SESSION ON RIDESHARE COMPANIES: INSURANCE & REGULATORY ISSUES FOR STATES

6TH ANNUAL TRANSPORTATION LEADERS’ POLICY ACADEMY – WASHINGTON, DC

PRESENTED BY GRIFFITH FOUNDATION & COUNCIL OF STATE GOVERNMENTS 18 MAY 2016

KIM B. STAKING

CALIFORNIA STATE UNIVERSITY, SACRAMENTO

THE OPINIONS EXPRESSED ARE THOSE OF THE AUTHOR AND NOT OF THE SPONSORING ORGANIZATIONS (GRIFFITH FOUNDATION & COUNCIL OF STATE GOVERNMENTS) OR OF CALIFORNIA STATE UNIVERSITY, SACRAMENTO

Preview • The monetization of the sharing economy

though the use of smartphones, and ridesharing in particular, is a break from the status quo, what is referred to in academics as a disruptive technology.

• Ridesharing appeared in this decade

• Uber (2010) Currently in 110 cities (US) | [non US: 235+]

• Sidecar (2011) Currently in 10 cities

• Lyft (2012) Currently in 168+ cities

Preview

TNC: Transportation Network Company

• Connects drivers to passengers [online]

• Set prices | collects fares | retains a portion

• Undertakes background checks, etc.

• Insurance: App on / not connected with passenger

• Contingent Liability Coverage

• Insurance: Match to pick up to drop off

•Commercial Insurance Coverage

•Contingent Comprehensive/Collision

No Collision/Comprehensive? No driver injury/Medical/PIP Problems with No Fault Insurance

Commercial Insurance Coverage Provided by Ridesharing Firms

Coverage varies by State [Contingent coverage, Deductibles]

Commercial Insurance Coverage Provided by Ridesharing Firms

Non contingent

Major Focus

• Recognize impact of Exponential Growth in Ridesharing

•Understand Legislative Challenges arising from the Sharing Economy and Ridesharing

• Review the Insurance Industry Challenges in developing appropriate insurance products

• Address the lack of coverage within a Personal Automobile Policy (PAP) and options

• Examine importance of ridesharing legislation on insurance availability

APPARENT EXPONENTIAL GROWTH OF RIDESHARING

COMING UP WITH SHARED SOLUTIONS

The greatest shortcoming of the human race is our inability to understand the exponential function.

― Albert A. Bartlett Professor Emeritus, Physics, Univ. Colorado

Exponential Growth Uber | 2010-2014

Source: http://www.nbclosangeles.com/news/local/Uber-Map-Investigation-I-Team-Ride-Share-Timeline-256559181.html

States with ridesharing laws rules States in which cities have passed municipal ordinances

Dec 2014

State Ridesharing Legislation June 2015 April 2016

Ridesharing Insurance by State

Main Source: The Ride Sharing Guy, Retrieved May 2015 [author calculations] http://therideshareguy.com/rideshare-insurance-options-for-drivers/

1 Insurer

2+ Insurers

April 2015

Main Source: The Ride Sharing Guy, Retrieved April 18 2016 [author calculations] http://therideshareguy.com/rideshare-insurance-options-for-drivers/

1 Insurer

2+ Insurers

April 2016

LEGISLATIVE CHALLENGES COMING UP WITH SHARED SOLUTIONS

… TO DATE A LEGAL AND REGULATORY DRIVEN PROCESS

The end of law is not to abolish or restrain, but to preserve and enlarge freedom. For in all the states of created beings capable of law,

where there is no law, there is no freedom. ― John Locke

Role of Regulation and Legislation Balance Innovation and Protection

• Addressing a disruptive technology

• Ridesharing is displacing other industries (taxi companies, taxi medallion owners and drivers)

• However, ridesharing is preferred by many users

• People like the web experience

• Knowing when a car is arriving

• Knowing that the route is priced correctly

• Responsibility for safety of citizens

• Are risks inherently different than other solutions?

• Questionable assumption of insurance coverage through personal automobile insurance policy

Major Legislative Issues Sharing Economy | Ridesharing

• Public Safety and Public Policy

• Adequacy of insurance coverage

• Background checks of drivers

• Evenhanded dealing with passengers & drivers

•Disclosure Requirements

• Need for data to regulate an industry that depends on data for its operations

• Deny coverage while engaged in ridesharing

Major Legislative Issues Sharing Economy | Ridesharing

• Rights of Insurance Companies

• Know if insured is a rideshare driver;

• Cancel or not renew insurance for rideshare drivers

• Deny coverage while engaged in ridesharing.

