Car Rental Risks and Protection Options

Entering the question "Should I buy insurance when renting a car?" into any search engine will yield well over a million responses. Unfortunately, many of the responses suggest that the answer to this important question is clear and simple. As insurance practitioners know, as with most coverage questions, the answer is not at all clear and certainly not simple. For the purposes of this article, the comments that follow are intended to address the short-term (less than 30 days) rental of a private passenger automobile, for personal (not business) use, that will be operated in the United States, its territories and possessions, Puerto Rico, and Canada. When renting a vehicle other than a private passenger automobile for personal use or any vehicle outside of the above referenced locations, consumers should be advised that most personal auto insurance policies contain exclusions and limitations that will greatly restrict coverage. In such instances, purchasing coverage from the rental provider is highly advisable.

The Perfect Storm for Confusion .... and Anxiety

With so many different answers to this question available on the Internet, is it any wonder that consumers feel such uncertainty over how to respond when the friendly rental car representative skillfully coaches them on the importance of accepting the insurance offer in front of them? Forget for a moment the surprising lack of industry consensus on this issue. Instead, consider the human factors contributing to the unease most consumers experience. Not the least among them are consumers who are not insurance savvy and must essentially assess which of three potential stakeholders they should rely on in the event of an accident—their auto insurance provider, their credit card company, or the rental car provider. Gulp.

While smart consumers prefer to make decisions armed with real insights, it is unrealistic to expect more than a few to know the right questions to ask. What are my risks? What are the differences in the protection provided by each option? Is any protection being duplicated? Triplicated? Which coverage is primary? Add to this uncertainty and angst the insurance misinformation often inserted by the rental car company representative: "Are you SURE you wish to decline? Does your insurance coverage protect you in this state? Sign here to decline this important protection. Now let's go and document the condition of the car. Sign here to agree this report reflects the condition of the car. Have a nice trip." Bigger gulp.

With some proper planning, these questions and many more can be addressed well before the consumer is at the car rental counter. Those who are in a role to counsel consumers can begin by explaining the forms of coverage that will be made available for purchase at the counter. Essentially, rental car providers make the following four forms of basic coverage available.

1. Damage waiver: either collision damage waiver or loss damage waiver (LDW)—in addition to waiving responsibility for collision or theft, this coverage often waives loss of use and other administrative charges not often provided by private passenger automobile insurance policies. Charges for this coverage can range from $9 to $19 a day.
2. Liability coverage available at varying limits: Charges range from $7 to $14 a day.
3. Medical coverage after an accident: Charges range from $1 to $5 a day.
4. Personal effects coverage: Charges range from $1 to $4 a day.

For obvious reasons, consumers who do not own a car are best advised to think three times before declining any coverage made available by the rental car company. Unless care has been taken to purchase named nonowned automobile coverage, those renting cars should always purchase liability protection from the rental car provider, at a minimum. As we'll see, while alternative forms of coverage may be available, those who do not have automobile insurance must proceed with the greatest caution before declining the protection offered by the rental car provider.

For those who own a vehicle and have private passenger automobile insurance, there is strong agreement that accepting the liability and medical protection offered by the rental car provider only serves to duplicate the protection already provided by a personally owned auto insurance policy. Provided the consumer has the benefit of off premises theft coverage provided by a homeowners/renters insurance policy, purchasing this coverage would also only serve to duplicate existing protection. Of the four forms of coverage made available by rental car companies then, it is the decision whether to purchase the collision/loss damage waiver that is most often examined and debated.

Benefits of Purchasing a "Damages Waiver" from the Car Rental Company

Rental car companies do not sell insurance but instead offer to "waive" the costs they will incur after a theft, collision, or other damage to the vehicle they make available for rent. Those advising consumers who own a car with comprehensive and collision coverage that their personal policy will be available to pay for damages to a rental car from theft or collision are correct, but only partially correct. Let's agree that being partially correct is not a good advisory practice.

