Startup liability: Marketplace economy companies face unique risks
Throughout the past year, I have helped place insurance programs for a number of “Peer- to-Peer” or “Marketplace Economy” companies – more appropriately called Technology Enabled Service Marketplace (TESM) companies. The insurance exposures that have accompanied this industry are vast, varied and complex, from Workers Compensation to Crime and Professional Liability. General Liability, however, remains the most common exposure for these companies, due to the numerous types of “jobs” they perform and specifically where those jobs are performed.
General Liability covers bodily injury and property damage caused to a third party due to the negligence of the policyholder (in this case, the TESM startup) as a result of their operations or products. With so many types of services being performed by a variety of workers, TESM companies face unique General Liability risks. For example, these companies schedule and perform cleaning, painting, handyman, manicure, driving, dry cleaning and delivery services, to name a few. Many of these activities take place in your home, your office, at a scheduled location or in a vehicle while they deliver you to a destination (think Uber or Lyft). These exposures are relatively uncontrolled, particularly in the B to C space- (note that B to C with a presence inside the home is a Decline.)
Without a doubt, the TESM economy is great for consumers. Customers can now use their iPhone to have a courier deliver coffee to the office, while busy professionals can schedule dry cleaning drop-offs and working parents can quickly find babysitters or home repairmen. On the flip-side, these types of services can create exposure nightmares for insurance carriers. Why? Independent Contractors.
The majority of TESM companies maintain a business model that utilizes independent contractors to perform the “jobs” that are booked on their software platforms. Insurance companies are slow to adapt to the changing business world and have a hard time classifying these companies, typically labeling them into a “Contractor” or “General Contractor” class, if they are even willing to quote the risk in the first place. While this may not seem like a bad classification, the contractor, or general contractor class, would normally include construction contractors, painting contractors, etc. (Think large construction projects with many different independent contractors working under the direction of a General Contractor that has hired all of them and oversees their activity.) As you can imagine, the General Liability rates for a Contractor are much higher than the rates for a software company that acts as the scheduler of services and payment facilitator. The independent contractors are truly independent and perceived as having a fluid relationship with the market maker.
So what does this mean for TESM companies looking for insurance? A startup company that estimates $500K-$1M in revenue (extremely small for the insurance world) is looking at premiums that can be as high as 10% of their estimated revenue- and that’s just for General Liability coverage. In addition, these policies have to be placed through Surplus Lines carriers, which means local states taxes and fees are added. Furthermore, many of them will include specific exclusions and warranty endorsements which may exclude coverage for certain losses.
Is it all bad news?
Fortunately, the answer is no. It may take a while before the industry gains a better understanding of the TESM business model and can better-mitigate the unique risk management issues these companies face, but there are solutions and in time, those options will increase. The small niche of insurance markets that currently provide coverage for these companies should expand as more TESM start-ups develop and premium prices become more competitive. TESM companies should also consider the availability of Surplus Markets for immediate coverage needs. Critical however, is the employers’ understanding and classification of independent contractors and employees in order to ensure they are covered from GL and other liability claims. Click here for additional information on obtaining TESM coverage, or contact your WGA representative to learn more.
About the Author
Michael Sullivan is an Assistant Vice President in the Property & Casualty group at WGA. His responsibilities include negotiating and placing specialized insurance programs with a variety of clients in the Technology Life Science, Energy and Clean Technology industries.