What Insurance Policies Do Marketplace (On-Demand) Companies Need?Insurance Explained
The on-demand or marketplace company model works by taking a service—such as transportation, food delivery, or dog walking, to list a few examples— and using technology to connect independent service providers with customers.
With consumers valuing fast, simple, and efficient service delivery solutions more and more, the on-demand economy is rapidly growing, attracting 22.4 million customers annually, who are spending $57.6 billion on their services. In fact, over 40% of the US population has used the services of at least one marketplace company.
The prospect of replacing traditional models of providing services makes marketplace companies extremely attractive to venture capital firms. Rideshare industry leader Uber raised $24.7 billion in investments and their main competitor Lyft raised $5.1 billion.
Evaluating the Risks Marketplace Companies Face
The pace of growth, reliance on technology, and the business model of working with independent contractors cumulatively create a relatively untested and unknown legal and regulatory landscape for on-demand businesses and the marketplace business model in general.
This exposes marketplace companies to several unique risks, making a good risk management solution crucial for on-demand businesses.
Trust and Safety
89% of consumers believe the marketplace model is based on trust between providers and users, which is why ensuring mutual trust and safety between the company, users, and service providers is so vital for the growth of any marketplace company.
To secure this level of trust, on-demand companies must assume responsibility for fraud prevention and verify user/contractor identity and credentials.
Marketplace companies give service providers access to their platforms, allowing them to interact with the customers directly. This means that the company needs to manage risks of fraud on both ends, ensuring that customers receive the services they’ve paid for while also protecting the providers from chargebacks and fake users.
However, since under ideal circumstances, every on-demand transaction would be as close to immediate and frictionless as possible, the window for detecting and stopping fraudsters can be limited.
Additionally, given the fact that marketplace companies rely on independent contractors to provide services to clients, it can be difficult to control the outcome of these services. Service failures occur when the company fails to meet all its contractual obligations, explicit or implied to the customer. This can range from poor service performance to missing deadlines or even causing physical or property damage to the customer.
Physical damages are a considerable threat to on-demand service businesses. Even with advanced vetting procedures, quality control, and HR procedures, accidents are practically unavoidable. Since the company’s employees or contractors are usually in close contact with customers and their property, marketing companies face a considerably higher risk of physical damage or injuries than most other types of technology companies.
Taking all this into consideration, it’s clear that marketplace companies face a difficult task of establishing a high level of trust and safety in their ecosystem through ensuring smooth customer experiences and absorbing a large amount of risk themselves. Finding the right balance is crucial and the right risk management solution is an essential piece of the puzzle that can give companies the necessary confidence and security to focus on growth strategies.
A vital component of the marketplace company model is worker classification. Marketplace service providers are typically classified as independent contractors rather than full-fledged employees. This means that the company doesn’t have to pay payroll taxes, overtime, and minimum wages to the contractors who provide services in their name. Additionally, it means that, as of yet, certain types of insurance, such as employment practices liability insurance (EPLI) and workers compensation aren’t considered as a necessity by some marketplace companies.
The struggle to classify on-demand workers as independent contractors received a considerable boost recently, with the Department of Labor (DOL) releasing a letter confirming that a certain virtual marketplace company’s workers are to be considered as independent contractors.
To determine whether the workers are economically independent contractors, the Department’s Wage and Hour Division applied its six-factor balancing test:
- The nature and degree of the potential employer’s control
- The permanency of the worker’s relationship with the potential employer
- The amount of the worker’s investment in facilities, equipment, or helpers
- The amount of skill, initiative, judgment, or foresight required for the worker’s services
- The worker’s opportunities for profit or loss
- The extent of integration of the worker’s services into the potential employer’s business
While this letter can only be used in a court of law by the specific business that requested it, it’s still an encouraging sign for on-demand companies. The next expected step in the fight for worker classification in the gig economy is for the agency to take formal action based on this letter and issue official guidance or regulation using the same reasoning.
