Author: Chris Boggs
Ownership, or rather the desire to own, is changing. More and more people see less and less the need to own something they don't use on a regular basis. As the saying goes, "I don't need a drill, I just need a hole." The insurance industry needs to prepare for this shift in attitude and desire.
If you are looking to this article for answers, stop reading now. This article does more to create questions than provide answers.
There are two sides driving this "pimping" society:
- The owners; and
- The nonowners
Seems sort of anticlimactic, doesn't it? But each side presents different exposures and different insurance needs.
The Owners (The Pimps)
Those who actually own property or capacity want to derive income from their investment. Such profit motive has long driven businesses to invest in property, but now individuals are looking for ways to earn some extra income from their under-utilized stuff.
Our personal lines clients are currently pimping such property as their:
- Cars (ridesharing and car sharing);
- Homes (Airbnb and others);
- Jewelry; and
But commercial lines clients are getting in on the pimping economy as well, looking to make extra money from:
- Idle construction equipment;
- Unused production capacity; and
The Personal Lines Exposure
Ridesharing was the insurance industry's first major introduction to the pimping (sharing) economy. The growth of Uber, Lyft and the myriad other rideshare companies required the industry to make a coverage determination and draw a coverage line in the sand.
The industry seemed to collectively agree that the public or livery conveyance exclusion in the personal auto policy (PAP) applied to ridesharing. But the unanswered (or unclear) question was, at what point was the car being used as a public or livery conveyance (when was it being pimped)? Was it:
- When the driver turned on the app and made himself "available" to those needing a ride?
- When the driver accepted a request for the ride? or
- When the driver actually picked up the passenger?
Insurance Services Office (ISO) created three endorsements to address when the PAP ceases to provide coverage (form numbers differ by state, so only endorsement names are used). Depending on the endorsement attached, PAP coverage may cease:
- When the driver turns on the app;
- When the driver has logged in to the app but has NOT accepted a request;
- When the driver accepts a request but has NOT picked up the rider; or
- When the driver picks up the rider.
Carriers in most states have the option to pick the point at which PAP protection ends.
|If the Carrier Wants to End Coverage When…||They attach the…|
|When the driver turns on the app…||Public or Livery Conveyance Exclusion |
|When the driver has logged in to the app but has NOT accepted a request…||Limited Transportation Network Driver Coverage (No Passenger)|
|When the driver accepts a request but has NOT picked up the rider||Transportation Network Driver Coverage (No Passenger)|
Once a rider is on board, there is no ISO endorsement available that provides coverage.
Regardless when the PAP coverage ceases (based on the endorsement attached), it's incumbent upon the driver to confirm that the rideshare company's policy picks up at that point. Is there a potential for a gap in protection? Maybe – but you may never know until it's too late.
This leads to an errors and omissions (E&O) question for agents insuring rideshare drivers: Should you try to interpret the point at which the rideshare company's auto policy responds? I don't know, you may want to pose that question to the E&O underwriter.
Making money driving people around wasn't good enough; the next natural step in car pimping was to turn the car into a profit center when the owner isn't using it. Ridesharing seemed to naturally morph into car sharing. Car sharing is a bit more difficult to manage from an insurance perspective because:
- Insurance follows the car;
- The PAP's definition of insured includes anyone using the covered auto with the named insured's permission; and
- Whether the vehicle is a public or livery conveyance is not clear. The concepts of public or livery conveyance seems to intimate the named insured is driving. In car sharing, the owner isn't even in the car; the owner has willing given permission to another driver.
So, the key question in a car sharing situation, is the vehicle owner covered for his/her vicarious liability for the actions of the driver/renter? ISO has created an endorsement to clear up this question – the Personal Vehicle Sharing Program Exclusion Endorsement. If this endorsement is attached when the vehicle is being "pimped," there is no coverage for the vehicle owner or the person driving.
Airbnb, and other home sharing opportunities, hit the insurance industry about the same time as ridesharing. The difference seemed to be that the pimping of space in your house (or your entire house) was not as contentious or riddled with questions as ridesharing or car sharing.
ISO developed two endorsements for the home sharing client (endorsement numbers vary by state):
- Home Sharing Host Activities Endorsement; and
- Broadened Home Sharing Host Activities Endorsement.
More information on car sharing and home sharing is available here:
Other Pimped Exposures
But what about all the other "stuff" being rented to others? What possible problems exist for the owner when he or she "shares" his/her boat, jewelry, clothes, tools and anything else that can be shared? Let's propose a few exposures:
- Theft: Some folks are just dishonest and may not give your stuff back. Is this covered?
