Running a business has inherent risks. A hotel guest falls asleep with the iron on, starting a fire that damages half the building. A baseball fan gets in his car after having several beers at the game and backs into another car in the garage, causing thousands in damage. A taxi driver swerves too late to avoid jaywalking pedestrians, and ends up killing one.
While these are all tragic accidents, they would all likely be covered by business insurance.
But what happens when things like this happen to people participating in the Sharing Economy? Say, a guest you opened your house to through home-sharing service Airbnb starts a fire that ruins most of your house. Or after opening your garage through ParkatmyHouse.com, a drunk person slams into your car. Or you hit a pedestrian while offering rides through a ridesharing service like Lyft or UberX.
Incidents like these are already starting to raise questions about who's responsible for damages in the Sharing Economy. On New Year's Eve 2013, an UberX driver hit a family of pedestrians in a crosswalk and killed a girl. The driver was between UberX rides -- he didn't have any passengers at the time, so the company's insurance didn't cover him. In this case, he was lucky that his personal auto insurance picked up the expenses, but most auto policies explicitly exclude accidents related to business driving. Since the incident, cities are cracking down on sharing services, and some ride-sharing businesses have announced plans to boost coverage for drivers.
But in most of the largely unregulated world of technology-enabled sharing services, an incident or accident could quickly become a worst-case scenario. Why? Because most people who enter the sharing economy don't have any additional insurance protection to ensure they are covered in the event of an accident.
Personal Insurance Policies Don't Cover Business Risks
One of the first things that small-business owners learn is that their homeowner's insurance doesn't cover their business liabilities -- even if they're operating a part-time consulting service out of a home office. Similarly, their personal auto insurance doesn't cover incidents that happen while they're working, whether that means driving to meet a client or pick up a new printer and copier.
But many people in the sharing economy don't think of themselves as a small business -- they're just trying to make a little extra cash by selling their services or renting their space. Without adequate risk management, though, an extra stream of income can quickly become an extra expense. In some cases, it can become a major expense.
Most Expensive Risks in the Sharing Economy
If you're offering services or renting space you own to strangers, you're exposed to the following risks:
- Personal injuries. If you're hit by a car while driving to pick up a fare as part of a ride-sharing service, your personal insurance may not cover you. That could be a problem if you end up in need of medical attention, which can get expensive fast.
- Damage to your property. Opening your home to strangers comes with the risk that they won't treat your possessions as carefully as you do (just ask this guy). Fires, appliance damage, floods and other property damage could easily result from an Airbnb stay gone awry.
- Damage to your customers' property. What happens if your dog chews a visitor's shoes to shreds? Or a dishwasher leak ruins the laptop she was charging? If you were charging that person to stay in your house, you could be responsible for covering the repair or replacement costs.
- Theft. Unfortunately, not everyone is honest. There's always a chance that someone will take advantage of your hospitality. If they do, it's unlikely a homeowner's or auto insurance policy will cover the losses if you invited them onto your property.
- Nonpayment. Even professional taxi drivers have to deal with people who run out on fares. While smartphone apps make it easier to exchange payment for services, it's still possible that someone could stiff you.
- Lawsuits. If someone you serve ends up getting hurt (or pretends to get hurt), he could sue you to recover damages. Whether or not you're actually liable for wrongdoing, you'll have to pay for a lawyer to defend your case. Even cases that are ultimately dismissed without going to trial can easily rack up a few thousand dollars in lawyers' bills, and if you do go to trial, you'll owe much more in court fees, docket fees and possibly a settlement or judgment.
Risk Sharing to Protect Your Revenue
To summarize: the bad news for sharers in the sharing economy is that extra revenue sources can transform into major expenses under the wrong circumstances.
The good news? You can also share your risks so they're less likely to damage your finances. And risk sharing is a well-established field -- it's called insurance. What's even better is that the majority of risks sharers face can be managed with a single, inexpensive type of insurance called a Business Owner's Policy (or BOP).
The basic BOP combines general liability insurance (which covers bodily injury to your customers and damage to their property) and property insurance (which covers theft and damage to your property), and it can be customized with a bunch of add-ons, including commercial auto insurance.
Insurance can't protect against customers who don't pay, but it can pay legal bills if and when an unhappy customer sues over injuries or property losses. Premiums for BOPs start as low as $450 per year, or $37.50 per month -- easily made up by a few customers in most sharing scenarios.
Ted Devine is the CEO of insureon, an online small-business insurance agent.