Last Updated on
Automobile rentals is a $29 billion industry and constitutes a significant portion of the transport sector in America. In 2018, there were 2,212,925 rental vehicles on U.S roads. There are six million auto accidents in the U.S. every year, and rental cars are involved in a significant portion of those accidents. To make matters worse, rental cars experience a higher collision rate per registered vehicle than non-rental cars. The top three car rental companies in terms of vehicles in service are Enterprise with 1,200,000 vehicles, Hertz (including Dollar, Thrifty, and Firefly) with 506,200 vehicles, and Avis/Budget (merged in 2011 and includes Payless) with 365,000 vehicles. The number of rental cars on the roads is expected to increase in the coming years, and along with it the number of collisions. Insurance claims and subrogation professionals necessarily become involved in the majority of these losses and it is imperative that they be familiar with the growing regulations within the car rental industry when it comes to the car rental company recovering its losses from either the renter or third-party tortfeasor responsible for causing the loss.
This article addresses both the right of a car rental company or other lessor of vehicles to recover physical damages and loss of use damages directly from the renter—which would be considered a contractual claim governed heavily by the terms of the rental agreement and applicable state law—and recovery from third-party tortfeasors, negligent drivers, or other actors who cause damage to a rental car.
RECOVERY FROM RENTER
The terms of a rental agreement that require a renter to return the vehicle in the same condition as when it was rented are aggressively enforced. In states where it is permitted, this includes recovery of the cost of physical repairs, loss of use damages, towing and storage costs, and administrative fees. The right to recover these contractual damages must be clearly stated within the rental agreement to be enforceable. Under common law (aside from any written rental agreement), the owner of a vehicle is usually entitled to recover the actual cost of repairs, allowing for all discounts. It is usually not permissible to recover the estimated cost of repairs if the actual cost is less. Loss of use damages can also be recovered by the car rental company from the renter under common law, unless a state enacts a law, or the contract provides otherwise. Loss of use is the value of being unable to use the vehicle during the period it is out of service for repair. Loss of use is not loss of profits. Loss of use equates to the loss of the right to see, touch, sit in, display, sell, rent, or use the vehicle in any other legitimate way. Loss of use damages sought from the renter may be recoverable under the renter’s personal auto insurance.
Recovery of loss of use from a car rental company customer (i.e., the renter) is a controversial subject. A rental contract often requires the renter to be responsible for administrative and “loss of use” fees—damages suffered by the car rental company when its car in the shop instead of out on the road. The right to recover loss of use is covered in the rental agreement. A typical rental agreement contains a close similar this this:
(3) Damage to/Loss of the Car. If you do not accept Loss Damage Waiver, or if the car is lost or damaged as a direct or indirect result of a violation of paragraph 14, or damaged as a result of an act of nature, you are responsible and you will pay us for all loss of or damage to the car regardless of cause, or who, or what caused it. If the car is damaged, you will pay our estimated repair cost, or if, in our sole discretion, we determine to sell the car in its damaged condition, you will pay the difference between the car’s retail fair market value before it was damaged and the sale proceeds, except in Canada or as otherwise required by law. In Canada, you will pay the greater of the car’s retail fair market value or its value on our books of account (also known as depreciated book value) before theft or, in the case of damage, the sales proceeds. Depreciated book value may be higher than retail fair market value. Where permitted by law, you authorize us to charge you for the actual cost of repair or replacement of lost or damaged items such as glass, mirrors, tires, and antenna, as part of your rental charges at the time of return. If the car is stolen and not recovered, you will pay us the car’s fair market value before it was stolen. As part of our loss, you’ll also pay for loss of use of the car, without regard to our fleet utilization, plus an administrative fee, plus towing and storage charges, if any (“Incidental Loss”). If your responsibility is covered by any insurance, credit card benefit, travel insurance or such other insurance or benefits, you authorize us to contact the benefit provider directly on your behalf and you assign all of your benefits directly to us to recover all consequential and incidental damages, including but not limited to the repairs of the car plus diminished value or the fair market retail value of the car (less salvage value plus costs incurred in the salvage-sale), and all Incidental Loss and administrative fees. If we collect our loss from a third party after we have collected our loss from you, we will refund the difference, if any, between what you paid us and what we collected from the third party. If the law of a jurisdiction covering this rental requires conditions on LDW that are different than the terms of the Rental Agreement, such as if your liability for ordinary negligence is limited by such law, that law prevails. You understand that you are not authorized to repair or have the car repaired without our express prior written consent. If you repair or have the car repaired without our consent, you will pay the estimated cost to restore the car to the condition it was in prior to your rental. If we authorize you to have the car repaired and the cost of repair is our responsibility, we will reimburse you for those repairs only if you give us the repair receipt.
