A collision with reality:
The fine print of car rental agreements

By John Atkinson, Partner
Thilman Filippini

For many of us, renting a car while traveling on business is a transaction so routine it's become almost automatic. But this month, we'll focus on the hidden hazards you should know about – a couple of which are chilling.

Call it "liability creep."

Each year the liabilities assumed under car-rental agreements increase. At one time, renters were responsible only for actual damage to, or theft of, the vehicle. But the rental car companies have added loss-of-use provisions, which mean that if a damaged car is in the repair shop for, say, two weeks after an accident, the renter is liable for revenues the rental car company has lost. Storage fees may be passed on to you.

Some agreements also now require that you pay for "diminution of value." This is the reduction in eventual resale value for a vehicle that has been in an accident.

One seemingly obvious solution would be to give in and purchase the expensive insurance offered by rental car companies. But here are a few more wrinkles:

There are provisions in virtually every rental contract that can void the entire coverage. For example, coverage often is voided if the driver has had even a single drink before getting behind the wheel, if he asks someone else to drive and that person is not listed as an authorized driver, if the driver is under the age specified – or even if the car is taken on unpaved roads.

For years, we have been advising our clients to purchase Hired Car Physical Damage on their Business Auto policy and to reject the "insurance" offered when you rent a car. Since Hired Car Physical Damage covers rented vehicles the same as it would an owned vehicle, why pay more for Loss Damage Waiver (LDW) or a Collision Damage Waiver (CDW)?

But we recently learned there are now pitfalls here too.

If the vehicle is not rented by the business per se, the Hired Car Physical Damage coverage won't respond to claims. Your employees should put the business name on the agreement and use a business credit card, if at all possible.

Then what about your Personal Auto policy? Doesn't that offer any protection?

Yes and no. Some policies won't cover if the car is an SUV, van, or pickup being used for business. Nor will it cover if the employee doesn't carry Comprehensive and Collision. Some policies exclude loss of use and all exclude diminution of value.

What's more, if the Personal Auto policy pays, it will be on the driver's loss record and might result in cancellation of coverage.

Okay – but what about my credit card? Won't that pay for the loss if my insurance doesn't?

To activate coverage, the cardholder must be the primary renter and must decline the LDW/CDW. Nothing is standard with credit card coverage, and it may be changed from time to time at the credit card company's whim.

If you violate even one minor term of the rental agreement, credit card coverage is voided when you need it most. Many credit cards exclude rented SUVs, and some exclude any weather-related damage such as flood and hail.

So what should you do?

We recommend you contract with only one rental company at the corporate level, if at all possible. This legally establishes that car rentals are for business use and that the business is doing the renting – not the employee.

Review the contracts of at least three rental car companies and choose the one that best suits you. Sign a blanket agreement for all rentals and keep a copy on file.

Take the LDW/CDW coverage or make a conscious decision to self-insure any exposures that an agreement specifies you are liable for, and/or that the Hired Car Physical Damage doesn't cover. (These probably include loss of use, diminution of value, storage fees, administration, and claims expenses.)

Some loss of use may be provided by your current Business Auto policy. Ask us to check on this for you. Depending on how often your firm rents vehicles and what the charge is (sometimes more than $20 per day), self-insuring might be a good option.

If you purchase LDW/CDW, make sure that all your employees understand the "Prohibited Uses" or other sections that will void coverage. If coverage is voided, LDW/CDW will not apply, in spite of the fact you paid for it.

Continue to carry Hired Car Physical Damage on your Business Auto policy.