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

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

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The taxi and limousine companies, which are regulated industries, see the situation differently, however. State and local governments usually require taxis to have a medallion, which gives them the right to operate a vehicle as a taxi. Medallions can be revoked if the drivers don't follow state or local laws, or the drivers may be subject to fines. Fares are regulated, and taxis may be required to have cameras, radios, credit-card readers, fare charts, and decals. TNCs generally aren't subject to any of these fines or fees.

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

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

The NLA points out that state laws vary as to mandatory insurance agreements, but some require up to $5 million of liability for vehicles with larger seating capacity. The NLA is concerned that TNCs are not providing sufficient insurance coverage.

State opinion varies. New York, for example, has required ride-sharing companies to adhere to certain requirements including insurance coverage, or be stopped by a restraining order against the company. In contrast, Colorado has set up a framework for TNCs to operate in and provide insurance to drivers.

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Car-sharing

Car-sharing is different from ride-sharing. Instead of transporting a passenger to a destination, someone engaged in car sharing 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 that checks the person's driving record, credit report and other background services. Owners sign up to share their vehicles, and the vehicles must meet certain requirements, although it's not certain whether the vehicles are inspected by the TNC.

When a match is made, the owner and the renter meet, and keys are exchanged although an electronic access is available through some TNCs.

Operating a vehicle for hire

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

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

(Photo: AP)

In stage one the driver is simply available for hire and is not actively driving an individual to a location. Uber provides contingent coverage for ride-sharing for stage one with limits of $50,000 for bodily injury to each person, $100,000 for all bodily injury and $25,000 for property damage for each accident, which is higher than any state minimum coverage. Coverage is contingent on a denial 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 the way to pick up a passenger. Uber and Lyft provide $1 million liability coverage beginning at this stage. Lyft provides contingent comprehensive and collision, and Uber's physical damage coverage follows the driver's vehicle coverage. Therefore, if a driver doesn't have physical damage on the vehicle when driving for Uber and has an accident, the driver won't be compensated for the loss to the vehicle.

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

In car-sharing, there are no such stages. The car is listed as available for rental, and possession occurs when the driver hands the renter the keys or the renter activates an automated system.

(Photo: Shutterstock)

Insurance gaps

If the TNC driver has an accident, is the driver covered under the TNC's policy, the driver's personal auto policy, both, or neither? The standard personal auto policy has an exclusion for coverage when a vehicle is used as a public or livery conveyance. Someone could hire the insured to drive the passenger to a designated location or could hire the vehicle alone and use it like a rental vehicle. Both uses are excluded, however. The personal auto policy is designed for an individual or family's use, not for commercial use.

ISO has developed a new endorsement that strengthens the public or livery exclusion. Known as the Public or Livery Conveyance Exclusion Endorsement (PP 23 40 10 15), it defines the "Transportation Network Platform" and clarifies the exclusion in the auto policy. The endorsement excludes liability, medical payments and physical damage while the auto is being used by an insured who is logged into a transportation network platform as a driver, whether the insured has a passenger in the car or not. The endorsement takes effect Oct. 1, 2015, in Iowa, Maine, Montana, New Mexico, Wisconsin and Wyoming. It is effective Nov. 1 2015, in Colorado, Indiana and Nevada, and effective Dec. 1, 2015, in Delaware and Idaho.

There is an endorsement for the umbrella policy as well, known as the Personal Umbrella Liability Policy Public or Livery Conveyance Exclusion Endorsement (DL 99 12 10 15). Currently only Alabama, Iowa, Maine, Montana, North Carolina, New Mexico, Wisconsin and Wyoming have adopted this umbrella form as of its effective date, Oct. 1, 2015, while Colorado, Indiana and Nevada have adopted it effective Nov. 1, 2015. Its principle is the same as the auto endorsement: to clarify and strengthen the livery exclusion. The form defines a transportation network platform as an online-enabled application or network that connects passengers with drivers using their own vehicles for the purposes of providing a ride. The form then excludes coverage anytime an insured is logged into a transportation network platform, whether a passenger is present in the vehicle or not.

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Underwriting concerns

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

Coverage provided by the TNCs can be either primary or secondary; many of those TNCs whose carriers provide excess coverage maintain a reserve in order to handle issues as they arise.

With ride-sharing, insurance commissioners are concerned that people are exposing themselves to losses without being fully aware that they may have no coverage. Many states have issued consumer alerts warning owners of vehicles, potential riders and potential renters that there may not be insurance coverage in an accident.

(Photo: Shutterstock/Freer)

Workers' compensation issues

Not only are there gaps in the personal auto policy, but there also are workers compensation issues to be addressed. TNCs often state that the drivers are independent contractors who use their own equipment, set their own hours and are invested in the vehicle they drive. Counterarguments are that the TNCs are providing work for the driver and are providing a driver for hire. Concern centers around what happens in event of an injury to the driver while on duty. If the driver is incapacitated and loses wages, there is no compensation for the driver.

