Car Sharing Hits Some Bumps In the Road

Carl Spanoghe
Source: Carl Spanoghe
Carl Spanoghe

Carl Spanoghe never planned to be in the car rental business. The project manager for a California software company works from his home in Oakland, so he doesn't use his 2008 Smart Car very often.

Rather than sell it, Spanoghe, 32, joined RelayRides, a peer-to peer car sharing service that brings together owners and renters.

Now Spanoghe rents his cute little car whenever he doesn't need it. He typically makes enough to cover his monthly car payments and insurance.

"It's great because otherwise the car would just be sitting there collecting dust," he said.

Peer-to-peer car sharing is only a few years old and as this new business model expands, it's running into a few roadblocks. Some states are asking questions about liability issues.

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Most insurance companies don't allow policyholders to rent or otherwise use their vehicle for commercial purposes.

Three states—California, Oregon and Washington—have passed laws that recognize car-sharing. These laws prevent insurance companies from canceling an owner's policy if they rent their vehicle this way and require these car-share programs to provide liability insurance acceptable the state.

Insurance companies worked closely with California's legislature on that state's law.

"Insurers wanted this to work," said Pete Moraga with the Insurance Information Network of California. "We knew that this was a trend that was not going away, so our goal was to come up with a law that was advantageous to all parties."

The two big players in the car-sharing market—RelayRides and Getaround—provide a million dollar liability policy for each rental. But this third-party coverage doesn't satisfy insurance regulators in every state.

Last month, RelayRides agreed to stop doing business in New York after that state's Department of Financial Services (DFS) said the insurance provided by the company was "illegal and inadequate."

A consumer alert from the agency warned vehicle owners that under New York State law, renting out their cars this way would violate their auto insurance policy, which would most likely leave them responsible for any damage or injuries that happened during the rental period.

RelayRides said it was "disappointed" with the state's position on this and promises to work with regulators to address their concerns.

The company could face a similar problem in Washington State. The insurance company it uses is not authorized to do business in that state either. And this hasn't gone unnoticed by the state insurance commissioner's office.

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"We support the concept of car-sharing programs," said spokesperson Stephanie Marquis. "Our concern is that consumers be protected should something go wrong. Washington's new car-sharing law is very specific about the type of insurance these programs need. They must use state-approved insurers."

Guy Fraker, founder and CEO of get2kno, a company dedicated to growing the shared economy said this is what can happen when a new business model challenges the status quo.

"There is regulatory reaction to make sure people are wrapped in this cocoon of security – whether they want it or not," he said.

Ready or not, this marketplace is growing

RelayRides is the big player in this new industry. It was started by a Harvard Business student in 2008 and went nationwide 15 months ago. Through its website, vehicles are available for rent-by-owner in about 1,500 U.S. cities.

"There's obviously a demand for this," said Steven Webb, director of corporate communications. "We now have thousands of vehicles that are rented by tens of thousands of members."

Webb said renters can make between $250 and a thousand dollars a month, depending on where they live and how well they market their vehicle.

Getaround is currently in five major U.S. cities—San Francisco, San Diego, Chicago, Portland, Ore. and Austin, Texas—and hopes to expand. It boasts more than 10,000 owners sharing their vehicles.

"It's a great option," said Jessica Scorpio, the company's 26-year-old founder. "You can find some cool cars that you wouldn't be able to find anywhere else, including the BMW 3 and Tesla Roadster."

The company recently introduced an Apple iPhone app that lets members rent on the spot if they choose a vehicle that's specially equipped. The customer can reserve that vehicle for an hour, day or longer, and open it using their smartphone—no key handoff required.

Getaround and RelayRides may seem similar in some ways to Zipcar (now owned by Avis), but the rates are typically cheaper. While Zipcars are relatively new, many of those available through car-sharing services are a lot older.

Possible safety concerns?

Getaround and RelayRides "encourage" owners to keep their cars in good condition, but no one is inspecting these vehicles to make sure there aren't hidden safety hazards.

Both companies also check state records to screen potential renters for major violations. Even so, you never know what can happen when a stranger gets behind the wheel of your car.

Lee Colleton, who works at Google's Seattle office, is a big fan of car-sharing. He rents his 2002 VW Jetta through RelayRides. Colleton doesn't worry about it being wrecked or stolen. He trusts the company-issued insurance policy would take care of that.

Colleton did share with me that one renter, "who seemed like a perfectly nice person," was arrested for DUI while driving his car. He had to pay $350 to get it out of the impound lot, but RelayRides reimbursed him for that.

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What lies ahead?

"This is happening. This is real. It's a new form of mobility," said Susan Shaheen, co-director of the Transportation Sustainability Research Center at the University of California, Berkeley. "I'm confident this is all going to get sorted out, but if it doesn't get done efficiently, it could hurt these companies pretty badly."

Get2kno's Guy Fraker is also optimistic because these ride-share companies are backed by some big names, like Google Ventures and General Motors. If the insurance issues can't be solved at the local level, the federal government may decide to step in, he predicted.

With the growing demand for this service, which is supported by the U.S. Transportation Department, chances are the current regulatory challenges will be nothing more than a minor speed bump.

Evan Goldin, who lives in San Francisco and rents his 2008 Honda Civic Hybrid via Getaround, is happy with sharing his vehicle and hopes to keep doing it.

Goldin says without the extra income he couldn't afford his car. He told me he finds himself walking, riding his bike or taking the bus more often now, so he can keep his car available for rental.

"It's a huge win overall," he said.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.