Note: This is a public, not private, article provided as a benefit to the industry and consumers.
With apologies to Bill Shakespeare for the title of this article, I’ve been writing and teaching about risk managing the rental car exposure for over 20 years. The question about whether to buy the loss damage waiver (LDW) was common then and remains so today. When I Googled “should I buy the rental car damage waiver” while writing this article, I got 40,600,000 hits. So, needless to say, much as been written about this issue. What needs to be said is that much of what has been written is bad advice. If you have auto insurance, is that good enough? What about credit card coverage? This article explores these issues and suggests some answers, at least one of which many of you might not like.
The vast majority of consumer articles suggest that the purchase of the LDW is not necessary if you have auto insurance and/or credit card coverage. For example in a 2014 article in U.S. News & World Reports entitled “7 Costly Car Rental Mistakes to Avoid,” the very first “mistake” involves buying extra insurance you don’t need. It says that your auto insurance policy “may” cover collision and quotes someone who says, “The credit card coverage will kick in for anything your person policy doesn’t cover….” Needless to say, “may” and “will” are two different things.
While many auto policies and some credit cards may provide coverage for damage to a rental car, it is almost certainly not complete and 4- to 5-figure uncovered losses are not at all uncommon. The purchase of the LDW (with caveats), along with auto insurance, combine to provide a belt and suspenders approach to risk managing the rental car exposure. So, with that premise in mind, let’s explore the value and deficiencies of auto insurance, credit card coverage, and loss damage waivers.
Personal Auto Policies
In the aforementioned “Top 10” article I wrote in 1998 and have since updated, I enumerate many reasons why buying the loss damage waiver is a good idea. I won’t repeat those reasons in their entirety, but in this section, I’ll highlight the more important issues that have resulted in uncovered claims that I’m personally aware of. We’ll start with the current 2005 ISO Personal Auto Policy (PAP) as the basis of our discussion, with some references to non-ISO auto policies.1
The ISO PAP extends physical damage coverage to nonowned private passenger autos, pickups, vans, and trailers if at least one declared auto on the policy has such physical damage coverage.2 So, if you’re renting a motor home, moving truck, motorcycle, etc., physical damage coverage will not extend to such vehicles. Damage valuation is on an actual cash value (ACV) basis, while most rental agreements require coverage for “full value” (translation: whatever the rental car company says is the value) and most PAPs exclude any “betterment” in value. The ISO PAP has a dollar limit for damaged trailers and many non-ISO PAPs have an exclusion or dollar limitation on nonowned autos or specific types of rental vehicles such that rental, for example, of an upscale SUV or sports car may have limited or even no coverage.
Many PAPs limit or do not cover the rental company’s loss of rental income on a damaged auto. There is often an option to provide increased limits for this coverage, but many price-focused consumers may decline such coverage. Even where this coverage is provided, many insurers may only be willing to pay what is indicated by fleet utilization logs while the rental agency wants the full daily rental value paid. In one claim, the renter was charged $2,000 more than his insurer was willing to pay. In another claim involving a luxury car rental that was stolen from his hotel parking lot, the renter was hit with the maximum daily rental rate of $300 for a total loss of use charge of $9,000 (that he negotiated down to $4,500). In still another claim, following the 2011 tsunami that hit Japan, replacement parts for a rental car were unavailable for several months and the renter incurred a $6,000 loss of use charge by the rental car company.
Probably the most significant deficiency in the PAP is the lack of coverage for diminished value claims and it’s the #1 reason I always buy the LDW. I’m personally aware of uncovered diminished value charges of $3,000, $5,000, $7,000, and $8,000 and read about one from a reliable source that totaled $15,000 on an upscale SUV rental. In one case, a Florida insured traveled to Colorado for a rock-climbing vacation. He passed on purchasing the LDW for his 4-day rental because “I’m an excellent driver and I’ve got car insurance and credit card coverage.” Apparently the driver of the vehicle that sideswiped his rental car while it was parked was not an excellent driver. The damage totaled $4,400 for repairs, $370 for administrative fees, $620 for loss of use, and $3,100 in diminished value. Of the $8,490 total, $3,990 was uninsured and not covered by his credit card, the biggest component being the $3,100 diminished value charge which was excluded by both his PAP and his credit card. In addition, he ended up having to hire a Colorado attorney to assist in resolving the claim. The cost of the LDW for the entire trip would have been less than $100, a small fraction of the total cost of his vacation trip.
