The season for summer vacations is here, which means many people will be renting automobiles for their trips. While the price of gasoline may weigh heavily on the traveler's mind, the question of auto insurance coverage while driving a rented car is usually not enough to keep people at home because the standard personal auto policy provides liability and physical damage coverage. However, FC&S subscribers still have questions pertaining to rental car accidents. Should the claim be handled by the renter's personal auto insurer or by the rental company's policy? Also, should the loss damage waiver offered by the car rental company be purchased?

The answer to the first question seems simple enough. The standard personal auto policy provides liability and physical damage coverage for rented cars, but these are noted to be in excess over any other collectible insurance since the rented cars are not owned by the named insured. This means that, as the owner of the rented cars, the rental company should provide primary coverage, either through an insurance policy or through self-insurance. But in fact, car rental agreements sometimes can interfere with this simple prescription. Consider the following legal cases.

In Integon National Insurance Company and Bankers and Shippers Insurance Company v. The Welcome Corporation, 53 F. Supp.2d 599 (USDC, S.D. NY 1999), the federal court addressed the question of whether the car rental company had to provide insurance coverage for an accident when the car was being driven by someone other than the renter. The court said that the rental car customer, by allowing an unauthorized third party to drive the car, breached the rental agreement and this negated liability coverage on the part of the rental company. A decision from a court in Virginia regarding Nationwide Mutual Insurance Company v. Welcome Corporation, 2001 WL 1349210 (Va. Cir. Ct.)., relying on the Integon reasoning, found that the rental agreement in question expressly prohibited the use of the car by anyone other than an authorized renter. The agreement dictated that “prohibited use of the car violates the agreement and voids or deprives the renter of all benefits, protection, and optional coverage to which the renter would have otherwise been entitled.” To the court, this meant that the self-insurance of a rental car company did not cover unauthorized use of the vehicle by a third party not privy to the rental agreement.

Another case to consider is Hertz v. Federal Insurance Company, 713 A.2d 820 (Ct. 1998). In this case, the Connecticut Supreme Court had to decide whether the liability policy of an auto rental company applied as primary or excess insurance. The Court said that the language of the rental agreement was the key. In the contract, the renter had expressly declined a liability insurance supplement offered by Hertz and agreed that Hertz's insurance was secondary. The insured driver chose implicitly to rely on her own insurer and so, Federal became the primary insurer.

There are, of course, cases that have come down on the other side of the issue, but the important point is that an individual who rents a car should not rely on the idea that the renter's auto insurance policy will always be considered as excess coverage. The terms of the car rental agreement can affect the status of a renter's auto policy, so those who rent cars should make a habit of reading the rental agreement, however tedious this task may be.

Renters also should know that some states have laws governing the primary-excess status of insurance coverage when it comes to rented cars. For instance, Utah law declares that a rental company shall provide renters with primary coverage unless there is other valid or collectible insurance coverage. The law, in effect, makes the renter's auto insurance policy the primary coverage. Another point an insured should ponder before renting a car is that coverage provided by the personal auto policy for non-owned autos is excess over any other collectible insurance.The renter should think about the fact that the rental company's insurance might be for minimum limits, or that the company's insurer might go bankrupt. If, for whatever reason, that “other insurance” is not collectible, the car renter should know that his or her insurance coverage will become the primary coverage.

Now for the loss damage waiver, which was formerly referred to as the collision damage waiver. The renter of a car contracts to be responsible for it while it is in the renter's possession. Every car rental company has its own particularly worded contract, but common to all the agreements is a declaration that the rental company will waive all or part of the renter's responsibility if he purchases the loss damage waiver (LDW), and does not violate any restrictions on the use of the rental car. Also common to the rental agreements is language that holds the renter responsible for certain indirect losses, such as loss of use, diminution in value, towing and storage charges, and other fees. So, the insured driver has to decide if it is worth buying the LDW or whether his own auto policy precludes the necessity of such a purchase.

The standard personal auto policy promises to pay for direct and accidental losses to any non-owned auto. Since a rental car fits the definition of a non-owned auto under the terms of the auto policy, there is coverage for the actual physical damage to a rented car. But what about the indirect damages for which the rental agreement holds the renter responsible? The standard auto policy will pay expenses for which the named insured becomes legally responsible, but any expenses for loss of use are limited to $20 per day up to a maximum of $600 (although many insurers will offer an endorsement to the auto policy that increases these limits).

The bottom line is that if the insured has physical damage coverage for his owned auto, the auto policy will provide such coverage for a rented auto. There is minimum coverage for indirect expenses, so the insured should be aware of exactly what he is accepting legal responsibility for when he signs the rental agreement since he may end up paying for those accepted responsibilities out of his own pocket. It should be noted that the auto policy does exclude loss to, or loss of use of, a non-owned auto rented by the named insured or any family member if the rental company is not allowed to pursue the renter for damages to the car. If the rental agreement or state law precludes any such recovery by the rental company, it would not be necessary for the renter to purchase LDW.

David Thamann is managing editor for FC&SThe FC&S Claim Queue is prepared and written by the editorial staff of The Fire, Casualty and Surety (FC&S) Bulletins, the most widely used encyclopedic reference service devoted to insurance policy interpretation and coverage topics. FC&S is published by The National Underwriter Company.