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The Hidden Dangers in Car Rental Contracts

By November 9, 2016February 23rd, 2021Personal Auto Insurance, Personal Insurance

The bill from the Car Rental Agency was over $4,000. The Insurance Company declined to pay the bill.  What happened?

Our customer went on vacation with his family to Orlando, Florida.   He rented a red Ford Mustang Convertible.  While stopped at a traffic light his car was hit in the rear by another driver.

Like most people he relied on his personal auto policy to pay for any physical damage to the rental car. His auto insurance policy paid the bill to repair the car.  So what was this bill for $4,000 all about?

Unexpected Ouch!

Hidden in the language of the rental agreement he agreed to pay for something called “diminution of value.”   When a car is in an auto accident the resale value of that car may be less than a comparable auto that has not been damaged.  The difference of value is considered the diminished value.  The bill for $4,000 was for that diminished value.

His insurance company was only responsible to pay for the repair of the car and not for the diminished value. Unfortunately, this happens more often than not.

In some states like Florida, car rental companies can collect both the cost to repair their car and the diminished value or diminution of value. The law firm of Matthiesen, WIckert & Lehrer, S.C has a document that summaries court cases or state statutes that deal with diminution of value claims.

Insurance Coverage Issues

So can you get insurance coverage for this? It all depends on where you go for coverage.  You can check with your credit card company to see if they would pick up the tab, but you need to ask specifically about coverage for damage to the car, diminished value, and loss of use.  Be mindful that the customer service rep at the credit card company probably doesn’t know what diminished value or loss of use even means.  Ask them to send you something in writing that explains their coverage.

Another thing to consider about the credit card company’s coverage is that it may be limited in other ways. For example, they may not cover the renting of exotic or luxury vehicles, vans, trucks, or even SUVs.  They may only cover you if you are the driver involved in the accident and no other driver.  We have seen cases where the credit card company didn’t cover theft of the rental vehicle.  Therefore, buyers beware!

A safer bet is to buy the coverage through the car rental company. Some rental companies refer to this as “Collision Damage Waiver” or Physical Damage coverage.  The car rental company’s insurance coverage pays for the following:

Damage to repair the car.

  1. Loss of Use (in other words this is the money that the car rental company couldn’t make while the car is being repaired or sold at auction after the accident)
  2. Claim expenses the rental company incurs to investigate the accident.
  3. The car rental company’s attorney fees.
  4. The car rental company’s administrative fees.
  5. Towing and labor costs.
  6. Diminution in Value or diminished value as we discussed.

Insurance Through Car Rental Company

There are a few things to keep in mind about buying coverage through the rental company. If you are in violation of the rental agreement you may also violate the coverage you bought through the rental company.  What do I mean by this? Some rental agreements will state the following conditions which if you violate, voids the rental agreement:

Only authorized drivers are allowed to drive. Those individuals whose driver’s licenses are on the rental agreement may operate the car. A good example of an unauthorized driver: a parking attendant.

  1. No driving under the influence of intoxicants or drugs, and some rental contracts go even further to say no substances that are “known to impair your diving ability.” This is a funny technical twist that means you may be well under the legal definition of driving while intoxicated and still violate your rental agreement.
  2. No driving off road or on unpaved roads. My Dad used to live in a development in South Jersey that had some roads paved and some unpaved. Depending on how you entered his development you could drive on an unpaved road.
  3. If the car was stolen and the keys happened to be left in the car will be a violation of the rental agreement.
  4. No going into other states or countries that were not disclosed on the rental agreement. Now you know why the rental company asks you where you are going when you rent their car.

Summary of what you need to know

You pretty much are signing your life away when you rent a car. Make sure you get the right insurance coverage.

  1. Your Personal Auto policy most likely will not pick up diminution or diminished value.
  2. Your credit card company may or may not provide the coverage you need.
  3. Purchasing the coverage through the car rental company is the best way to go from a coverage standpoint, but don’t violate the rental agreement.
Scott Harrigan

About Scott Harrigan

Scott started his career in insurance in 1988 and joined Rue Insurance in 2004 as a Marketing Specialist focusing on creating effective risk financing and risk transfer programs for companies and non-profit organizations. In addition to this he is a member of the Rue Insurance educational team that provides ongoing professional development in critical insurance concepts and programs to Rue employees. About Scott | More Posts by Scott