Watch Those Rental Car Contracts!

Its summer, and the living is easy ... until, of course, you find yourself at the rental car counter being asked if you want to buy the rental car company's "collision damage waiver" or "loss damage waiver" (CDW/LDW).

Now keep in mind, you're on vacation. You just spent eight and a half hours (including a lay-over in Atlanta) getting to a destination that should have taken two hours to reach. Your spouse is standing on the curb in the 101° heat with three screaming children and no one has seen your luggage. Are you really going to take out the magnifying glass and examine the fine print in the rental contract? Even if you do, are you going to understand what you're covered for if you buy their coverage or what you're exposed to if you don't? Maybe the very knowledgeable service person behind the rental counter will take the time to explain the details to you and tell that long line of folks behind you to simply be patient and wait? The answer to all three of these questions is "No".

This is the moment for an executive decision ... and fast. You're either going to decline their offer, and initial twelve places on their form ... with each spot re-thinking "Is this really smart? Am I signing over my first-born here if something goes wrong?" Then for the rest of the trip you're on pins and needles worrying about the consequences if the rental car gets damaged. OR ... You're going to buy their coverage and be angry with yourself when you get the bill for throwing away an extra $15 a day in fees.

This has to be the most common question we get asked this time of year. "I have an auto policy with full coverage, and I'm going to rent a car. I'm covered, right?" Well, in the words of a popular rental car ad some time ago ... "Not exactly".

First, let's talk about what is covered, and then, more importantly, what's not covered. If you have your own personal auto policy in your own (or your spouse's) name, the physical damage coverage (comprehensive and collision) you have on your own car will typically transfer over to the rental car. I can't speak for ALL insurance companies here, but certainly most companies will pay for the direct physical damage, less your deductible.

The same is true for liability for damage or injury you cause to others. In fact, because the rental car belongs to the rental company, their liability limits apply first. Unless you're renting from a small, no-name company, their limits are typically substantial, and most personal auto policies will pick up should theirs prove to be inadequate.

So where's the problem then? Well, there are some significant areas where you may not be covered if you turn down the rental company's CDW/LCW. Here are just a few:

Credit Card Issues – many car rental companies immediately place a charge on your credit card to cover the estimated repair costs and other fees. This may max out your available limit, and prevent further use of your card. This could be a problem if you're in the middle of your vacation, and counting on using that card for the rest of your trip.

Right to Inspect – most personal auto policies provide the insurance company with the right to "inspect and appraise" the damaged property before the repairs are made. The rental company may decide to repair the car immediately, causing the insurance company to deny the claim entirely.

Loss of Use – the rental company may charge you for the time their vehicle is out-of-service while repairs are being made. Depending on the extent of repairs and availability of parts, these charges can be over $1000, and can be charged even if the rental company has other unused rental vehicles sitting in their lot.

Diminution of Value – a vehicle that has been in an accident, even after repaired, is worth less than the same vehicle that has not been damaged. The rental company can charge the customer for this diminished value, regardless of whether or not you were at fault for the damage. Again, depending on the vehicle and the extent of the damage, this charge could be anywhere from $1000 to $10,000 or more.

Administrative Fees – rental companies can charge you for things like storage, towing, claims adjustment, appraisals, etc. None of which are typically covered by a personal auto policy. Usually not a big item, but could run you up to a few hundred dollars.

Impact on Your Policy – if you have your policy pay for the damage to a rental car, this could cause your premiums to increase or (if there is another incident within a 3-year period) could potentially result in your insurance company refusing to renew your policy.

Territory Limitations – your personal auto policy only covers autos operated in the U.S., its territories and possessions, Puerto Rico and Canada. Renting in Mexico or overseas? Sorry, no coverage.

Excluded Uses & Drivers – business use of pickups and vans is often excluded by the personal auto policy, and the damage waiver may only cover drivers specifically listed on the rental agreement. There are many other ways to void your CDW/LDW agreement as well, such as driving under the influence or using the rental car "off-road".

The bottom line? There are certain situations where buying the rental car company's coverage makes all the sense in the world. With their coverage comes the peace-of-mind that should the car get damaged, as long as you haven't breached the contract, you walk away without a worry.

In other situations, you may feel comfortable taking your chances and self-insuring some of the above risks. And therein lies the critical issue ... making a conscious decision to take chances you know about is a lot different than unknowingly or unwittingly accepting or rejecting insurance options that could really burn you in the end.

The goal here is to protect your lifestyle and avoid unpleasant surprises. A good agent should be able and willing to discuss these options and exposures in as much detail as you'd like, so you can make an informed, intelligent decision. Take advantage of their professional advice. In most cases, it's free.