Auto Insurance for Rental Cars: How Do You Know If You Are Covered When You Rent a Car?

One of the worst things to happen while you’re away on vacation is to have a car accident.  You’re happily driving down the road in your rented Ford Focus on your way to Yosemite National Park, or to the Statue of Liberty, you’re glancing quickly at the map, and bam, you hit the guy in front of you.  You exchange insurance information, wondering, in the back of your mind, if you’re covered, and if you should have bought that Collision Damage Waiver (CDW) or Loss Damage Waiver (LDW) that you rejected with a quick scribble of your initials.  Don’t wonder.  Find out before you go!

Rental car insurance is always a bit sticky because of the differences in rental car company contracts and the wording of your personal auto policy. Since each rental company has different language in their contract, and each auto insurance policy varies from the others, here are some general guidelines, and I’ll leave it up to you to find out the specifics for your situation.

General Guidelines for Coverage on Rented Vehicles
Most personal car insurance policies have coverage that extends to a rental car.  They have wording that provides “physical damage” coverage to “any non-owned auto”. Physical damage coverage applies to damage to the vehicle you are driving.  A non-owned auto is one that is a private passenger auto, pickup, van or trailer that is not owned by you or any family member and is being operated by you or any family member. (Not exact phrasing, but close.)  A rental car fits into the definition of a non-owned auto, so physical damage coverage would apply here. If you only carry liability coverage on your personal auto policy, there would not be coverage for the damage you caused to the rental car.  You should also look in the exclusions section of your policy for any specific exclusions regarding rental cars.

Perhaps you noticed in the definition of “non-owned auto”, that there was no mention of truck, jet ski, 4-wheeler, motorcycle, etc. Your personal auto policy does not provide coverage for these types of vehicles. So the next time you rent a U-Haul truck or other vehicle that does not meet the definition of non-owned auto, make sure you check with your insurance company to see if any coverage applies.

Some states allow you to purchase endorsements to your personal auto policy that extend coverage specifically to rental cars.  Find out how coverage applies in your state, so if you're going to be renting a car, contact your auto insurance company and ask what coverages will apply.

You may also want to contact your credit card company to see what rental car coverage may be available if you charge the full rental cost to your credit card. Many cards, such as Mastercard, Visa and American Express, provide some limited coverage, which is not perfect coverage, but at least it affords some protection.

OK, So You Thought You Were Covered!
You were on your way to the Grand Canyon and you were rear ended when exiting the highway.  Your first thought is, thank goodness your insurance agent told you your auto policy covers your rental car.  While it’s true that your insurer will pay for most of the claim if you are covered, they may refuse to cover other charges the rental car company says are related to the accident. Rental car companies are increasingly tacking on new fees when a car is damaged, including diminished value (to reflect the reduced resale potential of a damaged car), loss of use (to cover lack of revenue while a car is being repaired) and administrative fees (to process claims).  Not surprisingly, most insurers balk at paying for anything beyond repairs and perhaps what they deem is reasonable for loss of use.  The same goes for credit card companies. So should you have purchased that ridiculously expensive Collision Damage Waiver or Loss Damage Waiver at $30 a day at the rental car counter?

Well, look at it this way.  The average driver gets in only one accident per 285,000 miles driven, according to the AAA Foundation for Traffic Safety.  And if you have a comprehensive auto policy that covers you when you’re driving a rental car, even if the car gets massively wrecked, you’ll probably be on the hook for only a small portion of the damages.  As long as you have a cash emergency fund (and you do, of course, don’t you?), bypassing the Collision Damage Waiver may be a calculated risk worth taking.  Only you can be the judge of that.