Once Friendly Territory, California Looks to Toughen Rules for Uber, Lyft
In February, when Lyft was battling to stave off regulations of ride-service companies in Seattle, company CEO John Zimmer pointed to California as a shining example of a fruitful partnership between a disruptive tech industry and regulators.
“California had a yearlong rule-making process with several steps,” he said in an interview about the California Public Utilities Commission’s decision last year to sanction what it calls Transportation Network Companies, or TNCs. “And they were able to come out with something that put, in many cases, more strict standards on new companies like Lyft, yet preserved innovation and consumer choice. I think that’s a fantastic model.”
Ride-service firms in a struggle with legislators and regulators over insurance and other issues.
But critics of companies like Lyft and TNC behemoth Uber were not so happy with the CPUC ruling. Taxi companies and their regulators led the charge: Despite a host of requirements the commission created as the cost of TNCs doing business in California, these were nowhere near the regulatory burden that taxis had to contend with in San Francisco and other cities, they said. The biggest complaint: The state was not saddling the Lyfts and Ubers with the same stringent insurance requirements that taxi firms must meet under local regulations.
The TNC industry has portrayed these protests as the loud protectionist rumblings of an obsolete industry. But now, nine months after the commission’s decision paved the way for ride-service upstarts to purloin large chunks of cab business, the home state of the most prominent ride-service companies may be on the verge of levying significantly more rigorous insurance mandates, either through legislation, the regulatory process or both.
A stern letter that CPUC President Michael Peevey sent last week to UberX, Lyft and three other TNCs serves as a sign of just how precarious things have gotten for the industry in California. The letter threatened to revoke the companies’ licenses unless they prevented drivers from operating at five California airports. Not only did TNCs fail to obtain the necessary permits to serve the airports, Peevey wrote, but the vast majority of drivers flaunted CPUC regulations by not displaying required insignias on their vehicles. In addition, some drivers could not provide proof of insurance, and on two occasions at San Francisco International, operated without a valid driver’s license.
Peevey expressed his “personal disappointment and concern about this behavior.”
Uber was less than contrite: “We have spent countless hours with airport managers and their staff to help develop requirements that are aligned with CPUC regulations and embrace the spirit of ride-sharing,” company spokeswoman Eva Behrend said in a statement. “The tone of the majority of these conversations has been mutually respectful and productive. It’s unfortunate the CPUC is not allowing the airport process they designed to proceed by allowing ride-sharing companies to continue working with California airport authorities on their permitting process.”
(Update June 17: A representative for Uber said at a state Senate committee hearing today that it needed to do a better job of informing drivers of the insignia requirements. But she also said drivers do not like to identify themselves as working for TNCs because of harassment from taxis. We have also heard this, especially from Lyft drivers, who frequently remove the trademark mustache from their cars for the same reason.)
But the airport kerfuffle could prove to be a mere skirmish compared to other regulatory battles brewing around an industry that has expanded globally with startling rapidity. On June 6, Uber announced it had raised an additional $1.2 billion in investment capital to up its valuation to $18.2 billion.
Sacramento Takes a Whack
On Tuesday, the Senate Energy, Utilities, and Communications Committee heard two bills intended to inject a stronger dose of regulation in the world of TNCs, especially around insurance.
The TNCs offer drivers $1 million in commercial liability insurance, the same requirement as what San Francisco taxis must carry. But TNC coverage is excess insurance, ostensibly triggered only at the point where the personal policies of TNC drivers, using their own vehicle, after all, stop paying. The TNCs contend that drivers’ personal policies should be the insurer of first resort. But both the insurance industry and the state Department of Insurance have now taken the position that this set-up is based on a fiction, contingent on the erroneous view that drivers’ personal insurers will be happy to or at least tolerate paying claims for individuals who drive commercially for TNCs, an activity that has not been factored into the price of their policies. If it is a fiction, though, it’s one that makes TNC insurance less expensive, because it assumes drivers’ own policies will pick up at least some of the liability cost for accidents.
Uber, Lyft and Sidecar, another TNC, all insist drivers’ personal insurers have paid claims for accidents occurring during a paid ride. The insurance industry says that’s because the drivers’ insurer didn’t know the accident happened on a TNC call.
