The alphabet soup list of insurance terms includes Collision Damage Waiver (CDW), Loss Damage Waiver (LDW), Personal Accident Insurance (PAI), Personal Effects Coverage (PEC) and Liability Insurance Supplement (LIS). But what are you really paying for?
Before making the decision about accepting optional insurance coverages, renters need to understand what their personal automotive insurance policy covers. Some companies provide employees with insurance when they rent vehicles while on company business. Depending on the level of coverage you already have, you may be able to decline all offered coverage with hardly any financial risk.
For more specific advice we spoke to Michael Domzalski, an independent insurance agent from Grosse Pointe, Michigan. "Our agency looked into this matter and found that the Collision Damage Waiver offered by rental car companies offers some important coverage that standard auto policies do not," cautioned Domzalski.
He pointed out that renters could be hit with significant expenses if they had an accident while driving a rental vehicle. For example, standard auto policies typically do not provide coverage for the loss of rental income during the time that the rental car is being repaired. A rental car company could hit you up for as much as $50 per day for each day its vehicle is out of service. This expense is in addition to your standard policy deductible. Rental car companies also regularly charge administrative fees related to accident events, and these can add up to hundreds of dollars.
Some rental car companies also require that renters cover the "loss of value" to their vehicle after the accident damage has been repaired. This can be thousands of dollars that is not generally covered by standard auto insurance policies.
Domzalski also explained, "When an accident occurs in a rental car that is covered by the CDW, Collision Damage Waiver, the renter will not receive an accident surcharge on his personal policy. And this is a big deal." The accident surcharge can add a 20-percent premium to your auto policy that lasts for up to three years. Without the CDW, you'd end up paying at the time of the accident and for years after.
Some drivers with older cars elect not to carry collision coverage due to the cost. "If you don't have collision insurance for your primary vehicle, your personal insurance coverage won't cover collision damage on a rental. I can't see a judge letting someone off the hook who knowingly drove a vehicle with no collision insurance," said Domzalski.
Credit Card Coverage
Some credit card companies offer renters additional insurance as a perk. We spoke to American Express about its specific coverage. When the rental is paid for by the American Express card and CDW is declined, if you have an accident AmEx will pick up your personal policy's deductible and any loss of use charges. Other potential charges such as diminution of value and excess personal liability charges are not covered.
Because credit card coverage works in cooperation with your personal auto insurance -- so your primary insurer will find out about the accident -- you may suffer the long-term expense of an accident surcharge. On the flip side, if expenses exceed the coverage of your primary insurance, policies offered by most credit cards pay for that gap in coverage.
For a summary of which credit card offer what kind of coverage, see this chart.
Making The Choice
People usually rent when they are away from home, so they are driving an unfamiliar vehicle in an unfamiliar environment. This makes accidents more likely. However, the cost for CDW and other optional coverage provided by rental car companies can be pricy, often $15-$25 per day.
To make an informed decision, verify the details of your auto insurance policy and credit card rental car insurance policies. Because of regulatory differences between states and individual corporations, every policy and credit card offers different levels of collision, repair, loss and liability protection. It's up to you know what your exposure is and what you can afford. Armed with this knowledge, you can weigh the risk against the cost.