver's own insurance runs out.

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