Rental Cars, Credit Cards, and the Loss Damage Waiver

You’re are standing at the counter of the rental car desk. Your flight was late
and you are pressed for time, trying to make it to your business appointment or resort hotel
for a relaxing dinner with friends. There are six people behind you in line, all equally in a hurry
to get their car and get on their way. The desk agent asks you, “Do you want any of the
insurance packages we offer?” You think to yourself, “My auto policy covers me, I have a
credit card that covers the car, and I have read several articles on the Internet and in
newspapers saying that buying that Loss Damage Waiver (LDW) [sometimes referred to as
Collision Damage Waiver] is a waste of money and unnecessary since your auto policy covers
you.” So, to save about $25 a day for the four-day rental, you decline all of the coverages
offered by the desk agent and head along your way. Arriving at your hotel (or business
appointment), you park the rental car in a designated parking spot and head inside.

Later that evening, you return to the car to retrieve some baggage and find that the car has been rearended
with damage so severe that you question whether the car can be driven. There is, of
course, no note on the car leaving information about the damage caused. A few days later,
you manage to drive the car back to the rental firm where you fill out a report and are told by
the rental agent, “OK, Thanks. We will turn this in and you’ll hear from our loss control
department later.” It seems so simple that you don’t even call your insurance company to
report the loss. Then, a few weeks later, “The Letter” comes from the rental car firm
demanding that you pay $4,400 for damage to the rental car, an administration fee of $370,
loss of use charges of $620, towing charges of $190, storage fees of $170, and $3,100 in
diminished value. That’s a whopping total of almost $9,000. In a near-panic, you report the
loss to your auto insurance company and credit card company, thinking that everything will be
paid (except maybe your deductible) and the process will be pretty simple. A week later,
reality sets in when denials start to come in from the auto carrier and credit card company.
Situations like this happen hundreds of times per day around the country. In fact, the above
scenario is an actual loss relayed by star agent Robert Ludwig in the Sarasota, Florida area.
One of his customers went out west for a four-day pleasure trip and the facts above are
exactly what happened. FAIA has an in-depth article in our Education Library titled “Rental
Cars and the PAP”which deals with a variety of issues (liability, PIP, uninsured motorist,
physical damage coverage and more) and is a great source document to review. This article
will focus on the benefits of purchasing the LDW as well as point out some of the items agreed
to in a rental car contract, gaps in the auto policy, and benefits (and gaps) of credit card
coverage.

From the outset, it should be understood that purchasing the LDW on a rental vehicle is
always the best choice due to gaps found in auto policies and credit cards. While other
coverages such as liability and personal effects are available from rental car firms, this article
focuses only on the LDW offered by all rental car firms.

Rental Car Contract

Understanding the rental car contract (a legally binding contract, signed by the renter) and
what the renter is agreeing to is critical to understanding the need for the LDW. While each
contract is different, almost all contracts have wording in which the renter agrees to pay for
costs including, but not limited to:

• Fair market value of the car.
• “Full value” of the car. Note that “full value is not defined.
• Our estimated repair costs.
• Loss of use charges, even without evidence that an actual loss was incurred by the
rental car firm.
• Diminished value.
• Towing.
• Storage.
• Administrative fee.
• Pro-rata license plate fee.
• Damage from any cause to include natural losses such as hail or flood.

One rental firm even states: “You must reimburse us for damage immediately upon
return regardless of your insurance coverage or fault.”

It’s also important to know what terms and conditions are agreed to in the contract since
violation of these terms almost universally voids any “insurance” purchased from the rental
car firm and also voids any credit card coverage provided by the renter’s credit card. Common
actions that violate the rental car contract include, but are not limited to:

• Use by a non-listed driver. This could include a valet parking attendant.
• Use off of a paved service. This includes dirt roads, driveways, or parking lots.
• Use outside the United States, such as in Canada.
• Use outside of certain specified states.
• Failure to use seat belts or child safety seats.
• Failure to close and lock all doors and the trunk.
• Failure to roll windows up if the vehicle in unattended.
• Use while intoxicated or under the influence of drugs, legal or otherwise.
• Use while the vehicle is overloaded. (Not defined.)
• Used to transport explosives, such as a five-gallon gasoline tank for a lawn mower.

