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Fri, 21 Dec 2012 18:45:00 GMT | By Gordon Powers, MSN Money

Are you insured for car sharing?

Car sharing may be a great idea, but what happens when something goes wrong?

Gordon Powers, MSN Money

As gas prices continue to climb, the average annual cost of driving even a small car is now somewhere around $10,000, according to the Canadian Automobile Association.

So it’s not surprising that thousands of Canadians carpool to work or school, both to save money and preserve their vehicles. In fact, car ownership is making less and less sense to many people, especially those who live in the city and can bike or grab a bus.

And yet, there are times when having a car — or at least access to one — is still a must. That's why more and more urban drivers are looking at car-sharing services that allow drivers to rent cars by the day, or even the hour.

Unlike a carpooling system, where a few people show up each morning and drive to work together, car sharing involves joining an organization that owns vehicles scattered throughout a city.

Members of Zipcar, for instance, pick up cars from various locations across town and return them to the same spot. You book online or by phone, pay an hourly rate to use the car, and then return it to its designated parking spot when finished.

As a result, there are no worries about financing, depreciation, maintenance, or the price of gas.

But what happens when it comes to insurance coverage when you’re essentially driving someone else’s car? Or what about when someone is driving your own vehicle, for that matter?

Zipcar members are covered for $300,000 for all third-party bodily injuries or property damage. The actual vehicles are covered under a comprehensive collision policy, subject to a damage fee of up to $750 if they're involved in an incident during their reservation.

Realizing the appeal of car sharing, some cash-starved drivers have started renting their own idle vehicles out to those who might need a set of wheels from time to time. 

Generally, your auto policy extends coverage to those driving your car with your permission, as they might with a neighbour using your car to get groceries. But there can be problems if you go beyond that.

Companies like RelayRides have been encouraging people to rent their wheels to others, the same way they might rent out rooms and vacation homes. You set the price and they list your car online, connecting you with drivers who want to rent it – for a fee, of course.

And that really makes it a business, says insurers, who are generally reluctant to cover a claim that results from you using personal vehicles for commercial use.

In fact, insurers have the right to cancel the policy of customers who use their cars for commercial purposes without informing them. At the very least, it would affect your premiums.

Premiums for individual coverage are based on personal, not commercial, use of your vehicle — which makes sense. Putting your vehicle up for rent exposes it to greater risk from weather, traffic and drivers unfamiliar with the vehicle.

RelayRides is well aware of this and has an insurance policy in place to offset the fact that your own insurance company would likely deny a claim in this instance. But whether that would be adequate in the event of a catastrophic accident is a matter of debate.

To complicate matters, several U.S. states have passed laws ensuring that owners aren’t liable for damage when their cars are used for personal vehicle sharing. The same can’t be said for Canada, however.

In California, for instance, car-sharing companies are required to provide insurance equal to or greater than the car owner's coverage. What’s more, car sharing doesn't constitute commercial use of your vehicle as long as the money you earn is in line with the monthly costs of operating the vehicle.

But you live and drive in Canada, of course. Knowing what car insurance here will cover and what it won’t becomes especially important when anyone else is driving your car.

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