Highly-Publicized Examples of Insurance at Work for Marketplace Companies
- Uber agreed to pay $20 million to settle the class-action lawsuit filed by their drivers, claiming that they have been misclassified as independent contractors. See: Uber agrees to pay drivers $20 million to settle independent contractor lawsuit
- Three women who alleged that they were sexually assaulted by their Lyft drivers sued Lyft over claims that it misrepresented the safety of its rides to the women and the general public. See: Lyft sued for not keeping passengers safe
- Nine people injured by electric scooters filed a class-action suit against startups Bird Rides Inc. and Lime — as well as the manufacturers Xiaomi Corp. and Segway Inc. — accusing them of gross negligence, claiming the companies deployed their scooters in a way that was certain to cause injuries. See: As Deaths, Injuries Pile Up, So Do Claims Against Electric Scooter Firms
Recommended Coverage for Marketplace Businesses
The fact that the on-demand industry is growing so rapidly, along with the somewhat vague legal frameworks that support this model of doing business, give marketplace companies a unique risk profile.
Because of this, it’s crucial to have a very well-rounded and complete insurance program in place to protect your company from the myriad risks and possible claims that can befall it.
General Liability Insurance: Before considering more advanced insurance products, most businesses first need to secure a general liability insurance policy. This is doubly true for marketplace companies since independent contractors performing services are usually in close proximity with customers or their property, exposing them to possible bodily injury and property damage claims.
Technology Errors & Omissions Insurance: Litigation stemming from dissatisfied customers is proving to be expensive and there’s a lot that can go wrong in the course of providing an on-demand service. A technology E&O policy would respond to pay any legal fees, damages, and settlements that stem from allegations of failure in a company’s technology or during the provision of professional services. Given the reliance of marketplace companies on technology and the potential for service failures, having the right technology E&O policy should be a crucial part of their risk management strategy.
Cyber Liability Insurance: Marketplace companies face serious cyber risks, considering that these businesses very commonly operate and connect with their customers via mobile applications. Cyber liability insurance is crucial in helping the company deal with and recover from data breaches or cybercrimes. A good marketplace cyber policy will provide both first party and third party coverage. This would include paying for any lawsuits and costs associated with the breach itself, as well as paying for computer forensics, PR management of the fallout, the costs of notifying third-parties affected by the breach, and victims’ insurance policies as well.
Directors and Officers (D&O) Insurance: A D&O insurance policy is designed to protect the company itself as well as the personal assets of officers and directors from lawsuits stemming from any alleged breach of fiduciary duty, misrepresentation, or mismanagement. Investing in the right D&O policy is a crucial part of any company’s management liability program, providing the security blanket needed to make tough decisions and the confidence to successfully run the business without putting their personal assets at risk. Additionally, a requirement to purchase D&O insurance will typically be written into any funding contracts with VCs, as they will require a seat on the company’s board of directors and want to know that their personal assets will be protected.
Key Person Insurance: This type of insurance would respond to protect your company in the unfortunate event that a key contributor dies or is incapacitated and unable to perform his or her vital company role. Key person insurance is designed to cover any losses stemming from such a situation and will provide a financial cushion to weather the loss and eventual recovery.
Intellectual Property Insurance: The on-demand marketplace industry is disruptive and technology-reliant, which makes IP litigation a distinct, and very expensive possibility. Intellectual property insurance would protect the company by paying for any legal costs arising out of infringement claims filed against it, as well as paying to advance any claims the company has filed to protect it’s IP.
Commercial Crime Insurance: A commercial crime insurance policy protects your company from losses arising out of dishonest acts, whether they are committed by employees or third parties. Unlike most other commercial policies, it has nothing to do with protecting the company from potential lawsuits, but rather reimburses any losses suffered. Employee theft, third-party fraud, forgery, and robberies are some of the potential risks that this policy would cover.
Employment Practices Liability Insurance (EPLI): EPLI will cover any legal costs for accusations related to issues such as wrongful dismissal, harassment, discrimination, and other employment-related claims.
Workers Compensation Insurance: Workers comp will cover the medical costs and any lost earnings if an employee is injured or becomes ill at work. As more and more on-demand contractors are seeking employee rights and as their classification as contractors continues to be challenged, EPLI and workers compensation coverage will become increasingly important for marketplace companies.
If you’re a marketplace company or any other type of technology company looking for expert guidance in putting together the right insurance program to protect your high-growth startup, don’t hesitate to reach out to our brokers at any time.
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