- Bodily injury or property damage: Could the owner be held legally liable if he/she does not take proper care of whatever is pimped leading to injury of the renter or another person? It appears the homeowners' (HO) policy excludes this; how will the insured protect him or herself?
- Value: Does renting the property to someone else affect the value of the property? Will carriers want to create an actual cash value endorsement for (regularly) rented property?
- Coverage territory: Personal property in the HO policy is covered while anywhere in the world. Will carriers create and adopt a narrower extension of coverage for property being rented to others? Maybe effectively limiting coverage to just the premises or while in an insured's possession.
- Income loss. Even if the property is covered, is there a way for the owner to recover the lost income resulting from the damaged, lost or destroyed property?
- Business use. Will business use exclusions apply or be created?
Owner exposures are not likely limited to these few; there are certainly more. But what about the renter, what exposures does he or she have?
The Pimped (The Renters/Non-Owners)
Does the renter face any coverage issues in this sharing economy? Do currently available "standard" personal lines insurance policies protect the renter? Unfortunately, this section will continue as a series of questions. And in reality, most answers will be, "it depends."
- The "ride share" vehicle in which the individual is riding is involved in an accident and the ride share driver is at fault; from which policy or policies can the rider expect payment? The ride share driver's PAP will NOT respond, but his/her ride share company policy might if it is written properly and any specific conditions are met. IF the rider is a named insured on his/her own PAP or covered as a "family member," (s)he should be able to access the Medical Payment coverage if needed. Likewise, if the ride share driver's auto coverage does not exist, the rider may be able to recover from his/her uninsured motorist (UM) coverage.
- To look her best for the social event of the year, a lady rents a very expensive necklace and earring set. On her way home, she notices the $4,000 necklace is gone – and it is never recovered. From whence does the coverage extend?
- Coverage C in the HO policy extends coverage to property of others; but the extension is limited in scope, coverage applies "while the property is on the part of the "residence premises" occupied by an 'insured.'" The insured was off premises when the necklace "disappeared." Also, unless personal property is provided on a special cause of loss basis (HO 05 24), disappearance is not a named peril.
- Try looking to the liability side of the HO policy and there is another specific exclusion, there is no coverage for, "'Property damage' to property rented to, occupied or used by or in the care of an 'insured.'"
- The renter's last hope is the inland marine policy/personal articles floater (PAF). It depends on the form language. It appears ISO-based personal inland marine forms cover only listed jewelry. Unless the non-owned jewelry is listed, there is no coverage here.
- Clothes, tools and other personal property are subject to the same exclusions and limitations as jewelry. Because of the requirement that the damage occur on the residence premises, tools may be the only rented property covered, provided the insured isn't using the rented equipment to work on someone else's house.
Commercial Lines Happenings
Commercial lines clients are starting to explore the pimping economy. Like personal lines clients, businesses are looking for alternative methods of generating income; one way is to "rent" under-utilized equipment to others. Current and possible exposures have not yet caught the attention of the insurance industry, but they will.
Reports are that contractors are renting out their idle construction equipment to other entities. For example, the paving contractor does not need its road reclaimers for a week so it rents them another paving company rather than have them sit idle. The paving contractor generates income and the renting entity saves the cost of buying the equipment.
Another real renting situation is in the manufacturing space. A manufacturer may run one 10 or 12 hour shift a day. The other 12 to 14 hours, the machines sit idle. It is conceivable that such an operation may "rent" its production capacity (its machinery) to another manufacturer during the hours the building is presently closed. Like the contractor situation, the manufacturer earns revenue during otherwise non-productive time and the renting party does not have to invest in a building and its own manufacturing machines.
As on the personal lines side, how might these transactions ultimately affect the insurance programs of entities involved in pimping – on both sides? What are the ramifications?
- Will valuation be affected? It's possible carriers will be unwilling (or at least hesitant) about providing replacement cost on equipment or machines that is used twice as much as before;
- The loss of income. Business income coverage for the manufacturing company is affected by the rental income. And the renting company has a dependent property exposure.
- Delays. If the company renting the equipment is late in returning equipment, could there be a penalty for the owner of the equipment who needs it to do the contracted job?
- Bodily injury and property damage. If the machine or equipment malfunctions and causes injury, who is potentially legally liable?
- Contractual risk transfer. Will there be an increase in contractual risk transfer with which the insured and thus agent must deal with and comply?
- Will more additional insured endorsements need to be created?
This is but two possible situations and a few of the questions arising out of those situations to consider. As our commercial clients move more and more into the sharing economy, these issues will move to the front of the line.
Street Corner Economics
Regulations, lack of regulations, contracts, the lack of contracts and other issues create an interesting insurance landscape in the pimping economy. The change is coming, what is an insurance professional to do? I welcome your insight.
Last Updated: June 9, 2017