The New Importance of ‘For Hire’ Exclusions in Personal Auto

Personal automobile insurance policies generally exclude coverage when the insured carries a passenger for a fee. The exclusion is usually not a source of controversy. But with the rapid growth of peer-to-peer transportation networks, the personal auto livery exclusion has caused insurance coverage concerns related to ridesharing networks. It is important for insurers, insureds and other related parties to understand the applications and implications of the livery exclusion.

In a recent case, the Fifth Circuit Court of Appeals evaluated a “for hire” exclusion. While the case addressed a different context, the decision offers a clear statement on the exclusion and shows that courts remain inclined to enforce the plain language of livery exclusions.

In State Farm Mut. Auto. Ins. Co. v. Logisticare Solutions, LLC., 2014 U.S. App. LEXIS 9664 (5th Cir. May 23, 2014), the court held that a “for a charge” exclusion excluded coverage where the driver received payment amounting to more than the reimbursement of expenses. In the case, the insured served as a “volunteer” driver for a non-emergency medical transportation service. After a passenger was injured during a trip with the service, the insurer denied coverage citing policy language excluding coverage “for damages arising out of the ownership, maintenance or use of a vehicle while it is being used to carry persons for a charge.”

The driver argued that the exclusion did not apply to her “reimbursements” and pointed to a previous ruling from a Georgia trial court that the “for a charge” exclusion did not apply because “it did not appear that the parties intended to exclude coverage when the insured was reimbursed for mileage expenses, even if respondent Logisticare profited from the transaction.”

But the decision neither bound nor persuaded the Fifth Circuit. The court emphasized that, while not specifically defined, “for a charge” was not “unusual, technical or otherwise unclear.” Although the Georgia trial court had been persuaded by the parties’ characterization of the payment as “reimbursement” for the “volunteer” driver, the Fifth Circuit looked not to the form of the arrangement, but the substance of the payments. According to the court, Logisticare’s reimbursement system allowed drivers to profit in certain circumstances, and the exclusion clearly and plainly barred coverage “where the driver receives payment … that amounts to more than reimbursement.”

The court further rejected the driver’s attempt to characterize the arrangement as a “share-the-expense” situation, highlighting that the share-the-expense exception to the exclusion “refers only to expenses” and “unambiguously does not apply where the insured receives more than reimbursement.”

The ruling, although not unexpected, offers important guidance on livery exclusions. Personal auto insurers base their coverage and premiums on assumptions about the expected use of the personal vehicle, and the “for a charge” exclusion ensures that insurers are not assuming additional, unintended, commercial risks. As the Fifth Circuit decision demonstrates, courts are supportive of the principles underlying the livery exclusion and are willing to enforce its plain language.

Insurance Coverage and TNCs

This exclusion has driven the concerns regarding insurance coverage for peer-to-peer ridesharing networks. The introduction of transportation network companies (TNCs) such as Uber and Lyft has not only challenged the traditional transportation industry but also generated new insurance questions. TNCs allow individuals to offer “ridesharing” services for a fee through an app-based network but, as many insurance regulators have warned, the livery exclusion in drivers’ personal auto policies may exclude coverage, leaving drivers, passengers and third parties unprotected.

Many policies use language similar to that in Logisticare, excluding coverage when the insured is “carrying persons for a charge,” but other policies use broader language that also excludes coverage whenever the driver is “available for hire to the public.” As demonstrated by the Fifth Circuit in Logisticare, courts have upheld livery exclusions and will enforce the plain language of the exclusion based on the substance of the activity. Peer-to-peer drivers’ use of the ridesharing applications and provision of services will ultimately dictate the applicability of particular exclusions, but significant questions have arisen regarding when a driver is “available for hire” or providing livery services, and how the livery exclusion and other exclusions could shift responsibility between various parties and applicable insurers.

Some state regulators have called for the insurance industry to respond by adapting coverages to address TNCs. TNCs have addressed a few of the potential gaps by obtaining commercial policies and contingent coverages for their drivers. State and local governments, recognizing the impact of “for hire” exclusions in personal policies, continue to develop regulations with a focus on insurance requirements.

It is important for interested parties to understand the personal auto livery exclusion and its impact on the evolving transportation industry.