Given their phenomenal growth over the last couple of years, sharing economy startups have become an important part of the modern economic ecosystem. Their social and economic proposition is attractive: share resources (and earn environmental brownie points in the process) and make friends to expand your social circle.
For example, Airbnb, the popular site that is giving hotels a run for their money, enables site users to rent out spare bedrooms. In the process, the site claims to foster friendships and connections in addition to extra income for users. Ride-sharing services, such as Uber and Lyft, are based on a similar model of offering rides to strangers to generate income.
But there is a problem.
Sharing economy startups and sites are attractive to users because they reduce transaction costs and friction in similar industries, such as hotels and cabs. The startups themselves have low operational costs because they do not have inventory costs associated with traditional businesses. Uber does not own its cars, and Airbnb does not own homes.
The problem with this approach is that this reduces their liability risk, even as it simplifies operations. After all, how can you hold a platform responsible for personal car accidents and home disasters? This pushes the startup into a regulatory gray zone, where business roles, responsibilities, and liabilities are unclear.
Who is responsible when something goes wrong?
You ride a car or share homes with a stranger because you trust them. Generating that trust is the platform’s responsibility. But what happens when that trust is broken or misplaced? Who assumes liability for the broken trust? Is it the startup who connected you or is the individual responsible for his or her own behavior? Answering those questions has implications.
The liability argument extends to workers in sharing economy startups. The startups refer to them as “contractors.” Apart from unshackling the startups from numerous financial obligations, that designation also frees them from liability risks for contractor misdeeds.
For example, is Uber responsible for its driver’s problems, or do they have a personal responsibility toward customers?
On the vendor side, these problems crystallize into an insurance problem. Currently, insurance companies are not good at quantifying or underwriting trust networks because of unclear delineation in responsibilities.
As a result, most sharing economy startups do not offer insurance to users offering services on their site. This becomes a problem when their vehicle is damaged or compromised due to customer behavior. For example, Airbnb began offering host protection insurance after a man’s home was trashed by guests.
As sharing economy startups gain street cred and become popular with mainstream consumers, these issues are increasingly becoming important. Here are two cases that illustrate the liability problem for sharing economy startups.
While online dating is hardly comparable to the sharing economy, the essence of the plaintiff’s argument in this case is representative of the trust problem that is common to the sharing economy and online dating startups.
Michael Picciano from New York City got some tough love on online dating site OKCupid. The Queens resident was swindled out of more than $70,000 by a user on the site.
Sixty-five-year-old Picciano exchanged messages with Bruce Thompson (who posed as “genuineguy62″) on the site for more than 10 days before shifting to personal email. Not long afterward, Thompson asked Picciano for money to start a computer parts business. Picciano complied by transferring approximately $70,000 in three installments to Thompson.
Lest you wonder if Picciano was off his rocker, the man had sent forged checks worth $100,000 to gain Picciano’s trust. The police did not find fingerprints on the forged check. Nor have they been able to locate the software that was used to print the forged checks.
Picciano ended up suing OKCupid for breach of trust. In his suit, he claimed that the site is lacking “even minimal screening of the site’s subscribers and, therefore, deceptively creating the impression that the site was safe…when in fact, it was a trap for the unwary.”
The suit was dismissed by the court after OKCupid pointed to its safety tips, which clearly advise users from sharing personal or professional financial information with strangers.
Uber’s India problem
In its rapid journey to becoming the world’s second-most valuable startup in the world, Uber has had more than its fair share of controversy. Mostly, the company has sidestepped responsibility for its problems by blaming regulatory agencies and government authorities. A rape case in India finally forced the company to take responsibility for its actions.
Uber has been in India for some time now but the site has maintained a fairly low-key profile. But the ride-sharing startup blazed into public consciousness late last year, when a woman passenger accused an Uber driver of alleged rape. To make matters worse, the 32-year-old driver was a repeat offender who had previously been booked in a rape case. He also did not have a driving license issued by the Delhi Transport Authority. The company, which has been accused of playing fast and loose with government regulations, suddenly found itself in hot water. Since then, it has established background checks for drivers. Such checks are absent for commercial transportation licensing programs in India.
The woman’s lawyer filed a lawsuit in San Francisco that described Uber’s service as a “modern day equivalent of electronic hitchhiking.” Uber’s driver problems are not restricted to India. Two Uber drivers in Chicago have been charged with sexual assault as well.