When insureds travel on business or vacation, a rental car is often valet parked at a hotel or restaurant. The ISO PAP extends physical damage coverage for nonowned autos to “Any private passenger auto, pickup, van or ‘trailer’ not owned by or furnished or available for the regular use of you or any ‘family member’ while in the custody of or being operated by you or any ‘family member’.” Note that physical damage coverage attaches only “while” the auto is in the “custody” of an insured. So, the question is whether the vehicle is still in the custody of the insured while it’s being valet parked or otherwise in the custody of the valet service. If you don’t know and you’re relying on your PAP for coverage, the best advice is probably to not valet park a rental car.
There are many other deficiencies in the ISO PAP that apply and you can read about them in the previously mentioned “Top 10” article on our web site. That last point I’ll make is a reminder that the majority of auto policies in the marketplace are not “ISO-standard” forms. (To learn more about that, Google “independent agent magazine price check.”) Despite what you may be lead to believe by auto insurance advertisements or articles that imply that all auto policies and insurers are the same, there are potentially catastrophic differences, including coverage deficiencies with regard to rental cars. There are unendorsed non-ISO policies that don’t cover nonowned autos period, others that exclude business use of such autos or non-private passenger vehicles (this one shows up in policies of major national carriers, not just “nonstandard” auto insurers), others that exclude vehicles over 10,000 lbs. GVW, and the list goes on.
Conclusion? An auto policy simply is not adequate to cover the rental car physical damage exposure.
Credit Card Coverages
Read a few of the many articles on the internet about using credit card programs to fund damage to rental cars and you would think that little more is needed to adequately address the exposure. Unfortunately, credit card programs have as many, or more, deficiencies as does the PAP alone. Anyone relying on auto insurance and credit cards would be well advised to carefully study the credit card programs. In his article, “Rental Car Agreements, LDWs, PAPs, and Credit Cards,” David Thompson, CPCU3 writes:
Many major credit cards provide some limited, free coverage for rental cars. Most post the provisions related to rental cars on the card issuer’s web site. While these can run several pages, three specific conditions which limit, restrict, or invalidate the free coverage are show-stoppers. For example:
The following conditions limit, restrict, void or invalidate the Auto Rental DW coverage provided by your credit card:
(1) This Auto Rental DW supplements, and applies as excess of, any valid and collectible insurance. For coverage to apply, you must decline the DW offered by the Rental Company.
(2) The following losses are not covered by this Auto Rental DW coverage: (a) Any loss which violated the Rental Agreement of the Rental Company; (b) Any claim for diminished value of the rental car.
(3) Any loss or damage to certain types of vehicles—see list.
In other words, (1) credit card coverage is excess over ANY collectible insurance, (2) you must decline the rental company’s LDW, (3) violation of the rental agreement precludes coverage, (4) like the PAP, there is no coverage for diminished value which we’ve seen can total thousands of dollars, and (5) certain types of vehicles are excluded. Excluded vehicles may include pick-up trucks, full sized vans, certain luxury cars, or other vehicles.
And these are only part of the full list of limitations often found in these programs. Another common limitation is that loss of use is only paid to the extent that the assessment is based on fleet utilization logs. One major credit card only covers collision and theft even though the rental agreement typically makes the user almost absolutely liable for all damage, including fire, flood, vandalism, etc. Some credit cards offer broader optional protection plans but typically they also exclude coverage if there is a violation of the rental agreement and don’t cover diminished value.
Another issue with reliance on credit cards is that the rental company may charge uncovered fees that max out the credit limit on the card. If you’re 1,000 miles from home on vacation with a maxed out credit card, that can present problems.
Loss Damage Waivers
Many people don’t buy the rental car company’s LDW because they think they have “full coverage” between their auto policy and credit cards. Many see what can be a significant charge and choose not to buy the LDW on the premise, “This’ll never happen to me.” I rarely rent cars on business trips or vacation but I experienced a major claim with a hit-and-run in a restaurant parking lot the night before a 6 a.m. flight. I had bought the $12.95 LDW for my four-day trip, so I simply turned in the vehicle at the airport with little more than a shrug.
David Thompson, CPCU, who rents cars fairly often, says he has walked away from damaged cars three times. Both of us always buy the LDW with the exception of his frequent business trips where his employer had negotiated a special deal with a rental car company. Returning a rental at the Ft. Lauderdale airport, Thompson asked the attendant how many cars a month are returned with damage. She responded that, in her typical 12-hour shift, FIFTEEN cars are returned with damage and, in most cases, the damage was allegedly caused by someone else, not the renter. She estimated that only about 15% of renters buy the LDW. And this is one rental car company and one airport.
