Don’t Believe the Hype: This Industry is Toast

Last week, I forecasted deep trouble ahead for the Avis-Zipcar merger. To put it bluntly, the bottom line is this: Avis Budget Group (CAR) is getting a money pit; Zipcar (ZIP) is selling its soul.

Avoid it like the plaque!

However, while this particular merger is headed for the breakdown lane, what about the prospects for the growing car-sharing industry as a whole?

According to research firm Frost & Sullivan, the North American car-sharing market could surpass 4.4 million members and boast a value of $3 billion by 2016.

But the downside of these so-called “fleet” programs like Zipcar, Hertz on Demand and Daimler’s Cars2go is the same downside that individual car owners face: It’s expensive to buy, maintain, repair, replace and park their vehicles.

But what if there were a way to bypass these expenses by tapping into a market where car owners already shoulder them?

There is…

Rent My Ride

It’s called peer-to-peer – a service that some analysts see as the next wave in the car-sharing movement.

Companies include Wheelz, Getaround and RelayRides… with the latter being the most well-known. It works like this:

Vehicle owners set their hourly, daily and weekend rates. RelayRides acts as a middleman, or broker, by providing a framework for the exchange, a modest screening of renters and insurance. For these services, RelayRides takes 40% of the rental fee and the rest goes to the owner.

As with Zipcar, the mobile technology interface allows renters to locate, reserve and remotely unlock a nearby vehicle.

It’s the epitome of car-sharing – and sounds pretty good, right?

Not so fast.

Peer-to-peer’s business model is flawed. Fraught with unmanageable risk and naïve leadership, the industry faces significant headwinds…

The Accident Scenario

Generally speaking, insurance won’t cover commercial uses of personal vehicles –like starting up a taxi service on the side. RelayRides is well aware of this and provides $1 million of liability coverage in the event that a driver kills or maims somebody while using a rented car.

The United Services Automobile Association (USAA) and Allstate (ALL) are taking an even harder line. In March 2012, The New York Times’ Ron Lieber reported that each company was “troubled enough by the personal car-sharing movement that they might decline to renew [individual] policies if they found out that customers put their vehicles in a car-sharing pool.”

Their thinking is understandable. Particularly since Lieber followed up one month later by profiling the fallout from one tragic car crash in Boston, which involved a RelayRides renter who died at the scene and injured four others.

Now the owner of the car, her insurance company, RelayRides’ insurance company and lawyers for the injured parties are embroiled in difficult negotiations.

To complicate the issue further, the car owner’s insurance company (Commerce) has accused RelayRides of having a conflict of interest in representing both themselves and the car owner through the car-sharing program.

So if you add your car to RelayRides’ roster, you’d better be prepared for two potential outcomes: Your insurance company may drop you at the next opportunity and you’re on the hook for every penny over $1 million if your renter is found at fault in a catastrophic accident.

And this insurance mess speaks to the wider issue here…

Little Vision = Big Liability

From car owners, to renters, to RelayRides’ own insurance broker, it seems no one has properly thought through the extent of the liabilities they’re signing up for here.

For example, when presented with the scenario of RelayRides’ covering the owner of a poorly maintained car – perhaps to a negligent degree – RelayRides’ insurance broker unwisely told The New York Times: “I’m willing to raise my hand and say, ‘Yes’ to the question of whether the owner will have protection in the event that they’re sued and the allegation is that the car wasn’t maintained.”

He might as well just wear a t-shirt that reads, “Just Sue Me.”

In the case of the fatal crash, RelayRides’ Founder and Chief Community Officer Shelby Clark has said, “We 100% commit to making sure that everyone involved in this tragedy is taken care of as well as humanly possible.”

As well as humanly possible? That could be a lot of dollar signs. I hope they’re prepared for the precedent that this statement sets up for them.

The Insurance Showdown is Coming

My prediction: While car-sharing is an increasingly popular business now, the industry will crash and burn under the crushing weight of insurance pressures and drawn out litigation.

Here’s why…

Its success could pose a threat to auto insurance companies. After all, with more people sharing cars, it means fewer cars are on the road – and fewer individual policies being bought.

Naturally, behemoth insurance companies won’t innovate to match a changing driving climate if they don’t think they have to. So they’ll clamp down by jacking up premiums, providing narrower coverage and threatening to drop car owners who participate in car-sharing services.

That means rental prices will rise and car owners will think twice before adding their vehicles to the pool. Higher prices and less supply – that’s a tough scenario for any business to survive.

Ahead of the tape,

Elizabeth Carney

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Last week, I forecasted deep trouble ahead for the Avis-Zipcar merger. To put it bluntly, the bottom line is this: Avis Budget Group (CAR) is getting a money pit; Zipcar (ZIP) is selling its soul. Avoid it like the plaque! However, while this particular merger is headed for the breakdown lane, what about the prospects...