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Rental Cars and Insurance: I Was Wrong (Sort of)

Author: Chris Boggs

IA Magazine republished one of the VU's Ask An Expert questions and answers specifically related to personal auto policy (PAP) coverage issues when the insured rents from a non-traditional" rental platform such as Turo. In fact, Turo was the platform specifically addressed. (To review the question and response, click here.)

In my answer to this non-traditional rental exposure, I made a statement regarding the PAP's response to the traditional rental car exposure saying, In a traditional rental situation, the insured's PAP extends liability and physical damage to the rented vehicle on a primary basis."

David Thompson, CPCU, AAI, API, CRIS, a highly-regarded instructor with the Florida Association of Insurance Agents and a known coverage expert, questioned my statement. He simply asked, You sure about that?"

Before I go any further, let me tell you that when Thompson asks me a question like that I get to thinking, and second guessing, and worrying. Thompson admits that he knows two things very well, barbecue and insurance. I've not had the opportunity to sample his BBQ, but I do know he's one of the best when it comes to insurance which is why I began to question myself.

OK, back to our email exchange.

After asking, You sure about that," Thompson did the unthinkable he used policy language to back up his question and make his point. He copied and pasted directly from ISO's PAP:
 

LIABILITY:

OTHER INSURANCE

If there is other applicable liability insurance, we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide for a vehicle you do not own, including any vehicle while used as a temporary substitute for "your covered auto", shall be excess over any other collectible insurance except insurance written specifically to cover as excess over the limits of liability that apply in this Policy.

PHYSICAL DAMAGE:

OTHER SOURCES OF RECOVERY

If other sources of recovery also cover the loss, we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide with respect to a "non-owned auto" shall be excess over any other collectible source of recovery including, but not limited to:

1. Any coverage provided by the owner of the "non-owned auto".

2. Any other applicable physical damage insurance.

3. Any other source of recovery applicable to the loss.

His point, the PAP is excess for both liability and physical damage coverage when the vehicle is a non-owned vehicle. A rental car is certainly a non-owned auto; thus, the renter's PAP responds as excess protection over the coverage provided by the rental car company.

While I cannot argue that policy language makes coverage excess, it seems we must consider the contractual provisions in many (if not most) rental agreements that may alter the application of the policy language. Following is my response to Thompson:

I pulled out the (company name redacted) agreement to read its contractual provisions regarding insurance. Basically, the third-party liability section states that the rental car company does carry liability limits sufficient to meet state financial responsibility laws; however, NO liability coverage is extended to or for the benefit of the renter. But there is an unless" type wording that essentially says that the rental company will provide state minimum limits protection for the benefit of the renter if required to by state law.

So, from a liability perspective the real answer is, it depends on state law.

From a physical damage perspective, the agreement says that any damage to the vehicle is wholly the renter's responsibility unless modified by state law.

So, from a physical damage perspective the real answer is, it depends on state law.

State law plays a role and I NEVER considered that fact or even the possibility in my writing.

Thompson responded, Fifty states, 50 ways to do it. I still say the form gives excess coverage, but excess of nothing then becomes primaryor 'only' coverage."

From here, our conversation went awry in trying to decide upon whom we should lay the blame for my obviously only partially true statement. We considered blaming some quite well-known insurance folks but decided not to blindside them that way yet.

So, what does this all mean to you, dear reader? It means I need to apologize for my improper (or improperly explained) information.

Ultimately, Thompson is correct, the PAP is excess over the rental car company's coverage. Further, I think that Thompson is correct that excess of nothing makes the renter's PAP primary. Which means I'm correct.

So, the real answer to whether the PAP provides coverage to rental cars on an excess vs. primary basis lies in state law.

  • Liability: If state law requires the rental car company to provide liability coverage to the renter, the PAP is excess over the rental company's coverage. If, however, state law does not require the rental company to extend coverage to the renter, then the liability coverage provided by the renter's PAP is functionally primary because of the contractual language in the agreement.
  • Physical Damage: The renter's PAP is contractually primary unless state law does not allow such transfer to the renter. It is unlikely most states address physical damage.

One last point to keep in mind, even if the rental company is statutorily required to provide liability coverage, it is only required to provide state minimum limits (as is stated in the sample rental agreement).

Thompson's and my debate opened my eyes to something I had never considered regarding rental car coverage state law affects how PAP coverage applies. I spend so much time harping on the need to and benefit of purchasing the physical damage waiver that I never paid much attention to the availability and order of liability protection. For that, I do apologize.

Since this conversation began, I have taken the opportunity to review a few state laws regarding rental company liability insurance requirements. So far there seems to be a relatively even split between states that require the rental company's liability coverage to be primary and states that don't have such a requirement in statute (allowing the rental contract to take precedence). The VU plans to eventually add this to the state-by-state spreadsheets so stay tuned.

Last Updated: May 24, 2019

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