Demystifying Auto Rental Insurance

Rental Cars and the PAP

The first question that many PAP customers ask their agent is this: "If I'm driving a rental car and have an accident where I hurt someone, am I covered?" The simple, direct, and (most importantly) correct answer is: "Yes." The liability insuring agreement of the PAP says that the named insured and his or her family members have coverage for the "ownership, maintenance, or use" of "any auto or trailer."

"Any" is the operative word here. Of course, there are some exclusions, but those come up in rare cases. We will be dealing with the typical, vacation car-rental situation—where the PAP named insured rents a car for a week or so of vacation fun. Consider John and Mary Smith, who have a PAP that covers their 2006 Toyota Prius for liability, medical payments, uninsured motorists, collision, and other-than-collision. They fly to Southern California for 2 weeks of fun in the sun at Christmastime. They rent a car from any one of the myriad of car rental companies, and off they go. On the way to the hotel, John runs a red light and hits another car. John and Mary are unhurt, but the elderly driver of the other car must be taken to the hospital. If that injured driver sues John over his injuries, John's PAP will provide him with liability coverage and a defense. End of story.

The important thing to remember—and for agents to tell their clients—is this: as long as the client has a PAP with liability coverage, he or she has full liability coverage when driving any auto.

The "sticky wicket" of coverage for rental cars pops up in the physical damage area. The rental companies are quick to recommend their own insurance. And why not? (But remember, this is really not "insurance" at all.) On an annual basis, it is very expensive, thus very profitable for the rental company. At maybe $15 per day, many renters don't think twice about the cost ($105 for a one-week rental) and just allow the charge to be rolled onto their bill. But, when that $15 per day is annualized, it comes out to $5475. An annual charge of over $5,000 just for physical damage, just for one car!

But remember: most PAP insureds will have physical damage coverage for that rental car in their own policy. Let's look at the history of how this coverage has evolved over the years.

The Family Auto Policy

Under the old, hard-to-read, "Family Auto Policy" (FAP), nonowned cars (a rental is a nonowned car) were covered for physical damage as long as the insured had physical damage on at least one of his cars. If John were involved in an accident in a rented car, he would pay his collision deductible; the FAP would pay up to the deductible that the rental car company carried on its own policy (usually $1,000 or $2,500); and then the rental company's policy would pay the balance of the damage.

The obvious problem was what if John didn't carry physical damage on his only car? Then, he would be responsible for the rental company's deductible—typically $1,000 or $2,500—not a back-breaking amount, but coming up with it could be a hardship for John, especially when the rental company just rolls the amount of that deductible onto his credit card. After collecting the deductible from John, the rental company's own policy would then kick in.

This arrangement worked well for many years, but was changed when the FAP became the easy-to-read "Personal Auto Policy" (PAP). The rental companies also changed their rental contracts and their own insurance arrangements. More on that later.

The Personal Auto Policy

The first edition of the PAP changed the way that it covered damage to nonowned cars. The authors of that policy moved coverage for nonowned cars out of physical damage and into liability. Thus, damage to a rental car was now covered under property damage liability. The plus for the insured was that he or she no longer had to carry physical damage to be covered for damage to nonowned cars, and there was no deductible. The exposure to the auto insurer was not too bad—again, just the rental company's deductible.

In the above example, even if John did not carry physical damage, he would have been okay under the first edition of the PAP. His policy would cover his responsibility to the rental company (the company's deductible), and he wouldn't suffer any out-of-pocket expenses.

It was about at this point that the car rental companies got smart. They saw that their customers would not incur any out-of-pocket expenses for an accident, so the rental companies dropped the physical damage coverage on their fleets. And they changed their contracts, making the renter responsible for the entire value of the car.

They also made the renter responsible for any income lost as a result of an accident. That is an indirect loss (just like loss of income for a business that is shut down due to damage at its location). And remember, the PAP covers "direct" damage only—another "sticky wicket."

The second edition of the PAP saw coverage for nonowned cars moved back to physical damage (where it still is today), thus requiring PAP insureds to carry such coverage on at least one car and to pay their own deductible in order to have physical damage coverage for a nonowned car. The problem for insurers was a much bigger exposure. Since rental companies no longer carry physical damage on their fleets, the PAP insurer is now responsible for the difference between the insured's deductible and the amount of damage to the rental car—up to the value of the car.

In 1989, an exclusion regarding damage to rented cars was added to the PAP. That exclusion removes coverage (including coverage for loss of use) if the rental company is not allowed by state law or the rental agreement to collect for a loss. Under previous editions of the PAP, the rental company could collect under the named insured's PAP even if the insured was not legally responsible for the loss, such as in the case of hail damage to the rented car. This exclusion was added to prevent the rental company from collecting under the named insured's PAP in such situations.

