PAP coverage

Suggestions for agents

To Buy or Not to Buy

Introduction

Renting a car and covering damage to it used to be a rather simple thing. The rental companies carried their own physical damage insurance on their fleets, subject to a rather large ($1,000 or $2,500) deductible. The renter was responsible only for the amount of the fleet policy's deductible. If a renter (with physical damage on at least one of his own cars) had an accident in a rented car, the payments would be allocated as follows: the renter would pay his own deductible ($100, $250, $500, or $1000); the renter's auto policy would then pay the difference up to the fleet policy deductible; and the fleet policy would cover the rest of the damage. And even if the renter didn't have physical damage on his own cars, the most he had to pay was the rental company's deductible—again, usually $1,000 or $2,500.

But auto rental companies realized they could save a lot of money on insurance by just not buying physical damage coverage on their fleet. They decided to tell the renter: "You're responsible for the value of the car. PERIOD." This increased the exposure to the renter and his auto policy insurer. Now, if a renter doesn't carry his own physical damage, he may be looking at a bill in the tens of thousands of dollars if he wrecks a rental car. In addition to the value of the car, the rental agreements also hold the renter responsible for other indirect costs.

Car rental companies are quick to point out to their customers that the worry over such costs can easily be taken care of—with the purchase of a "Loss Damage Waiver" or LDW. Some rental companies also make available a "Partial Damage Waiver" or PDW. With a PDW, the renter is responsible for only a set amount of damage, instead of the entire value of the car. As might be suspected, the PDW is less expensive to purchase.

Note, however, that the LDW/PDW does not pay if the renter violates any restrictions on the use of the rental car. Such restrictions include use by an underage driver; not buckling seat belts; failure to lock the car when parked; engaging in a speed contest; driving under the influence; etc.

Rental Agreements

This treatment looks at sample agreements of car rental firms. Avis, Budget, Dollar, and Hertz contracts are used as hypothetical examples.

Avis

The rental contract of Avis states, "If you do not accept either LDW or PDW, you owe for all loss or damage to the car. Loss and damage are described in paragraph 13 below." 

Paragraph 13  goes on to state, "If you do not accept  Loss Damage Waiver, or if the car is lost or damaged as a direct or indirect result of a violation of paragraph 14, or damaged as a result of an act of nature, you are responsible and you will pay us for all loss of or damage to the car regardless of cause, or who, or what caused it."  Loss and damages the renter would be liable for include:

• If the car is damaged, you will pay our estimated repair cost, or if, in our sole discretion, we determine to sell the car in its damaged condition, you will pay the difference between the car's retail fair market value before it was damaged and the sale proceeds

• Where permitted by law, you authorize us to charge you for the actual cost of repair or replacement of lost or damaged items such as glass, mirrors, tires, and antenna, as part of your rental charges at the time of return

• If the car is stolen and not recovered you will pay us the car's fair market value before it was stolen

• As part of our loss, you'll also pay for loss of use of the car, without regard to our fleet utilization, plus an administrative fee, plus towing and storage charges, if any ("Incidental Loss")

That section concludes with what the renter must do, if the damages are covered by either his own insurance company, credit card benefit, travel insurance, or any other insurance or benefits:

• "You authorize us to contact the benefit provider directly on your behalf and you assign all of your benefits directly to us to recover all consequential and incidental damages, including but not limited to the repairs of the car plus diminished value or the fair market retail value of the car (less salvage value plus costs incurred in the salvage-sale), and all Incidental Loss and administrative fees"

Avis agrees to refund to the renter any amounts collected that are above the amount of the loss.

Dollar Rent-A-Car

Dollar Rent-A-Car's rental contract states, "The renter and any additional drivers are absolutely liable for any loss or damage to the rental vehicle, even if someone else caused it or the cause is unknown, whether due to theft, fire, hail, flood, collision, vandalism, or any other cause."

