Growing Pains in the Sharing Economy
A recent finding that an Uber driver is an employee rather than an independent contractor has focused attention on the future of the sharing economy.
Whatever that future, observers don’t expect that the sharing economy, with its business models that rely on smartphone apps like Uber’s, will have a significant impact on workers’ compensation insurance.
They are, however, watching to see how state labor commissions, courts and legislatures nationwide will address the employment status of people providing a range of services through technology platforms such as those offered by ride-sharing companies like Uber and its rival Lyft.
“We are very interested,” said Peter Burton, senior division executive for state relations at NCCI Holdings Inc., a workers’ comp ratings and research organization.
“We actively are watching work comp commission decisions as well as legislative decisions.”
But NCCI’s interest in how states will eventually rule on whether workers in the sharing economy will be legally designated as contractors or employees is mostly technical. NCCI wants to stay abreast of matters, for instance, should it need to develop new rates.
So far, there have been few definitive legal determinations on the classification of on-demand workers, and whether app companies linking them to customers must purchase workers’ comp insurance. Consensus may also be elusive.
“It’s going to have to be adjudicated state by state and you are probably going to have all sorts of different opinions,” Burton said.
“Right now it’s still uncharted ground.”
The issue of whether the sharing economy’s on-demand workers should be classified as employees and legally entitled to a range of benefits and expense reimbursements has surfaced before.
“It’s going to have to be adjudicated state by state and you are probably going to have all sorts of different opinions. Right now it’s still uncharted ground.” — Peter Burton, senior division executive for state relations,
NCCI Holdings Inc.
But the topic recently gained increased attention when news stories reported that rapidly-growing Uber — valued at $40 billion — is appealing a California Labor Commission finding that a former chauffeur was an employee rather than an independent contractor as the company classifies its drivers.
The Labor Commission said that Uber could not exist without the work performed by the former driver. It essentially found that Uber exercised enough control over how the driver conducted her work to make her an employee. The ruling requires Uber to reimburse the former driver $4,152 in expenses and interest.
Uber argued that it is merely a technology company that allows drivers and passengers to conduct transportation business. It filed its appeal of the Commission’s ruling to a San Francisco County trial court on June 16.
The California Labor Commission’s decision applies to a single plaintiff. But the case’s eventual outcome, and other ongoing cases including class-action lawsuits with similar allegations against a range of sharing-economy app companies, could substantially impact Uber’s profitability and business model.
However regulators and courts in California and other states decide the employment-classification issue, the overall impact on workers’ comp insurer operating results will not be significant, said Robert P. Hartwig, president of the Insurance Information Institute.
If courts and regulators find that sharing economy companies are employers, then workers’ comp insurers would gain only modest opportunity to write new coverage for workers not currently covered by comp policies, he added.
“It would bring the payrolls associated with tens of thousands of workers into the workers comp exposure base,” Hartwig said. “The vast majority of which is not there right now. That would represent a modest opportunity for some insurers who are inclined to write these.”
Any premium volume growth would be limited because the number of people participating in the sharing economy is “very small,” Hartwig explained. About 7 percent of the U.S. population aged 18 and older has engaged in providing sharing-economy services.
Their participation typically is limited, rather than full time, and mostly conducted to supplement other income, Hartwig added. For instance, about 16 percent of people over the age of 65 have participated in the sharing economy, doing so to earn additional income.
Any new revenue workers’ comp insurers might gain from a group of newly insured workers could be offset by losses, Burton said. Insurers already understand how to rate taxi and limousine companies, but time would tell whether losses for ride-sharing companies differ.
Hartwig also wouldn’t expect significant impact on insurers should labor departments and courts take the opposite position, finding that people providing sharing-economy services are not employees.
Evidence does not exist that workers leave traditional jobs, where they are counted as part of employer payrolls and employers’ workers’ comp insurance exposure base, to exclusively participate in on-demand economy work, he said.
“There would be some very small amount of leakage from the overall payroll base to the extent that some occupations can migrate on net to this online platform, but that leakage is very, very small,” Hartwig said.
While there have been scant definitive rulings nationwide on whether shared economy participants are employees or independent contractors, “in most cases we have seen states leaning toward the side of independent contractor status,” Burton said.
That is consistent with Uber’s position.
In a June 19 press release announcing that it will appeal the California Labor Commission ruling, the San Francisco-based company said six states have found that Uber drivers perform services as independent contractors.
Uber also said that the recent California Labor Commission ruling is contrary to a previous finding by the same body. In 2012 the Commission ruled that a driver performed services as an independent contractor and not as an employee, Uber said.
“It’s important to remember that the number one reason drivers choose to use Uber is because they have complete flexibility and control,” the release states.
“The majority of them can and do choose to earn their living from multiple sources, including other ride sharing companies.”
Suffering losses from 2005’s Hurricane Katrina was bad enough for many businesses and individuals, but to make matters worse for many, certain losses were not covered by their insurance policies.
