Who’s liable in the share economy?

UPDATED: The tragic story, reported by The New York Times’s Ron Lieber last month, in which a man rented a car in Boston via peer-to-peer car sharing company RelayRides and wound up seriously injuring four people while losing his life raised a familiar question for the share economy. Who’s responsible?

Addressing liability and security have become paramount issues as business models based on sharing items have emerged. Luxury peer-to-peer car sharing service HiGear abruptly shut down at the end of last year after a successful launch just four months previous. A criminal ring had stolen $300,000 in fancy cars and the HiGear founders felt they just couldn’t protect its users’ cars. And Airbnb’s lackluster response last summer to the trashing of two Airbnb hosts’ apartments highlighted how critical it is for people to feel safe before sharing their most important valuables like cars and homes, which also can have the best margins in the share economy.

In terms of peer-to-peer car sharing, RelayRides holds a million dollar insurance policy during the rental period, which is most often sufficient. But in the Boston accident, a lawyer for one victim has suggested total claims for the four victims would be in the $1.2 to $1.5 million range. Liz Fong-Jones, who rented out the car, told The New York Times that RelayRides has told her personal insurance carrier to deny any claims against it for the accident. From RelayRides’s perspective, liability should stop with RelayRides as it feels this is no different from any case where an insurance policy may be exhausted by the claims.

And in places like California, which have passed bills about car sharing, the law is clear. Deputy California Insurance Commissioner Joel Laucher clarified to me that California’s peer-to-peer car sharing bill, AB 1871, states that the car sharing program is the owner of the vehicle for all purposes and assumes liability during rental. On the emerging question of whether someone’s personal insurance carrier could drop them because they’re putting their car in a car sharing network, he added that it’s illegal to cancel or non-renew an insurance policy based on someone signing up for car sharing.

So that’s all well and good for states like California, Oregon and Washington, which have car sharing laws protecting consumers, but what about places like Massachusetts, where the accident occurred? RelayRides founder Shelby Clark recently told my colleague Katie Fehrenbacher that while he thinks state car sharing insurance laws provide clarity, he doesn’t think he needs them to operate, evidenced by Boston being an early market for RelayRides. The company has a deal in place with GM to unlock OnStar equipped vehicles registered in the RelayRides network via a mobile phone app, further opening up the number of available cars. One can only assume that GM also isn’t panicked about the liability issues and imagines this program operating in all states.

On a practical level, while there’s a big focus on what happens if the million dollar RelayRides insurance policy is exhausted, the larger concern may just be about what happens if auto insurance companies start non-renewing policies for folks who put their cars into car sharing services. Lieber reported that auto insurer USAA has indicated that car sharing participation would generally result in non-renewal. If multiple insurers go this route and are able to do so legally, then a larger problem would result.

While I think it’s unfair to single out share economy companies for the liability and insurance risks inherent in their business models (all companies have these concerns), it’s important to note that as these business mature they’ll have to confront the very issues of liability that all businesses encounter.

Airbnb’s initial poor response to the apartment trashing is indicative of a startup’s desire to grow and get traction, not manage customer care. In the aftermath, Airbnb installed a 24/7 customer hotline to report problems and a $50,000 insurance policy against theft and vandalism. Though interestingly, it excludes “personal liability,” meaning that if someone opens your closet and a box falls on them, that’s on you. And Airbnb is clear that its policy is not a replacement for renters or homeowners insurance, which raises the same question that has faced car sharing: how jazzed are homeowners’ insurers going to be about their policy holders renting out their homes?

The reality is that no insurer wants to take on additional risk, perceived or real. Conversely, the concern is that the focus on insurance and liability can be the enemy of truly innovative business like RelayRides and Airbnb. And whatever happens with the lawsuits resulting from the Boston accident, this is just an inevitable case of the business model being tested.

Update: RelayRides’s founder Shelby Clark reached out to clarify that he believes that ultimate liability should rest with the person who rents the car from the RelayRides network, and that RelayRides insures the renter up to $1 million. Meaning that if the renter is found to have caused the injuries in question, and the policy is exhausted by a verdict beyond $1 million, the renter (and not the car owner who rented out the car) is responsible for paying any damages beyond that million. The accident occurred in Massachusetts and California Deputy Insurance Commissioner Joel Laucher noted to us that in California, at least, AB 1871 states that “the personal vehicle sharing program shall assume all liability of the owner and shall be considered the owner of the vehicle for all purposes.” He added that as the statute reads, nothing limits the liability of the vehicle sharing program. These are new business models with new questions, and many of these issues are likely to get resolved by state courts.

Question of the week

How should share economy businesses approach liability?