A lawsuit recently made headlines that, for anyone that knows the peer-to-peer (P2P) rental industry, is regrettable but inevitable given insurance industry developments and this new market.  The lawsuit basically alleges that the third-party platform is denying legitimate accident damage claims that, according to their own policy, should have been covered.

On these P2P platforms, vehicle owners — from enterprising individuals to fleet owners such as car rental companies — list vehicles for rent on a third-party app, as a daily rental or use by gig economy drivers.

The merits of either side of this particular legal tangle notwithstanding, the accident claims issue is the result, in my experience, of the unfortunate vast rate insurance fluctuation in the new mobility area of the industry in a very short time period.  The result — the interests of most third-party platforms often diverge in key areas from those of the owners listing vehicles. Regarding accident collision and comp reimbursement the party with less bargaining power —usually the car owner — is losing.

To fully understand the problem, let’s go back to the beginning, when insurance companies first started covering this new area of mobility in 2018 and 2019. Insurance rates for these platforms, particularly for gig renters such as Uber, Lyft, and delivery, were too low. In retrospect, those rates were clearly below market for the risk engendered.

Insurance Rates Skyrocketed

The risk part has not changed. It’s no secret that in renting to gig drivers in particular you can’t repeal the law of physics, and adverse selection takes hold. First, these gig drivers are incentivized to drive a lot, and it is a fact that the more one drives, the more accidents happen.

Second, many of the folks who rent cars to drive gig are doing so because they don’t have and can’t immediately afford to own a vehicle. This is usually the result of credit or down-payment challenges. This means that for the most part, a high insurance deductible for damage is much less a deterrent than with a mainstream renter — the subprime/deep subprime driver is simply going to walk away from the deductible should there be an accident. 

Finally, you have the “rental car effect” in general as to the quality of care. Most folks do not treat a rental car like they do a car they own. When you add an incentive to overdrive and alleviate down payment responsibility, you are essentially renting your car as a “taxi” with a driver that has no substantive financial responsibility.

Initially, for whatever reason, the insurance folks in 2018 or 2019 didn’t see it that way, and assumed their risk was less. That’s partially because when the driver was on the Uber, Lyft or gig platform the risk was technically covered by the ride-share entity, so the insurance fees were low.

What did Uber eXchange Leasing, Fair.com, and Maven all have in common? They thought they could make money renting to “gig” rideshare or delivery drivers, and they are all out of business.

Towards the end of 2019 the entire new mobility vehicle insurance industry looked at the massive losses they were experiencing in insuring gig rental vehicles. The market went from easy to hard almost overnight. Insurance rates per vehicle went up two, three, even four times in a heartbeat. And, as expected, this caused some major platform/rental vehicle changes just as quickly.

For example: Fair.com quickly got out of the gig rental business, publicly calling out the new insurance rates as the cause. Carsharing platform Maven went out of business altogether, as did many smaller subscription-type programs focused on gig drivers.

Owner Eats the Risk

A lot of the remaining gig platforms, almost by necessity and just to keep end-user consumer costs within reason, went to full self-insurance for collision and liability, and some are even on the hook for a big piece of the first dollars paid out for the liability side of accident claims. So whatever is paid out in an accident, beyond whatever deductible is stated, is coming out of the platform owner’s pocket, not an insurance provider.

Self-insurance isn’t unusual in the car rental industry, particular for the larger operators, but remember, in these cases the owner is the rental company — there are no third-party platforms involved, so there are no inherent expense conflicts.

In the case of the third-party P2P platforms, the owner eats the risk if the claim is denied, not the third-party platform. And unlike insurance companies that are held to regulatory sanctions for denying legitimate claims, non-insurance companies are not held to the same strict criteria.

And unlike most traditional car rental companies, these P2P platforms that rent to gig drivers are still losing large amounts of money per month, funded by private or public investors. They’re now focused on making that bottom line profitable. See the conflicts inevitably increasing? Every dollar paid out to a vehicle owner for an accident claim comes out of their pocket, so how quickly do you think any will be paying or even acknowledging claims?

Our company approached the problem a different way: Rather than shift the burden of risk and expense onto the owner in one form or another, we changed the paradigm of the renter by renting to only those who plan to buy the vehicle they are renting. This promotes an extra level of care and financial responsibility in higher security deposits, and it’s reinforced with enhanced telematics.

Reality of the Risks

My goal here is not to take sides, but to add visibility to the reality of the risks of renting cars to gig drivers in general and on these third-party platforms in particular, given the financial pressures and the inherent conflict of interest between the platform and the vehicle owner in respect to accident pay outs. 

Without proper knowledge and bringing this market evolution into the light, potential vehicle owners are not fully informed of the risks and potential true costs of operations in this area.

Then, with the smaller vehicle owners and organizations, the party that can least afford it (and is not supported by free-flowing investor funds), bears the full brunt of the risk and the expense, which seems unfair. Once this happens the only way to try to right the situation is with legal action, which itself is expensive — but might be a trend in the months to come. 

John F. Possumato is an attorney and founder and CEO of DriveItAway, a technology platform enabling automotive retailers to offer new app-enabled mobility options, focused on innovative rent-to-purchase/drive-to-own programs.