Abstract: Although damage waiver fees are generally considered outrageous, most consumers should consider purchasing the waiver for short-term rentals. This article addresses the types of losses and expenses a consumer can incur which may not be covered by their auto insurance or credit card coverage. Please note that insurance policy coverages and exceptions referred to are specific to personal auto insurance policies written in New York.

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Although most collision damage waiver (CDW) or loss damage waiver (LDW) fees are considered excessive, most consumers should consider purchasing the CDW/LDW for short-term rentals. This is becoming increasingly the case as rental car companies charge ever-higher fees and penalties for losses and expenses not covered by most auto policies or credit cards. Consider the following  reasons for purchasing the rental car damage waiver:
1.  Loss Valuation
The value of a rental car, according to virtually all rental agreements, is determined solely at the discretion of the rental company and may be significantly different from the market value "ACV" basis used in most auto policies. The “industry standard” (ISO) personal auto insurance policy covers the lesser of the "actual cash value" (market value) of the vehicle or the amount "necessary" to repair or replace the damaged property.
The rental agreement mayl contractually obligate the consumer to reimburse the rental agency for the "full value" (whatever that is) of the vehicle. If the renter’s insurance policy has a "betterment" clause, the insurer might not pay the “full value” and the renter could be responsible for the difference.

2.  Loss Settlement
As implied above, there may very well be disagreement over the value of the vehicle or the amount charged for labor and materials to repair the property—an Appraisal clause may be invoked by the insurer with its accompanying costs covered partially by the insured/renter.
More importantly, although the auto insurer has the right to "...inspect and appraise the damaged property before its repair or disposal"—the rental company may choose to make the repairs immediately, potentially resulting in a lack of auto insurance coverage because of failure to comply with the condition cited above.
In a recent claim involving farm equipment under a similar policy provision, the insurer denied coverage when the farmer had the property repaired immediately in order to minimize lost production and the insurer never had the opportunity to appraise the damage.
3.  Loss Payment
The rental agreement may require immediate reimbursement for damages and it is not uncommon for the rental company to charge the consumer's credit card for the full value of the vehicle and other expenses. This can create a significant debt, "max" out the card's credit limit (perhaps shortening a vacation or business trip), result in litigation, etc.
4.  Indirect Losses
The consumer most likely will be responsible for the rental company's loss of rental income on the damaged unit. A rental company may refuse ti divulge its fleet utilization logs for competitive reasons or their rental agreements may make the renter responsible for loss of use without regard to fleet utilization rates. If so, the renter may be charged even though unused rental vehicles are sitting on the lot. In one case, a renter was hit with a $2,000 loss of use charge. Insurers may not be willing to pay for charges they don’t feel represent a true loss of income by the rental company.
Most alarmingly, rental car companies are increasingly inclined to charge for "diminution of value," an indirect loss that is not covered by most auto policies’ physical damage section (nor most credit card coverages). We have seen documented examples of these charges for amounts in excess of $5,000 - $7,000 and heard of one that was allegedly $15,000 on an upscale SUV rental.
5.  Administrative Expenses
The rental contract may make the consumer liable for various "administrative" or loss-related expenses such as towing (e.g., one renter was charged for a 230-mile tow), storage, appraisal, claims adjustment, etc. These expenses may not be covered by an auto insurancepolicy.
6.  Other Insurance
Coverage under an auto policy is typically excess over: (1) any coverage provided by the owner of the auto, perhaps including self-insured plans, (2) any other applicable physical damage insurance, and (3) any other source of recovery applicable to the loss—CDW/LDW, travel policies, credit card coverages, etc. (what if the credit card coverage says it's excess over the auto policy?). The potential controversy over who pays what is obvious and can result in litigation.
In addition, keep in mind that many states have statutes, proprietary policy forms, and/or case law precedents that may govern this and other rental car exposures. For example, in determining which insurance is primary (pays first) and which is excess, states vary significantly. By purchasing the damage waiver, this distinction become unimportant to the renter.
In one final example, a consumer was given a loaner vehicle from a Cadillac dealer while his car was being serviced. He proceeded to total the vehicle in an accident to the tune of $37,000. His personal auto insurer refused to pay on the basis that their auto policy provided excess coverage over the dealer's garage insurance policy, offering only to pay a portion of the dealer's deductible. The garage insurer paid the entire claim, then sued the customer for $37,000.
When the consumer turned the suit in to his auto insurer, the claim was denied under the liability section of his policy, citing a “care, custody or control” exclusion. While this involved a dealer loaner auto, the same result could have been reached in this state if the auto was a rental.
7. Excluded Vehicles & Territories
Personal auto policies typically do not provide physical damage coverage for motorcycles, motorhomes, and other motor vehicles that are not private passenger cars, pickup trucks, or vans, and use of covered vehicles is limited to the U.S., its territories and possessions, Puerto Rico, and Canada (the rental agreement may also exclude operation outside a specific geographical area, in which case the auto policy could provide coverage not provided for under an LDW). In a New York State auto insurance policy, coverage for a rental car is limited to 30 days.
In addition, if a consumer is renting a trailer (U-Haul, camper trailer, etc.), auto coverage is typically limited to only $500 - $1,500. The consumer usually has no choice but to rely on the rental company's damage waiver for coverage under these circumstances.
8.  Additional and/or Future Costs
Payment for damage to a rental car may result in a significant premium increase on the renter’s auto policy via surcharges or loss of credits.
Conclusion
All auto insurance policies are not created equal, despite what you might be led to believe by some “low-cost” auto insurance advertising. In particular,  claims practices for the use of nonowned autos such as rental cars can vary dramatically from one insurer to another. Equally important, virtually all rental car companies draft their own rental agreements and can make charges and assessments that are not covered by any auto policy. Although damage waiver fees are generally considered expensive, most consumers should not rule-out purchasing the waiver for short-term rentals.

 

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Disclaimer
The above information is based on the “ISO standard” Personal Auto Policy in force in New York State at the time of publication and typical rental car agreements. Be aware that these contracts may vary from state to state and there may be statutory exceptions that may govern. In addition, these provisions can change at any time, so it is important to review the laws and contracts in effect in your jurisdiction at any point in time. Due to the brevity of this article, we cannot analyze every possible loss exposure and exception to the general guidelines above.