Hot Topic: Re"visiting" the sharing economy

A primer on the insurance issues surrounding lodging sharing companies

Background

Beginning in the early 2000's, social technologies enabled the emergence of new business models that capitalized on collaborative consumption. Today, the term "sharing economy" covers a wide range of digital platforms and offline activities. While there is no uniform definition for the "sharing economy," it appears to consist of four broad categories: (1) redistribution of goods; (2) increased usage of durable assets; (3) exchange of services; and (4) sharing of productive assets. eBay and Craigslist are examples of the first category. The second category includes car rental services such as Zipcar or Car2Go, bicycle rental or sharing companies and ride services (such as Uber, Lyft and Sidecar). The second category also includes lodging sharing companies such as Airbnb, HomeAway and Couchsurfing. The third category includes companies such as Task Rabbit and Handy, which allow users to sell services while connecting with other users in need of those services. The fourth category includes services such as communal offices or educational platforms that focus on sharing information in order to promote production rather than consumption. In this IREG Update issue, we will focus primarily on lodging sharing companies.

Risks of lodging sharing

Lodging sharing companies, such as Airbnb, HomeAway and Couchsurfing, provide online platforms that connect renters or guests with "hosts," including homeowners and tenants renting out all or some of their living space for short term rentals. These platforms pair renters looking for a cheaper option than a traditional hotel to homeowners or tenants that are often trying to get some extra income to help cover the costs of maintaining their property. The risks associated with renting out your home, or a room inside your home, are multi-faceted.

First, are the regulatory risks. In many cities, local zoning ordinances prohibit operating short term rental properties. These ordinances attempt to minimize the "hotelization" of neighborhoods. Some cities have imposed strict sanctions, reporting requirements, rental caps and taxes on these rental activities. The second risk for hosts is of property damage. Just this week, news stories emerged about an Airbnb guest suspected of stealing $35,000 worth of property from a San Francisco home. Host liability is a third risk of partaking in this sharing economy. By inviting guests into their homes, hosts open themselves up to potential liability in the case of any injuries to the guests or damages to the guests' property.

While most properties involved in lodging sharing are covered under the host's homeowner's insurance, traditional homeowner's policies are designed to cover owner-occupied properties or second homes that are either used exclusively by the family, or leased on a long-term basis. However, the vacation or short term rentals arranged by sharing economy companies are generally considered business or commercial activity which is not covered under a traditional homeowner's policy.

In the US, Airbnb has attempted to address this issue by offering its hosts free coverage under a general commercial liability insurance policy, covering up to $1 million. However, this coverage is secondary, so hosts are expected to first make claims through their personal homeowner's policy—the same policy that likely would refuse to cover the activity. In fact, there have been many instances of hosts losing their homeowner's insurance when the insurance company discovered that their insureds were "doing business" in their home.

Opportunities

There appears to be a lack of consistent information flow between hosts and insurance companies. Due to fear of backlash from insurance companies, hosts often do not volunteer information about their lodging sharing activities. If personal lines insurance companies are forced to pay for some of the risk of these lodging sharing business activities, all homeowners premiums will rise. Insurance companies can help protect themselves by asking policyholders and potential policyholders about any possible hosting activities, in the hopes of capturing more truthful answers.

On the flip side, consistent information needs to be provided to hosts as to what constitutes business or commercial activity and what activities would be permitted under their personal policies. Some companies interpret the exclusion to include any short-term rental activity. Other companies have set a cap on the amount of rental income hosts can receive before falling under the exclusion. If "occasional" use as a rental is permitted, what constitutes "occasional" use? Given the inconsistent interpretations, it is likely that regulators will eventually step in and give guidance to the industry in order to protect all insureds.

Lastly, opportunities exist for companies offering new, hybrid products. While a true commercial policy would certainly cover lodging sharing risk, for many hosts such coverage would cost more than they receive in part-time rental income. While insurance underwriters are often hesitant to underwrite new types of risks without years of data to back up their actuarial estimations, the lodging sharing market is primed and ready to see some truly well-priced innovative products. Home Away has begun offering hybrid insurance through CBIZ Insurance, specifically tailored to operate as a commercial policy when the home is being used as a vacation rental, and a personal homeowner's policy when used as a primary residence. Similar products could be introduced to address situations where hosts occasionally offer a portion of their home for rent, while maintaining it as their primary residence as well.

Conclusion

Online lodging sharing/short-term rental services have been around since the mid 2000s and show no signs of slowing down. It is important for hosts to understand the legal and regulatory landscape that these companies are operating under, and for insurers to make certain that they are protected from claims they have intended to exclude. As regulators sort out how best to deal with this emerging market, insurance companies can play a role by developing new products and helping to shape the regulatory landscape. Look for future IREG Update issues to address insurance challenges and opportunities related to other categories within the "sharing economy."

ICYMI ...

Noteworthy links from the past two weeks

General

  • AM Best previewed the action at the National Association of Insurance Commissioners August 13-18 meeting [Best's Insurance News & Analysis] (subscription required)
  • Senators continued to express their dissatisfaction with the Financial Stability Oversight Council (FSOC) process for designating non-banks as Systemically Important Financial Institutions [Law360]
  • FSOC's research arm questioned the National Association of Insurance Commissioners' stress testing standards for insurance companies [Best's Insurance News & Analysis] (subscription required)
  • The federal Government Accountability Office said that US state insurance regulators need to do a better job coordinating their efforts with their international counterparts [The Hill]
  • The NAIC moved forward with its efforts to address cyber security in the insurance industry [Business InsuranceCaptive Insurance Times] (subscription required)
  • Florida's state CFO hired a new insurance consumer advocate [Palm Beach Post]
  • The Federal Reserve and FDIC told AIG and Prudential that they had to improve their SIFI "living will" plans required by the Dodd-Frank Act [Wall Street JournalBloomberg] (subscription required)
  • The NAIC released the second volume of its insurance department resource report [NAIC]

Life & Health

  • The federal Department of Health and Human Services reported that increased competition helped keep healthcare costs down [New York Times] (subscription required)
  • The Obama administration has asked state insurance regulators to keep health insurance rates down [WisBusiness.com]
  • Experts said that major healthcare mergers are likely to draw intense antitrust scrutiny [Law360]
  • The battle over the US Labor Department's proposed fiduciary duty standard continued with many state policymakers coming out against the proposal [BNA]
  • The federal Health and Human Services Office of Inspector General issued a report on the performance of co-op health plans created under the Affordable Care Act [InsuranceNewsNet.comLaw360]

Property & Casualty

  • Regulators continued to question insurers' use of big data to set premiums through "price optimization" [BNA]
  • The Association of Bermuda Insurers and Reinsurers announced that Florida's Hurricane Catastrophe Fund has purchased $1 billion in reinsurance coverage [Orlando Sentinel] (subscription required)