'Gig Economy' Guarantees

The company does not provide logistics or courier services, and the company is not a logistics carrier. It is up to the third-party courier or logistics provider, courier or vehicle operator (collectively, the “postmate”) to offer courier services which may be scheduled through use of the software or service. The company offers information and a method to obtain such third party courier services, but does not and does not intend to provide courier services or act in any way as a courier, and has no responsibility or liability for any courier.

See http://bit.ly/1n2Kio0.

Postmates' terms also disclaim liability for both software issues and issues relating to the contracted couriers:

We will not assess the suitability, legality or ability of any third party couriers and you expressly waive and release the company from any and all liability, claims or damages arising from or in any way related to the third party couriers. The company will not be a party to disputes, negotiations of disputes between you and such third party providers.

This disclaimer of responsibility for, and liability resulting from, transactions conducted through the company's platform is typical of gig economy companies and serves to differentiate them from more traditional companies in terms of insurance and liability issues.

However, despite company disclaimers of this nature, users continue to expect the same level of protection that they receive from traditional service providers. Where regulatory and legislative forces have intervened, new business classifications (e.g., “transportation network companies”) and insurance mandates now serve to align those expectations without fundamentally challenging the “platform” characterization of the companies. Without such external intervention, however, gig economy companies may inadvertently find themselves conducting, in effect, unauthorized insurance businesses.

In some instances, regulators have required gig economy companies to purchase (or prove that they already offer) insurance protecting users and contractors from certain risks. However, absent a mandate, companies would be wise to provide certain protections or guarantees regardless. For example, gig economy companies may want to reassure customers that they are protected from:

• Injury caused by poorly maintained rental property;
• Theft or damage to property by contracted service provider. See http://bit.ly/1SkAoL3.
• Injury to pet left with contracted pet sitter. See http://bit.ly/1PdKsPc.
• Damage to goods handled by contracted delivery person.

These are all risks that a customer would reasonably expect to be shielded from when securing services from a more traditional business. In these examples, the business would likely be liable to the customer, whereby such liability would be covered under the business's liability insurance.

Similarly, companies may wish to assure contractors that they are protected from risks that would be covered under business liability insurance:

• Damage to contractors' property by customers. See http://bit.ly/1N9OUx8.
• Liability to third parties resulting from actions of customers or their animals.

Why Provide These Protections?

The business case for providing these types of protections is twofold: First, they are likely to increase the comfort of users; and second, they may increase the volume of business conducted through a company's platform. Failing to offer protection can lead to negative press when misfortune hits and a customer is surprised by the company's denial of liability. (For example, the son of an Airbnb guest who died using a property that may not have been adequately maintained has published a critical account of the event, even though Airbnb made a payment to the family for “humanitarian” reasons.) Offering protections may provide a competitive advantage or be necessary when competing with other companies in the same space that already provide them.

However, providing guarantees or protection for such risks may be viewed by insurance regulators as an insurance transaction that is subject to regulation. This is largely because a company does not control the transaction and seeks to avoid liability for such risks. Insurance is regulated on a state by state basis, and all states require licensure for both insurers (who bear insurance risk) and those who sell insurance (producers). As such, gig economy companies considering offering protections to customers or contractors should first review the insurance laws of states in which they conduct business.

What Is 'Insurance'?

This is especially important as even the very definition of “insurance” varies among the states. In California, for example, “insurance” is defined as “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” See Cal. Ins. Code ' 22.

In New York, “insurance contract” is defined as “any agreement or other transaction whereby one party, the 'insurer,' is obligated to confer benefit of pecuniary value upon another party, the 'insured' or 'beneficiary,' dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.” An event is “fortuitous” if it is “to a substantial extent beyond the control of either party.” N.Y. Ins. Law ' 1101(a).

