Putting Brakes on Rental Car Add-On Fees
Next week, three members of the National Assn. of Insurance Commissioners will meet in Florida to consider rental car insurance. They have considered it before. So have their parent association, the individual state insurance departments, the National Assn. of Attorneys General, the Federal Trade Commission, most state legislatures and a number of courts.
The $7-billion- or $8-billion-a-year rental car industry presents a consumer problem that never goes away: Stuck to the basic product like fungus are secondary products: insurance coverage, fuel charges, airport access fees. Some are mandatory, some optional. When one is removed, another grows to take its place.
One after another government watchdog has pointed out that one or another add-on is unfair to consumers; many just cover the company’s cost of doing business. But little has changed--apparently it doesn’t have to--and consumers had better protect themselves.
A decade ago, the standard counter question, “Do you want the insurance?” meant two limited coverages. For $5 a day, customers got “collision damage waivers,” or CDWs, wiping out their responsibility for the first $500 in damage to the car. Another $2 bought a bit of personal accident insurance.
It was expensive (the CDW would cost $1,825 annually) and was so poorly presented that customers thought it covered their liability, and often duplicated coverage on auto, health or homeowner’s policies. And although the companies always called it insurance, it wasn’t technically an insurance product and wasn’t regulated.
It wasn’t challenged much either, and car rental companies provided no data on premiums collected or damage costs, never mind claims experience. As a result, no one could assess the risk. Still, up to half of customers took the CDW--conceivably almost $100 million extra annually for Hertz alone.
By mid-decade, the CDW was up to $8 a day and usually covered the first $2,500 of damage, which made it an offer customers didn’t dare refuse. But it still wasn’t insurance, although state insurance departments were trying, unsuccessfully, to get courts to say it was.
Companies still provided no information on frequency or cost of damage; some said outright that it was simply good revenue for them. Two companies--Hertz and Dollar Rent-A-Car--were even caught supplementing those revenues by inflating repair costs that were charged to either customers or their insurers.
By 1988, the companies had “upped the exposure, the threat level to the consumer,” says Tony Schrader, deputy commissioner at the Texas Board of Insurance. The CDW now covered the full value of the rented car and cost up to $13 a day--a good chunk of the day’s rental cost. Three other coverages--personal accident, personal effects and supplemental liability--added $10 or $11.
Maybe CDW rates went up partly because fewer customers--some said barely a third--bought it now. No company had yet revealed actual damage costs. “If they know it, they don’t want us to,” says Art Weiss, Kansas deputy attorney general. “In fact, they admit it’s a profit center, that their artificially low rates are subsidized by the CDW.”
Now everyone got into the act. The NAIC, unable to regulate CDWs as insurance, offered state legislatures a model law that effectively banned the charge. The advertised daily rate would increase to make up for the lost revenue, but competition might keep it low. The National Assn. of Attorneys General issued guidelines requiring full and obvious disclosure of both mandatory surcharges and extra fees. And the FTC took action against both Alamo and General for quoting rates without including mandatory surcharges.
The biggest threat came from the marketplace, as American Express and then Visa and MasterCard offered CDW and other coverages free to premium cardholders. Indeed, at American Express, which extended the enhancement to all 34 million cardholders, “the calls started coming in the day we turned on the phones,” says Jim Erlick, vice president of card member services, and the phones handling CDW business get a half million calls annually.
Many states have considered legislation, and some passed laws. Texas requires that CDW prices be a reasonable reflection of the company’s actual damage costs, and fees immediately sank as low as $3 and $4. California limited CDW charges to $9 a day.
Illinois and New York cut the CDW by limiting customer responsibility to a $100 deductible. Just as the industry always threatened, basic daily rates shot up, making all renters pay for what had previously been optional, and Alamo sued the state of Illinois for taking away its right to recover from customers for damage to its cars.
Such solutions settle some dust and kick up new dust, including a little intramural warfare. The big companies support all-inclusive daily rates, knowing their volume will keep theirs competitive, if their business customers even care. But smaller companies have traditionally drawn leisure travelers by advertising a low daily rate and piling on surcharges and extras at the counter. Their complaint that they’ll lose business, says Art Chartrand, associate counsel for the NAIC in Kansas City, is like saying “that without the ability to rip off the consumer, us little guys can’t compete with the big guys.”
Some people further question whether consumers are well served when all charges, including optional ones, are bundled into a single rate. “We’re concerned that eliminating the CDW would take away consumer choice, when now they have choices,” says Joel Winston, assistant director of the FTC’s advertising practices division in Washington.
Not through yet, the NAIC is considering how it might regulate the other insurance products. There, too, the value is questionable, as is the sales presentation, and, while definitely insurance, they’re not sold by licensed agents.
One could be disheartened that there are so many more add-on charges now, and that even the CDW “still exists in largely the same way it existed some years ago,” says Schrader. On the other hand, all the activity attracted attention and new competition, and many consumers now know enough to stay vigilant, check their charge cards and auto coverages, and when given the choice about CDW, says Schrader, “just say no.”
