The Future (My Guesstimate) Hybrid “Uber-Lyft” Auto Insurance Policy

thBy Greg Johnson. I’ve recently posted a few articles about transportation network companies (TNCs) and the inroads they are making into the traditional taxi-cab business across the country. (See article one and two).  Tech savvy companies such as Uber, Lyft and Sidecar are poised to significantly erode, if not entirely replace, the taxicab industry within the next handful of years . . . assuming they can get their insurance programs in place.

The TNC insurance bill that passed the California Legislature in late August is paving the way for a new hybrid form of automobile insurance policy that will cover drivers whether they are using the vehicle personally or in the “taxi-cab” business. AB2293 directed the California Department of Insurance to expedite approval of new hybrid products and some insurers have been actively working with TNCs to develop them. See:

While there are certainly underwriting, pricing and policy writing challenges in assessing and limiting the risks, one would expect several liability insurers to join the fray and begin offering the new hybrid policy forms prior to the July 1, 2015 deadline.

The Hybrid Auto Insurance Policy:

It’s fairly easy to envision the general contours of a new “hybrid” automobile insurance policy, if that is the insuring path the TNCs decide to go down. The new hybrid auto policy would be issued to the TNC driver as the named insured. To keep things simple, TNC’s will probably mandate their drivers (1) maintain hybrid policies written with liability limits that, at a minimum, match the highest limits required of personal auto policies by any jurisdiction in the country (what I refer to as “base liability limits”); and (2) own the vehicle insured by the policy. At present, the highest personal auto limits in the country are $50,000 for death and personal injury per person, $100,000 for death and personal injury per accident, and $30,000 for property damage. These base liability limits would apply whenever the named insured is using the vehicle for any non-commercial use and during periods 1 and 3 of the TNC taxi-business (period 1: the moment a driver logs on to the TNC’s online app until the driver accepts a request to transport a passenger and period 3: the moment the ride is complete until the driver either accepts another ride request or logs off the app).

The hybrid policy would afford liability coverage on a primary, non-contributing basis and would need to name the TNC as an additional insured for any liability it may incur arising out of the ownership, maintenance or use of the vehicle when used in the TNC taxi-cab business. The insurer of the hybrid policy would be required to notify the TNC in the event of the driver’s non-payment of premium and cancellation. The hybrid policy may also include a “step-down” provisions where the base liability limits would be reduced to the minimum limits mandated by the law of the state where the accident occurred when the vehicle was used by someone other than the named insured TNC authorized driver (assuming step-down provisions are valid and enforceable in the state where the hybrid policy was issued). (See e.g., Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994), and State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160, 165 (Minn. Ct. App. 2001), review denied (Minn. June 27, 2001), cases I handled). The hybrid policy would contain the same type of provisions and exclusions normally found in a personal auto policy as authorized by the applicable jurisdiction except those which limit or exclude use of the vehicle as a taxi-cab.

AB2293 requires a TNC to maintain $200,000 of “excess” liability coverage insuring the TNC and driver for any liability arising out of the ownership, maintenance or use of the vehicle during periods 1 and 3 of the TNC’s taxi-cab business. AB2293 provides that this $200,000 can be satisfied by insurance maintained by the TNC, insurance maintained by the driver, or a combination of both. There are two primary alternatives here. First, the $200,000 of “excess” liability coverage could come from the TNC’s own commercial automobile policy, which would be issued to the TNC as the named insured and also automatically cover authorized drivers as additional insureds. The TNCs could pass on the cost of this additional $200,000 of liability coverage, or a portion of the cost, to their authorized drivers by a monthly fee, usage fee, increasing their revenue split with drivers, or by increasing fares. Second, the TNC’s could mandate that their drivers’ hybrid policy contain a “step-up” liability limit provision (above the $50,000/$100,000/$30,000 base liability limits) to extend $200,000 of additional liability coverage during these periods of time. (Of course, any time a TNC imposes additional premium costs on its drivers or decreases driver revenues, it will affect the competitiveness between TNCs in terms of attracting drivers).

