Rental Car Insurance Explained
Last Updated on July 27, 2020
Most drivers wind up renting a car at some point in their lives; perhaps they are “between vehicles,” or are having their primary vehicle serviced. The most common scenario, however, is when one takes a vacation. Most auto rental agencies offer optional insurance for a rental car when you sign the paperwork.
A common auto insurance question has to do with whether or not one should purchase rental car insurance when it is offered. Normally, the answer is “no” – but there are always exceptions to the rule.
Continue reading below to learn all about rental car insurance, including when you shouldn’t buy rental car coverage, when you should buy rental car coverage, and when you might already be covered for your rental.
Table of contents:
- What insurance coverage is offered by the rental agency?
- When not to buy rental coverage
- When you should buy rental coverage
- Check your own coverage first
- Rental car coverage for travelers
- Why agencies push rental car coverage
What Coverage Is Offered by the Rental Agency?
Usually, when you rent a car there are a few different coverage options to choose from. Let’s go over them briefly below so that you’ll have a better idea about whether or not you need to purchase them.
- Collision Damage Waiver – Also known as a loss damager waiver (LDW), the collision damage waiver (CDW), covers you for damage if your rental vehicle is damaged in a crash, vandalized, or stolen. Note that a CDW is not technically insurance, instead, it’s an agreement you and the rental agency sign that says they won’t come after you for damages. If you already have collision and comprehensive coverage with your personal auto insurance policy, you might not need CDW. To be sure, call your auto insurance agent to confirm.
- Supplemental Liability Coverage – Supplemental liability coverage (SLI) will cover the damage you cause (you are at-fault for) to other property or people. This can include vehicle repairs and medical bills. If you already have a personal auto insurance policy for the vehicle you drive back home, chances are you already have liability coverage that is extended to rental cars. To verify coverage, call your insurance agent to make sure your liability coverage extends to rentals.
- Personal Accident Coverage – If you or your passengers are injured in an accident while driving the rental car, personal accident coverage (PAC) will pay for your medical bills. If you and your passengers already have health insurance coverage, you most likely will not need this type of coverage as your personal health insurance policy will kick in to pay the bills. Additionally, if you have personal injury protection or medical payments coverage with your personal auto insurance policy, you probably won’t need personal accident coverage either.
- Personal Effects Coverage – Personal effects coverage (PEC) will pay for items stolen from your rental car. This can include laptops, clothing, and gifts. In this case, if you have “personal property coverage” already with your homeowners or renters policy, you will not need to buy PEC from the rental car agency.
When Not To Buy Rental Coverage
If you have good auto insurance already, chances are that when you rent a vehicle – whether for a vacation, or because your vehicle is being repaired or serviced, or for some other reason – you’re already covered. And even if you are not, if you pay for the rental with a credit card, in many cases liability is covered by the card issuer. Unfortunately, two out of five consumers do not realize this and often wind up buying the insurance offered by the car rental agency when it’s completely unnecessary.
According to the Consumer Federation of America (CFA), insurance for a rental car is a quasi-legal scam. It is a form of “add-on” insurance which makes consumers overpay – often by huge amounts. Afterward, the rental car agency gets a “rebate” (actually a kickback) from the insurer.
So – what’s going on? According to former Texas Insurance Commissioner Bob Hunter, it’s a competition in which a car rental company plays insurance companies off against one another. The rental agency offers to sell the insurance product of the company that agrees to pay the highest kickbacks. The result is that a car rental customer winds up paying premiums that are as much as 100% higher.
It gets worse: some of these auto rental companies claim that by purchasing their insurance, if you get into a wreck, you won’t hurt your standing with your own insurer – because you won’t have to file a claim with them. As is the case with many other kinds of scams, this one contains just enough truth to be dangerous; you won’t have to file the claim with your own insurer, but when the accident report becomes public and your insurer finds out, they’ll still raise your rates.