It continues, "liability will not exceed the full value of the vehicle, plus:

1. Actual towing and storage charges;

2. Loss of use;

3. Diminution in value, as determined by Dollar, regardless of whether the vehicle is repaired or not;

4. All rental charges through the date you report the incident if not returnable or the return date, whichever is later;

5. Any out-of-pocket expenses incurred by us as a result of the loss or damage to the vehicle; and

6. A reasonable administrative fee

7. Pro-rata license plate fees, all as allowed by law."

As with the other companies, Dollar agrees to waive the renter's responsibility for loss and damages if he purchases the LDW. If the renter violates any of the use restrictions in the contract, the LDW will not apply. Dollar also lists certain restrictions on the use of the car that void the LDW.

Hertz

Hertz tells its customer: "In the event of any other loss or damage to the car, regardless of fault, your financial responsibility extends to…": 

• The full value of the car at the time of rental, less its salvage value

• Expenses for towing

• Storage impound fees

• An administrative fee

• A reasonable charge for loss of use

However, Hertz states that purchasing the LDW relieves the renter of all financial responsibility for the loss or damage to the rental car, regardless as to whether the person has insurance as long as the vehicle is used according to the terms of the rental agreement. 

PAP Coverage

Prior to the Personal Auto Policy (PAP), insurers sold the Family Auto Policy (FAP). Under the FAP, the insured had physical damage coverage for a rental car on the same terms as he had for his owned cars. Thus, any deductible under the FAP would be paid by the insured, with the insurer picking up the amount to either the rental company's deductible or to the value of the car.

But this presented a problem: what about the FAP insured who doesn't carry physical damage coverage on his car? What if he rents a car and doesn't buy the LDW?

In an attempt to address this situation, the policy writers changed coverage for non-owned cars when the PAP was first published. The first edition of the personal auto policy moved coverage for non-owned cars out of the physical damage section of the policy and into the liability section. Thus, if an insured rented a car and damaged it, the PAP would cover that damage from first dollar under the property damage (PD) liability section.

Such wording may seem simpler and more effective—especially if the insured didn't have physical damage coverage on his own cars. But, there were so many disputes between insurers, insureds, and rental companies over responsibility and liability that the auto policy was quickly changed to go back to the "old way" of handling physical damage losses to non-owned vehicles—under the insured's physical damage section of the auto policy, if he carries such coverage. Also, the auto policy now excludes property damage liability coverage for damage to property "rented to; used by; or in the care of" the insured, thus removing coverage for rented cars from the PD liability section.

The current version of the auto policy, under the Coverage For Damage To Your Auto section,  promises to pay for "direct and accidental loss to "your covered auto" or any 'non-owned auto', including its equipment, minus any applicable deductible shown in the Declarations." A "non-owned auto" is defined as any private passenger auto, pickup, van, or trailer not owned by or furnished or available for the regular use of the named insured or any "family member" while in the custody of or being operated by the named insured or any "family member"; in other words, a rented car. In order for this coverage to apply to a non-owned car, the insured need only carry physical damage coverage on one car—regardless of the number of cars insured. The policy clearly says that, for a non-owned car, it "will provide the broadest coverage applicable" to any car shown in the Declarations.

For example: an insured owns 3 cars. One has liability coverage only; one has liability and other than collision (comprehensive); and the third has liability, comprehensive, and collision. This insured would have both comprehensive and collision coverage for any car that he would rent on a short-term basis. However, if he didn't have collision coverage on at least one car, he would not have collision coverage on any rental car.

The auto policy provides coverage for any direct damage to the rental car. If an insured does not carry physical damage coverage on any of his owned autos, he should purchase the LDW when renting a car.

