Your client calls to tell you he'll be renting a car whilevacationing in San Diego next week. He won't buy the coverage therental company offers if his own policy covers most of hisexposures. His brother-in-law told him the rental company coverageis a “big rip-off.” What do you tell him?

Most agents are aware that a standard personal auto policy doesnot cover all rental-car exposures. There's a gap between arenter's responsibility under the rental contract and what an autopolicy will pay. If, as is most common, damage to the rental car iscovered under the auto policy's physical damage section, theinsured will certainly have to pay the deductible and at least aportion of the loss-of-use charge. Considering the price of rentalcompany coverage, agents often suggest that a client considerretaining this uncovered portion.
But today the gap has widened. Two revisions in rental-carcontracts have significantly increased the renter's portion of therisk. One is an added charge for “diminution in value” whenever arental car is repaired. The other is “before and after,” a methodof determining the renter's responsibility when a car issubstantially damaged.
Diminution in value
About five years ago, rental companies began holding the renterliable for a “diminution of value” charge when a rental car wasdamaged. This charge represents the reduction in a vehicle's marketvalue due to its having been in an accident. When the repaired caris eventually sold, it brings a lower price.
When a renter returns a vehicle in damaged condition, he or shereceives one bill for repairs and another for diminution in value.Most auto policies cover most of the repairs, but few coverdiminution in value. This exclusion was introduced for the personalauto policy in 1999, with one for commercial auto a few yearslater.
There has also been extensive litigation addressing how coverageapplies in the absence of an exclusion. Most courts have foundpolicies do not cover the exposure, so the renter can expect toself-insure for diminution in value. Unfortunately, that's not theend of the story.
Before and after
Diminution in value is a concern when the rental company repairs adamaged vehicle–but today many cars are never repaired. With sometypes of damage, liability concerns make rental companies reluctantto return a repaired car to the fleet. Instead, they simply sellthe damaged car for salvage. They then charge the renter thedifference between the market value on the day of rental (“before”)and the amount the car brought at the salvage auction(“after”).
The following language is found in the contract of a major rentalcar company: “If the car is damaged, you will pay our estimatedrepair cost, or if, in our sole discretion, we determine to sellthe car in its damaged condition, you will pay the differencebetween the car's retail fair market value before it was damagedand the sale proceeds.”
A recent Michigan example illustrates this practice. The insuredrented a Ford Freestar with an estimated market value of $26,500and brought it back damaged. The cost of repairs, loss of use andappraisal fee totaled $7,800. The rental company chose not torepair the vehicle but to sell it at a salvage auction, where itbrought only $11,700. The renter received a bill for about $14,800,or the difference between the before and after values. The renter'sauto policy paid only the estimated repair costs, leaving a balanceof almost $7,000. That became the responsibility of therenter–quite a significant self-insured retention.
“Both provisions are being added to all rental contracts,” statedJim Maher of Midwest Car Corp. The company holds a 17-cityfranchise for two major rental car lines. He added that since therenter has signed a legally binding contract, rental companies haveno difficulty collecting.
As these new provisions are activated, the gap between what therenter owes and what his or her insurance will pay has become toowide to ignore.How can it be covered? Don't look to the insuranceindustry. Those few companies still covering damage to a rental carunder the liability section of the auto policy may be obligated topay the entire bill. However, when coverage is found only under thephysical damage section, most insurers will not acceptresponsibility for the additional charges. Do not expect them tocreate a new coverage to address the added exposures, because theserisks are not easily addressed by insurance.
Isn't some coverage for damage to a rental car included with acredit card? Only some credit cards provide any coverage for arental car. It's generally excess over the renter's auto policy,and payment is limited to the cost of repairs. A renter should notexpect a credit card company to pay diminution in value orbefore-and-after charges.
Regardless of what the brother-in-law thinks, there's really onlyone place renters can obtain full coverage, and that's through thepurchase of the loss damage waiver offered by the rental carcompanies.
The loss damage waiver
Rental-car companies hold the renter responsible for all damage tothe rental car, including an act of God. If a tree totals therental car during a severe windstorm, the renter is liable. Therental company will waive its right to hold the renter responsibleif he or she pays an additional fee and abides by the terms of thewaiver. This waiver, which is not insurance, can add between $15and $30 per day to the cost of the rental.
With the waiver, the renter will not be liable for any damage tothe vehicle. He or she will not be charged for repairs to thevehicle, for diminution in value, for before-and-after assessmentsor for loss of use. The renter can walk away from allresponsibility for damage to the vehicle as long as he or she hasnot engaged in any prohibited use.
All rental car waivers have a clause voiding the waiver if therenter improperly operates the vehicle at the time of the accident.Although wording varies, most waivers prohibit reckless orintoxicated use or use off paved roads. There is no coverage if anunauthorized driver uses the vehicle, so handing the keys to avalet parking attendant voids the waiver. Theft of the vehicle isnot covered if the keys are left in the car or if the vehicle isunlocked.
Buying the loss damage waiver is the only way to close thesignificant rental car gap that now exists. A renter must weigh thebenefits against the cost. The renter who purchases the waivershould review the prohibited use provisions and avoid engaging inany activity that would void the waiver.
The agent's responsibility
To make a sound decision on transferring or retaining this risk,the renter needs accurate information. Providing that informationis one of the primary responsibilities of an insurance agent. Theagent who continues to tell clients that an auto policy will coverthe majority of the damage to the rental car is misrepresenting hisproduct. Such a statement can carry a significant errors andomissions exposure, not to mention ethical implications.
How should an agent handle this issue? Consider a three-stepapproach:
1) Learn what your policies cover. An agent cannotbe expected to know all the details of rental-car contracts,particularly since they all contain different language. However,agents should know if the companies they represent pay fordiminution in value and before-and-after charges.
2) Develop a simple explanation. Providing a clearexplanation of the issues is a good way to add significantvalue tothe insurance transaction. Do not go into great detail. Simply giveclients the basic information for making a valid decision. Having awritten, standardized explanation is a good idea.
3) Document any discussion. Doing the right thingis no longer enough. Today, an agent has to have proof, so documentdiscussions in the client's file. Memories are often short.
It's never easy for an agent to tell clients something they don'twant to hear, but you have both a legal and moral obligation toprovide accurate and timely information. This includes discussingthe rental-car coverage gap that seems to widen every time a clientdrives a car off the lot.
Phyllis Van Wyhe is president of The Van Whye Group, whichprovides insurance education services to agents and brokers. For 15years, Ms. Van Wyhe worked as a producer with one of the largestagencies in the Midwest. During that time she earned both her CPCUand CIC designations, and developed a book of business fromscratch. Upon selling her book in 1994, she formed The Van WyheGroup with a partner. Ms. Van Wyhe operates a Web site offeringcontinuing education services, www.insurancece.com.An explanation of the issues raised in this article, suitable forgiving to clients, can be obtained from Ms. Van Wyhe at[email protected].Please put “Explanation” in the subject line.