The season for summer vacations is here, which means many peoplewill be renting automobiles for their trips. While the price ofgasoline may weigh heavily on the traveler's mind, the question ofauto insurance coverage while driving a rented car is usually notenough to keep people at home because the standard personal autopolicy provides liability and physical damage coverage. However,FC&S subscribers still have questions pertaining to rental caraccidents. Should the claim be handled by the renter's personalauto insurer or by the rental company's policy? Also, should theloss damage waiver offered by the car rental company bepurchased?

The answer to the first question seems simple enough. Thestandard personal auto policy provides liability and physicaldamage coverage for rented cars, but these are noted to be inexcess over any other collectible insurance since the rented carsare not owned by the named insured. This means that, as the ownerof the rented cars, the rental company should provide primarycoverage, either through an insurance policy or throughself-insurance. But in fact, car rental agreements sometimes caninterfere with this simple prescription. Consider the followinglegal cases.

In Integon National Insurance Company and Bankers and ShippersInsurance Company v. The Welcome Corporation, 53 F. Supp.2d 599(USDC, S.D. NY 1999), the federal court addressed the question ofwhether the car rental company had to provide insurance coveragefor an accident when the car was being driven by someone other thanthe renter. The court said that the rental car customer, byallowing an unauthorized third party to drive the car, breached therental agreement and this negated liability coverage on the part ofthe rental company. A decision from a court in Virginia regardingNationwide Mutual Insurance Company v. Welcome Corporation, 2001 WL1349210 (Va. Cir. Ct.)., relying on the Integon reasoning, foundthat the rental agreement in question expressly prohibited the useof the car by anyone other than an authorized renter. The agreementdictated that “prohibited use of the car violates the agreement andvoids or deprives the renter of all benefits, protection, andoptional coverage to which the renter would have otherwise beenentitled.” To the court, this meant that the self-insurance of arental car company did not cover unauthorized use of the vehicle bya third party not privy to the rental agreement.

Another case to consider is Hertz v. Federal Insurance Company,713 A.2d 820 (Ct. 1998). In this case, the Connecticut SupremeCourt had to decide whether the liability policy of an auto rentalcompany applied as primary or excess insurance. The Court said thatthe language of the rental agreement was the key. In the contract,the renter had expressly declined a liability insurance supplementoffered by Hertz and agreed that Hertz's insurance was secondary.The insured driver chose implicitly to rely on her own insurer andso, Federal became the primary insurer.

There are, of course, cases that have come down on the otherside of the issue, but the important point is that an individualwho rents a car should not rely on the idea that the renter's autoinsurance policy will always be considered as excess coverage. Theterms of the car rental agreement can affect the status of arenter's auto policy, so those who rent cars should make a habit ofreading the rental agreement, however tedious this task may be.

Renters also should know that some states have laws governingthe primary-excess status of insurance coverage when it comes torented cars. For instance, Utah law declares that a rental companyshall provide renters with primary coverage unless there is othervalid or collectible insurance coverage. The law, in effect, makesthe renter's auto insurance policy the primary coverage. Anotherpoint an insured should ponder before renting a car is thatcoverage provided by the personal auto policy for non-owned autosis excess over any other collectible insurance.The renter shouldthink about the fact that the rental company's insurance might befor minimum limits, or that the company's insurer might gobankrupt. If, for whatever reason, that “other insurance” is notcollectible, the car renter should know that his or her insurancecoverage will become the primary coverage.

Now for the loss damage waiver, which was formerly referred toas the collision damage waiver. The renter of a car contracts to beresponsible for it while it is in the renter's possession. Everycar rental company has its own particularly worded contract, butcommon to all the agreements is a declaration that the rentalcompany will waive all or part of the renter's responsibility if hepurchases the loss damage waiver (LDW), and does not violate anyrestrictions on the use of the rental car. Also common to therental agreements is language that holds the renter responsible forcertain indirect losses, such as loss of use, diminution in value,towing and storage charges, and other fees. So, the insured driverhas to decide if it is worth buying the LDW or whether his own autopolicy precludes the necessity of such a purchase.

The standard personal auto policy promises to pay for direct andaccidental losses to any non-owned auto. Since a rental car fitsthe definition of a non-owned auto under the terms of the autopolicy, there is coverage for the actual physical damage to arented car. But what about the indirect damages for which therental agreement holds the renter responsible? The standard autopolicy will pay expenses for which the named insured becomeslegally responsible, but any expenses for loss of use are limitedto $20 per day up to a maximum of $600 (although many insurers willoffer an endorsement to the auto policy that increases theselimits).

The bottom line is that if the insured has physical damagecoverage for his owned auto, the auto policy will provide suchcoverage for a rented auto. There is minimum coverage for indirectexpenses, so the insured should be aware of exactly what he isaccepting legal responsibility for when he signs the rentalagreement since he may end up paying for those acceptedresponsibilities out of his own pocket. It should be noted that theauto policy does exclude loss to, or loss of use of, a non-ownedauto rented by the named insured or any family member if the rentalcompany is not allowed to pursue the renter for damages to the car.If the rental agreement or state law precludes any such recovery bythe rental company, it would not be necessary for the renter topurchase LDW.

David Thamann is managing editor for FC&SThe FC&SClaim Queue is prepared and written by the editorial staff of TheFire, Casualty and Surety (FC&S) Bulletins, the most widelyused encyclopedic reference service devoted to insurance policyinterpretation and coverage topics. FC&S is published by TheNational Underwriter Company.