But what about the indirect damage for which the rental agreement holds the renter responsible? Remember that the sample rental agreements discussed earlier all hold the renter responsible for the following indirect losses:

1.     Loss of use of the rented car;

2.     The rented car's diminution in value.

3.     Fees and towing/storage charges.

Thus, an insured who has an at-fault accident in a rented car is responsible not only for the direct damage to the car, but also for certain indirect expenses. However, the auto policy only covers direct damage to a rented auto and would not cover the indirect expenses (with the exception of loss of use expenses, as noted in the transportation expenses insuring agreement clauses in the physical damage section of the policy.

Under the 1986 version of the PAP, the insured would be out of luck regarding the rental company's loss of use. That policy clearly promises to only cover "direct and accidental" loss to the non-owned car. The 1994 version of the policy expanded coverage in this area. That policy, along with the 1998 version, the 2005 version, and the current 2018 version of the PAP, agrees to provide payment for loss of use expenses for which the insured becomes legally liable on a non-owned auto. Thus, an insured (who carries physical damage coverage on his own policy) who rents a car under an agreement similar to those discussed earlier, will be covered for any direct damage to that rental car plus an amount (up to $30 per day) owed to the rental company because of the company's inability to rent that car while it is being repaired.

If the rental car is stolen while in the possession of an insured, the policy doesn't pay such loss of use expenses for the first 48 hours. The policy then pays up to $30 a day for the rental company's loss of use, up to a maximum of $900. Remember that an insured could have an endorsement increasing this coverage; available limits are $40/$1,200, $50,$1,500, and $75/$2250. The payments continue until the maximum is reached, or until the insurer pays for the stolen car, or until the rented car is returned to use, whichever comes first. The same provisions apply to damage to a rental car by any other peril or collision, except the initial waiting period is only 24 hours.

One observation is that the amount of coverage provided—thirty dollars per day up to a maximum of $900—is probably inadequate. Very few car rental companies rent their cars for as little as $30 per day. The insured may still face some unexpected out-of-pocket expenses, if the rental company claims loss of use of more than $30 per day. This is where Optional Limits Transportation Expenses coverage PP 03 02 would come in handy. 

Suggestions for Agents

When reviewing and explaining an auto policy to an insured, an agent should review all coverages involved, including how the policy responds to loss to a rental car. If the insured has purchased physical damage on at least one of his cars, his risk exposure will be covered. His auto policy will provide physical damage coverage on any non-owned car he would operate.

If the insured does not carry physical damage coverage on any of his cars, he should be told—preferably in writing, with a signed acceptance—that his auto policy provides no coverage for damage to any non-owned vehicles he may drive—be it a neighbor's car, a friend's car, a relative's car, or a rental car.

If the insured rents cars on a frequent basis, the agent should find out about how much he pays for the rentals on a daily basis. If the $30 per day coverage in the PAP is inadequate, additional limits may be purchased. The PAP manual provides for such coverage in the amounts of: $40 per day/$1200 max; $50 per day/$1500 max; and $75 per day/$2250 max. The appropriate endorsement is the "Optional Increased Limits Transportation Expenses Coverage" endorsement, PP 03 02. See, Endorsements Used with Personal Auto Policy.

To Buy or Not to Buy

That is the question. Because the standard auto policy offers no coverage for some of the indirect expenses the insured might face—such as diminution in value and towing charges—if the insured doesn't mind spending the extra money, buying the LDW is probably wise. Also, if the insured is involved in an accident with a rental car, he won't need to get anyone else involved. It will all be handled through the rental car company.

It should be remembered that coverage under the auto policy for non-owned vehicles is excess over any other collectible source of recovery. Thus, if the rental company has any type of coverage on the vehicle, the PAP becomes excess.

A final note regarding purchase of the LDW: the PAP excludes loss to a rented auto, if the rental company is not allowed by the rental agreement or state law to pursue the renter for damages to the car. In such a state, purchase of the LDW would be unnecessary, because the rental car company would not be allowed to pursue the renter for any damages to the car.

Includes copyrighted material of Insurance Services Office, Inc., with its permission.

Original October 10, 2012