The Truth About Car Rental Insurance You Need to Know

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No matter how often we cover the pitfalls of car rental insurance, travelers continue to face unexpected costs and frustrating disputes with agencies. Many people assume they are fully covered through their credit card or personal auto insurance, only to find themselves stuck with hefty repair bills, loss-of-use charges, or administrative fees after a minor dent or scratch. 

Car rental companies always push their collision damage waiver (CDW), also called loss damage waiver (LDW), and if you decline it, they won’t hesitate to charge you for even the slightest damage. Understanding your insurance options before you rent can help you avoid unnecessary expenses and ensure peace of mind. Here’s everything you need to know to decide whether or not to accept CDW or rely on alternative coverage. 

Coverage Type	Covers Collision Damage?	Covers Theft?	Covers Towing & Roadside Assistance?
Collision Damage Waiver (CDW)	Yes, except for exclusions (e.g., tires, negligence)	Yes	Yes
Personal Auto Insurance	Yes, but it is subject to deductible & possible premium increase	Depends on policy	Depends on policy
Credit Card Coverage	Yes, but usually secondary coverage	Yes, if included in the benefits	Sometimes
Third-Party Insurance	Yes, reimbursement after you pay upfront	Yes	Yes

Car Rental Insurance: What You Need to Know

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,  gross negligence, damage occurring when an unauthorized driver is at the wheel, and even driving on an unpaved road. (CDW terms and conditions 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 insurance, credit card, or third-party policy—is as comprehensive or convenient. If you want that full flexibility and peace of mind, pay for CDW.

CDW Insurance Is Ridiculously Overpriced

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

You’ll Pay Up Front for All Damage

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 those cases, you have to pay a damage claim up front, 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.

That’s why some rental companies won’t accept rentals via debit card, or a credit card with a small limit. If you can pay the initial rental fee with a debit card, you may still need to provide a credit card to cover a possible damage claim, which would be filed before you can leave the return counter.

‘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 may 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.

You Need 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. You might consider buying the rental company’s offering if you don’t have substantial liability insurance. Still, your best bet is to ensure you’re covered 24/7 with your own insurance so you can forget about the rental company’s overpriced insurance.

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Alternatives to Rental Company Collision Damage Waivers

Alternative #1: Pay with Your Existing Car 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 any claims may cause your rates to go up.

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 sample credit card benefits statement describes coverage as
“Physical damage and/or theft of the covered rental vehicle. Valid loss-of-use charges assessed by the rental company while the damaged vehicle is being repaired and is not available for use, as substantiated in the company’s fleet utilization log. Reasonable and customary towing charges related to a covered loss to take the vehicle to the nearest qualified repair facility.”

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 recover from your insurance first. You still have to pay the rental company up front then file for reimbursement from your card issuer.

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

Credit Cards with Primary Rental Car Insurance Coverage

Personal Credit Cards:

• Chase Sapphire Preferred® Card
• Chase Sapphire Reserve®
• Capital One Venture X Rewards Credit Card
• United℠ Explorer Card
• American Express Platinum Card
• Delta SkyMiles Reserve American Express Card
• Delta SkyMiles Blue American Express Card

Business Credit Cards:

• Ink Business Preferred® Credit Card
• Ink Business Cash® Credit Card
• Ink Business Unlimited® Credit Card
• American Express Blue Business Plus Card

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 such as Allianz. 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 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: Bonzah, for example, sells coverage at around $20 per day.

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.

Bottom Line

The takeaway is that no alternative source of collision damage coverage—your auto insurance, your credit card, or a third party—completely isolates you from risk. Many travelers successfully rely on lower-cost alternatives to CDW without encountering any problems. Occasionally, however, your 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, you might want to buy that overpriced CDW. Credit card or third-party coverage is sufficient for most travelers and circumstances, and primary coverage is much better than secondary.

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