Should I buy the “loss damage waiver” (insurance) for my rental car?
This is a question that most insurance offices get on a regular basis and unfortunately you will find many different answers so I thought it would be helpful to break down some of the reasons that this is a complicated question and how to help you answer, “Should I buy the insurance?”
First, I want to clarify that you are not actually buying insurance for the rental vehicle. In actuality you are paying the rental company to waive their rights to come against you for any losses they sustain due to damages to their vehicle. It is often called insurance, even by the rental car companies, but if you read the fine print you will find that it is in fact a waiver. Think about it, in order to sell insurance in the state of Michigan, you need to be licensed, they are assuredly not licensing all the counter people at the rental car companies.
In Michigan rental vehicles are typically included in the definition of non-owned auto and therefore are usually covered under both Liability Coverage and Physical Damage Coverage on your auto policy. But be cautious, you should read your policy carefully to see if there are any limitations or exclusions that could impact you at the time of a claim. And, even if there is coverage, that is not the whole story.
Although I am not a big proponent for buying unnecessary insurance, or in this instance paying for the waiver, I feel I would advise you to purchase the waiver for all rental vehicles. Even if you have rental car coverage on your policy, there are few key issues that are not addressed under your business or personal auto insurance that may hurt you if you have a problem with a rental vehicle.
One is Diminution of Value, which in essence states the vehicles worth is lessened due to the accident. This is not covered by your current insurance policy which will only cover actual repairs. If a renter returns a vehicle in damaged condition, they can receive two bills, one bill for the actual repairs and another for diminution of value. This charge represents the reduction in a vehicles market value due to its having been in an accident. When the repaired car is sold, it often brings a lower price.
The other is Before and After which comes into play if a vehicle is not repaired after an accident. Due to liability issues, rental car companies will often sell the damaged vehicle, as is, to a salvage company. They then charge the renter the difference between the market value on the day of the rental (“before”) the accident and the amount the car brought at salvage auction (“after”) the accident.
The scenario is as follows: Your rental vehicle has an estimated market value of $25,000 and is brought back damaged. The estimate for the cost of repairs is $10,000. The rental company chooses not repair it but to sell it at auction where it is sold for $10,000. You as the renter would receive a bill for $15,000, or the difference between the before and after values. Your auto insurance policy might cover the cost of the actual repairs or the $10,000 but it would leave you with an uninsured amount of $5,000 which is the difference between the cars value, $25,000 and the amount the vehicle sold for $ 10,000 and the claim amount $10,000.
This is a change that has come about in the rental car industry over the past few years and is a substantial gap in what you assumed was insured. You will find the language that allows for the above scenario in every major rental car company lease agreement. It usually reads something like this: “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”
The last piece is Loss of Use which often occurs when the rental vehicle is being repaired after an accident. It may be unable to be driven for days or weeks, and thus the rental car company is losing the income from that vehicle. They might expect to be paid for this loss as well and this is also not typically covered by your personal or commercial auto policy.
A loss damage waiver, allows the rental company to waive its right and not hold the renter responsible if they pay the additional fees and abide by the terms of the waiver. This is an important part so to abide by the contract. An example is, unless otherwise agreed to, only the person renting the vehicle is considered an authorized driver. Allowing your spouse or any another person, including a parking attendant or valet, operate the vehicle will void the waiver and once again makes you responsible for any damages.
When renting a vehicle, make sure to review the waiver and understand the prohibited use provisions and avoid engaging in activities that may void the waiver. Also, verify with your current insuranceagent to determine the level of coverage you have and any potential gaps. And as always, do not rely on their word alone, get it in writing in case you have an issue with your rental vehicle.
Note: This is a just general description of coverage, limits and exclusions on some policies, please carefully review your policy contract for details about your coverage.
Donald A. Shampine, CIC, CRM
President & CEO