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WHAT YOU SHOULD KNOW
AT THE CAR RENTAL COUNTER
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Two
revisions in rental-car contracts have significantly increased the renter's portion of the risk. One is an added charge
for "diminution in value" whenever a rental car is repaired. The other is "before and after," a method
of determining the renter's responsibility when a car is substantially damaged.
Diminution in value
About five years ago, rental companies began holding the renter liable for a "diminution of value" charge when
a rental car was damaged. This charge represents the reduction in a vehicle's market value due to its having been in an
accident. When the repaired car is eventually sold, it brings a lower price.
When a renter returns a vehicle in
damaged condition, he or she receives one bill for repairs and another for diminution in value. Most auto policies cover most
of the repairs, but few cover diminution in value. This exclusion was introduced for the personal auto policy in 1999, with
one for commercial auto a few years later.
There has also been extensive litigation addressing how coverage applies
in the absence of an exclusion. Most courts have found policies do not cover the exposure, so the renter can expect to self-insure
for diminution in value. Unfortunately, that's not the end of the story.
Before and after
Diminution in value is a concern when the rental company repairs a damaged vehicle—but today many cars are never repaired.
With some types of damage, liability concerns make rental companies reluctant to return a repaired car to the fleet. Instead,
they simply sell the damaged car for salvage. They then charge the renter the difference between the market value on the day
of rental ("before") and the amount the car brought at the salvage auction ("after").
The following
language is found in the contract of a major rental car company: "If the car is damaged, you will pay our estimated
repair cost, or if, in our sole discretion, we determine to sell the car in its damaged condition, you will pay the difference
between the car's retail fair market value before it was damaged and the sale proceeds."
A recent
Michigan example illustrates this practice. The insured rented a Ford Freestar with an estimated market value of $26,500 and
brought it back damaged. The cost of repairs, loss of use and appraisal fee totaled $7,800. The rental company chose not to
repair the vehicle but to sell it at a salvage auction, where it brought only $11,700. The renter received a bill for about
$14,800, or the difference between the before and after values. The renter's auto policy paid only the estimated repair
costs, leaving a balance of almost $7,000. That became the responsibility of the renter—quite a significant self-insured
retention.
"Both provisions are being added to all rental contracts," stated Jim Maher of Midwest Car
Corp. The company holds a 17-city franchise for two major rental car lines. He added that since the renter has signed a legally
binding contract, rental companies have no difficulty collecting.
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As these new provisions are activated, the gap between what the renter
owes and what his or her insurance will pay has become too wide to ignore.How can it be covered? Don't look to the insurance
industry. Those few companies still covering damage to a rental car under the liability section of the auto policy may be
obligated to pay the entire bill. However, when coverage is found only under the physical damage section, most insurers will
not accept responsibility for the additional charges. Do not expect them to create a new coverage to address the added exposures,
because these risks are not easily addressed by insurance.
Isn't some coverage for damage to a rental car included
with a credit card? Only some credit cards provide any coverage for a rental car. It's generally excess over the renter's
auto policy, and payment is limited to the cost of repairs. A renter should not expect a credit card company to pay diminution
in value or before-and-after charges.
Regardless of what the brother-in-law thinks, there's really only one
place renters can obtain full coverage, and that's through the purchase of the loss damage waiver offered by the rental
car companies.
The loss damage waiver
Rental-car companies hold the renter responsible for all damage to the
rental car, including an act of God. If a tree totals the rental car during a severe windstorm, the renter is liable. The
rental company will waive its right to hold the renter responsible if he or she pays an additional fee and abides by the terms
of the waiver. This waiver, which is not insurance, can add between $15 and $30 per day to the cost of the rental.
With the waiver, the renter will not be liable for any damage to the vehicle. He or she will not be charged for repairs
to the vehicle, for diminution in value, for before-and-after assessments or for loss of use. The renter can walk away from
all responsibility for damage to the vehicle as long as he or she has not engaged in any prohibited use.
All rental
car waivers have a clause voiding the waiver if the renter improperly operates the vehicle at the time of the accident. Although
wording varies, most waivers prohibit reckless or intoxicated use or use off paved roads. There is no coverage if an unauthorized
driver uses the vehicle, so handing the keys to a valet parking attendant voids the waiver. Theft of the vehicle is not covered
if the keys are left in the car or if the vehicle is unlocked.
Buying the loss damage waiver is the only way to
close the significant rental car gap that now exists. A renter must weigh the benefits against the cost. The renter who purchases
the waiver should review the prohibited use provisions and avoid engaging in any activity that would void the waiver.
Here are links to companies that underwrite many of our policies:
COMPANY LINKS
Mutual of Enumclaw
Safeco
Chubb
Foremost
Farmers Home Mutual
Progressive
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