By: Eric D. Jarvis

Many car rental operators can save significant expenses and still protect their business by using non-traditional risk management methods.

John Smith took his family on a long awaited sunny vacation. Being budget-conscious, John opted to rent a compact car from XYZ Rent a Car. John declined all insurance coverages and material damage waiver, believing his credit card covered him completely. Distracted and in an unfamiliar city, John caused a serious accident on his second rental day. This accident resulted in serious damage and injuries to another car and its occupants. The total cost of the damage and injuries was $175,000, which included extensive medical bills. John cooperated completely with XYZ Rent a Car, but the credit card company stated it only covered damage to XYZ’s car, and would not pay any of the $175,000. John had no other insurance, and XYZ was forced to pay this amount out of its own pocket. XYZ later filed bankruptcy as a result of the disastrous impact on its cash flow.

While this is a very dramatic illustration, it does show that a car rental company, concerned with the day to day tasks of running a competitive business, can be blindsided by a third party exposure. This risk is part and parcel of the daily auto rental business, and can be managed, reduced, or eliminated in a number of ways.

One of the most common and traditional ways to manage this risk is to simply buy insurance. The insurance company, in effect, is paid for taking on the risk that the car rental company would otherwise face. While an effective risk management strategy, the downside is the often steep expense of insurance premiums, ranging from $75 to $135 per car per month or more.

For some large car rental operations, an alternative risk management strategy is often used to turn this expense into a profit center. This strategy takes advantage of the financial liability laws to limit the operation’s third party exposure.

In many states, a rent-car operator may become permissively self-insured (some risk managers prefer the term "permissively uninsured"). This permits the daily auto rental company to forego the purchasing of insurance, which is replaced by a bond given to the state’s motor vehicle department. The bond is a one-time cost, which is significantly less than the long term costs of insurance premiums.

As the term implies, permissive self-insurance requires that the rent a car operator be responsible for third party losses. The real advantage arises, though, in that the liability of the permissively self-insured operator is capped at a relatively low level. If the example at the beginning of this article had taken place in California, XYZ’s liability would have been capped at $35,000, not the full $175,000. If XYZ had been permissively self-insured, it would have limited its exposure to a manageable amount, while avoiding the payment of $75 to $135 per car per month in insurance premiums.

Now, how to avoid that $35,000 exposure? As a risk manager, I would suggest that a permissively self-insured operator require that each of its renters have their own insurance when they rent the vehicle. In most states the entire risk is transferred to the renter, if they have their own insurance. To cover those renters that do not have their own liability insurance, a rental operator can sell insurance over the counter. The different insurance companies that offer this type of over-the-counter insurance product call it Renters Liability Protection, “RLP”, "RLI" or other similar names.

RLP is designed to cover the first level of risk exposure, in our example, the first $35,000 of a third party liability risk. When combined with the state laws protecting the permissively self-insured rent a car operator, which caps its risk at $35,000, the two strategies provide a shield of complete protection for the daily auto rental company. The economic benefits derived by avoiding the payment of insurance premiums are further enhanced by the increase in gross per car generated by RLP sales.

This discussion is a simplification of this particular risk management strategy, and differences in state law governing primacy of insurance, compulsory financial responsibility, and minimum liability limits all vary state by state. Please consult local counsel or a risk management expert familiar with your particular jurisdiction when considering this strategy.

For the right daily auto rental operation, this alternative risk management strategy can yield tremendous economic benefits, without sacrificing any of the protections of a traditional insurance policy. In making the decision to become self-insured, the rent a car operator must balance such factors as fleet size, and its current cost of liability insurance. As companies grow and insurance premiums increase, many companies find permissive self-insurance to be an increasingly appealing strategy.

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