What the gig economy means to insurance
The ability to share resources and services is creating a new way to do business, but these risks require different types of insurance coverage.
When someone asks a question, we might jokingly respond, “There’s an app for that…” When it comes to the rapidly expanding sharing economy, nothing could be closer to the truth. The rise in cellphone use and the numerous applications we can access through those mobile devices have created another type of economy that allows individuals to share everything from their cars, homes, airplanes and money to their expertise and time.
And, much of the sharing is actually conducted through a variety of apps.
If you want to share your home, you can place it on Airbnb, Vrbo or Home Exchange. Autos can be rented through Turo, Zipcar, Car2Go and GetAround. Then there are Uber and Lyft if you just need a ride to get around town. There are even niche service providers like DogVacay for pet boarding when you go away, Spinlister for folks who want to rent bicycles, and providers like OpenAirplane, AirPooler and FlightClub for pilots who want to fly but not necessarily own a plane.
The benefit to service and product providers is a flexible work environment that allows them to make money off of unused items, usually at a cost much lower than some established entities like hotels, taxis or rental car enterprises. For consumers, the advantage is often a great product or service at a reduced cost — so what’s the harm/? Doesn’t everyone basically win in this scenario? Maybe not.
Sharing risks
If everything goes as planned, the house overlooking the beach is as advertised on Airbnb, and the renter treats the property like it is his own or better, then there isn’t a problem. But what happens if a renter goes through the owner’s personal records, steals his identity, purchases thousands of dollars of electronics in the owner’s name and is never heard from again? Or what if an expensive work of art, a priceless piece of jewelry or other item is allegedly stolen from the property? The increased use of technology as part of the sharing process can also make it easier for frauds to be perpetrated.
“The rise of highly convincing photo fakes poses a significant fraud potential for app-based home rentals and their insurers,” shares Matthew Smith, executive director of the Coalition Against Insurance Fraud. “A swindler can photo-fake a phantom apartment. The claimed owner and a fake guest can collude on an expensive slip-and-fall scam in the so-called kitchen. Or, maybe lie that the guest stole an expensive possession that was edited into the image. Or submit a claim for a costly vase the guest supposedly broke, with the broken item photo-faked on the living room floor.”
Bill Heeb, technical vice president of claims at American Modern Insurance, says that other risks to properties can range from something as small as leaving doors or windows unsecured when leaving the property to renters who improperly operate appliances they are unfamiliar with that result in damage to the equipment or home. Then there are the risks from renters who host large parties despite them being prohibited in the rental agreement or conducting illegal activities that can increase the risk to the property or individuals.
“Most states hold landlords/homeowners to a higher standard of care relative to tenants/renters vs. normal guests and visitors, and this would also include home-sharing situations,” Heeb adds.
Since the products offered by the insurance industry haven’t quite caught up to the gig economy, there are gaps in the insurance products that are available. “The products are solid, but they haven’t been adapted for how people work,” explains Laura Langone, head of insurance operations for Airbnb, Inc. and the RIMS 2020 president. “How do you think about livery products for commercial lines? We’re seeing a change from personal to commercial use, but there isn’t anything to bridge that gap. Sharing companies have to bridge the gap and make sure the products are available.”
In addition to creating new products that provide the necessary coverage for the gig economy, correctly pricing them is also important. Langone says, “We are seeing new solutions from InsurTech and other nontraditional industries that involve pricing per mile or per day. It’s risk-sharing among an aggregated group of people.”
Many of the risks involved with the gig economy are similar to what insurers have seen in corporate or commercial exposures. However, numerous homeowners or car owners don’t understand their existing insurance products, what is and is not covered, or that their insurance companies may cancel their coverage if properties or vehicles are used for short-term rentals. “Now they have short-term rental coverages available,” adds Langone. “Consumers want to know that they are protected.”
Assigning liability — who pays?
When a home is leased for short-term rentals or a vehicle is used as a livery service, unexpected problems will arise. Determining who is liable and which insurer pays if there is coverage for the incident depends on the facts of the claim. According to their websites, Airbnb and services like Uber and Lyft provide coverage for hosts and drivers. Airbnb’s host guarantee program provides hosts up to $1 million in coverage for some property damage and has two other insurance programs to help protect hosts and their guests.
