Ed Perkins

SmarterTravel.com

No matter how often I cover the problems that come with collision damage under car rental insurance, consumers continue to share their frustrations. A reader recently emailed me:

“I’m interested in finding a complete bumper-to-bumper, ‘drop off the keys at the counter’ car rental coverage when I travel. I recently thought I had complete coverage though a credit card, but when my car suffered a small dent, the car rental company flat-out refused to document that it actually lost income from having the car rental in the shop (which took three weeks to repair a small dent). I was left with responsibility.”

This experience is uncommon, but not unique. Car rental companies desperately want you to buy their collision damage waiver, or CDW, and will go to great lengths to make you pay for even the smallest damages if you don’t. Here’s what you need to know.

The one way to 'drop the keys and forget it'

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. 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 own insurance, your credit card or a third-party policy — is as comprehensive or convenient. If you want that full flexibility and peace of mind, you pay for the CDW.

CDW insurance is ridiculously overpriced

Typically, a CDW starts at around $30 per day and can go higher. It’s often more than the base car rental rate. The actuarial cost to the rental company — the amount it would allocate toward a damage pool based on risk experience — is probably somewhere around $3 to $4 a day; the rest is theirs to keep. No wonder the agents push it so hard: It’s clearly 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 of 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 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’ll 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 the CDW, rental companies can charge for more than just fixing the damage. They 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, as our reader’s above wasn’t.

Alternative 1: Pay with your existing 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 the claim may have an effect on subsequent yearly rates.

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 typical 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.”

Note that this typical Visa card’s benefits specifically does 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 first recover from your own insurance. And 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 loss-of-use only if verified by the rental company’s log. Some rental companies don’t cooperate with credit-card issuers in providing such logs in a timely manner.

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 up front and claim later.

Typical third-party collision coverage includes about 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 $8 per day.

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. 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.

The uncertainty principle

The take-away from all this: No alternative source of collision damage coverage — your auto insurance, your credit card or a third-party — completely isolates you from risk. Lots of travelers successfully rely on lower-cost alternatives to a CDW without encountering any problems, sure. Occasionally, however, your own 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 at all, you might want to buy that overpriced CDW. For most travelers and circumstances, credit card or third-party coverage is sufficient, and primary coverage is a lot better than secondary.

This story originally appeared on SmarterTravel.com.

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