Do I Need to Purchase Rental Car Insurance?

Posted by Cathy Kravec on September 16, 2020

All rental car companies offer you the option to purchase their insurance coverage – or what they call a Loss Damage Waiver (LDW) – when renting a car. Most people decline coverage as it can be quite expensive and they generally assume their personal auto insurance will cover them. Unfortunately, this is not always the case. 

So Just What is LDW? 

LDW is an optional add-on to your rental car agreement that waives your financial responsibility for any loss or damage incurred to the rental vehicle, provided you have not violated the terms and conditions of the rental agreement. Damage could occur from an accident, chip in the windshield, door ding, animal, vandalism, fire or even theft – all the things you expect your insurance company to cover you for. 

Doesn’t My Personal Auto Insurance Protect Me?

Yes, your personal auto insurance policy will pay for the damages incurred while renting a vehicle, subject of course to your deductible. However, three clauses in most standard rental-car contracts have increased your portion of the risk. 

The first is an added charge for "diminution in value" whenever a rental car is repaired. The second is "before and after," a method of determining the renter's responsibility when a car is substantially damaged. The third is “loss of use,” under which the rental car companies charge you a fee while their car is being repaired and unable to be rented. 

Let’s take a closer look at each of these clauses.

Diminution of Value
Rental companies began holding the renter liable for a diminution of value charge when a rental car is damaged. This charge represents the reduction in a vehicle's market value due to its having been in an accident. When the repaired car is eventually sold, it brings a lower price. When a renter returns a vehicle in damaged condition, he or she receives one bill for repairs and another for diminution in value.

Before and After
With some types of damage, liability concerns make rental companies reluctant to return a repaired car to the fleet. Instead, they simply sell the damaged car for salvage. They then charge the renter the difference between the market value on the day of rental (the before) and the amount the car brought at the salvage auction (the after).

The following language is found in the contract of a major rental car company: 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.

A recent Michigan example illustrates this practice. The insured rented a Ford Freestar with an estimated market value of $26,500 and brought it back damaged. The cost of repairs, loss of use and appraisal fee totaled $7,800.

The rental company chose not to repair the vehicle but to sell it at a salvage auction, where it brought only $11,700. The renter received a bill for about $14,800, or the difference between the before and after values. The renter's auto policy paid only the estimated repair costs, leaving a balance of almost $7,000. That became the responsibility of the renter and was quite a significant self-insured retention.

Loss of Use
This is one additional way that many car rental companies have found to make it harder for you to turn down their insurance coverage. It amounts to the standard daily rental fee multiplied by the number of days the damaged car is out of commission. Their employees are often trained on how to use this provision to sell additional coverage.

The Bottom Line: Should I Purchase it or Not?

Here’s our best thinking about this issue. For rentals for business, you should:

  • Check with your human resources department on the company policy, to judge if you purchase this additional level of coverage or not.
  • Check your corporate credit card.

On rentals for personal use:

  • Check with your credit card company. Many Visa, MasterCard, and American Express cards will provide car rental insurance coverage, including protection for loss of use claims, as long as you rent the car on their card. If you have any questions, just call the 1-800 number found on the back of your credit card.
  • Ask your insurance agent if your insurance company provides coverage.
  • If no other coverage is available, buy it.

As always, we’re ready to help guide you through these and other insurance and risk mitigation issues, and help you craft the right coverage for your organization. Make a call today: (216) 350 5050.
 

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About the author Cathy Kravec

Cathy Kravec is the Director of Private Risk at Cleveland-based Armada Risk Partners, an all-risk insurance brokerage. She has more than 18 years of experience, focuses on assisting clients in understanding their insurance needs through a thorough review of their current insurance coverages, addressing coverage exposures and customizing an insurance portfolio that fits their individual risk.