• Economic Benefits

• Generation of employment opportunities

• Conflicts between sharing economy innovation and taxi industry

• Voter preferences

• State rights vs. Municipal rights

Legality Ridesharing spread across United States

in absence of clear legal structures

• California’s experience is typical:

1. Ridesharing services declared illegal with cease and desist order by California Public Utilities Commission (CPCU);

2. After additional information was provided, CPUC allowed ridesharing, with restrictions & insurance requirements;

3. Regulatory guidelines developed for background checks, allowable operations;

4. Insurance guidelines developed; Dave Jones, California Insurance Commissioner wrote comprehensive letter.

5. Rules under development were enshrined in legislation.

6. Legislation revised as more information became available.

Public Safety & Public Policy Confusion exists when legislation is not clear

• Legal and regulatory structures have a duty to balance innovation with public safety

• Reliability of background checks? • Personal attacks on passengers. • Different from the experience of taxis, limos, etc.?

• Some “unacceptable” drivers slip though both systems.

• Passenger ratings may provide some information

• Passengers and driver safety • Personal attacks on passengers

• Driver ratings may provide some information

Fair Dealing with Passengers & Drivers

Is Payment Structure Fair? • Surge Pricing: During periods of high demand

the ridesharing firms increase pricing significantly (to attract more drivers).

• Is there “Surge Pricing” in Taxi Industry?

• Hidden economic cost resulting from having to wait

• Rate Changes: Ridesharing companies have dropped the payment to drivers, claiming lower fares will result in higher usage.

Fair Dealing with Passengers & Drivers

Dismissal rules for drivers

• Some drivers have been dismissed without being told why.

•How reliable is the peer-to-peer rating system?

• False positives with too few ratings?

• Lyft/Uber agreements in California/Massachusetts made dismissal process more transparent and created appeals process.

State vs. Municipal Rights

• The regulation of taxi services has usually been done on a municipal basis

•However, ridesharing could be in chaos if rules changed across the state.

• Iowa experience (limited to larger cities)

• Regulation allowing ridesharing in larger cities

• Uber & Lyft withdrew from Iowa City

• Lyft withdrew from Des Moines

Insurance Adequacy

• Are drivers covered by Personal Auto Policies (PAP)? Or are more costly commercial policies needed?

• Is insurance coverage sufficient to protect the passenger, the driver and the general public?

• Can personal insurance coverage be voided?

• Personal Auto Policy: Exclusion; Concealment; Misrepresentation, etc. may be ground for contract invalidation just as are racing or intentional acts

Comparison of State Legislation

There is a wide variety of requirements in legislation

Basic structure similar, but there are unique differences by state

Model Law Developed by the National Conference of Insurance Legislators

• Establishes rules regarding who can serve as a driver.

• Drivers must pass a background check, follow a zero tolerance policy for alcohol and drug usage while driving, and must be at least 21 to drive for a ridesharing firm.

• Specifies that a rideshare company may meet its insurance requirements by purchasing coverage through an insurer that’s highly rated by a rating agency recognized by the department of insurance.

Note: The model law was based in part on Indiana’s rideshare law that incorporated compromise language agreed to by Uber and insurers .

Model Law Developed by the National Conference of Insurance Legislators

• Requires primary auto liability insurance purchased by the driver and/or by the rideshare company to cover:

• The period in which the driver is logged into the online system and is available to receive a transportation request

• The period during which the driver is transporting a rider

• Assumes Personal Auto Policy covers driver when app is turned off

• Limits TNC driver to prearranged rides

Recent Legislation California (Second Stage)

• Personal auto insurance will no longer apply while you are logged into ridesharing apps—unless drivers have purchased specific coverage for ridesharing.

• Ridesharing firms provide primary third-party commercial liability insurance—covering the costs of injury, death, and property damage to third parties—from the time drivers open their apps to the time they close them.

• Commercial Collision / Comprehensive when connected to a passenger or passenger in car (Deductibles can be high).

• They must also maintain $200,000 of excess liability coverage in the case of particularly bad accidents while app is on but not connected with a passenger.

