Posted on Feb 11, 2014

New ridesharing companies like Lyft and Uber are simultaneously revolutionizing transportation and instigating heated legal debates between taxicab companies, local and state officials, insurance companies and, of course, the companies themselves.

The premise of the ridesharing business model is simple: Consumers use their smartphones to request a ride and a rideshare company car arrives within minutes. From there, the transaction is similar to what you’d expect when riding a taxi. The only difference is that payment is conducted solely through the smartphone app.

Rideshare Cars vs. Taxicabs

Predictably, taxicab companies aren’t too thrilled about this new innovation. The main difference between the two is that rideshare companies will only take requests received through the smartphone app, so consumers can’t flag down a rideshare car like they would a taxi.

This key difference is what differentiates taxicab and rideshare companies. Even though they compete for the same clientele, they aren’t the same from a legal standpoint.

Since the 1930s, taxicab drivers have been required by the “medallion system” to pay very high fees in order to lawfully operate. Thus far, rideshare companies have been able to elude medallion fees and this issue has led a group of Chicago cabbies to sue the city.

Furthermore, unlike taxicabs, rideshare companies are subjected to state rather than city regulation. After the Los Angeles City Council issued a cease-and-desist order to rideshare companies, the state of California ruled that they fall under the California Public Utilities Commission’s (PUC) jurisdiction.

This means that as long as they include mandatory criminal background checks and training programs for drivers, safety inspections for vehicles and adhere to a zero-tolerance drug and alcohol use policy as mandated by the PUC, rideshare companies are in the clear.

Accident Liability

A bigger problem that nearly anyone could have foreseen is the issue of accident liability. Rideshare companies have claimed that they are not liable for accidents caused by their drivers because they are merely a “platform.”

As a “platform,” they argue that they merely “allow people to connect” (just like Facebook) which excludes them from liability. For example, if two people arranged a car pool on Facebook, Facebook wouldn’t be liable if an accident occurred. Rideshare companies claim they are no different.

But it’s hard to accept that argument when you consider rideshare companies are directly profiting as they “allow people to connect.” In the past, rideshare companies have required their drivers to have personal insurance that would cover any and all accidents. However, the Department of Insurance has pointed out many policies won’t cover accidents that occur while providing rides for pay.

Currently, rideshare companies’ self-applied label as a “platform” that merely “allows people to connect” is being put to the test in San Francisco Superior Court.

One of Uber’s drivers caused an accident that not only injured the other driver and damaged his vehicle, but also caused a fire hydrant to fly in the air and injure a nearby pedestrian. As a result, Uber and the driver himself are being sued and the driver’s $750,000 insurance policy isn’t likely to cover all the damages. If Uber ends up being held liable in this accident, should other rideshare companies expect the same?


Possible Solution

In an effort to resolve liability issues, Lyft has taken out an insurance policy that takes effect when the damages exceed the driver’s personal policy. Still, it’s hard to imagine that rideshare companies will be able to directly profit off of their drivers without fully insuring them for long.

Before the legalities are entirely settled, all rideshare drivers might also need to obtain commercial licenses, which they currently do not. Some believe rideshare companies should be required to have commercial broker licenses just like limousine companies have.

Rideshare companies are undoubtedly bringing a new element of convenience to the transportation industry. But before they become a mainstay in big cities and small towns alike, there are several legal issues that need to be resolved.

Jill Erin Wellskopf
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Director of Marketing, Hupy and Abraham