rental cars, the pap, and the loss damage waiver

The Insurance Coverage Law Information Center

The following article is from National Underwriter’s latest online resource, FC&S Legal: The Insurance Coverage Law Information Center.

RENTAL CARS, THE PAP, & THE LOSS DAMAGE WAIVERA rented car often comes with a loss damage waiver offered by the rental company.

This waiver may confuse the insured when it comes to coverage for rented autos. This article clarifies coverage questions pertaining to the PAP and damage waivers.

November 20, 2013

How Does The Policy Relate to The Rental Agreement?

Summary: A rented car is covered as a nonowned vehicle under the PAP. The policy promises to cover damage to a nonowned car in the same way it covers an owned car—the insured pays his deductible and the policy then pays for the remaining damage. However, rental car companies offer an item called the loss damage waiver (formerly the collision damage waiver), that may confuse insureds when it comes to physical damage coverage for rented autos. This treatment is meant to clarify the coverage questions for the insured. It first examines the language of some rental companies’ contracts to see what and for how much a renter is responsible. It then looks at how the PAP might or might not cover such items, and makes some suggestions for agents when advising their clients about rental cars and insurance.

Topics Covered:

• Introduction

• Rental agreements

• 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, or $500); the renter’s PAP 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 PAP 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.

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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.

The rental contract of Avis is written in the first person, from the standpoint of the renter. The section that describes the renter’s responsibility opens with: “If LDW is available but I do not accept it, I owe for all loss or damage to the car regardless of fault whether due to theft, collision, vandalism, or any other cause except accidental fire or explosion, or natural causes . . .”

The Avis agreement goes on to state, for the renter, the items and amounts for which he is responsible in case of damage to the rented car:

1. If the car is stolen or damaged, the renter must pay the vehicle’s “fair market value” before the theft or damage. Avis will deduct salvage prior to billing the renter.

2. However, if the repair costs plus the car’s “diminution of value” is less than the above amount, the renter is r esponsible for the lesser amount.

3. In addition to the amount in #1 or #2, the renter also owes:

a. The rental company’s loss of use on the damaged car, plus;

b. A “reasonable administrative fee” (to be determined by the rental company); plus

c. Towing and storage charges.

That section concludes with what the renter must do, if the damages are covered by either his own insurance company or the credit card he used to rent the car:

1. He must identify to the rental company the name of his insurance company and policy number; or the name of the credit card issuer.

2. He must authorize the rental company to collect directly from his insurer or any other third party that may be responsible.

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

The rental agreement from Budget is somewhat shorter and simpler than that of Avis. It describes the renter’s responsibility thus:

1. “Regardless of fault, RENTER IS RESPONSIBLE FOR all loss of and damage to the Vehicle . . . and any reduction in value of the Vehicle.”

2. It includes as the renter’s responsibility “actual towing, storage, impound, and other related expenses . . . “

3. Finally, the renter owes for Budget’s loss of use of the car along with any administrative expenses.

Next, the agreement discusses the LDW. It tells the renter that if he buys LDW and does not violate any of the “use restrictions,” Budget waives all or part of the renter’s responsibility.

For a car or passenger van, the rental company, under the terms of the LDW, waives the entire amount of the renter’s responsibility. If the rented vehicle is a truck or cargo van, the renter is still responsible for damage up to the truck damage limit as shown in the rental agreement. As with Avis, any violation of the use restrictions voids the LDW.


Dollar Rent-A-Car approaches the contract in the second person, telling the renter: “You are absolutely liable for any loss of or damage to the vehicle.” This liability exists even if the damage was caused by “someone else” or if the cause is unknown.

As with Avis and Budget, the renter from Dollar is responsible for the following:

1. The full value of the vehicle.

2. Actual towing and storage charges.

3. Loss of use.

4. Diminution of value.

5. A reasonable administrative fee.

Dollar adds a charge that no other company does: a pro-rata license plate fee.

As with the other companies, Dollar agrees to waive the renter’s responsibility if he purchases the LDW. If the renter violates any of the use restrictions in the contract, he becomes “fully liable for all loss or damage, including attorneys’ fees . . .” Dollar also lists certain restrictions on the use of the car—restrictions that void the LDW.

Hertz tells its customer: “You are responsible for any and all loss of or damage to the car resulting from any cause.” The amount of the renter’s responsibility is described as the sum of “X” plus “Y.” “X” is the lesser of the following two items:

1. The costs incurred by Hertz to repair the car; or if not repaired, the costs that Hertz would have incurred to make such repairs; or

2. The greater of the car’s fair market value of the amount for which the manufacturer would buy-back the car.

“Y” is the sum of towing, storage, and impound charges; administrative charges; and loss of useHowever, if the renter purchases LDW, Hertz will not “hold [the renter] responsible for loss of or damage to the car . . .” other than in the case of certain use violations.

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 policywriters changed coverage for nonowned cars when the PAP was first published. The first edition of the PAP moved coverage for nonowned 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 PAP insured didn’t have physical damage coverage on his own cars. But, there were so many disputes between PAP insurers, PAP insureds, and rental companies over responsibility and liability that the PAP was quickly changed to go back to the “old way” of handling physical damage losses to nonowned vehicles—under the insured’s physical damage section of the auto policy, if he carries such coverage. Also, the PAP 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 PAP (under the coverage for damage to your auto section—physical damage) promises to pay for “direct and accidental loss to . . . any ‘non-owned auto’, including [its] equipment, minus any applicable deductible shown in the Declarations.” A nonowned 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 while in the custody of or being operated by the named insured; in other words, a rented car. In order for this coverage to apply to a nonowned 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 nonowned car, it “will provide the broadest coverage applicable” to any car shown on the declarations.

For example: a PAP 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.

As a review of the direct damage coverage provided by the PAP for a rental car: the PAP provides coverage for any direct damage to the rental car. If a PAP 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, a PAP 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 PAP 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 PAP.

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 PAP expanded coverage in this area. That policy, along with the 1998 version and the current version of the PAP, agrees to provide payment for loss of use expenses for which the insured becomes legally liable on a nonowned auto. Thus, a PAP 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 $20 per day) due 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 a PAP insured, the policy doesn’t pay such loss of use expenses for the first 48 hours. The PAP then pays up to $20 a day for the rental company’s loss of use, up to a maximum of $600. 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—twenty dollars per day up to a maximum of $600—is probably inadequate. Very few car rental companies rent their cars for as little as $20 per day. The insured may still face some unexpected out-of-pocket expenses, if the rental company claims loss of use of more than $20 per day.

Suggestions for Agents

When reviewing and explaining a PAP 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 PAP will provide physical damage coverage on any nonowned 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 PAP provides no coverage for damage to any nonowned vehicles he may drive—be they 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 $20 per day coverage in the PAP is inadequate, additional limits may be purchased. The PAP manual provides for such coverage in the amounts of: $30 per day/$900 max; $40 per day/$1200 max; and $50 per day/$1500 max. The


appropriate endorsement is the “Optional Increased Limits Transportation Expenses Coverage” endorsement, PP 03 02 06 98. See, “Endorsements Used with Personal Auto Policy”, Personal Lines Volume, Personal Auto section.

To Buy or Not to Buy

That is the question. Because the standard PAP 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 PAP for nonowned 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.


For more information, or to begin your free trial: •Call:1-800-543-0874

•Email:[email protected]

•Online:www.fcandslegal.com

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rental cars, the pap, and the loss damage waiver

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