Car Rental Insurance Tips

Car Rental Insurance:  The Truths

This experience is uncommon, but not unique. Car rental companies desperately want you to buy their collision damage waiver, or CDW (sometimes also known as loss damage waiver, or LDW) and will go to great lengths to make you pay for even the smallest damages if you don’t. Here’s what you need to know.

The One Way to ‘Drop the Keys and Forget It’

When you buy a CDW, the rental company surrenders its rights to charge you for damage to a car rental—with a few exceptions, such as tire damage or gross negligence. (CDW terms vary by car rental company, so you’ll want to read them carefully before committing.) But otherwise, no matter how banged up the car could be, you’re off the hook: Just turn it in and be on your way. No other approach—your own insurance, your credit card, or a third-party policy—is as comprehensive or convenient. If you want that full flexibility and peace of mind, pay for CDW.

CDW Insurance is Extremely Overpriced

Typically, a CDW starts at around $30 per day and can go higher. It’s sometimes more than the base car rental rate. The actuarial cost to the rental company—the amount it would allocate toward a damage pool based on risk experience—is probably somewhere around $3 to $4 a day; the rest is theirs to keep. No wonder the agents push it so hard: It’s clearly a lot more profitable than the car rental alone.

You’ll Pay Up Front for All Damages

You can cover your major damage responsibility by relying on your own insurance, a credit card with insurance, or a third-party policy. But, in all of those cases, you have to pay a damage claim upfront, then recover as much as you can (all of it, you hope) by filing a claim afterward. That means signing a credit card bill for hundreds or even thousands of dollars when you return the damaged car, and not knowing if you’ll get that money back.

‘Damage’ Is More Than Fixing a Dent

If you don’t buy CDW, rental companies can charge for more than just fixing the damage. They also charge for:

• “Loss of use,” meaning the potential revenue lost while the car is out of service being fixed, even if the company had lots of other cars available.  And they generally figure that daily loss at the full retail rate.

• Towing charges, if you are unable to drive the car back to the return station.

• “Diminished value,” or the potential loss of the car’s resale value (because of your damage) when the rental company disposes of it, usually within two years.
• Administrative fees associated with the claims process.

Most non-CDW car rental insurance will cover those extras. But, in some cases, coverage depends on cooperation from the rental company—and it may not be forthcoming, as our reader’s above wasn’t.

Alternative 1:  Pay with Your Existing Insurance

In many cases, if your regular auto insurance covers collision damage to your insured car, it also covers damage to a short-term rental. But this coverage is generally limited to driving in the U.S. and maybe Canada, and won’t cover car rentals in Mexico, Europe, or anywhere else. So, before you plan on using your own insurance, check its coverage. If it does cover rentals, you can place a claim on it. Still, you must typically pay your policy’s deductible, and the claim may have an effect on subsequent yearly rates.

Alternative 2:  Use Credit Card Benefits

These days, most credit cards provide “free” collision coverage for car rentals, provided you use the card to secure the rental. A typical credit card benefits statement describes coverage as:

“Auto Rental Collision Damage Waiver reimburses You for damages caused by theft or collision — up to the Actual Cash Value of most rented cars. Auto Rental Collision Damage Waiver covers no other type of loss.”

Note that this typical Visa card’s benefits do not cover diminished value or administrative costs. A few premium credit cards offer primary collision coverage, meaning the card takes full responsibility for the payment. But coverage on most cards is secondary, meaning the card picks up only what you can’t first recover from your own insurance. And you still have to pay the rental company upfront, then file for reimbursement from your card issuer.

Another gotcha in the above fine print: This card (and many others) pays loss of use only if verified by the rental company’s log. Some rental companies don’t cooperate with credit card issuers in providing such logs in a timely manner.

Alternative 3:  Third-Party Car Rental Insurance

If you rent a car through one of the big online travel agencies (OTA) such as Expedia or Priceline, the agency normally offers you the option to buy collision coverage for around $10 a day. That coverage is provided by a third-party insurance company.  The cost is a lot less than the rental company’s CDW, but, as with credit card coverage, if you damage the car, you have to pay upfront and claim later.

Typical third-party collision coverage includes about the same contingencies as credit card coverage, but because it’s grouped with the booking you won’t have to make any other claims. You can also buy collision coverage independently by searching the internet for companies that offer it for around $9 per day.

General Liability Protection

You should never get behind the wheel of a car—or lawnmower, for that matter—without liability protection. But you don’t buy that from a car rental company: It usually comes with household, homeowner, or tenant insurance, and it covers far more than a car rental. And if your net worth is in six figures, you probably need an “umbrella” liability policy that covers a million dollars or more.

Car rental companies in most countries are required by law to include liability insurance. In the U.S., required coverage can be ludicrously small (usually only the minimum required by the state)—it’s usually much better in Europe. If you don’t have substantial liability insurance, you might consider buying the rental company’s offering. Still, your best bet is to make sure you’re covered 24/7 with your own insurance so you can forget about the rental company’s overpriced insurance.

The Uncertainty of Car Rental Insurance

The takeaway from all this: No alternative source of collision damage coverage—your auto insurance, your credit card, or a third party—completely isolates you from risk. Lots of travelers successfully rely on lower-cost alternatives to CDW without encountering any problems, sure. Occasionally, however, your own insurance, credit card, or third-party policy may not cover an unusual charge a rental company might impose.

If you’re unwilling to accept any risk at all, you might want to buy that overpriced CDW. For most travelers and circumstances, credit card or third-party coverage is sufficient, and primary coverage is a lot better than secondary.