Five major auto rental companies are shifting a new financial responsibility onto the renter.
These companies, Alamo, Avis, Budget, Hertz and National, have changed their rental contracts in various states to make the renter's own insurance policy the first line of defense if there is an accident involving a liability claim - i.e., one that injures or kills other people or damages others' property. Until recently, the liability insurance that rental companies are required to maintain by state laws was the primary coverage.For drivers who do not carry liability insurance or do not want to put their own policies on the line, the rental companies offer an alternative, which they sell under various names for an added daily fee of $8 or so.
For those without liability coverage who do not buy this, the renting company's back-up coverage becomes the primary coverage, but there is a possibility that the rental company will turn around and sue the renter. Rich McEvily, a lawyer for Hertz, said, "We say to the renter, "It's up to you to protect your own assets."'
In California, Hertz and Alamo have shifted both primary and secondary responsibility to the renter, which makes a suit more likely, but the situation is so new no suit has been reported yet. The California attorney general's office, according to Ron Reiter, an assistant attorney general, is asking the rental companies how they can shift the responsibility when the law apparently places the burden on the auto owner.
This type of insurance, usually called third-party liability, has nothing to do with the collision damage waiver, a rental-contract provision that, for a daily fee, absolves the renter of responsibility for losing or damaging a rented car.
Losing or damaging a rental car involves a finite cost: the value of the auto.
A liability suit growing out of an accident can involve millions of dollars if an injured person sues for lost potential earnings, or a family is left without a wage-earner.
Even before the recent changes, the rental companies were offering an "excess coverage" protection to provide more coverage to a driver in the event of a suit, but now it seems likely to be more popular, particularly since many people who rent cars do not own one and thus will not have liability insurance. Faced with the new rental rules, these people might not rent a car at all, since their houses or other property would be on the line in the event of a liability suit.
The burden-shifting is going on very rapidly. For the major companies, it apparently began in January, when Avis and Budget took the step in California, followed there by Alamo in March, Hertz in April and National in May. In Florida, Budget shifted in January, Hertz and National in May and Avis and Alamo in June.
Budget has also shifted liability in Indiana and Wisconsin, and has a new contract in the works for Texas renters.
National has acted in 17 additional states: Alabama, Colorado, Illinois, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Nevada, New York, New Jersey, North Carolina, Ohio, Oregon, Texas and Wyoming.
Alamo has shifted in 27 additional states: Alabama, Alaska, Colorado, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Washington and Wisconsin.
These companies say they are looking at their contracts in all states to see how to escape what Hertz has called "dramatically escalating liability costs."
The rental companies say "vicarious liability" laws are causing the move to shift the liability burden. Eleven jurisdictions have such laws, which hold a vehicle's owner responsible for damage done, regardless of who was driving it.
In seven states with such laws, according to Jan M. Armstrong, executive vice president of the American Car Rental Association, there is no limit on the amount of damages a jury may award in a liability case. Of these seven, she said, Florida and New York are producing the largest settlements, meaning the biggest legal losses for the rental companies. A New York jury last month awarded $163 million, a record, to a victim in an accident involving a rental car.
The five other places with no settlement limits are Connecticut, Iowa, Minnesota, Michigan and Washington, D.C. The four vicarious liability states with limits on awards are California, Idaho, Nevada and Rhode Island.
Florida was an early target for the shift. Dennis Stuth, director of risk management for Budget Rent a Car, said his company, looking for ways to stem the cost of liability settlements, noticed that smaller rental companies in Florida and California had shifted the primary liability burden to the renter's own policy. He said the company's lawyers then began working with local lawyers to see where state laws permitted such a shift.
All the companies discovered a Florida regulation that left an opening.
In 1977, according to Don Dowdell, counsel in the office of the Florida Insurance Department, the legislature approved making the rental company's liability insurance primary, unless the lease stated otherwise. In 1989, he said, a rule was approved that specified how the lease was to inform the renter about who bore this responsibility.
According to Joseph M. Russo of Hertz, Florida's law was enacted to make it possible for companies that leased whole fleets of vehicles to buy their own liability insurance and thus pay a cheaper rental price because the rental contract would exclude the cost of the owner company's redundant liability insurance.
Dowdell said the present situation, where the contracts require the renters to assume the burden, rather than permitting them to do it if they wish, was an undoing of the intentions of the 1977 legislators.
What's the bottom line? Those who have no auto liability insurance and rent cars a lot should consider buying their own. Chubb offers an add-on of $1 million in liability for its renters' and condo owners' policy. This might cost $80 to $100 a year more, says Ruth Buglione, an account executive at H.& R. Phillips insurance in New York.
Other companies, according to June Bruce of the Insurance Services Office, an industry clearinghouse, have a "named nonowner vehicle" policy with liability coverage to a state's limit. Ms. Buglione said this coverage would hook onto a homeowner's policy, and might cost $300 a year for $300,000 in coverage.
Otherwise, the rental companies offer $1 million liability coverage under various names. Hertz calls its option Liability Insurance Supplement, which is offered for $7.95 a day; Avis has "additional liability insurance" for $7.95 a day. Alamo's "extended protection" costs $7.99 a day. National's coverage is $6.95 a day, as is Budget's "excess policy." If, in addition, the renter bought a collision damage waiver, the added cost for the rental would be $20 a day.
On the subject of avoiding the collision damage waiver, American Express has changed its plan to limit its coverage under its credit cards to 15 major car rental companies.
In June it notified cardholders that as of Aug. 1 its back-up protection for loss of or damage to a rental car would be available only for those companies, but on July 26 it rescinded its decision.
American Express cited the complaints of smaller companies, voiced through the American Car Rental Association.
The card company said it would move to recover part of the costs from car rental agencies with records of losses "disproportionately" above a national average.