“Airbnb has a global lines adjuster for claims for the host, not the guest,” explains Langone. “It’s critical to bring more traditional commercial lines adjusters into the space. As you straddle commercial vs. personal, it’s important for the person buying the insurance. You have to look at what other types of services are needed for good customer service. It’s an end to end process from selling insurance to the claims process.”
For claims involving situations such as a burst pipe, electrical fires or a guest being injured, Heeb says that “each claim must be reviewed on a case-by-case basis and it would be very difficult to respond to these scenarios without the facts. The analysis would also depend on the homeowners policy package as it might contain a special endorsement that may specifically exclude or limit coverage for guests under a home-sharing arrangement.”
For Uber drivers, coverage is determined by whether or not the driver’s app was on at the time. When the driver is offline, or the driver app is off, their personal auto insurance coverage applies to any incidents. If the driver is available or waiting for a ride request, Uber does offer limited coverage for third-party liability if an incident is not covered by the driver’s personal auto policy. Accidents that occur during a trip or while the driver is en route to pick up a passenger have $1 million in third-party liability coverage. Uber has also partnered with several insurers to provide coverage to drivers when they are not driving for the company.
However, the risks go beyond just accidents. “Stolen identities are being used to create Uber or Lyft driver accounts,” warns the Coalition’s Smith. “Scammers might evade background checks and vehicle inspections and pose as a rideshare driver, leaving passengers with virtually no way to spot a phony. You could have convicted violent felons driving passengers around town. It’s a very dangerous situation.”
Smith says that some drivers also hide their commercial driver status from their insurers because they are either confused about their coverage options or they are trying to avoid higher premiums.
“Drivers also regularly swap advice on how to defraud their policies after collisions or other incidents,” adds Smith. “Drivers might pursue fares with their app in the ‘off’ position. Imagine an airport or large city where passengers hail cabs. Some drivers have taken jobs for cash. In an offline status, their personal auto insurance would take over, creating a major exposure for passengers if they’re injured.”
Serving the sharing economy
The variety of niche services arising present some interesting coverage questions. “Broadly speaking, most personal lines insurance policies coverage is either excluded or significantly limited when associated with such a business-related activity or when property is rented to others,” finds Heeb. “This is especially true when such sharing is done by the policyholder at a higher frequency versus a one-off situation and when substantive income is derived from the activity or the item rented. Also, any of this sharing or activity that occurs ‘off-premises’ may also have coverage limitations and exclusions. It is strongly suggested that entrepreneurs consider purchasing a commercial insurance policy for these sharing activities rather than depend on their homeowners policy.”
Langone recommends that insurers think about regulations and how they can affect coverage. “There are different regulations for industries and locales, and the average consumer isn’t aware of them. Airbnb has a policy group that works with regulators to educate them on the industry. The sharing economy is bringing opportunities and jobs out into other areas, not just to downtown neighborhoods, so it’s important to look at those issues too.”
California’s Assembly Bill 5 (AB 5) is poised to have the most immediate impact on the gig economy as it will affect whether companies classify workers as independent contractors or employees. The law, which went into effect on Jan. 1, 2020, cites three criteria for determining classifications:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
According to the California Department of Industrial Relations, companies that do not satisfy all three of these requirements must classify their workers as employees, meaning they must provide benefits and pay taxes on them. There are some exceptions, and entities like Uber, Lyft, the California Trucking Association and the International Franchise Association are continuing to lobby the California legislature. It is estimated that the law could affect one million workers. Similar legislation is being considered in New York and New Jersey.
This is why education is an important aspect of the process. Insurers should understand the new risks that are arising and where the coverage gaps exist. Consumers and gig economy service providers must be knowledgeable about what their existing insurance covers or excludes and purchase additional coverage to offset their increased risks. InsurTechs are learning how technology can be used to provide new services, can help link carriers and the policyholders, and bring new products to market that serve an even wider audience.
Patricia L. Harman (pharman@alm.com) is editor in chief of Claims Magazine.
To learn more about claims-related topics like this, join us at the America’s Claims Executive Leadership Forum & Expo in New Orleans, April 20-22, 2020.
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