Rental car insurance

If you’ve ever rented a car, you’ve probably been warned by salespeople at the counter about the possible consequences of walking away without buying their company’s rental car insurance. Put on the spot, you might not feel confident about exactly what your current auto insurance covers. And that’s what rental companies are counting on — along with their commissions for selling you the coverage.

Want to be prepared next time you’re renting? We can help you understand whether you need rental car insurance and how to get it before you get to the rental counter.

Rental car insurance or your own auto insurance?
Here are the typical insurance options from rental car companies, along with how to determine if you already have coverage within your own auto insurance policy. Coverage from your own policy applies when you are using a rental car for personal, nonbusiness purposes. The rules may be different for business use of a rental car. Check with your insurer or employer for details about coverage when using a rental car for business.

CRASHES AND CAR THEFT
At the counter: A loss-damage waiver (LDW), also called a collision damage waiver (CDW), gets you off the hook for any damage to the rental vehicle or theft of the car. It’s technically not insurance but rather a waiver that says the rental car company won’t come after you.

Your policy: If you have collision and comprehensive coverage on your own policy, it generally will extend to a rental car. However, you will still be on the hook for your deductible.

DAMAGE YOU DO TO OTHERS
At the counter: Supplemental liability protection will pay for damage you do to others’ vehicles or property. A typical limit is $1 million. If you have no auto insurance (for example, if you don’t own a car), you should buy this.

Your own policy: Your own liability insurance will cover you when you’re driving rental cars. If you have really minimal liability coverage on your auto policy, you could buy the supplemental protection to boost your coverage. But if that’s your situation, you’d be smarter to increase your own liability coverage anyway.

INJURIES TO YOU
At the counter: Personal accident insurance covers medical costs for you and your passengers if you’re involved in an accident. This includes ambulance, medical care and death benefits.

Your own policy: If you have health insurance, this coverage would largely be redundant. Similarly, if you are interested in death benefits, you should have a life insurance policy. Personal accident insurance also is not needed if you have personal injury protection or MedPay through your auto policy.

YOUR STOLEN STUFF
At the counter: Personal effects coverage pays for your belongings if they’re stolen from the rental car, up to a set dollar amount.

Your own policy: Your homeowners or renters insurance will cover your possessions if they are stolen, even away from home. To make a theft claim, you’ll need to file a police report, and your deductible amount will apply.

The credit card safety net
Credit cards often provide coverage for rental cars, assuming you have used the card to pay for the rental and the rental is in your name. You’ll automatically have this coverage if it’s included with your credit card — no need to call or sign forms. But it is secondary coverage, meaning your own auto insurance policy will pay out first. NerdWallet assessed credit cards that offer good rental car insurance.

If you don’t have auto insurance and are going to count on credit card coverage, call your credit card issuer to confirm the details.

Buying rental car insurance on your own
There are companies that sell standalone policies for rental cars if you don’t want to buy insurance at the counter. You generally need to decline the rental company’s coverage to use these.
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.”

Car Rental Insurance: 9 Nasty Truths
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 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.

RELATED:10 Hidden Car Rental Fees (and How to Avoid Them)
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 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.

RELATED:The Best Travel Rewards Credit Cards
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.

RELATED:Everything You Need to Know About Travel Insurance
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 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.