So said several Marsh experts during a June 17 webinar entitled, “Lessons from Hurricane Katrina, Looking Back, Planning Ahead,” which outlined ways in which Hurricane Katrina, which devastated New Orleans almost 10 year ago, impacted insurance underwriting, business interruption and claims handling.
The first lesson learned: businesses should thoroughly read their commercial property policies before they purchase them, said Duncan Ellis, leader of Marsh’s U.S. property practice. However, far too many find out the hard way what’s in their policies — or not in them — after sustaining major losses from catastrophes and other events.
“That’s the wrong time to find out that you are not covered for something, or that certain conditions do not apply,” Ellis said.
“After Katrina, many of our clients were sorely surprised to learn that despite having windstorm coverage, they weren’t covered for storm surge. Understanding what you are buying really can pay off.”
Ellis and Paul McVey, leader of Marsh Risk Consulting’s property claims consulting practice, outlined a number of “tripwires” in property policies that occurred after Katrina, for business owners to now be mindful of in case of future events.
The goal when dealing with major catastrophes is for insurers and policyholders to work as allies, McVey said. As part of a policyholder’s loss management plan, they should meet with their carrier and agree upon communication protocols and upon each party’s roles and responsibilities after an event. They should determine the appropriate carrier representative with the authority to make decisions on claims.
“After Katrina, many of our clients were sorely surprised to learn that despite having windstorm coverage, they weren’t covered for storm surge. Understanding what you are buying really can pay off.” — Duncan Ellis, U.S. property practice leader, Marsh
“What we see after Katrina, when decisions had to be made as to reinstatement, replacement, mitigation, there weren’t a lot of people involved at [carriers’] mid-management level to make those decisions,” he said. “That put the process on hold to a degree, and some of the things became confrontational. Insureds should make the effort to establish a relationship with an empowered senior claims representative.”
Other policy tripwires that caught businesses by surprise in Katrina that all businesses should now be aware of include:
- Determining the exact definition of special high-hazard flood zones, such as a 100-year flood plain, and how damage within those zones can impact sublimits. Typically within policy sublimits are further internal sublimits for these special zones. For example, if a business has a $200 million sublimit for flood, it is probable that there is a further internal sublimit of $50 million for high-hazard flood.
- Understanding policy definitions that determine whether an event was a named windstorm or a flood, which can impact whether the policy excludes surges from wind-driven water.
- Determining how coverage is typically triggered by civil or military authority and ingress/egress. There have been disputes about whether Katrina claims regarding ingress/egress issues should be paid after politicians told people to stay away from New Orleans, as carriers have argued that those politicians were actually not acting with civil or military authority.
- Determining how “wide area impact” or “idle period” impacts claims.
- Determining whether contingent business interruption coverage extends not only to suppliers or customers, but also to suppliers of suppliers and customers of customers.
- Determining the scope, time limits and corresponding disappearing deductibles within contingent business interruption coverage due to local utility companies’ service interruptions.
- Determining whether deductibles apply by occurrence and/or by location, and whether there are separate deductibles for property damage and “time element.”
- Determining whether costs, such as overtime for contractors rebuilding properties, fall under sublimits or “expediting expenses.”
- Determining what is — and is not — covered under business interruption, and how claim costs may be calculated.
“The property damage piece is very easy to figure out, but business interruption is probably the most misunderstood coverage and probably the most difficult in settling claims,” Ellis said.
“It’s not replacing revenues — it’s replacing profits lost and continuing expenses that the property generates when it’s not operational. For example, a continuing expense could be taxes and non-continuous expenses could be heat, light and power.”
Also often misunderstood is the indemnity period for contingent business interruption claims, McVey said. The timeframe is typically defined as the time to replace, reinstate or repair the property, but businesses should be aware that many variables could impact payment of claims. That’s why it’s so important to discuss these issues ahead of time with their broker or claims representative — particularly before renewal.
Detention Risks Grow for Traveling Employees
It used to be that most kidnapping events were driven by economic motives. The bad guys kidnapped corporate employees and then demanded a ransom.
These situations are always very dangerous and serious. But the bad guys’ profit motive helps ensure the safety of their hostages in order to collect a ransom.
Recently, an even more dangerous trend has emerged. Governments, insurgents and terrorist organizations are abducting employees not to make money, but to gain notoriety or for political reasons.
Without a ransom demand, an involuntarily confined person is referred to as ‘detained.’ Each detention event requires a specialized approach to try and negotiate the safe return of the hostage, depending on the ideology or motivation of the abductors.
And the risk is not just faced by global corporations but by companies of all sizes.
“The world is changing. We see many more occasions where governments are getting involved in detentions and insurgent/terrorist groups are growing in size and scope. It’s the right time for a discussion about detention risks.”
