Burdensome Regulations on Ridesharing Companies Won’t Ensure Road Safety


Burdensome Regulations on Ridesharing Companies Won’t Ensure Road Safety

New burdensome requirements on ridesharing companies will not do a thing to improve motor vehicle safety. While regulations on ridesharing services are being proposed all across the country under the guise of safety concerns, the real goal of many of these laws is to protect powerful, entrenched interests. Colorado is the first state to enact such a law, and it comes with increased liability insurance requirements for drivers using Uber and Lyft. A properly functioning insurance market protects victims of crashes by providing compensation for injuries and damages. But arbitrarily increasing insurance requirements on ridesharing vehicles without consideration of driving history and technological features does not make the roads safer.

The insurance industry has been adamant that personal auto insurance policies do not cover drivers who use their personal vehicles for commercial services like UberX, Lyft and Sidecar. Insurers have been pushing for state rules that make ridesharing companies or drivers purchase more expensive policies. For example, California enacted legislation last month that imposes one-size-fits-all insurance requirements on ridesharing services. The new rules require primary liability insurance when the ridesharing app is open: $30,000 for property damage, $50,000 per person and $100,000 for death and personal injury per incident. Coverage of $1 million is required once a driver picks up a passenger.

When Colorado’s recent law was first proposed, there was concern over liability coverage during the so-called “gap period”. That occurs when a driver opens the mobile ridesharing app but has not yet agreed to give anyone a ride. Regulators divide the ridesharing experience into three phases. The first phase begins when a driver opens the ridesharing app to look for passengers to pick up. Phase two begins when a driver accepts a match with a passenger and continues until the passenger steps into the vehicle. The final phase is defined as the entire ride until the passenger gets out of the car. Originally, the new rules proposed in California stipulated liability coverage of $750,000 during the first phase, placing a heavy burden on the ridesharing business model.

For a driver, just turning on the mobile app raises insurance requirements. Does this enhance road safety? The evidence on compulsory insurance requirements says “no.” An important 2004 economic study by Alma Cohen and Rajeev Dehejia examined compulsory state auto insurance laws and found that road safety actually deteriorated when states required drivers to purchase more insurance than they would otherwise. When losses are insured against drivers have less incentive to take the necessary precautions to avoid accidents. Economists call this moral hazard.

Moral hazard is essentially a problem of monitoring driver behavior. So, while officials claim that their regulatory goals are to increase safety and make sure ridesharing services are “playing by the same rules” as taxicabs, the actual effect of their rules could undermine safety. Consider the differences in monitoring between ridesharing drivers and cab drivers. The ridesharing service Uber allows customers to rate their drivers. If a driver’s average rating dips below 4.6 then the driver can no longer provide rides. Contrast this with the average 29 complaints per day filed against taxicab drivers in Chicago. While the rogue Uber driver with a hammer makes national press, Chicago’s Department of Business Affairs and Consumer Protection has thousands of cab driver complaints, such as the following one:

“Cab was driving the wrong way down a one-way street, struck a bicyclist and then fled the scene.”

While a full-scale data analysis would make a better comparison between ridesharing drivers and cab drivers, economic theory and evidence of moral hazard suggests that the private monitoring of drivers along with liability not government-mandated insurance policies keeps drivers in check.

While the insurance requirements ensure victims of traffic crashes during the gap period receive compensation for injuries and damages, regulators should pursue a less heavy-handed approach, allowing ridesharing services to voluntarily adopt insurance policies, as they already have, backing up drivers with contingent liability coverage. Otherwise, one-size-fits-all rules could lead to the opposite of what regulators intend: more reckless driving with more injuries and damages overall.