Coverage Corner

RENTAL CARS REVISITED

By Bill Wilson

I continue to believe that the No. 1 insurance myth is the belief by the public (and far too many industry practitioners) that insurance is a commodity that is differentiated only by price. This premise permeates industry advertising, so it is drilled into consumers’ heads daily.

But if there is a close second place, it’s the advice all too often given by consumer media that drivers don’t need to buy the loss damage waiver (LDW) when renting a car because their auto insurance already covers damage to the rental vehicle.

Well, first of all, there are auto policies that don’t cover the use of nonowned autos or that have somewhat lesser limitations, like the use of nonowned pickup trucks or nonowned autos on business. Absent that, there are still reasons why I almost always recommend the purchase of

the LDW. The following are my Top 10 Reasons to Buy the Rental Car LDW, with the proviso that there may be state-specific exceptions in some cases.

1. Loss Valuation. An ISO Personal Auto Policy (PAP) covers the lesser of the actual cash value (ACV) or the amount “necessary” to repair or replace the damaged property. Rental agreements usually impose a contractual requirement to reimburse the rental agency for the “full value” of the vehicle, whatever that is, and it is quite possibly something different than ACV. The PAP also has a “betterment” clause that may reduce payment.

2. Loss Settlement. The PAP grants the insurer the right to “inspect and appraise the damaged property before its repair or disposal.” That doesn’t always happen.

3. Loss Payment. The rental company isn’t always obligated to wait on payment from the insurer. They may insist on immediately charging the customer’s credit card and “max” it out while the insured is traveling, impacting other travel expenses.

4. LDW vs. Insurance. The PAP may have exclusions not found in the LDW. On the other hand, the PAP may cover losses excluded by the LDW. This is why having insurance and buying the LDW is a more complete “belt and suspenders” approach to risk managing the exposure.

5. Indirect Losses. The PAP may have no or limited coverage for loss of rental income to the rental agency, or the adjuster and rental agency may disagree on how this is calculated. Most important is the fact that most (but not all) auto insurers exclude charges for diminished value that can amount to thousands of dollars. I’m personally aware of numerous such uninsured charges ranging from $2,500 to $7,500, and I’ve heard of others of up to $15,000.

6. Administrative Expenses. The PAP may not cover incidental expenses like towing, storage, appraisal, adjustment expenses, etc.

7. Other Insurance. I’m aware of three instances where insurers denied claims involving damage to rental or loaner vehicles because of the carriers’ interpretations of Other Insurance clauses. (I wrote about this in my October 2023 Primary Agent article, “Coverage Gaps for Nonowned Autos.” Find the article at: issuu.com/ primary_agent)

8. Excluded Vehicles and Territories. The PAP may exclude damage to certain vehicles like motorcycles and motorhomes or limit coverage to vehicles like trailers. Non-ISO PAPs can be very restrictive, especially in the nonstandard auto marketplace. In addition, keep in mind that PAPs have limited territorial coverage.

9. Excluded Uses and Drivers. PAPs have limitations on coverage for some uses such as transportation of people or property for a fee or have driver exclusion endorsements (or limitations to specific operators) or not cover valet parking.

10. Additional or Future Costs. The PAP will have a deductible that can be sizeable and accidents may result in future premium surcharges or loss of credits. Keep in mind that rental cars are often vehicles with which the drivers are not familiar, and they may be operating these vehicles in unfamiliar areas with variable weather conditions, possibly increasing the risk of an accident.

So, should consumers purchase the LDW? While there may be state-specific exceptions, it is almost always advisable, from a belt and suspenders risk management approach, to buy the LDW if only for the peace of mind it provides.

Tune in for my October 2024 article when we talk about the fascinating insurance issues involving toilets.

Bill Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of seven books, including “When Words Collide…Resolving Insurance Coverage and Claims Disputes.” He can be reached at Bill@InsuranceCommentary.com or found hanging out on LinkedIn.