Loss of use coverage can be purchased on a personal auto policy. Sometimes referred to as rental car coverage, this coverage can be an add-on option or endorsement to a policy upon the payment of an additional premium. However, this does not cover the renter for a contractual loss of use reimbursement claim made by a car rental company. It typically pays up to a certain dollar amount per day for a rental vehicle while the insured’s vehicle is being repaired. Some car rental coverage, particularly the kind offered on a renter’s credit card or personal auto insurance policy, doesn’t cover loss of use. Although loss of use is a legitimate legal claim in some states, this type of recovery is not allowed in other states. These claims can be contentious, and often difficult to prove because a car rental company certainly has other vehicles it can rent in place of the damage vehicle.
Most states do not regulate or otherwise control the recovery of physical damage or loss of use damage by a car rental company from its renter. The terms of the rental agreement are held to apply and are enforceable. The terms by which the renter agrees to return the vehicle in the same condition are enforceable, and costs of repairs, loss of use, administrative fees, etc. are recoverable if called for in the rental contract. Even theft of the rental car is sometimes the responsibility of the renter if it’s stated in the rental contract.
Many states have special rules and laws governing the recovery of loss of use by a rental car company or fleet operator. Examples of regulated states are California, Illinois, Indiana, Iowa, Missouri, New York, Nevada, Utah and Wisconsin. For example, California provides that loss of use is not recoverable by a rental car company from a renter or authorized driver, but it may be recovered from third parties who cause damage to rental vehicles. Amazingly, this is true even though the rental car company has other vehicles available for rent. Cal. Civil Code § 1939.05. Section 1939.05 limits the amounts and types of damage a car rental company can recover from its customer. Many states have not addressed special rules or limitations to recover third-party loss of use damages by a car rental company or fleet operator. Wisconsin law does not allow a car rental company to collect for loss of use, administrative fees, or any other charges not specifically permitted by the statute, or any amounts already collected from a renter or authorized driver. Wis. Stat. Ann. § 344.574. It does allow recovery of such damages from a third party.
Some states have case decisions that affect the ability of car rental company to recover loss of use damages from its renter. For example, in 2012 the Colorado Supreme Court sided with PurCo Fleet Services in its seven-year battle to obtain loss of use fees from a customer who damaged her rental after colliding with a deer in Durango. Koenig v. PurCo Fleet Services, Inc., 285 P.3d 979 (Colo. 2012). The court ruled that the company was “entitled to recover loss of use damages irrespective of its actual lost profits.” The ruling applies only to car rentals in Colorado. Three states — New York, California and Wisconsin — have enacted statutes which provide limits on the amount that car rental companies can recover from renters for loss of use on a damage claim.
When a rental car company suffers damage to a vehicle in its fleet, the issue becomes multifarious, with recovery from the renter under the contract mingling with the right to recover in tort from the third-party tortfeasor. Some argue that a rental car company’s ability to recover damages for loss of the vehicle’s use during the time it is being repaired, and in an amount equal to the reasonable rental value of a substitute vehicle, depends on and subject to the ability of the rental car company to prove: (1) it suffered actual lost profits; and (2) it would have rented the damaged vehicle had it not been damaged.
Collision Damage Waiver (CDW). In order to provide the renter protection from liability for physical damage to the rental car, including loss of use and other charges, which would otherwise be payable by the renter under the terms of the rental agreement, car rental companies allow the renter to pay an additional charge in order to purchase the car rental company’s agreement to waive any right to recovery collision damage from the renter. This is known as a “collision damage waiver” (CDC), “loss damage waiver” or a “physical damage waiver.” When renting a vehicle, the renter elects or declines the CDW, which is the car rental company’s waiver of its right to look to the renter for payment of collision-type damage. If the lessee accepts (purchases) the waiver, the risk of any collision-type loss is shifted from the renter to the car rental company. However, every CDW is different, with many exceptions (e.g., intoxication, theft, illegal activity) and some covering only the rental car’s bodywork but not things like windows and mirrors, engine, interior, lost keys, etc. CDW agreements also vary from company to company and are sometimes regulated by the state.
