About 2 years ago, an article appeared in the Independent Agent & Broker magazine entitled "10 Reasons to Buy Collision Damage Waiver from a Car Rental Agency." Although the points made were valid, I still advise clients at least 90 percent of the time not to buy the coverage from the rental agency.
In the rental agreement that you sign, you agree to be responsible for all the damage to the vehicle while it is in your care. This not only includes accidents—even when the other driver is at fault—but also includes all other damage, including theft, hail damage, storm damage, broken windshields, etc. So, what's a vehicle renter to do to cover this exposure?
Sources of Coverage
There are four resources that can cover most or all of the obligations you incur as a renter when you bring the vehicle back damaged:
Purchase the collision damage waiver (CDW) from the rental agency. (CDW is a misnomer since the coverage applies to more than just collisions. A better title would be vehicle damage waiver.) This article addresses why this choice is not a good idea in most cases.
Coverage from your credit card company. This coverage often comes free when you charge a vehicle rental to your card. Stay away from excess coverage that only applies if your personal automobile policy doesn't provide coverage. Make sure, if you are going to use credit card coverage, that it is primary coverage to your personal automobile coverage.
Secure transferable collision and comprehensive coverage from your personal automobile insurance policy. You must have collision and comprehensive coverage on at least one vehicle for this to apply. You will be responsible for paying the collision and comprehensive deductibles that apply to your vehicle coverage. Note that in a few states, such as Minnesota, state law requires that property damage liability applies to rental car damage, regardless of fault, with no deductible.
Your personal umbrella liability policy may provide coverage. Make sure that the care, custody, and control exclusion in your policy has an exception for damage to nonowned vehicles that you have not agreed in a contract to provide insurance for such a vehicle. Less than half the umbrella policies I've studied do provide such coverage. You will be responsible for a deductible of up to $1,000—typically known as a self-insured retention (SIR). I like keeping the umbrella policy for backup but not as primary coverage because umbrella claims departments are not set up to handle vehicle damage claims quickly, which would cause you problems when you return the rental car in a damaged condition. [See the attached umbrella comparisons spreadsheet—item 8. Specifically, Auto-Owners, Chubb, Harleysville, and Ace include the coverage, subject only to the self-insured retention (item 6). Progressive, Safeco, Western National, RLI, USLI, MetLife, American Alternative, and Cincinnati do not provide the coverage.]
10 Reasons Not to Buy a CDW from the Rental Agency
Below are the top 10 reasons I feel it's not wise to purchase the CDW from the rental company.
It's hugely expensive. Fees usually from $10–$15 a day. Multiplying that by 365 days equals $3,650 to over $5,000 a year! This is at least 5 to 10 times the going rate for that coverage purchased individually!
Your personal auto policy covers the damage, providing that you have collision and comprehensive coverage on at least one vehicle. Coverage is subject to your paying the collision or comprehensive deductible at the time you return the vehicle, however.
Your personal umbrella policy probably covers the damage, subject to your paying the SIR (i.e., deductible).
Your credit card may very well cover the damage to the rental vehicle if you charge the rental to the card.
The rental company's CDW usually doesn't apply if the operator has had a single drink. (See the following case study.)
The CDW usually doesn't cover driving outside the state where the vehicle is rented, unless you have express permission to do so.
The CDW will not cover accidents when a nonlisted driver was driving—sometimes not even spouses.
The CDW generally will not cover damage caused by "careless driving" without defining that term. (Aren't nearly all at-fault accidents caused by some sort of careless driving? This is a dangerous exclusion in my view.)
The CDW sometimes applies excess over your personal auto policy coverage, requiring you to prove that your personal auto policy (PAP) coverage will not apply before this coverage will pay for the damage. (You encounter a similar problem with most credit card coverage.)
The CDW often excludes damage occurring when driving off paved roads. (How many people who buy the CDW coverage when they sign the rental contract realize that they have no coverage when they drive on gravel or dirt country roads?)
A Case Study
I once had a client who took a business trip with a friend and coworker to California. My client signed the rental contract and listed the friend as a permitted driver. He bought the CDW coverage from the rental agency. Later, he and his friend went to dinner. Both had a glass of wine with their meal. The friend drove the rental car back to the hotel parking lot where, in the dark, he drove over one of the concrete meridians and caused significant damage to the underside of the car—almost $4,000 damage. Although the coworker was a permitted driver, the rental agency declined to pay for the damage because of the alcohol-use exclusion and the careless-driving exclusion in their contract.
If that wasn't bad enough, guess who the rental agency came after for the $4,000? It was not the coworker who caused the accident. It was my client, who signed the car rental agreement in which he agreed to be responsible for all damage, no matter what the cause!
There are times when it makes sense to buy the CDW from the rental agency, such as when you have no other source of coverage, when you rent for business, or when another accident on your PAP will significantly increase your rates or lead to cancellation. But, in 9 out 10 cases, I advise clients not to buy the CDW coverage because of the cost and because there is usually a better "free" alternative. But, no matter which method you use to cover your obligations for damage to rental car, always have backup coverage in your hip pocket—an umbrella policy that will cover this damage just in case.
Jack Hungelmann's book, Insurance for Dummies, contains much of this information and is available at your favorite bookstore or online. For more information on his risk management and insurance business, go to www.JackHungelmann.com, where you can check out sample newsletters, brochures, and other articles written on various issues.
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