When you hand someone the keys to your car, you're handing over
your car insurance coverage, too.
- If your family member or friend or colleague causes an
accident in your car, it is your insurance that pays -- and your
rates that rise in response.
- Once your insurance hits its limits, the borrower's policy
kicks in.
- If he or she doesn't have a policy, then you as car owner are
on the hook for the damages that insurance doesn't cover.
Clearly, your finances are at risk if you let the wrong person
drive your car.
Or rent it.
Liz Fong-Jones probably didn't expect to be the subject of a
New York Times article
when she rented out her 2003 Honda Civic Hybrid through
RelayRides
, but that is exactly what happened when her car was involved in a
serious accident.
Though a $1 million liability policy stands between Fong-Jones
and financial harm, her case highlights the insurance issues that
can arise from renting out your car or even lending it to friends
and family.
Renting your neighbor's car
Zipcar now has over 700,000 members and company-owned cars
parked in neighborhoods from coast to coast, allowing
spur-of-the-moment, hourly rentals for its subscribers.
Peer-to-peer renter RelayRides takes the concept a step further,
allowing private car owners to rent out their idle vehicles.
The ground-breaking concept is also breaking ground in the
insurance world as well.
Policies for private vehicles typically exclude coverage for
business use. For example, if
you deliver pizzas
, you need a commercial policy. But rather than asking its client
car owners to buy commercial policies, RelayRides instead covers
the car itself up to its actual cash value and provides a $1
million liability policy.
The problem is when damages top that amount.
The driver of Liz Fong-Jones' car was killed, and four people in
the car that he hit were seriously injured. The police found him at
fault, so RelayRides and its insurance policy will be responsible
for the damages. While a final number is not yet available, the
total could easily go over the $1 million limit of the policy.
So who pays then? Nobody knows for sure.
Alex Benn, vice president of business development and trust and
safety at RelayRides, acknowledges that there is no way to predict
who will be sued. Benn points out that the company's insurance
policy covers the cost of legal defense above and beyond the $1
million limit, so Fong-Jones should not have to worry about legal
fees.
And he says he is confident that Fong-Jones will not have any
liability, claiming that U.S law dictates that liability falls
where fault lies, which would clear Fong-Jones.
Insurers don't like risk
This kind of uncertainty makes car insurance companies
unhappy.
Insurers argue that letting strangers behind the wheel adds risk
to the policy, risk they have no way of assessing. Everything from
unknowns about driving records to additional miles being put on the
car increases the odds of an accident. (RelayRides says renters are
thoroughly screened
.)
"Peer-to-peer car sharing services are doing a disservice to
customers by not disclosing they are putting their personal
insurance and perhaps their own assets at risk," says Loretta
Worters, spokesperson at the Insurance Information Institute.
"Customers should be aware that if their vehicle is being used as a
commercial venture, it should be insured with a commercial
policy."
Insurers may threaten to raise your rates, or even cancel your
policy, for participating in car sharing.
"If someone rents their vehicle it would not be covered by their
personal auto policy," says Kevin Smith of Allstate. "Furthermore,
the owner could put their current coverage in jeopardy, as well as
risk being unable to secure auto coverage from our company in the
future."
Even as some insurers have begun to include language
specifically excluding coverage for vehicles used in sharing
programs, California, Oregon and Washington recently passed laws
that prevent insurers from cancelling policies of car owners who
enroll their vehicles in them.
If no money is changing hands
If you're only lending your car, not renting it, the drivers
listed on your policy are always covered with no restrictions.
Typically anyone driving your vehicle with permission is
covered, but some insurers put restrictions on coverage of drivers
not listed on the policy, says Penny Gusner, consumer analyst for
CarInsurance.com. A few of the more common ones are:
-
Drop-down limits:
This policy provision will drop the coverage for anyone not
listed on the policy to the state minimums, even if the user has
your permission. This will often be a dramatic reduction of
coverage.
-
Double deductible:
This doubles your deductible on your collision coverage for any
non-listed drivers. A $500 deductible is now $1,000.
-
No physical damage coverage:
This means that if a driver not listed on your policy has an
accident, your insurer will pay the third-party liability damages
but not to repair your vehicle.
A friend or family member who is living with you or driving your
vehicle on a regular basis should be listed on the policy, Gusner
says. If you have a teen driver, adding him or her to your policy
as soon as he or she gets a license is important.
Even if your policy doesn't have permissive restrictions, as car
owner you are responsible for paying the deductible needed to
repair the car. Even if you were not driving, your rates will
probably rise, Gusner says.
And if the damages exceed your policy limits, the victims could
come after your personal assets. Nothing can stop someone from
suing you.
"Insurance is never 100 percent in any case," Gusner says.
Her advice before joining any car-sharing program is firm: Do
your research. Make sure you're not violating any portion of your
personal auto insurance contract. And, she says, "look into the
insurance that the car sharing plan has in place to make sure it's
financially fit to payout high-dollar claims, if the worst-case
scenario occurred."