The insurance industry is attempting to dismantle this two-tier TNC coverage by backing AB 2293, sponsored by Assemblymember Susan Bonilla (D-Concord). The bill, which does not set specific coverage amounts, would require TNCs to advise drivers that their personal insurance may not provide coverage during TNC work. It would also force the companies to carry primary insurance, like taxis do, and defend drivers against lawsuits for loss or injury when providing TNC services. The bill would also extend the time that drivers are insured to when they have their apps open but have yet to accept a call, so called “Period 1.”
In a statement, Uber called the bill “a back-room deal by insurance companies and trial attorneys to prematurely force the ridesharing industry to fit their special interests. The bill allows insurance companies to escape their liability for services they’ve already charged ratepayers, and helps trial attorneys work the system to ensure they get the largest payouts possible.”
(Update June 17, 1 p.m. The energy committee forwarded AB 2293 to the Committee on Insurance. The bill does not contain specific amounts of required coverage, but that is where the debate appears to now lie. At the hearing, representatives for Lyft and Uber said they support a number of the bill’s requirements: that their insurance be primary, that there be a written disclosure to drivers of TNC insurance limitations and that the period of coverage now extend from app on to app off. However, as an official analysis of the bill states, the TNCs contend that requiring $1 million in coverage for the period before a driver accepts a call would “kill their business model and service.” So the TNCs have proposed an amendment that would set a requirement of just up to $100,000 in insurance, which is what Uber and Lyft offer now for this period. Committee Chair Alex Padilla seemed to push the bill’s sponsor, Susan Bonilla, to forward the bill with those requirements. But she said, “I can’t abandon the reality that catastrophic things do happen and that $100,000 isn’t going to be enough … What happens after that is exhausted?” Bonilla did, however, say that she is “committed” to treating Period 1 with more flexibility than in the subsequent times a driver will have to covered. Interestingly enough, Kara Cross, General Counsel for the Personal Insurance Federation of California, said Uber told her in negotiations that they can’t acknowledge that Period 1 is commercial activity, because that could come into play in the lawsuit against them by the family of Sofia Liu, the 6-year-old killed in San Francisco on New Year’s Eve, by an UberX driver.
Update 6:34 p.m. Uber’s Eva Behrend, in a response to Kara Cross’s comment, said, “That’s patently false.”)
A second bill, AB 612, sponsored by Assemblymember Adrin Nazarian (D-Los Angeles), is backed by the Taxicab Paratransit Association of California and would legislate requirements closer to what local taxi companies labor under: mandatory drug and alcohol testing of drivers; closer monitoring of DMV records; mandatory criminal background checks; driver fingerprinting; and the banning of anyone convicted of a number of crimes, from burglary to credit card fraud to obstructing a peace officer. The bill also stipulates TNCs must have a preventive maintenance program for driver’s vehicles, and that all vehicles involved in TNC work must be registered with the CPUC, with an official decal affixed to every bumper.
A provision that would have required TNCs to cover vehicles around the clock was removed from the bill before the hearing.
Uber, naturally, is not a fan, calling the proposed legislation “a flagrant attempt to stymie innovation and competition by an antiquated industry. It is an obvious play by the taxicab industry to kill competition and limit consumer choice … “ Backers of the bill, the company said, wanted to “make it impossible for companies like Uber to operate.”
William Rouse, the president of TPAC and general manager of Yellow Cab in L.A., said the legislation is necessary to police companies that are plain out of control. He pointed to the violations at California airports as an example.
“There is not a single jurisdiction, whether inside or outside the U.S., where the TNCs actually follow the letter of the law,” he said. “This is the new world order, where these companies just routinely, habitually thumb their nose at the law in every single city where they operate.”
(Update June 17, 1 p.m. The committee voted to remove all but the drug and alcohol testing and background check provisions from AB 612. Representatives from San Francisco International Airport spoke in favor of the bill.)
CPUC Puts the Hammer Down
TNCs are also under the gun from the CPUC’s proposed modification of its original TNC decision. These new regulations, if approved, could significantly increase the companies’ insurance costs. The modified decision is scheduled to be heard on July 10 or after.
