Cagey Consumer

Opinion: FTC endorses change in Illinois CDW law

Illinois state law has recognized that the collision damage waiver offered by car rental companies is an abusive practice, and therefore banned charges for such protection, while at the same time limiting the renter's liability in most circumstances to $200. When a bill was presented to the Illinois legislature to severely weaken this protection, the FTC took the unusual step of endorsing the change to state law.
Over the years, the car rental industry has been guilty of various abusive practices. Among the most flagrant of these abuses has been charges imposed for collision damage waiver (CDW).

Collision damage waiver has always been marketed as a low-ball or bait and switch practice. That is, one would make a car reservation over the phone for a given rate; only after you arrived to pick up your car would you be made aware of the need to purchase CDW. While there is usually no requirement to purchase CDW, customers are often uncomfortable exposing themselves to a large liability, with the result that many would buy such coverage, without the opportunity to shop around for the best deal or even to determine if their personal automobile insurance would possibly cover them. Not only have consumers not had the opportunity to shop around, CDW coverage has generally not been subject to state insurance regulations because, well, because the car rental companies say it's not insurance. (Even the FTC press release about this endorsement refers to CDW as collision damage waiver insurance.)

The loss exposure for CDW is only for the loss of the rental company's vehicle (plus padding such as loss of rental value), not for the much greater liability that can result in the event of death or injury to other parties. Yet, the annualized rate charged for CDW is typically about $5,000. And even at this bloated price, most contracts provide that the CDW does not apply if the driver was violating any traffic laws when the accident occurred. The net result is that renters who select CDW pay lots of money for coverage that is often not as good as that provided at no extra charge to people who charge their rental on certain credit cards.

At the time that some credit cards started offering free CDW coverage, car rental companies typically capped the renter's liability to $3,000. As a result, the credit card coverage imposed this same limit. The result was that car rental companies eliminated the limit on the customer's responsibility. It took a couple of years for the credit card companies to expand their coverage to the full value of the car.

States bar or restrict CDW

Although most states have no laws that significantly restrict CDW, a few have imposed significant restrictions. Just two states, Illinois and New York, have banned CDW outright. The laws in these states limit the customers' liability for damage to rental vehicles.

This probably means that car rentals in these states are less likely to offer low-ball rates, since they are no longer able to pump up the price at the last minute through CDW. In effect, consumers who do not have access to or knowledge of much cheaper coverage, and hence who are likely to purchase CDW, are effectively subsidizing the rentals charges for those drivers who do not purchase CDW.

Illinois modifies anti-CDW law

Recently, a bill was introduced to the Illinois legislature to allow rental car companies to charge for CDW. The FTC issued a press release [Wayback archve] in support of this change, citing the possibility of reduced rental rates and the possibility that higher-risk drivers would be the ones to foot the bill. Thus the FTC actively promoted the removal of a valuable form of consumer protection.
Related links:
New York City Consumer Affairs office advice on shopping for rental cars [Wayback archive]
Western Insurance Information Service advice on CDW [Wayback archive]
Conde Nast Traveler Ombudsman report of dispute involving CDW coverage
NAIC bibliography on car rental insurance
The Rental Snake Pit (SF Bay Guardian) (dead link)
New York State law (Insurance News Network)
Practical Pointers Renting a Car (BBB)
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Updated September 14, 1998