[This differs from coverage in other states].

Recent Legislation Maine

[Very clear and precise]

Legislation passed on 6/13/2015 [Governor’s veto overridden]

• Standard structure in terms of insurance coverage, background checks, and the licensing of TNCs

• Primary insurance during “App on” period must be provided by primary automobile liability insurance that recognizes that the driver is a transportation network company driver

• Insurance during “App on” period is not contingent on primary insurer denying claim.

• Driver must be notified by TNC that

• Driver should contact Personal Auto Policy Insurer and that coverage may be limited

• Driver with lien may be in violation of lien agreement

• State law supersedes municipalities

Recent Legislation New Mexico

• Legislation passed on 2/10/2016; signed by Governor

• Previously, the Public Utilities Commission had set strict standards. Lyft had withdrawn and many considered the Uber was operating illegally.

• Standard structure in terms of insurance coverage, background checks, and the licensing of TNCs

• Insurers have the right to exclude coverage while the app is on, including the right to defend

• Permitted exceptions to insurance coverage include an exclusion for liability of the insured under any workers' compensation law

• Removed language in previous version stating that TNC drivers are independent contractors and not employees

Specific Legal Clauses

• Maryland • Public Service Commission will regulate the new

transportation industry, and issue licenses to the companies and their drivers.

• The companies must prove they have a stringent background check system that requires fingerprinting of all drivers (9 month waiver).

• Nevada • 3 percent excise tax on fares, including on taxis and

limousines, to fully fund medical school at UNLV.

•Utah • Minimum $1 million in liability insurance.

• Firms do their own background checks and vehicle inspections.

Specific Legal Clauses

•Tennessee

• Rideshare firms do own background checks

• Virginia • Pay $100,000 for a license to operate in the state. • Background check – review of history of felonies and a

search of sex offender and crimes against minors registry. • The company or the driver must have insurance that

covers up to $1 million in liability • Must abide by a zero-tolerance policy regarding the use of

drugs and alcohol.

Specific Legal Clauses

• Rideshare laws in three states—Arkansas, Indiana and North Carolina—require drivers for the companies to be classified as independent contractors

•Georgia’s legislation requires drivers to be responsible for their own background checks

Open Discussion

Questions Regarding Legal and Regulatory Issues

Insurance Covered in Next Section

INSURANCE ISSUES NEED FOR INNOVATION | COMING UP WITH SHARED SOLUTIONS

MARKET DRIVEN VS. REGULATOR DRIVEN APPROACHES

GRADUAL MOVEMENT FROM OPPOSITION TO LIMITED ACCOMMODATION

“Have Insurers Lost the Capacity to Run an Underwriting Profit?” ― Robert Hartwig, President, Insurance Information Institute

“Next time, listen to your actuaries!”

Utmost Good Faith Uberrima Fides

Insurers operate under the concept of Utmost Good Faith: High degree of honesty imposed on all parties)

• Ridesharing firms continue to provide erroneous information to drivers regarding coverage under Personal Auto Policy (they know, or should have known; and have been told).

• Ridesharing activities are required to be disclosed by driver to insurer (representations).

• The exclusion for providing livery services is clear

• Ridesharing insurance structures may create a perverse incentive for drivers to misrepresent risk/loss.

How Insurers Underwrite Risk Big Data Problem

•Gather and interpret loss data

•Determine risk classification (separating policyholders by risk level)

•Appraise time (and resources) engaged in risky

•Personal risks vs. commercial risks

•Predict estimated losses and prices

Underwriting is particularly difficult in Ridesharing

where risk profiles differ considerably (hours driven, time of day, location, etc.)

Exclusions

• Exclusions define activities not covered by insurance. In Personal Auto Policies, these include:

• Racing or speed contests

•Using car for illegal activities

• Providing Livery Services (transporting passengers for hire)

• Sustained while being in the business of the insured (e.g. commercial activities)

Insurance Reaction to Ridesharing

New ISO standard wording (2015) for Livery Exclusion.

•We [the Insurer] do not provide Liability Coverage for any ‘insured’: • For that ‘insured’s’ liability arising out of the ownership

or operation of a vehicle while it is being used as a public or livery conveyance.