The proposal, released last Tuesday, makes no bones about clarifying the issue of whether drivers’ personal insurance would cover claims related to TNC accidents.
“A driver’s personal automobile policy is no way required to provide coverage or the duty to defend for TNC services,” the commission wrote. Reinforcing that stipulation, the commission states TNC policies “shall provide exclusive coverage, and assume all liability and the sole duty to defend, at dollar one,” which would prohibit the TNCs’ reliance on excess insurance. The proposal does say that a driver’s insurance can be used to cover TNC accidents, but only if it is “specifically written for the purpose of covering transportation network services.” And those policies do not currently exist.
Like AB 2293, the latest CPUC proposal also extends the time that drivers are insured to Period 1.
The UberX driver who struck and killed Sofia Liu in San Francisco was reportedly in this interval between calls, so was not covered by Uber’s policy, a limitation not widely known at the time. Subsequently, both Uber and Lyft announced they had closed this gap by offering up to $100,000 in coverage for drivers in the app on-and-waiting time. However, this won’t be good enough under the CPUC’s proposal, which appears to simply extend the $1 million insurance requirement to this period.
Uber and Lyft have also added $50,000 in collision insurance, and Uber offers $50,000 in comprehensive coverage (fire, theft and such). These are all contingent, however, on drivers having bought the same coverage on their personal auto policies. The CPUC’s proposal gives TNCs no such leeway, making collision and comprehensive mandatory regardless of a driver’s having purchased it on his own. Finally, the commission also wants to require $5,000 in coverage for medical payments related to injuries resulting from an accident. Insurance Commissioner Dave Jones is supporting the proposed CPUC changes.
TNC Arguments Against
When the CPUC first floated the expansion of the mandatory $1 million coverage to include Period 1, Uber argued it could spur drivers to “(keep) the app open at all times, regardless of the drivers’ intent to accept a request for transportation service … solely to obtain the benefit from the increased insurance.” Uber also speculated that drivers not engaged in TNC work might turn on the app “immediately following an accident in order to try to secure the potentially significant financial benefit of the higher limits.”
Lyft had similar objections: “(A) TNC driver could forget to close the app and be considered to be ‘providing TNC services’ in the middle of the night when the car is parked on the street and the driver is sleeping, or when the vehicle is being driven by another household member, or when it is being used to transport a driver’s child to soccer practice.”
Kara Cross of the Personal Insurance Federation of California says TNCs can guard against drivers gaming the system this way by monitoring their acceptance rates, tracking who has the app on while not accepting rides.
But Stuart Nelson, the president of Point West Insurance, a property and casualty insurance broker in Sacramento, says the CPUC’s mandatory collision coverage could invite fraud. “You could damage a car personally and then say it was damaged during a drive,” he says. “I could have this pre-existing damage and then claim it happened as an Uber driver, and Uber has to cover it.”
TNCs Would Pay More
Nelson, Kara Cross, and Jerry Sullivan, who runs an insurance brokerage business, all say TNCs will pay more for insurance if the CPUC changes go through.
“People who write livery are prepared to write the kind of exposure these guys will have,” Sullivan said. “But it’s going to cost them 30 to 35 percent more than they are now.” He said that increase only takes into account the greater expense of extending the period of time drivers are covered — the TNCs might incur additional increases for the additional collision and comprehensive insurance. Nelson thinks requiring TNCs to offer one-size-fits-all collision coverage to every driver could be a significant extra cost, because “there’s no way to properly insure the risk. We won’t know if we’re insuring a 1974 Volkswagen Bug or a Ferrari.”
The taxi industry, for its part, is still not happy with the CPUC, because the proposed changes would not go into effect immediately, but after the current TNC policies expire or one year from the effective date of the decision, whichever comes first.
Jerry Sullivan said he was in discussion with Lyft about 18 months ago to broker insurance coverage, but that the company balked when he quoted them a price for primary coverage from Lloyds of London. “They didn’t want to pay the price,” he says. “That’s not how they designed their business model.”Related