The Auto Policy

The standard ISO Personal Auto Policy (PAP) provides coverage for a “non-owned auto,”
defined in the policy as a “private passenger automobile, pick-up, van or trailer.” At least one
auto on the PAP must have Part D – Damage to Your Auto for this coverage to apply to a rental
car. Clearly not covered for physical damage (remember, this discussion focuses only on
physical damage to the rental vehicle and does not address liability, medical payments, PIP, or
uninsured motorist coverage) would be vehicles such as a U-Haul box truck or a motor home.
The policy responds on an “actual cash value basis.” Remember, too, some rental car
contracts specify that the renter will pay the “full value” of the car, whatever that term means.
The PAP also covers loss of use charges up to $20 per day and administrative fees, but there
is a limit of $600 for these combined charges unless higher limits were selected on the policy.
The PAP does not cover diminished value and, as outlined in the actual claim above, those
charges can be significant. Other charges such as towing, storage, and the pro-rata license fee
may or not be paid by the PAP; there is not universal agreement among insurance experts as
to whether these would be covered or not. Remember, too, if the PAP does not cover charges
of any type imposed by the rental car firm, the renter personally agreed to pay those when
the contract was signed.

The standard ISO Business Auto Policy responds in a similar manner as long as the policy is
structured to provide coverage for the non-owned auto via using Symbol 8 for physical
damage. Assuming that Symbol 8 was properly used, the larger vehicles such as the box truck
or motor home would be covered, subject to a possible dollar limit listed on the declarations
page.

Credit Card Coverage

With the disclaimer that each and every credit card agreement is different and must be
analyzed, it’s safe to say that the following listed items are common to many/most credit
cards offering rental vehicle protection.

Coverage is excess, meaning the claim must be submitted to the automobile insurance
company first. At least two credit cards, however, offer an optional service whereby the
cardholder signs up for coverage which is primary coverage (before the auto policy
responds) for damage to rental vehicles. Not all vehicle types are covered and there are
limitations and restrictions on this optional coverage. Short of signing up for this optional
coverage, it’s safe to assume that any credit card coverage is excess to any other
insurance available.

The coverage is void if the rental car contract is violated in any manner. Remember the
prohibitions for use by a non-listed driver, off of a paved surface, and others.
To activate the coverage, LDW must be rejected and the entire rental charge must be
paid for using the credit card. One consumer had a claim denied when she used
“frequent renter points” to pay for the car and charged only the tax and fees to the
credit card.

Diminished value is not covered.  Loss of use charges, if covered, must typically be supported by fleet utilization logs.
Remember, the contract may require payment of these charges without regard to fleet
utilization.

Excluded vehicles include (but are not limited to) pick-ups, full size vans, moving trucks,
motor homes, off road vehicles, vehicles with less than four wheels, and vehicles with a
cost new over $50,000.  Coverage does not apply in some countries. Read the agreement to see a list of
companies.  Coverage is void in DUI situations.  Rentals of a certain number days or less are covered, ranging from 14 days to 40 or
more days. Each credit card is different.

Examples

Example #1: Ralph has a PAP with a $500 deductible for collision. He rents a car for two days
for a business trip using his personal credit card and declines all coverage offered by the rental
firm. His employer does not have a BAP and carries only hired and non-owned auto liability
coverage. While driving down a dirt road to meet a friend for dinner, Bill loses control of the
car and hits a tree causing damage to the car. The rental car firm demands payment of $3,700
for damage to the car, $450 for loss of use for seven days, an administrative fee of $250, and
$1,200 for diminished value.

Since Bill violated the contract by driving off of a paved surface, his credit card coverage is
void. Bill’s PAP pays the $3,700 damage to the rental car less his deductible, $120 for loss of
use charges ($20 per day after 24-hour wait), $250 for the administrative fee, and denies the

$1,200 diminished value. Total cost to Bill is $2,030.