Both definitions involve the indemnification for loss resulting from an unknown event. However, in interpreting them, courts have applied a different focus to each. In California, the focus is generally on whether a risk is transferred to another party who aggregates it with and spreads it among similarly situated persons, while in New York, courts interpreting it focus on the fortuitous and future nature of the event which triggers the benefit. See, e.g., Title Insurance of Minnesota v. State Board of Equalization, 14 Cal. Rptr. 2d 822, 828 (1992) and Hertz. Corp. v Superintendent of Ins. of N.Y., 520 N.Y.S.2d 700 (N.Y. Sup. Ct. 1897), Petro, Inc. v. Superintendent of Ins. of N.Y., 804 N.Y.S.2d 598 (N.Y. Sup. Ct. 2005).

In general, however, there are exceptions that apply to varying degrees to these definitions. Such exceptions include instances where there is a simple allocation of risk between two parties to an agreement (for example, allocating the risk of damage between a lessor and lessee), where one or both parties can control the happening of the event, where no risk is assumed (e.g., prepaid fee for service arrangements), or where risk assumption is merely incidental to an overall transaction.

Because gig economy companies: 1) are a third party to the underlying transaction between the contractor and customer through their platforms; 2) do not control the actions of customers or contractors; 3) disclaim liability arising out of the underlying transaction and therefore do not have any risk to allocate; and 4) would fight any attempt to assign such liability as a matter of law, the guarantees they offer could be considered “insurance” in one or more states. In addition, because states generally also prohibit “free” insurance and require licensure of those who sell insurance, simply purchasing a commercial policy that provides coverage to customers may not be sufficient to avoid regulatory issues, as the gig economy company may not have an insurable interest in the risks such policies are meant to cover. Companies should therefore exercise care when offering guarantees, whether called “insurance” or other protection to their customers and contractors.

Factors that a gig economy company should consider when developing guarantees include:

• What are the risks from which the company wishes to protect customers, contractors and/or third parties?
• What are the reasonable expectations of contractors and customers?
• What is the potential liability of the company under its stated business model and terms and conditions?
• What liabilities would the company be willing to assume in addition to those in its current business model?
• In light of the potential liability (or lack thereof) of the company, what insurable interest does the company have in the risks for which it seeks to provide protection?
• Can a proposed guaranty be structured as a guaranty of the company's performance of a specific action (e.g., assistance in collecting damages) relating to the losses suffered by customer or contractor (i.e., secondary to the liability of the counterparties to one another)?
• Would providing a specific guaranty alter the nature of the relationship between the company and contractors such that their independent contractor classification may be challenged?
• Can the same protection be provided through means other than a company guaranty (e.g., requiring contractors to be insured and/or facilitating the same)?

Addressing these questions can help a company to determine if offering protection would be considered an insurance transaction or have the unintended effect of repositioning the company so that it operates as a service provider rather than a platform. In short, gig economy companies face a series of dilemmas. Failing to provide protection to contractors could put them at a competitive disadvantage to other companies in their space who offer guarantees. When not liable, providing protection to contractors or customers could be classified as the unauthorized transaction of insurance. Assuming liability in connection with making a guaranty may reduce or eliminate insurance regulatory issues, but may conflict with the company's classification as a platform and lead to other results incompatible with the gig economy business model.

Conclusion

At this time, there is no simple solution, and each company will need to determine its own comfort level until market and regulatory forces develop more fully. There are a variety of structures currently in use by gig economy companies offering guarantees, and new structures will continue to evolve. In developing guarantees, gig economy companies should:

• Consider insurance regulatory issues, as well as market forces and business structure issues, when evaluating options
• Work with appropriate experts, including lawyers, insurance producers, and insurers, to develop a guaranty program
• Educate customers and contractors regarding the protections they do, and do not, enjoy to avoid negative surprises
• Be clear as to the scope of any guaranty provided and its relationship to the company's potential liability
• Make sure insurance policies purchased to protect the company's customers and contractors are structured to include them as insureds
• Consider creative and third party solutions such as working with an insurance licensee to offer optional coverage or assisting contractors in purchasing liability coverage
• Keep abreast of new developments that may affect structures already in place

As the gig economy continues to mature and evolve, regulatory and market structures are apt to coalesce ' and regulatory uncertainty will likely decrease.

Nicole M. Zayac is Counsel at Michelman & Robinson, LLP. She can be reached at 415-882-7770 or [email protected].