As the Dallas ridesharing startup Alto Experience Inc. was preparing last November to launch service, one of its co-founders, Will Coleman, had a seemingly minor item on his to-do list: Get insurance to cover claims of sexual assault. At least one specialty broker that he engaged told him finding coverage would be easy enough that the broker could get back to him the following week. Yet by March of this year, Alto was insuring itself against sexual-assault claims after more than 60 insurers either priced policies prohibitively high or told Coleman’s representatives that sex-assault coverage was too risky for them to provide at all.
“They could see a change in the market in the previous six to nine months,” Coleman says of one of the several brokers he used for Alto, which launched in January as a safe source of rides for women. He founded the company with a friend, Alexandria Halbardier, who now serves as its chief customer officer.
Many big-name insurers have stopped offering any form of sexual-assault coverage to ridesharing companies because large claims they’ve paid have made it too risky, experts say. “It’s called ‘burning the tower,’” says one insurance executive who works with large companies and carriers but has no ties to Alto. “Think about the assault cases you’ve heard about, and then consider that most never become public. Ridesharing has been a large-scale industry for perhaps three or four years, and claims payouts have already burned though the metaphorical tower of premiums they’ve paid.”
Uber and Lyft have both had issues with driver background checks because of their aggressive pursuit of expansion, says Brendan Helt, a Pittsburgh account analyst at Research Underwriters, one of the brokerages that worked for Alto. “They have become very lax in this area, which is why we see these sexual assault news stories coming out all the time.”
Neither Uber nor Lyft responded to repeated requests for comments before each went public earlier this year. Companies typically avoid media interviews during a federally mandated “quiet period.” But Lyft’s prospectus for shareholders, which went live March 1, gives a window into an enormous surge in its insurance spending over what the document calls “auto-related incidents.”
Gaps for the Companies’ Drivers
Uber and Lyft both tout the insurance they provide drivers, including up to at least $1 million in coverage for injuries or other damage their drivers cause to other people. Both adopted these policies after years of criticism about what some felt was inadequate coverage. Even their latest policies may have gaps for the companies’ drivers, an analysis by legal publisher Nolo shows.
For assault victims, both commercial and personal auto policies generally exclude coverage for the use of a vehicle for illegal acts. That type of limitation is found among most types of insurance, even employment-related practices liability coverage, or EPL, which covers sexual harassment.
“If the harassment results in a physical assault, it will probably be defended as a mixed claim on an EPL policy,” says Rachelle “Shelly” Glazer, a Dallas-based partner at Thompson & Knight. “The injury from the assault will probably not be covered.”
“It’s nearly impossible for transportation network companies to obtain new coverage inWill Coleman, Co-founder, Alto Experience Inc.
Some policies cover companies for negligently hiring or supervising employees who commit sexual assault, according to Ernest Martin, partner and chair of Haynes and Boone’s insurance recovery group. “These include commercial general liability and directors and officers policies.”
Lyft’s prospectus does not break out how much it has spent, if anything, on sexual assault claims from passengers. What is curious is a chart estimating total reimbursement amounts Lyft owed insurers at the end of each of the last three fiscal years, for future claim payments carriers may make for Lyft’s auto-related incidents, such as injuries and property damage.
Lyft in October 2015 began insuring its own auto risks, obtaining outside coverage that meets state regulatory requirements and then reimbursing carriers for claims payments out of a pile of money, called “reserves,” that Lyft deposits into a subsidiary. Based on unsettled claims both that Lyft knew about and that it didn’t, its reserve obligations totaled an estimated $20.6 million in January 2016, SEC filings show. By December 2018, those obligations had grown by nearly 40 times, to $810.2 million, even after the company paid a combined $335.8 million in claims reimbursements over those three fiscal years.
Granted, the total number of rides Lyft provided quarterly grew more than sixfold, to 178.4 million, over that time. But add the amount Lyft paid in claims in 2018 alone ($220.9 million) to the amount it owed at year’s end on future claims, and you get $1.14 billion—which is more than it brought in via revenue ($1.06 billion) the previous year.
The surge in Lyft’s auto insurance costs seem stranger still considering its drivers are contractors. The law is unsettled on whether companies are liable for actions of contractors they’ve hired, according to Bryant Greening, attorney and co-founder of LegalRideShare, a Chicago personal-injury firm focusing on cases involving Uber and Lyft. “Different courts rule differently,” he says.
When Greening’s firm sues the ridesharing giants over sexual assaults, the companies’ general liability insurers sometimes provide coverage and sometimes the companies pay for their own defenses, he adds. “There doesn’t seem to be any rhyme or reason about who’s responsible.”
The upshot for ridesharing startups such as Alto is that sexual-assault insurance will remain scarce for the foreseeable future. Part of the issue is that ridesharing dates to Uber’s founding in March 2009. That’s not much time in the best of circumstances for insurers to compile reliable actuarial tables, which show the probability that they will have to pay claims in a given time frame.
With insurers still feeling the sting of sexual assault claims payouts at Alto’s cohorts, the Dallas shop will land coverage down the road only by showing it can avoid the problems that have plagued its field. “Unless you’ve already had insurance, it’s nearly impossible for transportation network companies to obtain new coverage in this space without having been in the business for several years,” says Coleman, using regulators’ term for ridesharing. “The insurance companies have told me, ‘Until you can show us data that demonstrate something different, our numbers will be from the other guys and so we can’t insure you.”
Alto is up to the task, Coleman says. Having raised $14.5 million in venture funding, the company employs its drivers, who undergo what he calls “rigorous” background checks and drug testing, along with three days of training that includes a safe-driving course, he says. The nearly 100-employee business tracks its vehicles’ speeds and uses interior and exterior cameras that can detect distracted driving.
Coleman and Halbardier aim to grow Alto’s Dallas operation over six to eight months, use that achievement to raise more money, and expand to additional cities late this year or in early 2020.
Uber last September introduced new safety features for both passengers and drivers, such as the ability to communicate through the Uber app without providing their phone numbers. Lyft allows passengers to show their locations to their family and friends, and its prospectus says it is investing in technology to improve safety.
The flip side is that negative reputations can take a long time to wear off, assuming they ever do. CNN in 2018 reported that 103 Uber drivers had been accused of sexual assault or abuse. This past January, the network said an internal Uber memo concluded the company’s internal investigators were struggling with overwork and low pay while juggling nearly 1,200 cases a week.
That doesn’t mean ridesharing’s giants can’t overcome their past mistakes. Companies have pulled off similar feats before. It does mean that neither they nor small players like Alto can expect the public to cut them much slack if they have persistent safety issues going forward. Should that happen, the road to redemption won’t be long and it won’t be winding. It will be a dead end.