Many cases are being filed to determine whether drivers are employees or independent contractors. Carriers are providing defense costs outside of policy limits because the cases are significant for the long term, and the carriers want to establish precedents beneficial to the industry as a whole.

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

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

(Photo: Shutterstock/PrinceOfLove)

Insurable interest

If the TNC does provide insurance for the vehicle, what is its insurable interest? The TNC doesn't own or maintain the vehicle and minimally stands to lose financially if the vehicle is out of commission. TNCs state that their interest is in public safety by ensuring that drivers are covered, and they're stepping into the shoes of the owners and drivers of the vehicles.

Sidecar drivers are allowed to advertise extras provided in their vehicle to riders, such as water and snacks. This could turn into a product liability issue: If a driver provides homemade snacks that make someone ill, is the driver or Sidecar responsible for the medical bills?

One insurance program that is offered provides limited products exposure as long as the driver or owner of the vehicle is not preparing the food that is offered. The carrier does, however, require drivers to carry a food handler's license. If the TNC has a system that maintains a database of the licenses of drivers and shows that they perform license checks quarterly, a small sublimit is available. Generally, the policies state that the drivers are at their own risk if they provide food, drinks or legal marijuana and that the TNC is not responsible for any illnesses that may result from the purchase of said products.

(Photo: Shutterstock)

Cell phone use

A related concern is the use of cell phones and texting while driving. In one recent case pedestrians were crossing the street when an Uber driver collided with them. Although the driver wasn't carrying a passenger at the time, the driver was logged on to the app and was actively looking to pick up a rider. One of the pedestrians died, and the family sued the driver, Uber, and Rasier LLC, a subsidiary of Uber and parent company Rasier CA-LLC, the insurance certificate holder for the coverage carried by Uber.

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

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

This case could have a significant impact on a burgeoning industry, and it's especially important for Uber as it provides its drivers with cell phones. Uber is now offering cell phones that restrict the use of texting. It's virtually impossible to control the judgment of drivers when they're on the road, however; unless they are grossly negligent, assigning liability may be difficult.

(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 million during various stages of the ride, it's easy to see how tempting it would be to log into a system after the accident and claim that the driver was actively looking for a fare in order to use the TNC's insurance coverage. Adjusters will want to receive time stamps and other information from the TNCs in order to establish the legitimacy of the claim.

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

City and state regulation

A number of states and local governments have considered legislation for ride-sharing companies. Nevada recently approved licenses for Lyft and Uber as transportation network companies, which will allow the companies to operate within the state. Pricing will be set, with both companies allowed to adjust pricing for prime time (peak times when the provider can raise rates) or use dynamic pricing. Lyft can raise rates up to three times the base rate, and Uber has uncapped levels for dynamic pricing. Both companies are working with officials to speed business license approval for contracted drivers.

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

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

Related: Geico expands rideshare product to Pennsylvania

(Photo: Shutterstock/Gustavo Frazao)

In May 2015 Tennessee enacted legislation that allows ride-sharing companies to operate statewide. The law defines ride-sharing as the prearranged transport of persons when transportation is incidental to another purpose of a volunteer driver, and it includes car, van and bus pools. Workers' compensation doesn't apply to ride-sharing, employers are not liable to passengers and others from the use of the vehicle, cities and towns may not impose taxes or require additional licenses for ride-sharing providers, and no additional fees may be charged to ride-sharing providers.

Los Angeles has voted to allow Uber and Lyft to pick up passengers at the Los Angeles International Airport. Airport pickups are a bone of contention among taxi drivers, as they are held to stricter requirements and see the ride-sharing competition as unfair. There are some limits for ride-sharing pickups at the airport:

• The ride-sharing companies will be charged $4 for rides entering and leaving the airport,
• Only 40 vehicles are allowed to circle the loop at any one time, 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 passengers at the airport.

Uber is fighting legislation in Broward County, Fla., that would require drivers to be fingerprinted and would implement new insurance standards. Although Uber uses a security company to check for local, state and federal criminal records, without fingerprints it's easy for individuals to change names and hide criminal histories.  

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

Summary

Ride-sharing and car-sharing have great potential for changing methods of transportation as a whole. Although they're similar to taxis, limousines, and rental car services, there are many differences that set them apart. The rides and vehicles are provided by any interested person who has passed the company's specifications as to driving history, background, maintenance of the vehicle, and other parameters. As outlined, insurance issues are some of the largest and most pressing issues. Various court cases are under way, and how those are settled will be significant. States are enacting and considering legislation as the ride-sharing apps become more popular with consumers. The climate is rapidly changing, so stay tuned.