• This includes but is not limited to any period of time that ‘insured’ is logged into a ‘transportation network platform’ as a driver, whether or not a passenger is ‘occupying’ the vehicle.

• This exclusion does not apply to a share-the-expense car pool.

Insurance Gaps

Passengers:

• Generally equal or better coverage than taxis

Drivers:

• Will personal auto policy provide coverage?

• Will policy be cancelled if insurer discovers rideshare activity? Will ridesharing firm drop them if they have an accident?

• Fairly low coverage level during contingent period (possibly no comprehensive/collision).

• Currently no worker’s compensation coverage

• No medical, life or disability insurance for drivers

Open Discussion

Questions?

RIDESHARE COMPANIES: INSURANCE & REGULATORY ISSUES FOR STATES

WEBCAST

GRIFFITH FOUNDATION & COUNCIL OF STATE GOVERNMENTS 17 MAY 2016

THANK YOU!

References Benecke, Chris, Denise Brown, Joe Dillon, Brian Gerritsen, Leah Heller & Kim B. Staking. (2015). Risk Management Implications of the Sharing Economy. CPCU Working Paper (Golden Gate and Sacramento CPCU Societies). Retrieved from http://www.goldengatecpcu.org/files/public/CPCU_Sharing_Economy.pdf on April 23, 2015.

California Legislative Information (n.d.), AB-2293 Transportation network companies: Insurance coverage (amended in Senate August 26, 2014). Retrieved from http://leginfo.legislature.ca.gov/faces/billTextClient bill_id=201320140AB2293.xhtml on August 27, 2014.

California Public Utilities Commission (2013, September 19). Decision adopting rules and regulations to protect public safety while allowing new entrants to the transportation industry. Decision 13-09-045 (issued Sept. 23, 2013). Retrieved from http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M077/K192/77192335.pdf on September 13, 2014.

California Public Utilities Commission (2014, June 10). PROPOSED Order Instituting Rulemaking on Regulations Relating to Passenger Carriers, Ridesharing, and New Online-Enabled Transportation Services. Agenda Item #13072 (Rev. 1) 13-09-045. Retrieved from http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M098/K126/98126852.pdf on August 14, 2014.

Casualty Actuary Society. (2014, Dec 11). Actuaries Debate Insurance Issues in Ridesharing. Press Room. Retrieved form http://www.casact.org/press/index.cfm?fa=viewArticle&articleID=2740 on May 20, 2015

The Council of State Governments. (2016, April). State regulation of rideshare companies. Capitol Research: Transportation Policy. Retrieved from http://knowledgecenter.csg.org/kc/system/files/CR_rideshare.pdf on April 20, 2016.

Harrison, Sheena. (2015, February 15). Uber, Lyft could be forced to provide drivers with workers comp benefits. Business Insurance. Retrieved from http://www.businessinsurance.com/article/20150215/NEWS08/302159993/uber-lyft-could-be-forced-to-provide-drivers-with-workers-comp?tags=%7C69%7C92%7C304 on May 20, 2015.

Isaac, Mike & Natasha Singer. (2015, June 17). California Says Uber Driver Is Employee, Not a Contractor, New York Times: Technology. Retrieved from http://www.nytimes.com/2015/06/18/business/uber-contests-california-labor-ruling-that-says-drivers-should-be-employees.html on June 18, 2015.

References Independent Insurance Agents and Brokers of America, Inc. (2015.) ISO Files New PAP “Car Sharing” Endorsements. Virtual University. Retrieved from http://www.independentagent.com/Education/VU/Insurance/Personal-Lines/Auto/Rental-Cars/Wilson2015ISOTNCPAPFiling.aspx on May 14, 2015

Jones, David (2014, April 14). Letter to Michael R. Peevey, President of California Public Utilities Commission related to insurance issues and Transportation Network Companies. Retrieved from http://www.scribd.com/doc/217289190/Insurance-Commissioner-Rideshare-recommendations-to-California-Public-Utilities-Commission-on-Lyft-Sidecar-Uber#scribd on February 10, 2015

Knowledge@Wharton (2014, July 16). Kicking the Tires on Uber’s $17 Billion Valuation: Is It Worth That Much? Retrieved from http://knowledge.wharton.upenn.edu/article/kicking-tires-ubers-17-billion-valuation-worth-much/ on July 15, 2014.