Rental car companies experience many different costs when a car is damaged or stolen, and those who decline the damages waiver are contractually accepting the responsibility to pay for those many different costs. Following are the risks that are eliminated when purchasing the damages waiver from the rental car company that are often not covered by other protection solutions. As a result, transferring these risks back to the rental car provider by purchasing the waiver is a protection strategy well worth considering.

• Nickel-and-dime claims: Often, minor scratches, dents, etc., can result in damages in the hundreds of dollars and well below the collision deductible on a personal auto policy, resulting in an out-of-pocket expense for those who decline the waiver.
• Loss-of-use costs: Damage that results in the rental company alleging the time it took to repair the car prevented it from earning rental income for a period of time can result in "loss-of-use" charges.
• Before-and-after costs: The costs that arise when the value of a rental car becomes diminished after an accident are rarely covered by traditional personal insurance policies. They can also be significant.
• Extra fees: Purchasing the damages waiver from the rental car provider will also waive "administrative expenses" incurred after a loss. Essentially, these are soft costs incurred after a claim such as storage, claims adjustment expenses, and towing. While these costs are not often very significant, they are also not covered by most personal auto insurance policies.
• Loss settlement disputes: Insurance practitioners well understand the challenges that arise in trying to agree on the value of a damaged car that has been determined a total loss. The cost the rental car company requires to replace the car may be far higher than the actual cash value loss settlement the personal auto insurer will pay.
• Time and aggravation: Among those who opt to purchase the waiver from the rental car provider, the reason most often cited for doing so is the "reduced hassle and peace of mind" factor. Reducing the time and angst of documenting the condition of the car before and after the rental is a big benefit.
• Credit card gotcha: Those who decline damages waivers and experience a claim quickly learn the rental car provider will be applying any uncovered charges to the credit card used for the rental. Purchasing the damages waiver eliminates this risk, which can be sizable.
• New claim activity: Those who prefer to transfer the risk of damage from the rental car company to their auto insurance provider should be reminded that doing so can have an impact on the terms of their personal coverage.

Alternative: Relying on a Personal Automobile Insurer

Especially for those renting a car for many days or even weeks, the cumulative costs of paying for the damages waiver cause many to decline the waiver and transfer the risk of possible damages to the insurer providing personal automobile coverage. Except for a few states, consumers who wish to do so must have comprehensive and collision coverage on their personal auto policy. Consumers should be reminded that claims requiring loss of use, diminished value, administrative charges, and variances in valuation disputes can be costly and are not covered by standard auto policies. Knowing about these risks can help consumers determine if electing to save the cost and self-insure is a risk worth accepting.

For those who decide to transfer these risks to their personal auto insurer, there are at least two national underwriters providing greatly enhanced coverage for damage to rental cars. Unlike insurers offering standard coverage, Chubb and AIG Private Client Group provide coverage for damage to rental cars under the liability (property damage) section of their automobile policy. As a result, qualifying auto policies issued by Chubb and AIG Private Client Group provide coverage not only for collision and theft but also for loss of use, diminished value, and administrative costs not normally covered by traditional auto policies. This significant benefit is often overlooked and partly explains the reason for the higher cost of the enhanced coverage provided by these insurers.

Coverage from Credit Card Providers

Many who assert, "I'm covered by my credit card" would be wise to reexamine the protection they believe is available to protect them. First, cardholders should be aware the coverage provided by any credit card provides collision and theft coverage but not liability or personal injury protection. And, with very few exceptions, the collision and theft coverage provided by credit card companies is secondary to the coverage provided by the cardholder's automobile insurance provider. For cardholders with an auto policy that does not provide comprehensive or collision coverage protection, coverage provided by the credit card company would be available to assist with physical damage and theft claims, although many conditions apply. As consumers likely realize, benefits available to cardholders on the same network can vary, including the coverage for damage to rental cars. There is a good amount of information available to those who want to more closely examine the variances in protection provided by credit card companies, though it can be quite confusing.

Following is a very brief summary of the current rental car protection available through major credit card companies.

