On September 18, California Gov. Gavin Newsom signed Assembly Bill 5 (AB5) into law, making California the first state to require businesses to hire workers as employees in certain industries instead of using them as independent contractors. It’s a move that’s sure to have reverberating effects on the gig economy.
The law was aimed at companies like Uber and Lyft that rely on a workforce of drivers who use their own cars and carry their own insurance, but it applies to other industries, including trucking, health care and media. AB5 is intended to protect workers who are classified as independent contractors by ensuring they receive benefits like health insurance, paid sick time and workers’ compensation coverage.
Companies in California that rely on a massive workforce of drivers and couriers who, until now, were not classified as employees, are about to enter a phase of major disruption.
Background on the Gig Economy
As the courier, ride-hailing and trucking industries have developed over the last 15 years, a push to use independent contractors has, in many ways, transformed the economy. When a driver who was formerly an employee of, say, a taxi company, became an Uber driver, her work-status classification changed to independent contractor, and she was suddenly responsible for obtaining her own insurance policies.
Alongside the explosive growth of ride-hailing companies, there’s been a proliferation of companies hiring independent contractors as “last-mile” couriers to deliver their packages. Notably, Amazon, which ships more than 5 billion packages a year, and doesn’t own most of the trucks used for delivery, hires small courier “companies” to alleviate its reliance on more expensive shipping options like the USPS, UPS and FedEx.
One of the big problems is that Uber and Lyft drivers rely on their personal auto insurance policies which expressly exclude using a vehicle for work. When these drivers are in an accident, the auto insurer can, and does, deny the claim. That leaves the injured claimant (i.e. the other driver or pedestrian) in a potentially bad situation in which they’re forced to seek renumeration from Uber or Lyft.
Another troubling aspect of this gig economy is that in order to maintain the independent contractor classification of its drivers and couriers, a company cannot mandate driver safety training. So even if a courier has multiple bad claims experiences, the company cannot effectively manage safety.
To cover these claims, companies can purchase “hire and non-owned” liability policies which are intended to cover claims that are either above the driver’s limit, or that name the company to the suit. Ten years ago, these policies didn’t have a significant number of claims. But with the “Uberizing” of the world, the proliferation of drivers, the Amazon effect, more expensive vehicles, poor road infrastructure, rising medical costs and unprecedented high settlements, the cost and availability of these policies has changed dramatically.
What Does the Future Hold?
AB5 will unquestionably disrupt the trucking industry in California and will have a lasting effect on how ride-hail companies do business. And it’s not likely to begin and end with California. As we’ve often seen in the past, California leads the way with progressive legislation like AB5, only to be followed soon after by states like New York and Massachusetts.
So, what are the insurance options for the Ubers and Amazons of the world once all their drivers, couriers, truckers, etc. become employees? When the new law goes into effect on Jan. 1, 2020, they could simply close shop in California. Another option is that they could purchase the vehicles their drivers use and take ownership of auto insurance policies. But with 325,000 Lyft drivers and over 200,000 Uber drivers in California, that would be cost-prohibitive. A more realistic scenario will be a continuation of the hired/non-owned liability coverage to protect companies against the low limits in most personal auto policies.
The bigger concern for these companies will be in buying health, workers’ comp and disability insurance for their workforce, not to mention factoring in Social Security and basic benefits like paid sick time. This will be an area of major change that we will be following closely on the insurance side.
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