Don't risk your car insurance by operating your vehicle as a part-time taxi

Using your own car as a taxi for hire via a smart-phone app—such as a Lyft car in San Francisco, with its trademark on-duty pink mustache (shown above)—might seem like a great idea that is environmentally green and has the potential to add the other kind of green to your wallet. Unfortunately, wannabe hack drivers should beware: Your personal auto insurance might not cover you or your car if you have an accident while you're working at this avocation.

So-called "transportation network companies," or TNCs, including Lyft, Uber, and Sidecar, have sprung up in cities across the U.S., from Atlanta, Boston, Charlotte, N.C., and Washington, D.C., to Chicago, Dallas, Seattle, and San Diego.

"Earn cash with your car," is Uber's come-on for prospective drivers. "You drive every day," Sidecar says, "Why not get paid for it? Offset the cost of your car. Meet new people. See the city in a new way." And Lyft, which sells itself to potential riders as "your friend with a car," woos drivers by promising easy money: "Drivers are making up to $35 an hour plus choosing their own hours!"

Riders make "donations" using their Lyft app, for example, which then pays 80 percent to the "community driver" by depositing earnings directly into his or her bank account each week. If a rider "forgets" to make his donation, Lyft extracts the "suggested" fare anyway by charging his associated credit card.

Lyft Fares are a combination of $1.65 per mile and 20 cents per minute in Denver, for example, plus $1.25 for the pickup and a $1 "trust & safety fee"—which pays for driving record and background checks for the cabbies and $1 million in excess liability insurance to protect riders.

It's all very clever and innovative in today's smart-phone-happy world, where apps have an answer for every problem—like that know-it-all nerd who used to bug you in fifth grade.

But meanwhile, TNC drivers risk losing a bundle on their road to taxicab riches (not that we've ever met any millionaire cab drivers): That million-dollar excess liability insurance covers passengers, pedestrians, other cars, and property, but it doesn't cover injuries suffered by the driver or damage to his or her car-cum-cab if there's an accident.

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Most standard personal auto insurance policies contain a livery exclusion, which doesn't cover losses that occur while you're operating the vehicle to drive paying passengers, according to the California Department of Insurance.

"These TNCs are really a commercial endeavor," says Robert Passmore, senior director of personal lines policy at the Property Casualty Insurers Association of America, a national trade group. "TNCs give strangers rides for a fee, and the drivers are getting paid. That would generally trigger the livery exclusion."

Lyft's website says its excess liability insurance is designed to cover liability "for property damage and bodily injury of passengers and/or third parties," but the first party—the driver—is not mentioned. Too, liability insurance is only one type of coverage. There's no mention here of collision or comprehensive coverage, which would protect the driver's vehicle in a crash or from vandals; personal injury protection or medical payments coverage, which can cover driver injuries; or uninsured/underinsured motorist insurance, which would cover damage to the driver's vehicle caused by another driver who doesn't have enough or any liability insurance.

If you're a TNC driver or thinking about becoming one, you're obligated to report that use of your vehicle to your insurer. (Remember that question on the insurance application about whether you use your car for business, pleasure, or commuting? The correct answer for TNC drivers is "business.")

If you don't tell your insurer about your sideline taxi business and subsequently suffer a TNC-related loss, the insurer is likely to find out and may not pay your claim. Worse, your insurer might cancel or not renew your policy.

If you vehicle is financed and you haven't yet paid off the loan, the lack of insurance could put your auto loan in default, because you're not protecting the lender's collateral against loss according to contract. "Loan agreements require a borrower to maintain proper insurance," says Steven Stapp, president and CEO of San Francisco Federal Credit Union. If a TNC driver gets into an accident and their personal insurance won't cover the damage to the vehicle, the borrower will still be responsible for the cost of the vehicle and paying off the loan, says Stapp.

Meanwhile, The New York Times reported today that Uber is dealing with its own unanticipated liability issues, including a lawsuit alleging that an Uber driver was responsible for the wrongful death of 6-year-old Sophia Liu in San Francisco last New Year's Eve.

What do TNCs say about this? None of the three companies mentioned here responded to our requests for interviews.

So check with your insurer now, before there's trouble. You'll probably be advised to purchase a commercial auto insurance policy, which can be significantly more expensive than personal coverage. That necessary cost of doing business should be figured into your calculation to determine whether being a TNC driver really is the no-cost easy money proposition that the app developers lead drivers to believe it is.

And, uh-oh! You may be wondering now whether you're in similar jeopardy if you carpool with your co-workers or neighbors or give rides to strangers through state and local commuter rideshare programs. Fear not. Those arrangements are specifically exempt from the livery exclusion—something of an exception to an exception—even if you accept share-the-cost payment from your passenger for gas and tolls.

-—Jeff Blyskal

On Jan. 27, this article was updated to include information about how being a TNC driver can also affect your car loan and an article in The New York Times about Uber.

Do you have a question about auto, homeowners/renters, life, or any other kind of insurance? Ask the Insurance Guy by e-mailing your query to MoneyEditor@cr.consumer.org.