Panel Summary: Risk, Liability, and Insurance in the age of MOD
Laura Fraade-Blanar, RAND, Moderator
Greg Kildare, Norfolk Southern (formerly of LA Metro)
Allison Frey, King County
Michael Day, Aon
The panel was part of SUMC’s MOD Sandbox Innovation and Knowledge Accelerator Workshop in Seattle-Tacoma on May 14, 2019. The session began with Moderator Laura Fraade-Blanar providing a backdrop of the importance of insurance for MOD projects. She also touched on some of the questions surrounding insurance, particularly who is responsible and what levels are needed.
To help further set the stage, the panel discussion was framed around these central themes:
- What’s the risk of a major event happening and the likelihood that it will occur?
- What exposure to liability are you willing to accept?
- How much data is needed to establish a curve to measure the likelihood of a major event?
(5 billion miles of travel are needed in order to detect a 20% difference in fatal accidents.)
The discussion began by clarifying the difference between insurance versus indemnity. Insurance helps to insulate a company or in this case a transit agency against claims. On the other hand, indemnity is the transfer of a liability in a contract that would otherwise not exist. Allison Frey of King County underscored the importance of insurance by citing the extent of King County Metro’s transit portfolio, the 13th largest transit agency in the U.S. with 150 million annual passengers. Frey views her team as not the “no” department. Rather, they are there to help the agency understand the risks and exposure and serve as a guide.
Among the panelists, there was a general theme that insurance for MOD-related projects was not business as usual. While incidents related to MOD public-private partnerships tend to be rare, when they do happen, the costs can be huge. Who should bear those costs, the private shared mobility operator or the transit agency, is something that is still being learned. And, since liability is done on a state-by-state basis and California and the Pacific Northwest do not have tort caps, the resulting costs could run far beyond the insurance coverage of a shared mobility operator.
Transportation Network Companies (TNCs), an increasingly common partner with transit agencies, would argue that insurance typically follows the vehicle, but in doing so the coverage may be underwhelming and not sufficient to cover a major accident. If a serious injury or death were to occur, they would not necessarily be able to cover the costs of, say, a $40 million lawsuit. While the transit agency may not be directly held liable given that it contracted with a third-party mobility operator, that would not necessarily stand up to public opinion. Complicating things further, TNCs would also argue that they are not the employer of the driver because their role is to match a driver and vehicle to a passenger. In fact, there is an incentive for TNCs to provide as little training as possible because the stronger the relationship follows a traditional employer-employee arrangement, the more liable TNCs could ultimately be held. Herein lies the grey area around MOD and insurance and liability: TNCs will not enter into a contract that breaks the model of them being more than a software application of matching drivers to passengers. And, while TNCs are happy to provide indemnity, they will not accept responsibility.
One potential solution is for public agencies to mandate higher insurance coverage from third-party shared mobility operators. King County Metro did just that with Via for their MOD service. The more insurance that the third party operator can bring to the table, the better it is for the agency. However, this will also raise the costs of the services, as noted in LA Metro where they required under the Sandbox grant that Via carry higher insurance coverage.
King County follows a risk-value bell curve—which is used to evaluate the liability and the incremental risks that can be taken under any contract. Given the lack of tort cap in the Pacific Northwest, the question remained who would assume liability once the initial coverage was depleted. While a shared mobility operator might be willing to agree to more coverage and assume some additional liability to obtain a contract, they will not open themselves to unlimited liability, especially for smaller contracts. In the case for Via in Seattle, Via increased its liability coverage, and in a catastrophic incident, the liability would then turn to King County Metro, who had purchased coverage for costs beyond the coverage provided by Via.
In a marketplace where insurance premiums continue to rise—attributed in part to distracted driving and smartphones —who pays these premiums and at what level is something that needs to be further discussed along with policy implications. Ultimately, someone needs to bear the risk, and given that TNCs are not going away anytime soon, the lessons learned from MOD projects like these can help inform this process. At the end of the day, the two parties will have to come together and share these costs. This will inevitably raise the costs of the program. Other options include increasing the costs of MOD contracts to cover these higher insurance costs, requiring insurance coverage in the contract, purchasing coverage for the provider, or operating the MOD service with transit agency employees who fall under the agency’s coverage. Of course, requiring or purchasing higher insurance coverage will also increase the cost of the service, so striking that balance between insurance coverage and cost is important.
Indemnity was also discussed during the panel. “Indemnity is your own pocket; insurance is your credit card.” A contract without indemnity specified means everyone is held responsible for their own actions. When indemnity clauses are entered into a contract, then the liability is shifted from one person to another. However, even when those liabilities are specified in a contract, if the responsible party cannot pay the damages, then those could come back to others listed in the contract. That’s where insurance comes in—to pay. But increasingly, more and more exclusions are being inserted into to policies. For this reason, it is crucial to get the indemnification arrangement right.
Since transit agencies are government entities, they are often required to provide the highest duty of care to their passengers. Hence, the legal obligations owed to passengers may exceed those of the TNCs or other service partners. Damages are also dependent on the injured person’s income, the number of kids, medical costs, and other factors, so costs vary very widely.
These issues are still being worked out and many questions still need to be answered but the important lesson for agencies is to have insurance to cover reasonable exposures. Insurance companies also need to respond better to new technology solutions, and additional regulatory control would also help the process. Pilot partnerships, such as the MOD Sandbox, can help inform a way forward over the long term.
Laura asked the panel to ponder what we will be talking about in five years on this issue.
Allison hopes to see additional insurance products that cover agencies’ financial interests and thinks we will be dealing more and more with autonomous vehicles.
Greg suspects that there will be more taxes or regulations on the industry that could impose insurance requirements. He added that the uncertainties of today around whether TNC drivers are employees will be clarified in courts and legislatures. If courts determine TNC drivers are employees, then the insurance industry will respond accordingly.
Michael ended with the idea that insurance is a social need but must operate at a profit. Costs are underwritten to risks, and claims can be large, so companies will make business decisions accordingly. This could be an area for government involvement to ensure that the interest of public agencies and the traveling public are met.