Knowledge@Wharton (2014, Nov. 5). Sharing economy 2.0: Can Innovation and Regulation Work Together? Retrieved from http://knowledge.wharton.upenn.edu/article/the-next-phase-for-the-sharing-economy/ on November 6, 2014.

National Association of Insurance Commissions. (2015). Transportation Network Company Insurance Principles for Legislators and Regulators. Retrieved from http://www.goldengatecpcu.org/files/public/NAIC_2015.pdf on May 14, 2015

Singer, Natasha (2014, August 16). In the sharing economy, Workers Find Both Freedom and Uncertainty. The New York Times. Retrieved from www.nytimes.com/2014/08/17/technology/in-the-sharing-economy-workers-find-both-freedom-and-uncertainty.html?_r=0 on November 25, 2014.

Vallet, Mark. (2015, June 18). Insurers roll out ridesharing policies. Insuracne.com. Retrieved from http://www.insurance.com/auto-insurance/coverage/insurance-rideshare-uber-lyft.html

Werbach, Kevin. (2015, Summer). Some Friendly Advice for UBER and its Compatriots. Wharton Magazine.

Wood, Robert W. (2014, Jan 8). Big Liabilities For Uber, Sidecar And Lyft? Forbes. Retrieved from http://www.forbes.com/sites/robertwood/2014/01/08/big-liabilities-for-uber-sidecar-and-lyft/ on May 14, 2015.

Additional Slides

• In case specific questions are asked

Critical Legal Issue Are drivers independent contractors or

employees? Worker’s Compensation is a sub-issue

• California Labor Commission has ruled both ways. Most recent rules for plaintiff being an employee with respect to Worker’s Compensation and Uber paid $4,152.

• California Unemployment Insurance Appeals Board ruled driver was an employee in regards to awarding unemployment insurance when laid off by ridesharing firm.

These two cases are from administrative law judges; therefore non-binding as legal precedents to other cases – each was unique.

• Federal Judge is hearing class action suit scheduled to start on June 20, 2016. On April 21, 2016 Uber reach an agreement with drivers in California and Massachusetts paying $84 million to drives (plus $16 million contingent on a successful IPO at 1.5 time current valuation). Awaiting acceptance by judge. No settlement of employee/Independent contractor, but Uber will continue to treat as independent contractors.

I am not a Lawyer – Seek professional advice

• Seth D. Harris and Alan B. Krueger (2015). A Proposal for Modernizing Labor Laws for Twenty-First-Century Work: The “Independent Worker”. The Hamilton Group. Policy paper 2015-10.

• http://www.hamiltonproject.org/assets/files/modernizing_labor_laws_for_twenty_first_century_work_krueger_harris.pdf

• Discussion of legal issues and proposal for a new category of Independent workers

Critical Legal Issue Are drivers independent contractors or employees?

Need for Innovation in Insurance Markets

Big Data

Problem

TNCs are working with selected

insurers to design policies for

Rideshare Drivers

Why the Delay?

Economic Impact on Passengers With car ownership costs approaching $9,000 per year

[Survey response: 5,700 passengers and 2,600 drivers across 7 major cities]

Source: Lyft (2015, Oct. 22). The Power of the Passenger. http://blog.lyft.com/posts/thepowerofthepassenger.

Valuation* Uber: $62.5 billion | Lyft: $5.5 billion

*Value estimates based on Investor Purchases: 12/15/2016-5 Uber; 1/16/2016 Lyft

Source: http://www.onlinemarketing-trends.com/2015/10/how-uber-is-eating-its-competitors-for.html

Free Cash Flows V = rWACC – growth rate

Metromile and Uber Integrated Insurance coverage

Earning and time Uber, New York City | November 2014

Driver Longevity – 20 cities [based on survey of 963 drivers by Sherpa Share]

Earnings – 20 cities [based on survey of 963 drivers by Sherpa Share]

Disruptive Innovation Perspective of Ridesharing Firms

• The initial position of the ridesharing companies was that there was no need to regulate the services provided.

• The “drivers” were unlocking the value of assets that they owned in an entrepreneurial effort.

• Insurance coverage should be the responsibility of the “drivers” personal insurance policy.

• This is no different than the exception to the livery exclusion for car pooling.

• The sharing economy was considered a revolutionary change in transportation as they were providing a better, cheaper, service.