— Tom Dunlap, Assistant Vice President, Liberty International Underwriters (LIU)
“Practically any company with employees traveling abroad or operations overseas can be a target for a detention risk,” said Tom Dunlap, assistant vice president at Liberty International Underwriters (LIU). “Whether you are setting up a foreign operation, sourcing raw materials or equipment overseas, or trying to establish an overseas sales contract, people are traveling everywhere today for so many reasons.”
Emerging Threats Driven By New Groups Using New Tools
Many of the groups who pose the most dangerous detention threats are well versed in how to use the Internet and social media for PR, recruiting and communication. ISIS, for example, generates worldwide publicity with their gruesome videos that are distributed through multiple electronic channels.
Bad guys leverage their digital skills to identify companies and their employees who conduct business overseas. Corporate websites and personal social media often provide enough information to target employees who are working abroad.
And if executives are too well protected to abduct, these tools can also be used to identify and target family members who may be less well protected.
The explosion of new groups who pose the most dangerous risks are generally classified into three categories:
Insurgents – Detentions by these groups are most often intended to keep a government or humanitarian group from delivering services or aid to certain populations, usually in a specific territory, for political reasons. They also take hostages to make a political statement and, on occasion, will ask for a ransom.
In other cases, insurgent groups detain aid workers in order to provide the aid themselves (to win over locals to their cause). They also attempt prisoner swaps by offering to trade their hostages for prisoners held by the government.
The most dangerous groups include FARC (Colombia), ISIS (Syria and Iraq), Boko Haram (Nigeria), Taliban (Pakistan and Afghanistan) and Al Shabab (Somalia).
Governments – Often use detention as a way to hide illegal or suspect activities. In Iran, an American woman was working with Iranian professors to organize a cultural exchange program for Iranian students. Without notice, she was arrested and accused of subversion to overthrow the government. In a separate incident, a journalist was thrown in jail for not presenting proper credentials when he entered the country.
“Government allegations against detainees vary but in most cases are unfounded or untrue,” said Dunlap. “Often these detentions are attempts to prevent the monitoring of elections or conducting inspections.”
Even local city and town governments present an increased detention risk. In one recent case, a local manager of a foreign company was arrested in order to try and force a favorable settlement in a commercial dispute.
Ideology-driven terrorists – Extremist groups such as Boko Haram and ISIS are grabbing most of today’s headlines with their public displays of ultra-violence and unwillingness to compromise. The threat from these groups is particularly dangerous because their motives are based on pure ideology and, at the same time, they seek media exposure as a recruiting tool.
These groups don’t care who they abduct — journalist, aid worker, student or private employee – they just need hostages.
“The main idea here is to shock people and show how governments and businesses are powerless to protect their citizens and employees,” observed Dunlap.
Mitigating the Risks
Even if no ransom demands are made, an LIU kidnap and ransom policy will deliver benefits to employers and their employees encountering a detention scenario.
For instance, the policy provides a hostage’s family with salary continuation for the duration of their captivity. For a family who’s already dealing with the terror of abduction, ensuring financial stability is an important benefit.
In addition, coverage provides for security for the family if they, too, may be at risk. It also pays for travel and accommodations if the family, employees or consultants need to travel to the detention location. Then there are potential medical and psychological care costs for the employee when they are released as well as litigation defense costs for the company.
LIU coverage also includes expert consultant and response services from red24, a leading global crisis management assistance firm. Even without a ransom negotiation to manage, the services of expert consultants are vital.
“We have witnessed a marked increase in wrongful detentions involving the business traveler. In some regions of the world wrongful detentions are referred to as “business kidnappings.” The victim is often held against their will because of a business dispute. Assisting a client who falls victim to such a scheme requires an experienced crisis management consultant,” said Jack Cloonan, head of special risks for red24.
Without coverage, the fees for experienced consultants can run as high as $3,000 per day.
Given the growing threat, it is more important than ever to be well versed about the country your company is working in. Threats vary by region and country. For example, in some locales safety dictates to always call for a cab instead of hailing one off the street. And in other countries it is never safe to use public transportation.
LIU’s coverage includes thorough pre-travel services, which are free of charge. As part of that effort, LIU makes its crisis consultants available to collaborate with insureds on potential exposures ahead of time.
Every insured employee traveling or working overseas can access vital information from the red24 website. The site contains information on individual countries or regions and what a traveler needs to know in terms of security/safety threats, documents to help avoid detention, and even medical information about risks such as pandemics, etc.
“Anyone who is a risk manager, security director, CFO or an HR leader has to think about the detention issue when they are about to send people abroad or establish operations overseas,” Dunlap said. “The world is changing. We see many more occasions where governments are getting involved in detentions and insurgent/terrorist groups are growing in size and scope. It’s the right time for a discussion about detention risks.”
For more information about the benefits LIU kidnap and ransom policies offer, please visit the website or contact your broker.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.