Can Insurers Fill the Coverage Gaps of the Sharing Economy?

Why buy a car when an Uber or Lyft driver is right around every corner?

Why book a hotel room when you can find free lodging through Airbnb or HomeAway?

And why buy a home individually when you could rent a house or large apartment with multiple friends and share the costs?

Welcome to the mindset of today’s 20- and 30-year-olds.

These cultural shifts appear to be more resilient than previously expected. Sharing has already had an impact on auto and homeowners insurance providers: slightly lower premium volume.

And while the decreases are not particularly worrisome at this point, the same may not hold true for the unique personal liabilities the sharing economy creates for the individuals who regularly share their car or home with others in exchange for money. Traditional auto and homeowners policies generally do not insure such transactional activities—creating gaps that could potentially result in serious financial harm for sharers.

But for the property-casualty insurance industry, these coverage gaps also present opportunity in the form of novel policies and endorsements that could provide a new source of premium for carriers and commission income for agents. While an actual market has yet to develop, a few carriers have already announced they are in the process of developing these coverages.

In the meantime, it’s up to independent agents and brokers to highlight the danger of treating personal lines as a commodity, says Jeff Kusch, senior vice president and head of field operations at The Main Street America Group.

These dangers are quite real. But many home and auto owners are unaware of their personal liabilities when sharing their property with others for a fee.

Home Sharing

“If you are renting out all or part of your house on a regular basis, your insurer will likely view this as a business arrangement,” says Robert Hartwig, president and chief economist at the Insurance Information Institute. “You are essentially running a B&B or a hotel. If one of the renters damages or destroys the house, standard homeowners insurance will not apply. The owner will need what amounts to a landlord policy.”

The cost of this commercial insurance product is substantial for someone using Airbnb or other home-sharing websites like HomeAway and Roomorama to rent out a home for a few weekends a year or a couple weeks during summer months. In fact, the premium may dissuade the use of the home for such purchases—hence the need for a more affordable coverage endorsement to the homeowners policy or an entirely new policy that addresses the coverage voids.

Another home-sharing exposure affects the personal property of the person renting the home. While homeowners insurance provides coverage for the property of traditional guests like Cousin James and his wife staying at the premises, these guests aren’t paying for the privilege.

“ISO treats roomers and boarders differently than true guests,” says Bill Wilson, Big “I” associate vice president of education and research and director of the Big “I” Virtual University. “The issue is whether or not the guest is truly sharing the home or actually renting it.”

Adding to the confusion is customary ISO language that refers to visitors at the home as “guests”—the same term many home-sharing websites utilize. And what about theft or damage of property by the guest or renter? While ISO offers a coverage endorsement that addresses theft or damage by an occasional visitor or traditional guest, the insurance does not necessarily apply to roomers or borders. “The question is, are renters in the sharing economy occasional visitors or something else?” Wilson points out.

Even more problematic is bodily injury liability to respond when a guest or renter injures themselves, such as tripping and falling down the stairs. Homeowners insurance covers visitors to the house who are injured on the premises, but not necessarily someone paying a fee to rent the house for the week. “The homeowner’s personal liability policy may not respond if you make money off the property, or if you make an amount above a certain threshold,” says Christie Alderman, new product manager for Chubb’s Personal Insurance.

She’s referring to policies that exclude liability for a home business in which the homeowner received more than $2,000 from the business in the year prior to the current policy. The odd timeframe complicates what is already confounding—whether or not sharing one’s home for money constitutes an actual business.

The onus thus falls on agents to carefully translate and explicate the puzzling policy implications—not an easy task given the different carriers’ policy terms, conditions, exclusions and nuanced language.

Car Sharing

An idle car in the garage can be a potent source of cash flow for its owner, assuming they want to share it with others for cash. Using RelayRide, a car rental marketplace, they can do just that—making the vehicle available to others to rent.

For the renter who does not have automobile insurance, the implications are pressing. “Just as you would need insurance coverage if you went to the counter at Hertz or Avis at the airport, you will need it when renting someone else’s car,” Hartwig says.

Even more complicated is the owner of a car who drives it for Uber, Lyft, Sidecar or a similar car-sharing enterprise. Several U.S. states have suggested a three-phase approach to the driver’s property damage and bodily liability risks: Phase one begins after the driver turns on the Uber app and is looking to pick up a fare. Phase two occurs once the driver receives an invitation on the app to pick up the fare. Phase three commences when the driver picks up a passenger and ends with the drop-off. Before these stages kick in, the driver’s traditional car insurance applies, such as when driving to the grocery store.

Each phase involves different insurance considerations. “If the driver were to injure a pedestrian during phase one, Uber has reportedly said it does not provide coverage because no transaction has effectively taken place, as there is no passenger in the vehicle,” explains Rick Holbein, vice president and director of personal insurance at State Auto Insurance Companies. “However, the driver’s customary car insurance may not provide coverage, since the driver may be seen at this time as providing a livery service, which is excluded in the auto insurance policy. This is where we are seeing some insurance companies begin to offer coverage.”

Phases two and three are a bit more problematic. “Uber and Sidecar have agreed to buy and provide $1 million of coverage to the driver in phase three, but apparently only 100/300 [$100,000 per person and $300,000 total per accident] in bodily injury liability insurance in phase two,” Holbein says. “There is nothing with regard to physical damage insurance, however. This represents another potential insurance void the industry can address.”

Down the Road

Several states and even cities are just beginning to address these issues through model legislation, and the National Association of Insurance Commissioners recently published a whitepaper on the sharing economy as it relates to transportation. “Eventually, the regulations will get worked out and then we as an industry will know exactly what types of insurance coverage to provide,” Holbein says.

How should agents and brokers respond to difficult client questions about sharing homes and cars with others for a fee? Alderman suggests listening closely to these queries and then reaching out to carriers for a customized policy or coverage endorsement.

“If more people participate in the sharing economy, then the economics of this will tip the scale and we’ll likely see more insurance companies introduce standard policies,” Alderman says. “When [an insurer] knows that dozens of strangers could be bunking in the home each year or sliding behind the wheel, they have to assume the risk increases—and the price of coverage will likely go with that from an industry perspective. It could be an opportunity if aligned with a company’s target market.”

And it might just might make up for the lost premium on traditional homeowners and auto insurance. “It might just be a generational thing, with young people passing on buying a house and car,” says Alan Dobbins, vice president and senior research analyst with the research group at Conning. “But if it persists, obviously it will take a bigger bite out of the exposure growth in auto and homeowners insurance. As companies develop new products to deal with this, it will help soften the impact.”

Russ Banham, a Pulitzer-nominated business journalist and author, is an IA contributor.

Blip on the Radar—Or More?

The question mark for the industry in moving further ahead with standard policies is whether or not the sharing economy represents a short-term cultural shift or something longer-lasting. “It will be interesting to see if this trend is temporary or will continue to grow, triggering product changes,” says Jeff Kusch, senior vice president and head of field operations at The Main Street America Group. “If there is one thing our industry does well, it is adapting coverages to meet the changing needs of the marketplace.”

Regardless, ISO is in the process of developing coverage solutions to address these gaps and has already moved to create clearer exclusions involving shared assets. “It will be interesting to see if or how fast carriers adopt them,” says Christie Alderman, new product manager for Chubb’s Personal Insurance.

“Eventually, property-casualty carriers will have to design specific products to address the personal lines risks associated with a sharing economy,” Kusch agrees. —R.B.