Example #2: Sharon has a PAP with a $500 deductible for Other-Than-Collision. She rents a
car for three days for a pleasure trip using her personal credit card and declines all coverage
offered by the rental firm. A severe hail storm damages the car. The rental car firm demands
payment of $3,900 for damage to the car, $590 for loss of use for six days, an administrative
fee of $200, storage charges of $170, and $900 for diminished value.
Sharon’s credit card provides excess coverage so the claim goes to the PAP carrier first. The
PAP carrier pays $3,900 less the $500 deductible for the hail damage, $100 for loss of use
charges, and $200 for the administrative fee. The PAP carrier denies the storage fees citing
“no evidence charges were incurred” and also denies the diminished value claim. Sharon
submits the $500 deductible, $490 non-covered loss of use charges, $170 of storage charges,
and $900 in diminished value to her credit card. The credit card issuer pays the $500
deductible, denies the loss of use charges since the rental firm refuses to produce a fleet
utilization log, and also denies the storage charges and diminished value since the card
excludes those charges. Total cost to Sharon is $1,560…plus she spent four weeks dealing
with the rental car firm, insurance company, and credit card company, all of which ruined her
fun vacation. Adding insult to injury, since Sharon had a vandalism claim on her auto policy a
year earlier her insurance company imposes an additional premium on her policy for three
years since she no longer qualified for her preferred rate tier. That increase was $190 per six

months for three years.

Example #3: Betty is moving into a new house and opts for a “do-it-yourself” move. She rents
a moving truck for one day and in order to save $24 she declines the LDW offered by the
rental firm. Betty remembers the articles she read on the Internet about how the LDW is a
waste of money. Unaccustomed to driving the large vehicle, she swings wide on a turn and the
side of the truck hits a power pole ripping a four-foot hole in the truck. Betty turns the truck in
and is told, “The contract requires you to reimburse us for damage now.” Damage is estimated
(by the desk clerk) at $5,200. The clerk also “estimates” loss of use charges of $750,
estimates an administrative fee of $250, and diminished value of $1,100. Betty used a “gold”
credit card to rent the truck and her available credit is only $4,500. The clerk charges that to
Betty’s credit card and says that loss control will be in touch later for the remainder of the
amount due. Betty only has the one credit card and now she is “stuck” without a credit card to
use for routine purchases.

The adjuster for Betty’s PAP investigates the claim and sends a denial letter since the truck is
not a “non-owned auto.” The credit card company also completely denies the claim since
trucks are excluded in the coverage they provide. That leaves Betty with full responsibility for
over $7,000 in charges. Betty has to set up a payment plan, including interest, with the rental
firm and it takes her three years to pay off the debt. Betty kicks herself for trying to save $24.
Example #4: Bill (real name, real claim) flies from Tennessee to Phoenix for a quick two-day
business trip. Bill’s employer has a procedure manual stating that the LDW will be rejected.
Bill, maverick that he is, ignores the manual and always buys the LDW. On the way to the
airport to fly back home, he stops for dinner at a Mexican restaurant, parking the car in a
designated parking spot. He returns to the car after dinner to see damage that he estimates to
be around $3,000. He drives to the airport and as the rental car attendant comes out and sees
the damage, Bill holds up his contract saying, “I bought your coverage.” The attendant verifies
that information via her hand-held computer, prints out the final bill, and says to Bill, “Thanks
for renting with us sir. Have a safe flight.” For about $50, Bill has saved himself and his
employer countless hours of time and hundreds of dollars all because he complied with the
rental contract and bought the LDW.

Bottom Line:

Customers should always be advised of at least two major issues when renting a vehicle. First,
read, understand, and comply with the rental agreement. Second, the best choice at the rental
car counter is to spend about $25 a day and accept the Loss Damage Waiver. Present the
situation to customers who travel for pleasure as, “If you can afford the plane ticket, rental
car, fuel, hotel, food, beverages, and entertainment for your vacation, you can also afford $25
a day for the LDW. Build this $25 a day into your vacation costs, don’t violate the rental car
contract, and sleep better knowing that a damaged car is the problem of the rental car firm
and not yours.”
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Copyright FAIA, 12/1/11, David Thompson