-Partners in Practice -

It is one of those situations in which the conventional wisdom no longer applies. If you have been sending employees to distant sites secure in the knowledge that the automobiles they rent are adequately insured, you may want to take another look. Skyrocketing insurance premiums have caused Hertz, Avis, and others to cast about for ways to limit their risk and reduce their costs. In doing so, they have significantly increased yours.

For years, only the most conservative of managers instructed employees to accept the Collision Damage Waiver offered by their favorite car rental agency. The cost was too high for the benefits offered, and the risk, for the most part, was insured elsewhere. Exactly where that coverage was to be found has never been widely understood, but the advice from those in a position to know was consistently reassuring: "Decline the rental agency options." In today's chaotic automobile liability environment, this once good advice may no longer be valid.

In order to understand the problems created by the changes being introduced, it is important to know what the potential sources of liability arising out of the rental of automobiles really are. There are three, none of which presented serious difficulties in the past, but all of which now poses added risk for both you and your employees.

First, the car itself might be damaged through the fault of the driver. Second, there is potential liability to others who might be injured as a result of the driver's negligence. And, third, there is the possibility of damage to the vehicle or liability to others arising out of the negligence of the rental agency (as a result of faulty brakes, for example). You may have been required to assume the rental agency's risk under the terms and conditions of the rental contract.

In simpler times, there were simple ways of dealing with each of these sources of loss. The driver's responsibility for collision damage to a rental car was generally limited to $1,000 under the terms of the rental agreement. Most often, this liability was covered under the driver's personal automobile policy, including any liability assumed under contract for the negligence of the rental agency.

In the event your employee's insurance failed to respond, liability for collision damage may well have been yours. If you were among some 90% of the employers in the United States, you probably did not insure this $1,000 risk. Like the Collision Damage Waiver offered by the rental agency (which accomplished the same thing), it was not worth the cost.

As for liability for damage to the property of others or, worse, for bodily injury to others, broad protection was available. Included in the cost of the rental agreement was liability insurance which normally afforded limits of $100,000 for each person and $300,000 for each accident for bodily injury and $25,000 for property damage. Above these limits, the limits of liability under the personal automobile insurance carried by the employee/driver were generally next in line.

Only excess of these other avenues of recovery did your firm have a liability exposure. This risk has typically been insured as "hired automobile liability," coverage for which is found in business automobile liability policies or, for firms with no owned automobiles, under the "non-owned and hired" coverage part of their commercial general liability policies. And, coverage for the liability of the rental agency assumed under the rental agency contract, if any, has long been afforded under a contractual liability endorsement to these policies.

Over the past several years, car rental companies have been quietly changing the rules. Liability for collision damage to the rented automobile has been increased from $1,000 to as much as the full value of the car. The liability insurance coverage once afforded as an integral part of the rental agreements used by most rental agencies has all but disappeared. Absolute indemnification agreements covering the negligence of the agency (which were rarely encountered in the past) are now commonplace.

What can you do in light of all this? A number of alternatives are available, but in order to find the right solution for your firm, you need first to understand the insurance options currently offered under typical rental agreements. They are explained in the paragraphs below. As you review them, keep in mind that, unless you have negotiated a corporate agreement with a particular car rental agency which provides otherwise, it is your employee to whom the vehicle is rented, not your firm.

• Liability Insurance Supplement or Additional Liability Insurance.

  This insurance option affords primary liability limits for bodily injury and property damage suffered by others. The coverage does not extend to damage to the rented vehicle (see Collision Damage Waiver below). If this option is rejected, your employee's personal automobile liability policy would be the first to respond in the event of an accident; your firm's "hired automobile liability" coverage would respond excess of the limits available under your employee's policy.

• Collision Damage or Loss Damage Waiver.

  This coverage option provides insurance for damage to the rented vehicle and for damages suffered by the rental company stemming from loss of use of the damaged vehicle. If this option is rejected, the rental company will look to the lessee (normally your employee) for the cost of repair (up to the full value of the vehicle) and for lost revenues. Coverage for these losses would, subject to any applicable deductible, normally be found under your employee's personal automobile policy. Absent a special Hired Automobile Physical Damage endorsement to your automobile or general liability policy, there would be no coverage in place for your firm if your employee's policy somehow failed to respond. Remember that some may maintain liability coverage only; their vehicles may not be worth the cost of property damage protection.

• Personal Accident Insurance.

  This option provides medical and life insurance for the lessee and any passengers in the rented vehicle. Limits vary from one rental car company to the next.

• Personal Effects Protection.

  This option provides coverage for damage to or loss of personal items owned by the lessee.

Here, listed in the order of priority we would recommend, are the actions you might take in response to all this:

1. Arrange for a Corporate Account with One of the Major Rental Companies.

   This will make the firm, rather than the employee, the lessee, and it will bring the automobile insurance carried by the firm into play on a primary basis. Most rental companies are more than willing to establish corporate accounts for firms of any size, and when you establish a corporate account you should be in a position to address risk in a coherent fashion. Larger firms with a high volume of rental activity will, of course, have more baragining power, but here are some negotiating guidelines which may prove useful to firms of all sizes:

   • Secure Blanket Third Party Liability Coverage.

     Establish a minimum level of primary liability insurance coverage, $100,000 for example, to be included in all your rental agreements. This can normally be done for an additional rental charge of as little as $2 per day. It will protect both the employee renting the vehicle and the firm against liability for bodily injury and property damage to others, and it will respond before your firm's hired automobile liability insurance (which is generally written on an excess basis) is brought into play.

   • Exercise the Collision Damage Waiver on a Blanket Basis.

     Extend this property damage coverage for the rented vehicle to cover all your rentals. The cost is still high (approximately $9 per day), but the risk has increased from $1,000 to the full value of the car. You can control the cost somewhat by negotiating a manageable collision damage deductible.

   • Reject the Superfluous Options.

     Unless you have a unique and compelling reason to do so, do not exercise either the personal accident or the personal effects coverage option. These risks are normally insured elsewhere: Injury to your employee is covered under your workers' compensation and group health insurance; injury to passengers is covered under your automobile liability insurance; and personal property should be covered, either under your employees' individual homeowners' or renters' policies or your firms business personal property coverage.

2. Purchase Appropriate Protection with Each Rental.

   If for some reason you are not able to arrange for a corporate account, or if an alternate rental car company has to be used on an emergency basis, instruct your employees to purchase both the Liability Insurance Supplement and the Collision Damage Waiver when renting cars. Pass the costs through to your clients as direct reimbursables where you can. You are not being paid enough to retain these risks.

3. If All Else Fails....

   If neither of the foregoing options works for you, contact us, and we will arrange for your automobile policy to provide coverage for third party liability claims, extend coverage to include a Hired Auto Physical Damage endorsement to insure against damage to the rented vehicle, and (at your option) add coverage for your employees as insureds (otherwise, their personal automobile liability coverage will remain primary). In some cases, this alternative may appear to be more cost effective than either of the previous two, but hidden administrative costs in both underwriting and claims adjusting tend to tip the balance toward the other options.

4. Inform Your Employees.

   It may come as news to many of your employees that their insurance may be called upon to respond first in the event of an accident involving a rental car they are driving (and that it is their deductible that is on the line). If this, in fact, is the case in your firm, they should probably be made aware of it. Unless you exercise one of the three options outlined above, it most likely is the case. And even if you do take control, you will want to make certain your employees understand how to respond to the options offered at the counter by the rental car agency.

Finally, if you are in doubt about any of this, please give us a call. The issues are complex. We would welcome an opportunity to discuss alternatives which might better enable you to manage your risk in light of the changes that have taken place.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
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