The cost of the LDW admittedly can be significant, especially if you extrapolate what the effective physical damage insurance cost would be at that daily rate. But that’s only one way to view the investment in peace of mind, not to mention the avoidance of what can be significant claims. On an 8-day vacation last year, the LDW cost me more than the actual rental and, in fact, more than my airline ticket. But I considered that part of the cost of the vacation. Based on at least one anecdotal story, the incidence of rental car damage is not insignificant.
Is the LDW all you need? Is it foolproof? Well, kind of, as long as you follow the rental agreement. Like most credit card coverage, if you violate the rental agreement, you are likely to void the LDW. Many rental agreements consider the following to be violations:
Driving on an unpaved road or off-road (often the case in public parks or states like Alaska and Hawaii).
Operation while impaired by alcohol or drugs.
Any illegal use (parking violations?), reckless driving, racing, or pushing or towing another vehicle.
Use outside a designated territorial limit.
Operation by an unauthorized driver.
This illustrates the advantage of using the belt and suspenders approach of the PAP plus the LDW. The ISO PAP does not exclude the first three rental agreement violations and the territorial limit is usually broader than any restrictive rental agreement territory outside of Mexico.
As for unauthorized drivers, some rental companies may automatically include a spouse or fellow employee or authorize them to drive for an additional fee. More often, the renter never reads the rental agreement and presumes anyone on the trip can drive. In one claim, a father and son were on vacation and the father rented a car. The son had a driver’s license but was too young under the rental agreement to drive the car. The rental clerk made this clear at the time of rental. Despite knowing this, the father allowed the son to drive and he wrecked the vehicle. Not only was the LDW voided, the father’s non-ISO PAP excluded the claim because the son was a nonpermissive driver.
A special case of unauthorized drivers could be valet parking at a hotel or restaurant. As we saw earlier in this article, there is an argument that a personal auto policy might not cover damage to a rental car by a valet. Most rental agreements do not allow operation of the rental car by an unauthorized person. Some agreements might except valet parking, so it’s important to determine at the time of rental whether valet parking is covered. If not, then consumers would be well advised not to use valet parking.
A final note on third-party LDWs…in 2011, a fellow CPCU rented a car through Orbitz or Expedia which offered an LDW at the time of the reservation. He mistakenly assumed this was the same LDW offered by the rental car company, but it was underwritten by a separate entity. During his trip, the rental car was damaged by a deer on a rural Montana road. To make a long story short, the third-party LDW was not a true “no liability” LDW warranty of the type offered by the rental car agency and the end result was, after negotiations on the uncovered portion of the charges (including diminished value), he had to pay in excess of $1,000 out of pocket.
A Note on Business Auto Policies
Unfortunately, space does not permit as detailed a consideration of coverage under the ISO Business Auto Policy (BAP), though many of the issues are the same as the PAP. If you have an ISO BAP with “Drive Other Car” coverage, it has a care, custody or control provision similar to that in the ISO PAP, so that may also impact valet parking. Another issue involves coverage under Symbol 8 or Symbol 9 since only the former provided physical damage coverage on leased, hired, rented, or borrow autos. And, Symbol 8 alone provides coverage for autos “you” (the named insured) lease, hire, rent, or borrow. When employees rent autos on business, the ISO CA 20 54 – Employee Hired Auto endorsement should always be used to ensure “insured” status for the employee and primary physical damage coverage vs. coverage by their PAPs. The CA 20 54, though, has its own problems, something perhaps we can address in a future article.
When I rent a car on a business trip or vacation, I price the rental to include the LDW and make my decision, in part, on that basis. The peace of mind alone is invaluable and, again, I consider the cost to be comparable to my decision to stay in a decent, secure hotel. If you rent cars frequently consider negotiating a price including LDW with one or more rental car agencies. Otherwise, caveat emptor. If you are an insurance professional giving advice to consumers about whether to purchase the LDW, it would likely be in your and your customer’s best interest to recommend consideration of the LDW. Your E&O insurer will appreciate it.
1 The 2005 edition of ISO’s PAP was current when this article was written. By the time of publication or as you read this article, ISO may have filed a 2015 edition of this form.
2 In some states or under some policies, damage to a rental car and perhaps other nonowned autos is provided under the liability coverage of an auto policy. This article does not address such coverage or laws, but rather how the unendorsed ISO PAP responds in most states.
3 The author gratefully acknowledges the contributions to this article, especially several claims examples, by David Thompson, CPCU, Mike Edwards, CPCU, and John Eubank, CPCU, ARM.
Last Updated: March 3, 2015