Uber and Lyft are two of the most popular "rideshare" or car-hire services. But how does automobile insurance work when you drive for Uber or Lyft? Whose insurance will cover a car accident that occurs when the driver has the app on and is waiting for a ride request, has accepted a trip and is on the way to the pick-up, or is driving a passenger? Does the driver's carrier step up, or the company's, or both? Do the answers vary depending on whether there’s injury or just property damage? Do the answers vary by state? And who would an injured Uber or Lyft passenger make a claim against? Read on to get the answers.
Uber and Lyft are "rideshare" services that compete with taxis and more traditional car transport services. Uber and Lyft don’t own or operate cars, and go to great lengths to not treat drivers as employees; they prefer to treat them as independent contractors. This classification is critical to the companies’ avoiding responsibility for accidents or damage that happen when drivers are working: Independent contractors are normally responsible for the results of their own negligence, whereas an employer usually covers the consequences of an employee’s carelessness. (Learn more about employer liability for car accidents.)
It's unclear whether or not these rideshare companies can continue to shield themselves behind the "independent contractor" argument, especially in the face of legislative efforts to have drivers classified as employees. In California, for example, a law known as "AB5" is meant to protect Uber and Lyft drivers (and other so-called "gig workers") and make it more difficult for companies to argue that rideshare drivers and deliverypersons are not employees.
When Uber and Lyft began operations, they faced an enormous problem concerning their drivers’ insurance coverage: Most of the drivers did not have commercial policies. Instead, they had garden-variety personal policies, all of which exclude coverage when the vehicle is being used for commercial purposes. It’s easy to see why: The insurance company extends coverage (sets the premiums) based on its assessment of the risk of an accident and a claim (the higher the risk, the higher the premium). Risk of a claim is considerably lower when the vehicle is used for personal use, as against being used to make money (the sheer number of miles and hours on the road go way up when a vehicle is used commercially). So, when someone needs to drive for work, they normally need a commercial policy—whose premiums are much higher than those for personal policies. Uber and Lyft drivers would be nicely covered if they bought commercial policies, but the premiums are quite high and few drivers buy such coverage.
How Insurance Companies Understand Ridesharing
In the world of ridesharing and insurance, a driver’s time is divided into three phases, or periods. (A driver who has the app closed is not in "driver mode.") Insurance coverage differs depending on when the accident occurs, as explained below.
Period 0: The app is closed.
Period 1. The driver has the app open, and is driving around and waiting for a nibble.
Period 2. The driver has been matched with a rider and is on the way to the pick-up.
Period 3. The rider is in the car and the period ends when the rider gets out.
Let’s suppose now that an Uber driver causes an accident and injures someone else, either the passenger or a third party; and that property damage is also involved. The injured people make a claim on the driver’s personal liability insurance policy, asking the driver’s carrier to cover them; and the driver makes a claim to his carrier under his collision policy, to take care of the property damage to his car. But the insurance adjuster discovers that the car was being used to transport an Uber passenger, which is a commercial use not covered by the driver's personal policies. The adjuster denies the claims. What’s more, the driver’s policy will probably be cancelled, because the driver was violating the terms of the insurance policy (that he use the car only for personal trips, not commercial ones).
This result is a disaster for everyone involved. The parties injured by the driver must resort to suing the driver personally, and it’s a safe bet that most Uber and Lyft drivers aren’t flush with cash to cover medical bills and expensive property damage. The driver himself must repair or replace his car at his own cost. Surely there’s a better way to handle this outcome?
In response to the bleak result just explained, some insurance companies, in some states, stepped up. No, they didn’t revise their policies to include working as a Lyft or Uber driver as "personal use." Instead, they followed their play book by offering additional coverage—at an additional price. A ridesharing endorsement, covering liability and property damage to the driver's car, is much less expensive than commercial coverage, but it’s not available in all states, nor does it cover you in all periods (some cover only Period 1).
Understand that without this endorsement, even if you’re just trolling and waiting for a match, your personal insurance carrier will consider you to be engaged in commercial activity—and it won’t cover you.
Uber and Lyft recognized that the endorsements offered in some states by some insurance companies were not sufficient to protect their drivers. So they offered insurance of their own, but it’s of very limited value and it comes with a nasty surprise. Here’s how it works.
Period 0: When drivers are in their vehicles but are not logged into the Uber or Lyft app. The driver is not in so-called "driver mode," so the driver's own personal car insurance coverage will apply to any accident that occurs, and Uber's or Lyft's insurance coverage will play no role.
Period 1: When drivers are logged into the app, but have not yet accepted a ride request. Uber and Lyft provide liability coverage for any accident that is the fault of the driver if the driver's own insurance doesn't apply. This is third-party insurance; it covers only losses sustained by others who were injured or had their property damaged. It does not cover the Uber or Lyft driver's own injuries or vehicle damage. This liability coverage pays:
From reading the above, you might naturally conclude that your worries are over—Uber and Lyft will take care of it, right? Well, not exactly. The coverage just explained is “contingent” coverage. That means that it will step up only after you’ve made a claim on your own policy first (Uber and Lyft won’t even give you the benefit of their policies until you prove that you have your own insurance). So here’s what you’ll be facing:
But here comes the nasty surprise for drivers who don’t have the benefit of a ridesharing endorsement: Because you’ve been driving commercially, and have made a claim on a personal policy, you’re in violation of your policy, and the company will probably cancel your insurance. That’s not the result you wanted. And to make matters worse, if the damage and injuries surpass the rather modest policy limits offered by Uber’s and Lyft’s insurance, victims can always sue you for the excess.
Laws in some states vary the rules just described. In California, for example, carriers can’t offer contingent liability insurance. This means that California drivers must either buy a commercial policy or a ridesharing endorsement for their personal policies.
Periods 2 and 3: When the driver has accepted a trip/ride, until the rider gets out. Uber and Lyft provide liability coverage in the amount of $1 million. So, this liability coverage would apply to injuries sustained by a customer who is riding in an Uber or Lyft car, whose driver causes an accident. It would also apply to injuries and vehicle damage sustained by anyone who is hit by an Uber or Lyft car when the ridesharing driver is found to be at fault for the accident. But again, the liability coverage won't cover injuries sustained by the Uber or Lyft driver.
As explained above (Period 1), drivers who have endorsements will see any claims go first to their own carriers, with the Uber & Lyft policies kicking in if the damage amounts exceed the policy limits of the driver’s personal policy.
There is some good news, however, when it comes to damage to the ridesharing driver’s car, regardless of whom or what caused the underlying incident. Unlike the situation in Period 1, in Periods 2 and 3 Uber’s and Lyft’s collision and comprehensive policies kick in. But once again, this is "contingent" coverage, which means that it will work like this:
What happens if an Uber or Lyft driver is hit by an uninsured or underinsured driver in an accident that is not the fault of the ridesharing driver? Uber offers a policy for such incidents in Phase 3 only, with a limit of $1 million.