Reasons to Purchase the Rental Car Damage Waiver
The majority of what we have read from online consumer websites and have heard from the general public, suggests that you don’t need to purchase the Loss Damage Waiver (LDW) from the Rental Car Agency. People say that if you have a personal auto insurance policy (PAP) and/ or credit card coverage then the LDW is not necessary. NOT SO FAST! While many PAPs and some credit cards may provide/ extend coverage for physical damage to the rental car, there can be some significant gaps in coverages that could leave you out in the cold and looking at a large loss to pay for yourself! We strongly recommend that consumers have a PAP but also consider purchasing the LDW. Below are the reasons why and the potential gaps in coverages that could loom if you decide not to purchase the LDW from the Rental Car Company.
Loss Valuation: The value of the rental car, according to virtually all rental agreements, is determined solely at the discretion of the rental company. Essentially the rental car company can set the value of the rental car at whatever they want, which may be significantly different from the market value/ actual cash value (ACV) basis used by almost all PAPs or credit card coverages. The rental agreement may very well contractually obligate the consumer to reimburse the rental agency for the “full value” (whatever that is) of the vehicle. If the renter’s insurance policy has a “betterment” clause, the insurer might not pay that “full value” and the renter could be responsible for the difference.
Diminished Value/ Loss Settlement: As implied above, there may very well be a disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property to the same value as before the loss. Diminished Value is an indirect loss not covered by most PAP’s or credit cards. We have seen uncovered diminished value charges up to $10,000.
The auto insurer also has the right to “…inspect and appraise the damaged property before its repair or disposal” – the rental company may choose and often repairs the vehicle immediately, potentially resulting in a lack of auto insurance coverage because of failure to comply with the condition cited above.
Loss Payment: The rental agreement may require immediate reimbursement for damages and it is not uncommon for the rental company to charge the consumers credit card for the full value of the vehicle and other expenses right away. This can create significant debt and max out credit card’s limit.
Loss of Use: The consumer most likely will be responsible for the rental company’s loss of rental income on the damaged unit. Most auto policies/ credit cards have, at best, daily and maximum caps for this indirect loss and some may pay only for the loss of income resulting from theft, not collision or other causes of loss. 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. Insurers may not be willing to pay for charges they don’t feel represent a true loss of income by the rental company.
Administrative Expenses: The rental contract may make the consumer liable for various “administrative” or loss-related expenses such as towing, storage, appraisal, claims adjustment, etc. None of these expenses are typically coverage by PAP’s.
Excluded Vehicles: PAP’s typically do not provide physical damage coverage for motorcycles, motorhomes, and other motor vehicles that are not private passenger cars, pickup trucks, or vans. If a consumer is renting a trailer (U-Haul, camper trailer, etc.), auto coverage is typically limited to only $500 - $1,500. The consumer usually has no choice but to rely on the rental company’s damage waiver for coverage under these circumstances.
Excluded Uses & Drivers: The PAP may have limitations on the use of vehicles that are not otherwise excluded by the rental LDW – for example, some auto policies provide no physical damage coverage for the business use of non-owned pickup trucks or vans.
Also, some PAP’s may include exclusions for certain individuals or may apply only to designated individuals that can be covered by listing them on the rental agreement. In contrast, the LDW usually only applies to designated individuals (with certain omnibus “insureds” such as spouses), so having both an PAP and the LDW can again be advantageous.
One often overlooked issue where a large gap might exist is using valet parking at a hotel or restaurant during a personal or business trip. Most PAP’s cover damage to nonowned autos if you have physical damage coverage on at least one declared auto. However, this coverage may extend only to a nonowned auto “while in the custody of or being operated by you or a family member” If the rental car is being valet parked, it’s certainly not being operated by you and might not be considered in your “custody”. The catch-22 is that, even if you purchase the LDW, most rental agreements void the coverage if the vehicle is being driven by an unauthorized driver. As discussed above, the only authorized drivers are those identified by name on the rental agreement and perhaps a spouse or co-worker. Hotel valets? Highly unlikely. Some agreements might expect valet parking, so it’s very important to determine at the time of rental whether valet parking is covered. If not, then consumers would be well advised not to use valets.
Additional and/ or Future Costs: The PAP will most certainly include a physical damage deductible in the range of $100 - $500, or more, while the rental agency’s LDW may not. In addition, payment for damage to a rental car may result in a significant premium increase on the renters PAP via surcharges or loss of credits.
Conclusion: Not all auto insurance policies are created equal, despite what you might be led to believe by some “low-cost” auto insurance advertising. In particular, coverage and claims practices for the use of nonowned autos like rental cars can vary dramatically from one insurer to another. Equally important, virtually all rental car companies draft their own rental agreements and can make charges and assessments that are not covered by an auto policy. Although damage waiver fees are generally considered outrageous, most consumers should consider purchasing them. We always advise consumers to include the damage waivers when pricing rental cars on vacations. Using a combination of your personal auto policy and the rental company’s damage waiver is the best way to protect yourself in case of a loss.
¹Bill Wilson, CPCU, ARM, AIM, AAM Director, Big “I” Virtual University