Should You Buy the Rental Car Damage Waiver?

As I have expressed on many occasions, I believe the myth that insurance is a commodity differentiated only by price is the greatest misconception perpetrated on the public. Sadly, most of the misconception comes from our own industry in the form of price-focused advertising. But, if I had to pick a second-place contender, it would probably be the recommendation that there is no need to purchase the damage waiver when renting a car.

There must be thousands of consumer articles written on this subject, most advising that your own auto insurance or a credit card is sufficient to cover any damage to a rented auto. Almost all of these articles are full of misinformation and bad advice as many individuals who have paid thousands of dollars out of pocket can attest.

I published my first article over 25 years ago telling the truth about why it is almost always advisable to purchase the damage waiver, even if you have insurance and think you have coverage under a credit card or another option. If you Google “top 10 reasons to purchase the rental car damage waiver” you’ll get about 90 million hits … many of them are my original article or an updated version.

Space does not permit addressing all 10 reasons to buy the damage waiver here but let me elaborate on a couple of them and then introduce you to a rental car issue you may not be aware of.

My auto policy has excellent coverage for the use of nonowned autos. A notable exclusion found in almost all personal auto policies is that coverage for damage to the vehicle is limited to private passenger cars, pickups (most of the time), and (with a dollar limit) trailers. If I rent a U-Haul truck or an RV, I have no coverage if the vehicle is damaged. If I rent a really nice camper trailer, I have very limited coverage, most often about $2,000. But, even if I rent a private passenger auto, my policy has exclusions and limitations for certain things.

For example, I have limited coverage for loss of use of any auto. “Loss of use” refers primarily to the rental car company’s loss of revenue. There are per-day and maximum limits on my policy that can be increased by endorsement, but few insureds elect to do so. Even if the limits were adequate, sometimes the rental company and insurer (or credit card company) can’t agree on what the appropriate charges should be. In one case, that resulted in the renter paying $2,000 out of pocket.

Worse, the limits are sometimes grossly inadequate. One renter of an upscale vehicle was hit with a $9,000 loss of use charge that cost him $4,500 out of pocket. Everyone is probably aware of supply chain issues that have affected many businesses, including the automobile industry. Delays in obtaining repair and replacement parts can drive costs up. Due to the unavailability of Japanese auto parts following the 2011 tsunami, one renter incurred a $6,000 loss of use charge in excess of his policy limits.

Solution? Buy the rental car company’s loss damage waiver and as long as you are in compliance with the rental agreement, there are no loss of use charges.

The main reason, though, that I always buy the loss damage waiver is because every rental agreement I’ve seen over at least the last 10 years makes the renter responsible for the reduction in value of a rental car, otherwise known as diminished value. The majority of auto policies exclude this, though I’ve seen a few insurers who cover it, most often as an option.

I’ve personally been involved in assisting agents with uncovered claims for diminished value that range from $3,000 to $8,000. I read an article about a $15,000 diminished value claim on an upscale SUV rental. A business acquaintance was hit with a $3,500 diminished value charge that he negotiated down to $1,500.

David Thompson, CPCU, tells the story in his seminars on rental cars about an insured who was sued by a rental car company and incurred a diminished value charge of $3,100 plus court costs and attorney fees in his fruitless defense.

Solution? Buy the rental car company’s loss damage waiver. If you damage a rental car, the likelihood that you’ll be hit with a diminished value charge is high and, again, most insurance policies won’t cover this. The same is true for many, if not most, credit cards and certain supplements you can buy from web sites like Expedia and Orbitz.

Yes, the loss damage waiver is expensive, sometimes half or more of the daily rental rate. For that reason, when I’m comparing the cost to rent a car, I include their damage waiver expense. For the peace of mind I get, I’m willing to pay the extra $100 to $300 expense on a short-term trip. I view it as just part of the cost of the trip.

Here’s one final recommendation on rental cars even if you buy the damage waiver. Don’t valet park a rental car at a hotel, restaurant or other venue. The damage waiver may be voided by allowing an unauthorized person to drive the vehicle. In addition, many auto policies only cover nonowned autos “while in the custody of or being operated by you or a family member.”

If you relinquish possession of the rental car, you may also relinquish your insurance and your coverage under the loss damage waiver. Hopefully, the venue has some form of garagekeepers coverage or otherwise will cover damage to an auto being valet parked, but it is foolhardy to rely on the insurance or goodwill of others.

What are your thoughts and experiences on this issue?