RECOVERY FROM THIRD PARTY
Third-party subrogation claims involving damages to a rental vehicle are less regulated than attempts to recover from the renter and are more closely aligned to common law tort actions. In evaluating whether or not a rental car company can recover damages from a third-party tortfeasor for loss of use of a rental car which has been damaged in an accident, the law of the applicable jurisdiction must be consulted to determine the following:
- Are loss of use damages recoverable at all when a vehicle is damaged?
- If so, are loss of use damages recoverable when the vehicle is totaled, repaired, or both?
- Are loss of use damages recoverable for a commercial vehicle and, if so, how are the damages measured?
- Must the owner prove that there was no similar replacement vehicle available to rent in order to recover loss of use damages?
- How are loss of use damages measured? Reasonable rental value? Loss of profits? Other?
- Are there any cases which specifically extend the right to recover loss of use damages to a car rental company?
The recovery of third-party loss of use damages varies greatly from state to state. The law which specifically addresses the right of a rental car company to recovery loss of use/lost profits damages from a third-party tortfeasor is hard to find and is an issue not addressed directly in most states for some reason. Therefore, extrapolations and parallels must be drawn between cases allowing loss of use/lost profit damages where a different type of “commercial vehicle” such as a dump truck, tractor-trailer, or other specialized commercial vehicle is involved. Where loss of use damages flowing from loss of a commercial vehicle is involved, some states require an actual rental car to have been purchased, while others do not. Some states allow recovery where there is repairable damage to the vehicle, but not when the vehicle is a total loss. For example, for many years, Texas allowed only an owner whose vehicle was repairable to recover for the loss of use of the vehicle during repair, while the owner of a vehicle, which was totally destroyed, was not allowed to recover.
In 2016, the Texas Supreme Court changed the rules and allowed recovery of loss of use damages when damaged personal property was a total loss. In J & D Towing, LLC v. Am. Alternative Ins. Corp., 478 S.W.3d 649 (Tex. 2016), the court noted that a majority of jurisdictions within the U.S. permitted loss of use damages in partial-destruction cases but prohibited them in total-destruction cases. However, the court noted that case law and treatises have shifted away from this distinction, because the owner of personal property which is totally destroyed may suffer loss of use damages to the same extent that the owner of partially destroyed personal property. The court said the distinction was “illogical.” States which allow recovery often require the plaintiff to prove damages for loss of use of a repairable car by establishing the reasonable rental value of a substitute car for the time reasonably required to repair or replace it.
When a commercial vehicle such as a tractor-trailer, taxicab, or rental vehicle is involved, the landscape changes. A cab company, for example, would argue that, as a result of an accident, it loses the use of one of its taxicabs and, therefore, the leasing income from that vehicle during the time it takes to purchase and outfit a replacement taxicab. In 2012, the Alabama Supreme Court determined for the first time that loss of use damages could be recovered by a commercial taxicab owner, even when the taxicab was totaled, because to do otherwise would allow for an element of damages for a damaged commercial vehicle that is repairable that it does not allow for a damaged commercial vehicle that is a total loss. Ex parte S & M, LLC, 120 So.3d 509 (Ala. 2012). Most states have held that if, in addition to damages to a commercial vehicle, the commercial vehicle owner has lost its use for a period of time while the vehicle is undergoing repairs, that owner is entitled to recover the value of the use of the vehicle to himself during the period reasonably required for making actual repairs, or repairs which could have been made with ordinary diligence.
In Kentucky and Mississippi, for example, one whose commercial vehicle has been damaged solely by reason of negligence of another is allowed to recover loss of use for a period of time reasonably required to repair it. Dean Truck Line, Inc. v. Greyhound Corp., 186 So.2d 240 (Miss. 1966). Texas has the second highest number of vehicles on the road among U.S. states and it only first decided the extent of its loss of use damages rules in 2016. This area of the law is still a work in progress. In some states, such as Tennessee, case law rather than statutory law provides the answer. In Tennessee, case law allows for recovery of third-party loss of use damages by a car rental company when a rental vehicle is damaged, for the time necessary for the vehicle to be repaired. Tire Shredders v. ERM, 15 S.W.3d 849 (Tenn. 1999).
Calculation of Third-Party Loss of Use Damages. There is a great deal of disagreement as to how a car rental company or other commercial vehicle owner can calculate loss of use damages. Even within the car rental industry, there is widespread disagreement as to how loss of use damages are to be determined. At Enterprise, the largest car rental company, loss of use is based on the total number of labor hours from the repair estimate, divided by four, which the company says is a conservative estimate of labor hours that can be incorporated into each workday, and then multiplied by the daily rental rate. PurCo Fleet Services, a risk management company specializing in car rental loss prevention, calculates loss of use based on the number of days needed for repair, times the daily rate on the contract. Courts across the country have been just as disparate in their damage determinations.
