Should I Buy Rental Car Insurance?

One of the more common questions we receive is “should I purchase the insurance from the rental car company”?

A rental car is treated like a temporary replacement vehicle for your own car. Your same insurance limits and deductibles would apply to the rental vehicle. There are a few “gotchas” in all rental car contracts however so it is good to be aware of those and we highlight them in this article.

We want to make sure that you are aware that a standard personal auto policy does not cover all rental car exposures. There's a gap between a renter's responsibility under the rental contract and what an auto policy will pay. If (as is most common), damage to the rental car is covered under the auto policy's physical damage section, the insured will certainly pay the deductible and at least a portion of the loss-of-use charge.

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.

Gotcha #1: 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 seldom, if ever, would they 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.

Gotcha #2: 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 and was quite a significant self-insured retention.

Coverage from Your Credit Card Company?

Only some credit cards provide any coverage for a rental car. Coverage through a credit card company is generally not Primary Coverage, meaning you would need to use your auto insurance first before claiming anything from the credit card company. A renter should not expect a credit card company to pay diminution in value or before-and-after charges. 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. 

Some companies, like American Express, offer a separate policy if you sign-up for the program and charge the rental car through that specific credit card. That coverage becomes Primary coverage on the rented vehicle and is a great option to consider if it's available through your credit card. 

Loss Damage Waivers (the thing they try to sell you at the counter)

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.