"Collision Damage Waiver" Insurance May Benefit Consumers

The FTC staff comments were made in response to a request from Ron Stephens, Chairman of the Executive Committee of the Illinois House of Representatives.

Current Illinois law bars car rental firms from offering CDW and bars them from holding renters liable for more than $200 in non-intentional loss, damage or theft. The bill under consideration would remove the bans, cap CDW charges and impose disclosure requirements about insurance and their costs on car rental firms.

According to the staff letter, signed by C. Steven Baker, Director of the FTC's Chicago Regional Office, the state law banning the sale of CDW by rental companies and capping renters' responsibility for losses has altered the allocation of risk, making car rental companies financially responsible for most damage. The staff said that the law may have caused rental companies to increase basic rental rates and to refuse to rent cars in certain high risk locations.

In the staff letter, Baker said that, "even if average rates are not substantially different where CDW is banned, the ban may still have adversely affected many consumers . . . When CDW is banned the rental companies would typically include their overall risk of loss in the basic rental rate, which would be the same for both good and bad drivers . . . Thus even drivers who have their own insurance would pay, indirectly, for the protection that the rental company provides itself against renters with both good and bad driving records. Therefore consumers who already have auto insurance that covers their risk must pay an additional sum in an increased basic rental fee."

Further, the staff letter noted that with traditional auto insurance, safer drivers pay less than drivers that pose a greater risk. When this risk is instead recovered through a higher rental rate, however, there is no way to adjust price between drivers posing different levels of risk. "Thus, when optional CDW is banned, relatively safe drivers may subsidize relatively unsafe ones because the costs of losses must be bundled into the rates for everyone," the comment said. In addition, "banning CDW may have led to higher basic rental rates in Illinois if car rental companies raised rates to recover the costs of accident and theft.

Certain provisions in H.B. 3285 require rental companies to inform consumers about CDW and about other insurance options. The staff said that, "by tying disclosures about CDW to statements about price, the bill recognizes one of the problems that has been alleged: advertisements of seemingly low prices may have misled consumers by failing to disclose substantial additional charges like CDW."

"Permitting car rental firms to offer CDW might make it easier for some consumers to rent cars, especially those who are otherwise uninsured or who rent cars in high risk locations," the staff letter says. "Permitting rental firms to hold renters liable for a greater range of losses and permitting renters to purchase CDW to cover this potential liability might also lead to somewhat lower overall rental rates. Ensuring that consumers have the information they need to make choices about liability protection is likely to enhance consumer welfare more than would restricting the choices available," the letter concludes.

The Commission vote authorizing staff to submit the comment was 5-0. These comments represent the views of the staff of the Federal Trade Commission and do not necessarily reflect the views of the Commission or any individual Commissioner.

Copies of the staff comment are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web site at: http://www.ftc.gov (no period).

(FTC File No. V960010)