Primary Coverage v. Excess Coverage under a PAP

We have a question on the primacy of coverage between auto policies of rental car vendors and our insureds. If the rental car is damaged while the insured is driving it, or is found damaged by the insured after he left it in a store's parking lot, is the insured's personal auto policy going to provide coverage on a primary basis, or on an excess basis to that of the rental car vendor's policy?

Kentucky Subscriber

The rental car is considered a nonowned auto under the terms of the personal auto policy (PAP). The other sources of recovery clause in the PAP declares that any insurance provided with respect to a nonowned auto shall be excess over any other collectible source of recovery. This collectible source includes any coverage provided by the owner of the nonowned auto. So, if the rental car vendor has physical damage coverage for the car rented by your insured, your insured's PAP will provide excess coverage.

Consider also that the other sources of recovery clause describes as a collectible source any other source of recovery applicable to the loss. This means that if your insured is not liable for the damage (as for example, if he were hit by an at-fault driver), the auto policy of your insured will provide excess physical damage coverage if the at-fault driver has collectible sources of recovery. If the at-fault driver has liability insurance or can pay for the damage out of pocket, that is an other source of recovery applicable to the loss.

Another point to consider: the rental contract may state that the renter is primarily responsible for any damage to the car. If that is the case, look at what the renter's PAP declares in the other sources of recovery clause: the renter's PAP is excess over any other collectible source of recovery. The rental company is not providing any other collectible source of recovery for the damage to the car, and that makes the renter's PAP primary. The key word here is collectible. If the rental company does not provide physical damage coverage, there is no other collectible source of recovery, and the renter's auto policy drops down into the primary role.

Of course, if the car rental company offers a loss damage waiver for the insured and it is accepted, that in effect becomes the other collectible source of recovery. The insured's PAP will provide excess coverage, but such coverage is for direct damage to the rented car, not indirect damage, such as diminution in value, administrative fees, or towing or storage charges.

Finally, the current standard personal auto policy has an exclusion that blocks coverage for loss to or loss of use of a nonowned auto rented to the named insured if a rental vehicle company is precluded from recovering this loss from the named insured pursuant to the provisions of any rental agreement or state law. So, if the rental company cannot recover from the named insured for the damage to the rented car because of the rental agreement wording or because of a state law prohibiting a recovery, the renter's PAP will not respond to the loss anyway. If that is the case, the question of primary or excess coverage is not relevant.

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