Monday, Jan. 16, 1989

Leave The Coverage to Us

By Barbara Rudolph

Travelers heading for the sun or the slopes this winter will probably notice a jump in the price of getting away from it all. The culprits this time are not the airlines but the leading U.S. car-rental agencies, which are imposing their first significant price increases in several years. Last week Hertz increased its rates as much as 5%, and Avis said it plans to do likewise within the year. Other rental agencies are expected to follow the industry leaders before long.

The car-rental companies are responding in part to a loss of revenue from one of their most expensive options: collision insurance. Until recently many car-rental customers paid as much as $13 a day for so-called collision-damage waivers to protect themselves against liability for any repair costs in case their vehicles were damaged. But many major credit-card companies now offer such coverage to their cardholders at no cost whenever they charge a rental. As a result, more and more consumers decline the pricey waivers. In the most sweeping move so far, American Express began offering the collision coverage last week to its more than 11 million green-card holders. The American Express action, says Joseph Russo, a Hertz vice president, "begins the de facto elimination of the CDW by car-rental companies."

Rental-car firms have long maintained that CDWs are reasonably priced and that most of the revenues from them go toward repairing vehicles. But now at least some car-rental executives concede that the CDW has been a money-maker all along. The Hertz rate increase, says Russo, is "primarily designed to take care of the revenue loss" that will follow American Express green-card coverage.

Consumer advocates have argued in recent years that CDWs are a lemon of a deal at the usual rate of $10 or more a day. Robert Hunter, president of the National Insurance Consumer Organization, calculates that insurance companies can provide policyholders with comparable protection for about $1 a day. The CDW controversy began to heat up in 1987, when many rental agencies removed the ceiling on customer damage liability, which was typically $3,000, and began holding motorists responsible for the full value of the cars they were renting. That threat helped car-rental clerks persuade more customers to accept the CDW. Acknowledges Russell James, a vice president at Avis: "Many companies were abusing it. They were gouging the customer." Many consumers were already covered but did not realize it, since about 60% of all insured motorists carry rental insurance as part of the coverage for their personal cars.

The growing resentment against CDWs created a marketing opportunity for credit-card firms, which concluded that such coverage would be so inexpensive that they could offer it free. (The credit-card coverage is typically supplement insurance, which pays damages if other policies cannot be tapped.) American Express began providing the coverage in November 1987 to its gold- and platinum-card holders. Last year MasterCard and Visa did the same for their premium customers, but they have not yet done so for regular cardholders.

Several car-rental agencies point out that rising rates cannot be attributed entirely to the loss of CDW business. A wave of restructurings and buyouts in the industry has left rental-car firms in need of greater revenues to pay off a total of $2 billion in debt. Avis, in particular, borrowed $1.4 billion in 1987 for a leveraged buyout in which the employees took over the company.

Steep rate increases can be expected in states where legislatures ban CDWs. In Illinois, which last week became the first state to do so, car- rental agencies are now liable for all repairs if the damage is accidental. Hertz and Avis have already boosted their Illinois rates about 8%, and the Alamo rental-car agency says its prices there will jump 20%. A similar ban on CDWs will take effect in New York on April 1. As CDWs head for the junk heap, basic car-rental rates are likely to keep on climbing. But most consumers will probably be better off, since the coverage was a partly hidden, add-on expense. Says Barry Reid, president of the National Association of Consumer Agency Administrators: "At least everybody is going to know up front what the doggone car costs."

With reporting by Naushad S. Mehta/New York