Insurance Fees on Rental Cars Hit the Skids
One would think the “collision damage waivers” in rental car contracts were insignificant--a few bucks here, a few there on top of the main charge.
But years have been spent challenging this tangential fee, and state legislatures, insurance departments and attorneys general are now attacking it in various ways. Indeed, the National Assn. of Insurance Commissioners, or NAIC, just proposed banning the charge entirely--an action that rental car firms warn would make them raise rental rates to compensate for the lost revenue.
The collision damage waiver, or “CDW,” began as an innocuous little charge for wiping out the customer’s responsibility for the first few hundred dollars of damage done to a rental car, a responsibility similar to deductibles in auto insurance policies. The rental companies covered everything else, including the driver’s liability in accidents, but that wasn’t clear when rental agents offered the waiver with an offhand, “Do you want the insurance?”
The rental companies’ justification for the charge was a bit dim: Not even Hertz and Avis have ever been able to provide figures to anyone about the frequency or cost of damage, or even how much they took in from customers. People began to suspect the charge was not coverage for losses but simple revenue. Indeed, the companies asserted that it wasn’t insurance at all, and therefore not subject to regulation or challenge.
Abuses Challenged
The justification was even dimmer for consumers, unless they had the impression they’d be driving totally uninsured without the CDW. Without statistics, no one knew the actual risk. Some said the risk of driving a strange car in a strange city was higher; some said it was lower because renters tend to be fairly affluent, often professional, and more careful in strange cars and strange cities.
Furthermore, the customer’s own collision coverage might be transferable to rental cars, and many companies reimbursing business travel preferred an occasional $500 payout to all those $5 days.
The debate got louder as rental companies made CDWs even more useful as revenue generators. By 1981, it cost $5 a day to wipe out $500 worth of customer liability; by 1985, it was up to $7 or $8 a day, against $2,500 in liability; by 1986, it was $9 to $13 a day, weighed against liability for the whole value of the car--a compelling argument for the CDW. At that point, it could be a third of the daily cost of renting, and sometimes even mandatory to the rental.
Those who didn’t take it were at more risk than they thought for any damage. Hertz, currently under a Justice Department investigation, has admitted charging customers and their insurance carriers considerably more than the actual cost of repairs.
The CDW was also a cost that was buried mid-contract and not included in advertised rates. Blame for this was often cast on the smaller companies, who, needing some competitive advantage, advertised irresistibly low rates, later supplemented by the supposedly incidental CDW charge.
Such abuses didn’t go unchallenged, often by state insurance departments receiving complaints from consumers who naturally (“Do you want the insurance?”) assumed the waivers were a kind of insurance. Indeed, the challengers often made a similar assumption, whether they proposed legislation, proposed regulation, or, like a model law written in 1986 by the NAIC, suggested giving insurance departments authority over the details and marketing of the product.
But when such challenges ended up in litigation, the courts generally ruled that whatever the CDW looked like and however it worked, it was not, technically, insurance. And while rental companies could be forced to disclose the fees, they were not subject to regulation.
With a third of the states now considering legislation of some sort on CDWs, the NAIC has produced another model law, much bolder than a proposal for regulation and ignoring the issue of whether it’s insurance. The commissioners would simply “prohibit the sale of the collision damage waiver,” says William McCartney, Nebraska’s commissioner and head of the NAIC’s task force that investigated CDWs. Rental companies are also prohibited from holding customers liable for any damage to the car not caused by misconduct.
This sweeping solution seemed “cleanest, easiest and simplest,” says McCartney. Rental companies will probably “increase the daily charge to cover (the loss of revenue),” he says, “but I’m convinced that competition will hold down such charges.” Unlike the CDW, they’re visible.
The NAIC’s intent, says McCartney, was “to develop a piece of legislation that would provide uniformity across the country.” A model, of course, is an ideal: It’s unlikely to emerge unaltered from every state legislature.
California’s current Assembly bill is a good example. Legislation was initially introduced eliminating CDWs outright, says Tim Howe, chief of staff for the bill’s sponsor, Lloyd Connelly (D-Sacramento). The alternative was “to regulate every pernicious aspect of CDWs,” says Ron Reiter, deputy to California Atty. Gen. John Van de Kamp, who is backing the bill.
The final proposal--admittedly a compromise with the rental car industry--is part abolition, part regulation. The initial phase, which ends July, 1990, allows CDWs to stand but limits the charge to $9 a day, and allows continued customer liability for collision damage but limits responsibility for theft and vandalism. Furthermore, the stated daily rate must include all mandatory charges (but not an optional CDW). Thereafter, CDWs are eliminated, and customer liability for damage is limited to $200, rising to $250 in 1993, and $50 more each five years thereafter.
The transition period gives rental companies “some time to adjust their prices and practices,” says Reiter. As for the customer’s continued liability for some damage, says Howe, “we accepted the industry’s argument that the customer should feel some responsibility to the car.”
Even this compromise is in Reiter’s view “a radical change in the way they do business.” Not everyone agrees, but it’s unarguable that it would certainly be a change, and perhaps a preview of more radical changes to come.
