Driver liability issues raise questions for car-sharing startups

FORTUNE — When is an Uber driver an Uber driver, and what happens when there’s an accident?

Million-dollar questions like these — and more — are being asked in the aftermath of Sofia Liu’s death. On New Year’s Eve, the 6-year-old was struck and killed by Syed Muzzafar in his gray Honda Pilot as she crossed an intersection in San Francisco’s Tenderloin neighborhood. Weeks later, Liu’s family filed a wrongful death suit against Muzzafar and Uber, alleging Uber was also responsible because Muzzafar was looking for passengers and had the Uber app open on his smartphone.

“Under the law, is the clock ever off? When are these guys deemed to be on?” wonders Ara Jabagchourian, a partner with the Los Angeles-based law firm, Cotchett, Pitre & McCarthy, LLP. (Jabagchourian is not involved with the case.)

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Uber argues its drivers can work whenever they please, a draw for some former cab drivers used to working regular shifts. But drivers — or at least Uber X drivers — should note the company’s insurance policy works similarly. Black car drivers, for instance, are required to have commercial insurance that covers them at all times, whether that insurance is covered by the driver or their employers. Likewise, Uber X drivers are contractors, not company employees, and what their coverage looks like can wildly vary: Some may be covered via commercial insurance because of another employer or because the driver opted for it, but by no means is it mandatory for an Uber X driver to have it.

Instead, Uber has a million-dollar insurance policy covering potential damages like those the Lui family is seeking, but that policy kicks in from the moment a passenger hails an Uber X driver with the Uber app until the moment the passenger is dropped off. And if an accident does happen, the policy either kicks in to make up the difference between what a driver’s personal insurance covers and damages sought, up to and including $1 million; or if the driver is for any reason uninsured or underinsured.

Uber’s competitor, Lyft, offered somewhat similar insurance coverage until this Wednesday when Lyft expanded its scope. The startup introduced collision coverage of up to $50,000, provided Lyft drivers already have personal collision coverage of their own. According to Lyft spokesperson Erin Simpson, several Lyft drivers have previously run into problems with their personal insurance providers regarding accidents once the provider realized they drove for a ride-sharing service. So Lyft’s collision coverage is intended as a guarantee for drivers when they’re on the clock — not a standalone plan. (In addition, Lyft’s new policies now offer coverage up to $1 million for uninsured or underinsured motorists.) Lyft also announced participation in the Peer-to-Peer Rideshare Insurance Coalition, a group of transportation companies — one that includes competitor Sidecar — as well as regulators, insurance providers, and other stakeholders trying to address insurance issues within the space.

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In Muzzafar’s case, Uber argues it isn’t liable because he was merely looking for passengers but hadn’t found one yet. If a user had already hailed Muzzafar and Muzzafar was en route to pick them up, or an Uber passenger was already in the car, Uber’s million-dollar policy would apply, but only then, if the driver’s personal insurance isn’t enough to cover all the damages.

The reality is less clear-cut. “The argument could be made they [drivers] are using the app while they’re driving, and obviously use of cell phone is illegal in California,” points out Jordanna Thigpen, a Los Angeles attorney with Westerman Law Corp. and former executive director of the San Francisco Taxi Commission. Currently, liability as it pertains to a company like Uber largely varies by city or state. And while there remains much to be sorted out, Thigpen argues for balanced legislation — neither lacking, nor stifling innovation — for the ride-sharing space. Says Thigpen: “There’s a reason transportation has been regulated for over 100 years. If you leave mass people to their own devices, well, it’s not a good idea.”