Author: Bill Wilson
Although most damage waiver fees are considered outrageous, the insured is best advised to purchase the waiver for short-term rentals. This is not only in the best interest of the insured, but also the agent since an inadequately covered loss may result in the loss of an account or worse, an E&O claim.
Note: This is a public, not private, article provided as a benefit to the industry and consumers.
Although most collision damage waiver (CDW) or loss damage waiver (LDW) fees are considered outrageous, the insured is best advised to purchase the CDW/LDW for short-term rentals. This is not only in the best interest of the insured, but also the agent since an inadequately covered loss may result in the loss of an account or worse, an E&O claim. This is becoming increasingly the case as rental car companies charge ever-higher fees and penalties for occurrences not covered by most auto policies. Click here for Disclaimer.
1. Loss Valuation
The value of a rental car, according to virtually all rental agreements, is determined solely at the discretion of the rental company and may be significantly different from the "ACV" basis used by most auto policies. The ISO Personal Auto Policy (PAP) covers the lesser of the "actual cash value" of the vehicle or the amount "necessary" to repair or replace the damaged property.
The rental agreement may very well contractually obligate the insured to reimburse the lessor for the "full value" (whatever that is) of the vehicle. Under the current PAP, the "betterment" clause may result in the insured being significantly underinsured relative to his/her obligations under the rental agreement. For more information on this issue, read the VU article, "Betterment in the ISO Personal Auto Policy."
2. Loss Settlement
As implied above, there may very well be disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property—depending on the PAP edition, the Appraisal clause may be invoked by the insurer with its accompanying costs covered partially by the insured.
More importantly, the PAP insurer has the right to "...inspect and appraise the damaged property before its repair or disposal"— the rental company may choose to effect the repairs immediately, potentially resulting in a lack of PAP coverage because of failure to comply with the condition cited above. In a recent claim involving farm equipment under a similar policy provision, the insurer denied coverage when the farmer had the property repaired immediately in order to minimize lost production and the insurer never had the opportunity to appraise the damage.
3. Loss Payment
The rental agreement may require immediate reimbursement for damages and it is not uncommon for the rental company to charge the insured's credit card. This can create a significant debt, "max" out the card's credit limit (perhaps shortening a vacation or business trip), result in litigation, etc.
4. Loss Damage Waivers (LDW)
The rental agreement usually requires reimbursement for more than collision, making the insured responsible for ANY "loss" in value beyond normal wear and tear regardless of fault. Obviously, the PAP must include collision coverage on at least one insured owned vehicle for collision coverage to transfer to the nonowned auto.
If the rental agreement includes a Loss (not just Collision) Damage Waiver (LDW), the policy must also include comprehensive coverage to protect the insured. Even so, keep in mind that the insured's contractual liability under the rental agreement may be almost absolute, so it's possible the PAP may not respond to all losses. (Note: Likewise, the PAP might respond to losses not covered by the LDW such as use off paved roads, use while intoxicated, use by unlisted drivers such as valet parking (see below), etc. Therefore it is important to have BOTH PAP and LDW coverage.)
5. Indirect Losses
The insured most likely will be responsible for the rental company's loss of rental income on the damaged unit. The PAP has, at best, daily and maximum caps for this indirect loss and, depending on the edition date, an unendorsed policy or proprietary company form may pay only for loss of income resulting from theft. In addition, many rental companies will not divulge their fleet utilization logs for competitive reasons or their rental agreements may make the renter responsible for loss of use without regard to fleet utilization rates. If so, the renter may be charged even though unused rental vehicles are sitting on the lot. In one case, a renter was hit with a $2,000 loss of use charge, far more than what her PAP covered.
In addition, rental car companies are increasingly inclined to charge for "diminution of value," an indirect loss that is not covered by the PAP's physical damage section (nor most credit card coverages). We have seen documented examples of these charges for amounts of $5,000 and almost $8,000 and heard of one that was allegedly $15,000 on an upscale SUV rental. For more information on this issue, check out the VU article "Rental Cars and Diminution of Value" and the American Agent and Broker magazine article "Rental Car Contracts Raise Coverage Stakes."
6. Administrative Expenses
The rental contract may make the insured liable for various "administrative" or loss-related expenses such as towing (e.g., one insured was charged for a 230 mile tow), storage, appraisal, claims adjustment, etc. None of these expenses are typically covered by the PAP.