Auto Rental Contracts

To research this column, I drove to the Dayton International Airport (Dayton, Ohio) where I was able to obtain rental agreements from four different car rental companies: Alamo, Avis, Budget, and National. We will now take a brief look at what each of these contracts requires of the renter.

The Alamo contract uses the words "you" and "your" much like the PAP, meaning the person or persons entering into the rental agreement. In the section on "Loss or Damage to the Vehicle," Alamo tells the renter that he or she must pay for "all damage to … the vehicles, while rented to [the customer]." In addition to direct damage, the customer must also cover the loss of use of the vehicle, the diminished value of the vehicle, towing, and any other miscellaneous charges—even if the customer is not at fault. If the car is a total loss, the customer owes not only the value of the car, but also any towing and administrative charges incurred by Alamo.

After explaining the renter's responsibility under the contract, Alamo goes on to describe what it offers in the way of a CDW. The renter may choose from two different levels of CDW. The first, and most expensive, "Maxi Waiver Saver" removes all financial responsibility for loss to the car from the driver. The contract clearly says that under this option, "Alamo will pay for all loss or damage to the vehicle."

The second level from Alamo is called "Maxi Saver 3000." Here, Alamo agrees to pay the first $3,000 of any damage, with the renter (and thus, the renter's auto insurer), picking up the balance. But remember with this option, the renter must still pay his or her own collision deductible before coverage from the PAP kicks in.

The Avis contract is structured somewhat differently. It first describes the LDW, then outlines the renter's responsibility, should he or she choose not to purchase the LDW. With the LDW, Avis agrees to cover all loss or damage to the car.

In addition to the LDW, Avis also offers the option of a "Partial Damage Waiver" (PDW). Unlike the Alamo contract, where the only partial option is that the rental company pays the first $3,000, the Avis document does not specify any such amounts. It appears that the renter may choose among several offerings, at various costs.

Like Alamo, Avis makes the renter responsible for all loss or damage to the car. Such responsibility is solely the renter's, regardless of who or what may have caused the damage. The renter is also responsible for Avis's loss of use, administrative fees, and towing and storage charges.

Like Avis, Budget first describes the LDW and then moves into the renter's responsibility for the car. Under the Budget LDW, the rental company assumes responsibility for loss or damage to the car, other than the renter's "responsibility" which is specified in the written agreement.

If the renter does not purchase the LDW from Budget, the contract says that the "[renter] will pay [Budget] for all loss or damage to the car, regardless of cause." In addition to the damage to the car, the renter also owes Budget for loss of use, administrative fees, and towing and storage charges. Apparently, Budget does not offer a partial LDW.

Just as the other rental companies do, National makes the renter responsible for the value of the car, plus administrative, towing, and storage charges. Like Alamo, National offers two levels of LDW:

• Loss Damage Waiver: National agrees to pay for all loss or damage to the vehicle.
• Loss Damage Waiver 2: National covers the first $3,000 of damage, with the rest being the responsibility of the renter.

What to Recommend

When asked about rental cars, agents need to be prepared. If the client is looking for the easiest (yet maybe not the cheapest) way to cover his or her responsibility for a rental car, the agent should suggest that they purchase the CDW or LDW from the rental company. Although expensive, it does provide the quickest and easiest way for a claim to be handled. Also, if the client is going to an area where his or her own insurer may not have any employee adjusters, it may save time as it could take a couple of days for the insurer to get up to speed on a claim.

Agents should also review any coverage available under the customer's PAP. Remind them that the PAP does cover damage to the rental car, subject to the customer paying his or her own deductible.

Another important source of coverage is the customer's own credit card. Many credit card companies agree to cover any cars rented with their particular card. The agent should suggest that the customer contact the credit card company to discover its policy.

Finally, the agent should look at the law in the state where the customer is going to rent the car. If the law in that state does not allow the rental company to collect for damages from its customers, then purchase of the LDW is unnecessary.

There are some things in the rental contract that may void any coverage provided by the CDW/LDW. Two of those are:

Use of the car in a way specified as prohibited in the contract—using the vehicle for hire; towing or pushing anything with the car; racing; driving under the influence; or while the car is overloaded.

Use of the car by any unauthorized driver—read that to mean anyone under a certain age or anyone not named on the rental application. Thus, if John and Mary rent a car, but they only give John's information to the rental company, Mary is not authorized to drive the car.