I assume TNC’s will want to “control” the risk of liability above the base liability limits ($50,000/$100,000/$30,000) by having their commercial policies provide liability coverage to drivers during periods 1 and 3 (and pass along the premium cost to drivers through monthly fees, increased revenue splits or increased fares) as opposed to mandating the driver’s policy insure this risk. I say this for at least a couple of reasons. First, ABA2293 provides that if any insuring obligation “will be satisfied in whole or in part through a driver’s policy, the TNC must verify that insurance is maintained by the driver.” That would present an onerous challenge. Second, from a practical standpoint, many TNC drivers may not be able to absorb increased premium charges associated with obtaining $200,000 of liability coverage in one fell swoop. I assume most TNC drivers, if not all, would opt to pay the cost on a usage basis (or out of fare revenue realized) as opposed to paying the cost up-front. One downside of insuring the drivers is that TNC would have no right of indemnity against the driver for any amount the TNC insurer pays which exceeds the base liability limits.

Note that the California Public Utilities Commission (CPUC) called for greater liability limits during periods 1 and 3 than AB2293 requires. The CPUC plan required $100,000/$300,000/$50,000 instead of 50,000/100,000/30,000 coverage. There does not appear to be anything in AB2293 which would prohibit the CPUC, which regulates the taxi-cab industry in California, from requiring greater limits (or additional types of coverage) than those specified in AB2293 assuming the amounts identified in AB2293 are only minimum amounts and the CPUC’s regulatory power allows it. However, with AB2293’s additional requirement of $200,000 excess liability coverage, it would appear the California legislature largely satisfied the CPUC plan.

Also, the original bill called for $750,000 in liability coverage during periods 1 and 3, considerably more than the amounts ultimately passed. At least one legislator wanted a minimum of $750,000, the same liability limit mandated for limousine services.

Periods 1 and 3 gives rise to some ambiguity. For example, it is possible that a TNC driver may log onto the app in order to qualify for greater levels of insurance or the driver may be logged onto apps from different TNCs and get into an accident. Presumably, the TNCs will develop some type of usage fee to lessen these potential problems. At a minimum, if the driver is logged onto more than one TNC online-app at the time of an accident and the loss exceeds the base liability limit of the TNC driver’s policy, the policies insuring the TNCs would have to contribute equally to the loss.

Period 2 presents the greatest liability risk to a TNC and its drivers. Period 2 begins the moment in time a driver accepts a ride request until the ride is complete. AB2293 requires $1,000,000 in liability coverage for death, personal injury and property damage and provides that this obligation can be satisfied by insurance maintained by the TNC, insurance maintained by the driver, or a combination of both. The same two alternatives discussed above with respect to the $200,000 excess obligation apply here as well.

In summary, I would expect the TNCs to mandate that their drivers carry a hybrid policy affording the base liability limits of $50,000/$100,000/$30,000 on a primary, non-contributing basis with step down liability limits the base liability limits where the base liability limits would be reduced to the minimum limits mandated by the law of the state where the accident occurred when the vehicle was used by someone other than the named insured TNC authorized driver (assuming step-down provisions are valid and enforceable in the state where the hybrid policy was issued). The hybrid policy would need to be endorsed to add the TNC as an additional insured. I anticipate the TNC’s commercial policy would insure TNC drivers against liability during periods 1 and 3 in the amount of $200,000 and during period 2 in the amount of $1 million. I would further expect the TNCs to pass along the cost of liability coverage in excess of the base liability limits of $50,000/$100,000/$30,000 to the TNC drivers, either by use of a monthly fee, usage fee, increased split of fare revenue or increased trip fares.

There are, of course, other ways of satisfying the liability insuring requirements of AB2293 (and those which will be imposed by other jurisdictions), but I’ll leave that for another day.