7. Other Insurance
The PAP says it is excess over: (1) any coverage provided by the owner of the auto (does "coverage" include rental car company self-insured plans?), (2) any other applicable physical damage insurance, and (3) any other source of recovery applicable to the loss — CDW/LDW, travel policies, credit card coverages, etc. (what if the credit card coverage says it's excess over the auto policy?). The potential controversy over who pays what is obvious and can result in litigation.
In addition, keep in mind that many states (e.g., MD, MN, NY, TN, etc.) have statutes, proprietary forms, and/or case law precedents that may govern this and other rental car exposures. For example, the PAP is primary rather than excess for nonowned autos loaned or rented by a dealer, but not rental agencies. Another state makes the PAP primary only if the auto is rented without purchasing a damage waiver. Another states only modifies the PAP with regard to liability for rental cars, not physical damage. Another state makes no exceptions for any nonowned autos including rentals. Needless to say, since the PAP Out of State condition says the policy will comply with state laws, it can become virtually impossible to know whether the PAP will respond on a primary or excess basis in a given state while on a trip...yet another reason to rely on the rental company's damage waiver.
In one final example, a consumer was given a loaner vehicle from a Cadillac dealer while his car was being serviced. He proceeded to total the vehicle in an accident to the tune of $37,000. His PAP insurer refused to pay on the basis that the PAP provided excess coverage over the dealer's garage policy, offering only to pay a portion of the dealer's deductible. The garage insurer paid the entire claim, then subrogated against the PAP insured by filing a lawsuit. When the insured turned the suit in to his PAP insurer, the claim was denied under the liability section of the PAP, citing the care, custody or control exclusion. While this involved a dealer loaner auto, the same result could have been reached in this state if the auto was a rental. For more information on this claim, check out the VU article, "Driving a Dealer Loaner Auto...No PAP Coverage?!"
8. Excluded Vehicles & Territories
The PAP normally does not provide physical damage coverage for motorcycles or other non-auto/pickup/van vehicles (e.g., motorhomes) and use of covered vehicles is limited to the U.S., its territories and possessions, Puerto Rico, and Canada (the rental agreement may also exclude operation outside a specific geographical area, in which case the PAP could provide coverage not provided for under an LDW). In addition, if the insured is renting a trailer (U-Haul, camper trailer, etc.), PAP coverage is typically limited to only $500 - $1,500. The insured usually has no choice but to rely on the rental company's damage waiver for coverage under these circumstances.
9. Excluded Uses & Drivers
The PAP may have limitations on use of vehicles that are not otherwise excluded by the rental agreement damage waiver — for example, some older editions of the PAP (and perhaps some proprietary company forms) provide no physical damage coverage for the business use of nonowned pickup trucks or vans.
Also, the PAP may include an exclusionary endorsement for certain individuals or may apply only to designated individuals that can be covered by listing them on the rental agreement. In contrast, the damage waiver usually only applies to designated individuals (with certain omnibus "insureds" such as spouses), so having both a PAP and the damage waiver can again be advantageous. For an example of this exposure, check out the article, "Rental Cars and Unauthorized Drivers," and for an example of a coverage dilemma for business auto exposures involving auto symbols 8 and 9, check out the article, "More Rental Car Issues."
One often overlooked issue where a large coverage gap can exist is using valet parking at a hotel or restaurant during a trip. For an example of more information, check out the article, "PAP Coverage for Valet Parking."
10. Additional and/or Future Costs
The PAP will most certainly include a deductible in the range of $100-$500 or more. In addition, payment for damage to a rental car may result in a significant premium increase (if not nonrenewal) via surcharges or loss of credits.
Recommended Consumer Reading:
There are two excellent related articles on this subject from the Denver Post that consumers will find very enlightening:
Bonus Consumer Article:
To download a consumer version of this article that IIABA member agencies can share with their clients, click here for the Word document or click here for the pdf version (select "Save as..." from the pop-up menu...if this does not work, try RIGHT-clicking the link and select "Save as..."). Other consumer articles that IIABA members can use in client newsletters and other communications are here.
The above information is based on the ISO standard Personal Auto Policy in force in most states at the time of publication and typical rental car agreements. Be aware that these contracts may vary from state to state and there may be statutory exceptions (e.g., the State of NY...see the article, "Collision Damage Waivers in New York") that may govern. In addition, these provisions can change at any time, so it is important to review the laws and contracts in effect in your jurisdiction at any point in time. Due to the brevity of this article, we cannot analyze every possible loss exposure and exception to the general guidelines above.
Copyright 1998 by Insurors of Tennessee. Used with permission.
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