What rental car insurance do I need?

This seems to be my month for questions about insurance for rental cars. I’m just winding up a series of columns narrowly focused on the issue “loss of use” coverage by credit cards. Meanwhile, along comes a much broader question that puts the “loss of use” issue into the more general context.
“I drive but do not currently own a car, so do not have car insurance. All the information I see about insurance for rental cars assumes the renter already has personal car insurance. I have a Visa card, which I believe offers some insurance. So what does a renter who doesn’t own a car do?”

Although the reader asked specifically about drivers who lack personal insurance, the question raises some topics of interest to just about anyone.

The short answers to the reader are (1) one way or another, you need both collision and liability insurance, and (2) you have several ways to get the insurance you need.

Car insurance basics

Whenever you get behind the wheel of a rented car, you face two separate kinds of risk:

• Collision/loss. When you rent a car, you are liable for the value of any damage to or loss/theft of the car you rent during the period it’s in your possession.
• Liability. When you drive any car you are potentially liable for any damage you might do to another person or another person’s property (including but not limited to a car.)

Of the two, liability is the far greater risk. In this litigious society, killing or severely injuring someone could potentially wipe out your entire asset base—house, investments, the works. With collision, on the other hand, your financial exposure is limited to the value of a car—certainly not trivial, but at least not potentially unlimited.

Rental car companies sell insurance or waivers to relieve you of both risks. Both, however, are extremely expensive; buy them only when you have no other option.

Liability insurance

As far as I know, all personal auto insurance includes liability if nothing else. Limits are usually generous, and if you have a significant estate, you can buy an “umbrella” policy that increases your coverage to $1 million or more.

Also, as far as I know, most personal auto insurance extends liability coverage to rented cars, at least for occasional use. But by all means make sure of what your policy includes, in case you need some supplemental coverage.

Even if you don’t own a car and thus don’t have any regular personal auto insurance—or if your regular auto insurance doesn’t extend to rented cars—you can easily cover yourself. Many insurance companies sell “non-owner” automobile policies. They cover you not only when you rent cars, but also if you borrow a car from someone. Policies generally cover you for a fixed term, not per-rental.

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Credit cards, on the other hand, do not cover liability. If your regular insurance doesn’t cover rental cars, or you don’t have regular insurance—and you don’t buy a non-owner policy—you have no alternative but to buy daily-rate liability coverage from the rental company. Even paying gouge rates is far better than facing unlimited risks without liability insurance.

Collision insurance

Your financial risk of collision to a rented car includes three main components:

• The cost or repairing the damaged car.
• The “loss of use” charge the rental company imposes to offset the revenue it misses during the time the damaged car is out of service for repair.
• A “diminished value” charge that reflects the reduced resale value of a damaged, car, even when repaired, compared with the value of an undamaged car of the same model and mileage.

Rental companies, of course, are eager to sell you their own program to avoid collision risk: If you buy a collision and loss-of-use waiver (CDW), the rental company waives its right to collect damages from you. The problem is that CDW is extremely expensive, up to $25 a day; the rental companies like it because it’s something like 75 percent or more pure profit.

Personal insurance coverage. Some personal auto insurance extends collision coverage to rented cars; some doesn’t. Some limits coverage to cars you rent while your regular car is in for repairs, not to vacation rentals. Coverage may also be limited to a relatively short period of time. Some covers loss of use, some doesn’t, and some offer loss-of-use coverage as an optional extra. In general, personal insurance in the U.S. covers you when you drive in the U.S. and Canada, but not anywhere else.

As with liability, you can’t intelligently assess what extra coverage you need until you first determine exactly that your own insurance covers. If you don’t have auto insurance at all, you obviously need some alternative form or coverage. And even if you have regular auto insurance, if it doesn’t include collision for your regular car (if, for example, a car is too old to warrant the expense), it probably doesn’t cover a rented car.

Credit card. All AmEx cards, all Diners Club cards, most Visa cards, some MasterCards, and some premium Discover cards provide no-cost collision coverage when you use the card to rent a car. But, as I’ve found out recently, that coverage is far from absolute:

• Most credit card coverage is secondary, meaning it covers only the amount you can’t first recover from your regular insurance. Diners Club and a few versions of AmEx, MasterCard, and Visa provide primary coverage, meaning the card picks up the tab regardless of your other insurance. Since regular insurance doesn’t cover you outside the U.S. and Canada, all credit coverage becomes de-facto primary in other areas.
• If your credit card covers collision at all, it includes the full cost of repairs to the damaged vehicle and the fine print says it also covers loss of use. But as I’ve found recently, loss of use coverage can be incomplete or uncertain. And Discover doesn’t cover loss of use at all.

Travel policy. If you’re not satisfied with the potential risks of credit card coverage, you can buy supplementary collision coverage as part of some bundled travel insurance policies. The cost is usually less than half of what you’d pay the rental company, but as far as I can tell, it isn’t available separately.

Other insurance

Rental companies also promote personal effects and accident insurance. Both, as far as I can tell, are poor buys. If you have a homeowners’ or household policy, chances are it already includes your personal possessions even when you’re traveling. And accident insurance is a borderline scam in any form.

What to do

Both liability and collision insurance are essential whenever you drive a rented car. My overall recommendations:

• If you don’t own a car but either rent or borrow cars a few times a year, buy a non-owners’ policy. If you rent just once a year for a few days, however, you’ll probably pay less by buying the rental company’s overpriced liability coverage for a daily rate.
• If you want 100 percent risk-free protection for all the elements of collision risk, buy overpriced CDW.
• But if you’re willing to accept some risk that you won’t be fully covered for loss-of-use charges, the combination of your regular insurance plus your credit card will cut your rental bills substantially.