Interim California Rules:

The new hybrid automobile insurance policies are expected to hit the streets before July 1, 2015.

In the interim, AB2293 protected personal auto insurers, at least from the perspective of third-party liability insurance. Personal auto insurers were legitimately concerned about having to take on the risk (and indemnification costs) associated with commercial use by their named insured TNC drivers. All personal auto policies contain livery and business use exclusions. While such exclusions will invariably insulate the personal auto insurer when its named insured TNC driver is transporting a passenger for hire, the applicability of the exclusions during periods 1 and 3 is less certain. AB2293 makes it clear that in California a driver’s personal auto policy has no obligation to respond to a TNC accident during periods 1-3 (unless the personal auto policy is “specifically written to cover the driver’s use of a vehicle in connection with a transportation network company’s online-enabled application or platform”).

First Party Coverages:

Most jurisdictions require the owner of a motor vehicle to obtain an automobile insurance policy which, in addition to providing third-party liability insurance, affords first-party coverages such as no-fault coverage (a/k/a personal injury protection or medical and income loss benefits) and uninsured motorist (UM) and underinsured (UIM) motorist protection coverage. These coverages are referred to as first-party coverages, as opposed to third-party coverage, because the accident victim generally obtains the benefits from his or her own insurance company. Further, in contrast to third-party liability coverage – which typically follows the insured vehicle – first party coverages typically follow the named insured (and others who qualify as an insured under the policy) wherever they may be injured. In other words, if an accident arises out of the ownership, maintenance or use of a motor vehicle, an insured can generally looks to his/her own insurance policy to recover first-party benefits regardless of where s/he is injured.

ABA2293 only addressed UM/UIM coverage and require $1,000,000 in uninsured motorist (UM) and underinsured (UIM) motorist coverage during period 2 (“from the moment a passenger enters the vehicle of a participating driver until the passengers exists the vehicle”). This requirement is extremely odd to me as it appears to be well in excess of any UM/UIM limit mandated by California law. I would have expected TNCs to oppose this limit as vigorously as they opposed the bill’s original requirement that TNCs afford $750,000 in liability coverage during periods 1 and 3. TNC drivers, like taxi-cab drivers, are not always at fault for an accident, much less always 100% at fault. Requiring UM/UIM limits of $1,000,000 as opposed to say, $50,000 per person/$100,000 per accident (or even a lesser amounts) imposes a substantial risk on TNCs.

ABA2293 does not address whether the $1 million of UM/UIM coverage applies on a “primary” basis to any person injured while occupying a TNC authorized vehicle or whether it would be excess to any UM/UIM coverage available to the passenger. Although UM/UIM coverage is a first-party coverage which typically follows the person, not the vehicle, some jurisdictions, like Minnesota, have enacted UM/UIM priority statutes which require the accident victim to look first to the UM/UIM coverage on the occupied vehicle (i.e., the TNC vehicle). (See Minn. Stat. §65B.49, subd. 3a(5).) If the accident victim’s damages exceed the UM/UIM limits available under the policy insuring the occupied vehicle, the accident victim may then seek “excess” UM/UIM coverage under his/her own policy to the extent the limits available under that policy exceed the UM/UIM limits of the policy insuring the occupied vehicle. Id. Even assuming the $1,000,000 UM/UIM limits mandated by ABA2293 only apply on an “excess” basis, the risk remains substantial as the majority of passengers are only going to maintain minimum limits of UM/UIM coverage, if they even have a personal auto policy.

ABA2293 did not address no-fault coverage (a/k/a personal injury protection or medical and income loss benefits) which is typically mandated by law or comprehensive and collision coverages, which are optional coverages insuring damage to the insured vehicle. It is my understanding that TNCs offer comprehensive and collision coverage during period 2 (i.e., when transporting passengers), but only if the driver purchased similar coverage under his/her personal policy.

I’ll address first-party coverages more extensively in a future article on this blog.

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson © All rights reserved. 2014.

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