As an example of courts disagreeing among themselves within individual states, in New York, the Third Department Appellate Division has refused to award commercial loss of use damages when no substitute chattel has actually been rented. Mountain View Coach Lines v. Gehr, 80 A.D.2d 949, 439 N.Y.S.2d 632 (N.Y.A.D. 3 Dept. 1981). In direct contrast to this rule, and on indistinguishable facts involving the same plaintiff bus company, the Second Department has allowed recovery for loss of use regardless of whether or not a substitute was actually obtained. Mountain View Coach Lines v. Storms, 102 A.D.2d 663, 476 N.Y.S.2d 918 (N.Y.A.D. 2 Dept. 1984).
Car rental companies calculate their loss of use according to a formula that often uses a theoretical rate, but these calculations are often challenged. Some argue that a rental car company’s ability to recover damages for loss of the vehicle’s use during the time it is being repaired and in an amount equal to the reasonable rental value of a substitute vehicle during that time, is dependent on and subject to the ability of the rental car company to prove that (1) it suffered actual lost profits, and (2) it would have rented out the damaged vehicle had it not been damaged. Third-party loss of use claims by rental car companies are allowed in some states and not in others. Within individual states, courts will disagree among themselves as to when, whether, and how loss of use claims are to be awarded and calculated.
A case which illustrates well the variables involved in rental car company loss of use damage claims is Koenig v. PurCo Fleet Services, Inc., 285 P.3d 979 (Colo. 2012). The Colorado Supreme Court looked to the Restatement (Second) of Torts § 931(a) when it issued the first appellate decision in the country addressing the issue of lost profits in the context of car rental. Although this case involved the effort of a car rental company to recover loss of use damages from its renter—rather than a third-party tortfeasor—it wandered into a discussion of loss of use damage calculations generally and is, therefore, helpful in the third-party context as well. The Koenig decision follows the “Restatements of the Law” discussed above. Koenig is persuasive authority for any jurisdiction and any judge who considers the question of lost profits for a car rental company. The court ruled that car rental companies can recover loss of use damages even if they do not suffer any financial losses. The concept of loss to a rental car company is an interesting one. The notions of lost profits and reasonable rental value both capture the same loss—that is, an owner’s loss caused by the deprivation of a chattel—but measure the loss differently. Denver Bldg. & Const. Trades Council v. Shore, 287 P.2d 267 (Colo. 1955). The position that if a plaintiff made a profit it could not have been damaged is “argument in a circle” according to the court in Shore:
This is argument in a circle, since there is no way of determining the extent of profit which plaintiff would have realized had he not encountered the delay caused by the unlawful interference of the defendants. Defendants would propose loss of profits as the basis of recovery and then attempt to show that plaintiff failed in his proof. Should it appear that plaintiff had actually suffered a loss on the contract project, or made no profit at all, would defendants agree that the measure of damages is the difference between such deficit and the amount of profit normally accruing from similar contracts? We believe not. Many factors not involved here enter into profit realization. It is impossible to allocate to each of several heavy machines on the job the proportion of the over-all profit attributable to the agency of each thereof. Apparently for this reason the rule has generally been adopted that where through unlawful or wrongful acts of defendants heavy equipment has been kept idle and the work expected to be accomplished thereby delayed, the fair rental value of such equipment during the period of prevention of its use is generally adopted as a proper measure for determination of the extent of damage. Id. at 272.
A well-recognized treatise on damages— McCormick, Damages, § 124—recognizes the following criteria for determination of the value of use:
- The rental value or the amount which could have been realized by renting out the article during the period;
- The cost of hiring a substitute; and
- The ordinary profits that could have been made from the use of the vehicle.
A chart we have created on this subject can be found HERE. It examines the ability of a rental car company to seek damages for physical damage, loss of use, and/or lost profits from the renter or a third-party tortfeasor when a vehicle from that company’s rental car company’s fleet is damaged or destroyed. For more information on subrogating auto property subrogation claims, see our book, “Automobile Insurance Subrogation In All 50 States” published by Juris Publishing. For questions relating to automobile insurance subrogation, please contact Gary Wickert at [email protected]