• Visa: Generally viewed as offering the most generous free benefits. Visa provides rental car insurance on all of their cards—Standard, Signature, Rewards, etc.
• MasterCard: Benefits are also fairly standard, although those who have analyzed the coverage indicate loss of use is not covered.
• American Express: AmEx offers the ability to secure extra coverage for a small fee. It offers free secondary coverage up to $50,000 ($75,000 on AmEx platinum) but, for an extra fee, will offer primary coverage with a higher limit and protection against injury and property damage. Conditions apply.
• Discover: Discover's benefits are quite limited. Discover does not cover loss of use fees and provides modest coverage for collision damage up to $25,000. Discover Escape provides enhanced coverage.
• Diners Club International: Now owned by Discover Financial, provides physical damage and theft protection that is primary coverage, sparing cardholders the need to submit claims through their personal auto insurer. Check this link to review the broad rental car protection through Diners Club.

A remarkably detailed chart comparing the rental car coverage provided by the major credit card providers is available through creditcards.com.

"Stand-Alone," Enhanced Primary LDW for Rental Cars

Insuremyrentalcar.com offers a stand-alone LDW up to $100,000 for rental cars damaged or stolen. Costs are appreciably lower than what rental car companies charge, with options for daily, single trip, and annual programs. Annual policies provide a particularly good value for regular users, with the added advantage of covering US residents for vehicles rented outside of the United States. Because coverage is primary, there is no need to submit a claim to your personal auto insurance company. The policy features a $0 deductible, is underwritten by Chubb, and appears to be available for purchase only over the Internet. The actual policy form, available to review on the provider's website, reveals that broadened coverage is available to pay for charges alleging loss of use, diminished value, and reasonable administrative costs.

Conclusion

It is no easy task helping consumers understand the many risks that arise when renting a car. Also, explaining the scope and limitations of the various forms of protection requires an even longer discussion. A common "best practice" guiding many insurance practitioners is to instead embrace the broad-brush legal guidance aimed at reducing exposure to errors and omission claims. Advising all clients to always accept the coverage offered by rental car companies will surely reduce an agent's exposure to errors and omissions claims. Conversely, emboldening consumers who wish to avoid the cost of damages waivers from rental car companies and advising "You're already covered, just decline" is an incomplete answer, at best.

To arrive at a better advisory approach, consider sharing the same insights and perspectives we employ when renting a car for our own use. Begin by providing a more complete explanation of the many risks involved. Review the strengths and limitations of the various forms of protection that are or can be available. Once the risks and available solutions are understood, consumers should weigh the relative costs and benefits of those options and arrive at a decision that makes the most sense to them. The decision to purchase or decline the damages waiver may even vary based on the specific circumstances of each rental. Given the variables and the personal choices that influence our decisions, it seems wrong minded to provide those we advise a simple "always" or "never" answer to this question.

As it concerns the decision to purchase the damages waiver from the rental car provider, I am most comfortable offering to others the approach that makes the most sense to me personally.

Renting a car for just a day (or even a few days)?

• Why not simply remove the hassle and the possibility of uncovered costs arising from a possible claim and purchase the damages waiver? This decision not only eliminates the potential for financial risk but also, more importantly, the time and aggravation of being involved in claims disputes between the car rental company and other parties.
• When doing so, be aware of the conditions of the waiver, especially who can and cannot drive the car.

Renting a car for a period of time that causes the total cost of buying the waiver to exceed your personal financial pain threshold?

• If the daily cost of the waiver spread over many days exceeds what you are willing to pay, embrace alternative protection strategies to reduce the risks when declining the waiver.
• Examine purchasing personal automobile coverage from one of the few insurers that provide greatly broadened protection for rental cars.
• Understand the benefits available from your credit card(s) and rent the car with the credit card providing the broadest protection. Consider adding a credit card provider offering increased protection.
• Embrace the simple "best practice" of using the camera or video feature of a cell phone to carefully document the condition of the rental car before accepting and upon returning it. Be sure the images include the rental car representative who will also be documenting the condition of the car.

Rent a car with frequency?

• The broad protection and modest annual fee associated with the annual plan option for the stand-alone primary coverage referenced above have a very strong appeal: namely, broad protection, peace of mind, and savings. While there may be other plans similar to this one, embracing this protection solution is wise for those who rent cars with any frequency.