When You Should Buy Rental Car Insurance
That said, there may be times when purchasing insurance for that rental car may not be such a bad idea. For example, while American auto insurance companies are generally good about taking care of their customers when traveling at home, in some cases their hands are tied when those same customers travel outside the country. It’s not usually a problem in Canada, but in Mexico, if you do not have Mexican insurance and are involved in an accident, you can wind up in a very bad situation. The reason: Mexican courts refuse to recognize foreign insurance policies. This is also the case in other countries. If you are planning to travel abroad and are thinking of renting a motor vehicle during your stay, contact your insurance company as well as the issuer of any credit cards you may use to pay with and find out ahead of time whether or not you are covered.
Check Your Own Coverage First
Although you’ll want to check with your own auto insurance agency in order to make sure, chances are good that you’re already covered by your own personal auto policy when you’re driving a rental car. You should also be aware that if you pay with a credit card, the card issuer often covers any damages to the vehicle in the event of an accident. You’ll have to file a claim of course; the rental car agency does not automatically do this.
In many cases, your own auto insurance policy will cover damages to a rental vehicle. According to a survey done by the National Association of Insurance Commissioners, over 40% of consumers are not aware of this fact – and often waste money buying the rental agency’s coverage. Worse, consumers often wind up paying for damages out-of-pocket for no other reason than they fail to file a claim with their insurer.
If you plan to rent an automobile, it’s a good idea to call your auto insurance provider and find out what protection your current policy provides on rental vehicles.
Check Your Credit Card
You should also be aware that when you pay for your rental with a credit card, the issuer of the card may provide some auto insurance coverage as well. However, be aware that this is usually “secondary” or “supplemental” insurance – and you have a limited time (usually around 45 days) in which to notify the company or forfeit your right to compensation.
Rental Car Insurance for Travelers
Even though your own personal auto insurance policy may cover rental cars, there are usually conditions and limits. Rental vehicles used for business trips are usually not covered (though you should be covered through your company), and there may be time limits. Also, keep in mind that US-issued auto insurance does not always cover travelers in foreign countries. For example, Mexican courts do not recognize insurance awards from US companies; whether renting a car or driving your own vehicle in Mexico, you’ll have to purchase some kind of coverage while traveling in that country.
If you are planning on driving in any foreign country, check with your own insurer first. Depending on where you are, it may be a smart idea to buy the rental agency’s insurance or accident and damage waiver.
Why Do Rental Agencies Push Insurance?
Why does anyone do anything in America anymore? It’s about money. High fuel costs and falling demand have cut into car rental companies’ revenues. By offering insurance (which can cost twice as much as personal car insurance), they are attempting to recoup lost profits. The latest trick, of course, is to require customers to “opt-out” – but putting this information in fine print so that it is usually overlooked. Even more egregiously (but still within the law), car rental agencies get “kickbacks” from the underwriters of this add-on, but usually unnecessary, insurance.
If you do opt-out, the rental agent will probably tell you that by purchasing their auto insurance coverage, if you do wind up in an accident, you won’t have to file a claim with your own insurer because their own insurer will take care of it – and you won’t risk getting stuck with higher rates from your insurance company because of it. This is a half-truth; their insurer may handle the claim, but the accident report will become a matter of public record, and when your own insurance company discovers it, your rates will still go up as a result.
Final Word on Rental Car Insurance
For domestic rentals, purchasing the rental agency’s policy is usually a waste of money. Some auto rental companies argue that having coverage through them can help drivers maintain “good standing” with their own insurers should they be involved in a collision while driving a rental vehicle; however, such accident reports do become part of the public record, and if your insurer discovers it, you’ll suffer the same consequences.
If you are traveling abroad, rental car insurance may, in fact, be a good idea for a couple of reasons. First, some foreign countries (such as Mexico) won’t recognize insurance settlements from insurers outside their borders. Secondly, there may be a great deal of red tape involved, and getting a settlement may take months – and in the meantime, you will be on the hook for any damages.
The smartest thing to do when renting a car is to do your homework; find out beforehand what your own insurer and credit card issuer will cover.