Car Rental Firms Drive a Hard Insurance Deal
“It almost doubled the cost of my rented car,” a New Jersey visitor to California says, “but I took the insurance coverage to protect myself from liability if the car got smashed.”
Indeed, what the agent called “the coverage” cost her $196.20 for 18 days--41% of the final bill--and she didn’t really know what it covered. The only explanation was printed on the back of the contract handed over with the keys, and didn’t suggest that she might already have such coverage.
Most rental car companies provide built-in liability coverage for damage done by the renter to others, and assume responsibility for any damages over $2,500 to the rented car. The “collision damage waiver” ($7 to $8 a day), or “CDW,” transfers to the company as well the customer’s defined responsibility for the first $2,500. It is distinct from two other options: one insuring loss of life and medical payments and the other damage to personal effects.
As insurance goes, it’s high-priced stuff. The New Jersey visitor’s cost for the collision damage waiver (almost $150) could buy from State Farm, the nation’s largest auto insurer, a half year of collision and comprehensive coverage, $50 deductible, for a similar car. And, translating her $7.95 daily rate into an annual $2,900, one could fully insure four, six, even 10 such cars (depending on location) with State Farm for all contingencies for a year.
Ah, but the CDW is not insurance, the rental car industry protests, particularly when anyone suggests that insurance regulators examine sale price or selling practice. Instead, they say, the waiver simply amends a two-party contract so the company “waives our contractual right to proceed against the customer to cover the damage,” says Cal Kuhlman, general counsel for National Car Rental.
Looks Like a Duck, Walks Like a Duck
To most people, what looks like a duck and walks like a duck is a duck, and these companies certainly seem to be selling insurance coverage by assuming that $2,500 risk. Apparently, even the companies see a duck: Avis puts its vice president for insurance in charge of the collision damage waiver, among other coverages, and National’s “Pocket Guide” for consumers puts the explanation of the waiver in the section titled “What about insurance?”
But their insistence that, somehow, it’s not insurance is important, because if it is, state insurance departments can ask for rate justifications and reserves for future losses, among other things. Some are already considering the question, to great industry opposition. Iowa’s deputy insurance commissioner Tony Schrader, for example, filed an action prosecuting Hertz and Avis as “unauthorized insurers” for selling the damage waiver, but the companies challenged the action on grounds that it wasn’t insurance, and the state commissioner ruled for them. Louisiana’s department, however, recently ruled that Hertz’s damage waiver “is insurance, pure and simple,” says John Fontenot, the department’s assistant general counsel, “and the agents selling it should be licensed to sell insurance.” Hertz will get a re-hearing.
As it is, the companies don’t justify their rates to anyone, least of all customers, and no one knows either the accident frequency or losses supposedly behind them. “As a matter of policy,” a Hertz spokesman says, “Hertz doesn’t disclose proprietary business information pertaining to CDW.” For its part, Avis can’t give statistics on either frequency or expense, says Stanley Roth, Avis’ vice president of insurance, “but experience shows that a person driving a rented car has a greater chance of having an accident, thanks to lack of familiarity with both the car and the place.”
It’s unlikely that these companies keep no track of such expenses. Indeed, although National’s Kuhlman claims that “I don’t have that data and it’s not readily available,” he adds, “Obviously we know our costs.” Ostensibly, it’s those costs that pushed CDW rates from $5 to $7 a day and the amount at stake from $500 to $2,500 in the last couple of years, thus making it an option one dare not refuse.
Buying Coverage They Already Have
But marketing, rather than costs, may base the change, says Bob Hunter, president of the National Insurance Consumer Organization, Alexandria, Va.: “They intimidate people into taking it by raising the discomfort level if they don’t.” If even half the renters accept it, as one rental company executive estimated a few years ago, Hertz alone would take in $278 million a year just in collision damage waiver premiums on its 40 million total days of car rental in the United States last year.
Many of those customers are buying coverage they already have. Their life, health, and homeowner’s insurance, plus any medical payments and liability coverage on their auto policies cover the death benefits, medical payments, and personal effects provisions of the two insurance riders, and their collision coverage (depending on the insurer) may be transferable as well, removing the need for the damage waiver. People traveling on business may also be covered by their companies, who therefore instruct employees to refuse the waiver; they’d rather pay for an occasional accident than all those daily premiums.
Unfortunately, rental agents rarely mention the possible redundancy--a matter of questionable selling added to the question of price. Nor do these questions get much discussion from the industry.
“It appears they’re trying to prove it’s not insurance instead of suggesting ways we can solve the problem without regulation,” says Don Ainsworth, director of Missouri’s Division of Insurance, and head of a National Assn. of Insurance Commissioners’ task force trying to get industry help on such questions. “I’m looking for a solution,” he adds, “and can skirt the issue of whether it is or isn’t insurance.”
