Special Report: Commercial Auto

Rental firms can take advantage of financial liability laws to limit their exposure

Many car rental operators can save significant expenses and still protect their business by using non-traditional risk management methods.

John Smith took his family on a long awaited sunny vacation. Being budget-conscious, John opted to rent a compact car from XYZ Rent a Car. John declined all insurance coverages and material damage waiver, believing his credit card covered him completely. Distracted and in an unfamiliar city, John caused a serious accident on his second rental day. This accident resulted in serious damage and injuries to another car and its occupants. The total cost of the damage and injuries was $175,000, which included extensive medical bills. John cooperated completely with XYZ Rent a Car, but the credit card company stated it only covered damage to XYZ’s car, and would not pay any of the $175,000. John had no other insurance, and XYZ was forced to pay this amount out of its own pocket. XYZ later filed bankruptcy as a result of the disastrous impact on its cash flow.

While this is a very dramatic illustration, it does show that a car rental company, concerned with the day to day tasks of running a competitive business, can be blindsided by a third party exposure. This risk is part and parcel of the daily auto rental business, and can be managed, reduced, or eliminated in a number of ways.

One of the most common and traditional ways to manage this risk is to simply buy insurance. The insurance company, in effect, is paid for taking on the risk that the car rental company would otherwise face. While an effective risk management strategy, the downside is the often steep expense of insurance premiums.

For some large car rental operations, an alternative risk management strategy is often used to turn this expense into a profit center. This strategy takes advantage of the financial liability laws to limit the operation’s third party exposure.

Some states permit rent-a-car companies to be “permissively uninsured.” Even a permissively uninsured rent-a-car company, as the registered owner of the rental vehicle, is still required to satisfy the state minimum financial responsibility requirements, and may be held responsible up to those limits for an injury to a third party caused by the renter.

However, where the rent-a-car company is permissively uninsured, the personal insurance of a renter, which provides car rental coverage, becomes primarily liable. Since any auto insurance policy carried by the renter must also meet the minimum financial responsibility limits, the rent-a-car company that is permissively self-insured is at zero risk for all cars rented to persons with their own liability insurance.

Renters liability protection is a policy sold to the renter that provides the renter with liability insurance at the minimum financial responsibility limits.

The rental firm may require each driver to show proof of insurance before renting one of its cars. If the customer does not have his or her own insurance, the customer may purchase RLP, or alternatively, the rental firm can add RLP to the customer’s agreement without charge. In this way, the driver of the rented vehicle will always have minimum liability insurance, and the RAC will be at zero auto liability risk-avoiding primary fleet liability costs, and making a profit on its sales of RLP.

In the legal environment of California, Nevada, and other similar states, the RLP program greatly enhances the bottom line of most auto rental operations.

For XYZ Rent-A-Car, the current cost to provide liability insurance on its fleet of rental vehicles is $19,200 per month. Under RLP, XYZ would avoid that insurance cost, would make a profit by selling RLP to its rent-car customers, and, even assuming that XYZ would itself purchase RLP for the remaining vehicles upon which it would remain exposed otherwise, still come out with $13,277 hard money profit, and be ahead each month a total of $32,477!

This translates into an annual bottom line increase of $389,722, which, for many rental firm clients, effectively doubles profitability!

Eric D. Jarvis is director at Knight Management Insurance Services LLC in Los Angeles, Calif. He can be reached at ericj@knightcompany.com or at (323) 692-4033.

Topics Auto Commercial Lines Business Insurance