Renting out your car – profitable venture or insurance disaster?

Korrena Bailie

America loves its cars - according to the latest figures from the Department of Transport, there are over 250 million registered passenger vehicles on U.S. roads, and many of these vehicles aren’t being used regularly by their owners.

As the economy continues to falter its way to recovery, Americans are taking on second – some even third – jobs to earn extra money. But what if a source of extra cash was sitting in your garage the whole time?

Inspired by companies like ZipCar, a membership-based car-sharing company, a new trend has popped up: Peer-to-peer car rental. Renting out your car sounds scary, but new companies promise to make the process easy, safe and profitable. These new companies include RelayRides, Getaround and JustShareIt.

Also on the market are ride-sharing companies, where car owners offer rides to people that need a quick ride, generally for commuting and daily tasks such as shopping. Lyft, an app pioneered by Zimride, the largest rideshare program in the United States, neatly matches up riders with drivers whenever the rider requests, much like calling for a taxi. The rider then pays a minimal fee, usually around $10.

Lyft and Sidecar, another ride-sharing company, were fined $20,000 by the California Public Utilities Commission in November 2012 for multiple charges, including not having enough evidence that users carry sufficient property damage insurance coverage. Lyft claims that they provide ample liability insurance – they offer $1 million in excess liability insurance, which means that their policy will kick in if the car owner’s own auto insurance doesn’t cover all damages in the event of an accident. However, many big insurers will not cover car-sharing claims and can even withdraw coverage altogether.   

RelayRides, their insurance, your insurance

RelayRides, a peer-to-peer car-sharing company founded in Boston in 2010, enables car owners to rent out their vehicles in 20 big U.S. cities, including New York, San Francisco and Los Angeles. There are no exact numbers available, but RelayRides has “tens of thousands of members, and thousands of cars” in their marketplace, according to Steve Webb, director of corporate communications at RelayRides.

The premise is simple. Car owners can create a profile and list their cars on the RelayRides site. To make it even more appealing, car owners get to approve - or deny - any reservation requests, and set the price that they charge. The owner can meet the renter and give him the keys, or, for extra convenience, set up a lockbox where any renters can collect the keys remotely.

Car owners get to keep 60 percent of the rental fee and RelayRides keeps the other 40 percent, half of which is the company fee with the other half covering RelayRides insurance.

Insuring a stranger in your car

For any cautious car owner that is considering signing their car up for RelayRides car-sharing, there is one big note of caution – liability insurance.

Insurers don’t prohibit drivers from renting out their cars for commercial purposes, such as RelayRides, but they typically will not cover any claims if something happens to the car while it is rented out. And if the policyholder tries to make a claim for a car-sharing accident, insurers may choose to non-renew the policy or cancel it.

To tackle the growing popularity of peer-to-peer car-sharing, Geico recently changed the wording of its auto policy to state that car sharing is not covered. 

For car-sharing companies such as RelayRides, this is a positive change, as it means that renters don’t have to worry about losing their coverage if Geico discovers their car is being rented out.

Other insurers are taking note of the trend. “We recognize the benefits of car-sharing arrangements and, as the practice gains larger scale, we are considering possible policies and products that may address the insurance implication,” says Justin Herndon, spokesman for Allstate. In the meantime, however, he advises any policyholders that are considering car-sharing to talk to their insurance agent first.

To date, three states – California, Oregon and Washington – have passed legislation prohibiting insurers from canceling policies upon discovery that a policyholder is participating in car-sharing. However, in states without such legislation, car-sharing insurance remains a legal gray area.

For car owners, RelayRides provides full comprehensive and collision coverage, up to the actual cash value of the vehicle. RelayRides pays for the car to be fully repaired after a crash, but it’s likely that the owner is responsible for any depreciation in value after an accident.

RelayRides also covers up to $1 million worth of liability that protects the driver against third-party injury and property damage claims.

While most car owners would consider this insurance more than adequate, it has already proved in at least one instance that it’s not enough.

In February 2012, 24-year-old Patrick Fortuna crashed his RelayRides rented Honda Civic into another car, killing himself and severely injuring all four adults in the other car. The owner of the car that Fortuna was driving was financially liable for the accident, and the claims costs could exceed the $1 million benchmark that RelayRides had set.

So what happens if the damages from an accident involving a RelayRides car exceed the policy amount? Will the company step in to pay the remainder, or will the car owner have to cover the excess?

According to the RelayRides blog, it depends on the situation, and who is ultimately declared to be at fault. The parties involved might end up settling for the RelayRides maximum liability amount. But if the driver of the rented car was at-fault, then it’s possible that the owner would find himself liable for any amount over the $1 million limit.

RelayRides does not give a definitive answer to the problem. Webb says, “[RelayRides] firmly believe[s] that car owners should be able to confidently list their cars in a peer-to-peer marketplace, without fear of being held liable for incidents that occur when renters are driving their cars, or having their personal insurance policies non-renewed.”

As the car-sharing market is so new, insurers and insurance experts are optimistic about the future of car-sharing generally, and believe insurance companies will step up to fill in the gray areas. 

“It’s not a question of insurers becoming more flexible, it’s a question of policies adapting to cover the unique liability inherent in this type of operation,” says Pete Moraga, spokesman for the Insurance Information Network of California. 

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