Client Communications

Rental Car Coverage - Business Auto Policy

Should I purchase the Loss Damage Waiver offered by the rental agent when I rent a vehicle while on company business, and instruct my employees to do the same?

This is a great question, and one that our customers ask frequently. When you or one of your employees rent a vehicle for business use while out of town, there comes that time when you’re standing at the rental car counter and the agent asks the inevitable question: “Do you want to buy our loss damage waiver (or our insurance coverage)?”

Most loss damage waiver (LDW) fees are outrageous. Sometimes they cost more than the daily rental fee itself. But are they worth the additional cost? The answer may depend on your tolerance for risk and inconvenience. You must decide if the extra cost is reasonable, considering the potential for an uninsured loss should something happen to the vehicle during the term of the rental contract, and the resulting inconvenience of dealing with the rental company and your insurance company – or perhaps even your employee’s insurance company – to satisfy the rental company’s demands.

First, you should know that the LDW is not actually an insurance policy. It is a waiver of the rental company’s requirement in the rental contract that the renter bring the vehicle back in the same condition as when it left their lot. Most rental contracts make the renter responsible for any damage to the vehicle, including theft and weather-related damage. When the renter purchases the LDW, the rental company is removing that provision from the contract on a conditional basis.

If you don’t purchase the LDW and the vehicle is damaged, here are some of the costs for which you or your employee could be held responsible under the rental contract:

1. Cost to repair damage to the vehicle, or the full value of the vehicle if it is a total loss

2. “Diminished value of the vehicle – the difference between what the vehicle was worth before the accident and what it is worth after repairs have been made

3. “Loss of use– the amount of money the rental company loses on rental fees while the vehicle is out of service for repair or replacement

4. Administrative or loss-related expenses incurred by the rental company, such as fees for towing, appraisal, and claims adjustment, plus general office expenses for handling the paperwork

Reasons to purchase the Loss Damage Waiver:

1. Your policy may not cover damage to the rental vehicle at all.
Your policy does not cover damage to the rented vehicle and related costs, UNLESS the policy has been changed to cover vehicles rented by you or your employees on company business (the “Employee Hired Autos” endorsement), and you have purchased special coverage (“hired auto physical damage” ).  (Note: not all insurers offer these coverages.)

2. Your insurance company may not pay the entire amount demanded by the rental company.
When your policy covers damage to a rented vehicle, the amount payable by the insurance company is the lesser of the “actual cash value” of the vehicle or the amount “necessary” to repair or replace the vehicle, minus the same deductible that would apply if the damage was to one of your own vehicles. In addition, some policies cover “loss of use” with a daily limit (usually as low as $20 per day) and a maximum limit (usually $600). Because of all these limitations, you or your employee may become personally responsible for:

1. The amount demanded by the rental company to repair or replace the vehicle in excess of actual cash value” or the amount “necessary ”to repair or replace;
2. The amount of your deductible;
3. The amount demanded by the rental company for loss of use in excess of the daily and maximum limits payable by your insurance company, if the company offers this coverage at all;
4. The amount demanded by the rental company for “diminished value of the vehicle, even after the repairs are complete;
5. The amount demanded by the rental company for administrative or other loss-related expenses.

3. Your policy may exclude some electronic equipment.
Your policy may exclude loss to some electronic equipment that receives or transmits audio, visual or data signals. If you rent a vehicle equipped with a GPS receiver, for example, your policy may not cover it.

4. Your premium may go up or your policy may not be renewed.
You or your employee are driving an unfamiliar vehicle in unfamiliar territory. If you or your employee has an accident while driving a rented vehicle, and your insurance company pays the claim, it may hold this fact against you – with a premium surcharge or perhaps even non-renewal.

5. Your or your employee’s line of credit may be adversely affected.
If you don’t buy the LDW, the rental company will probably ring up an estimated damage amount on your credit card or your employee’s credit card, pending settlement by the insurance company.

6. You or your employee may suffer a huge inconvenience.
When you purchase the LDW, you or the employee can bring a damaged vehicle back to the rental company, throw the keys on the counter, and walk away. When you haven’t purchased the LDW, you or your employee may have to spend a significant amount of time dealing with the rental company and your insurance company, and perhaps the employee’s insurance company, as well.

7. Your personal auto policy (if you have one) or your employee’s personal auto policy may be affected.
Most personal auto policies cover accidents involving vehicles rented by you or your employee, even when the rental is solely for business purposes. When you purchase the LDW, the personal auto policy won’t be needed to pay for damage to the rented auto. (Note: If the accident is your fault or your employee’s fault, the personal auto policy may become involved if the accident involves injury to other persons or damage to other property. There is nothing you can do to avoid this.) For more information on how the personal auto policy responds to accidents involving rented vehicles, ask us for a copy of an article on that subject.

Bottom Line: We recommend that you buy the Loss Damage Waiver from the rental company.

Recommended Guidelines for Employers

Here are some guidelines for you to consider if employees rent vehicles for company business:

1. Instruct employees to include the company name, if possible, on the rental agreement.
2. If you have no tolerance for the risk of incurring the potential uninsured losses shown above, or the means to pay those losses, tell employees to purchase the LDW offered by the rental company.
3. Tell employees to report any accident in a rented vehicle to you and to their own personal auto policy insurer or agent.

This article was prepared and made available to your agent by the Independent Insurance Agents of Texas, which is solely responsible for its content. Please read your insurance policy. If there is any conflict between the information in this article and the actual terms and conditions of your policy, the terms and conditions of your policy will apply. The Independent Insurance Agents of Texas is a non-profit association of more than 1,500 insurance agencies in Texas, dedicated to helping its members succeed, in part by providing technical resources that explain insurance policies sold to their customers.

Client Communications

Experience Modifiers – Workers - Compensation Policy

What is an experience modifier, how is it computed and how does it affect my premium?

This is a great question, and one that our customers ask frequently. The experience rating modifier is the one area where an employer’s efforts can significantly reduce premium cost.

Experience rating is the interaction of claims management and insurance pricing. An organization that controls its losses also controls its experience modifier and ultimately is responsible for higher or lower premiums. Although the formula is quite complicated, an understanding of the basic components will assist you in minimizing the impact of losses.

The experience modification formula considers losses for a three-year period, excluding the current policy period. The “losses” are more than just the amount that has been actually paid out on a claim. They are the “incurred” losses, which also include the reserves that an insurance company adjuster has estimated the loss will pay out in the future, either in direct medical treatment or as indemnity payments to the injured worker while he or she is unable to return to work.

As an example, let’s consider that an experience modifier for a risk is being calculated during 2006 for a policy that will be written effective Jan. 1, 2007. Since the 2006 policy is not yet closed (expired), the loss data is not available. This one-year lag period allows the insurance company the time to close most claims and more accurately estimate the cost of the open claims that will continue for more than one year. The three years that the experience modification calculation is based on are the years that began in January 2003, January 2004 and January 2005.

In its simplest form, the experience rating calculation compares the actual losses for the individual employer with the expected losses for the average employer in the same industry and same state with the same amount of payroll.

An experience modifier of 1.00 represents an employer whose actual losses closely matched the expected losses for their business. If the actual losses were greater than the expected losses, the experience modifier would be greater than 1.00; conversely a modifier less than 1.00 means that actual losses were less than expected.

Since no two employers in the same industry will have the same claims histories, the experience modifier calculation is designed so that the employer with the greater claims pays more for workers’ compensation. Through this system, employers have a financial incentive to improve the safety of the workplace. The chart below shows the significant impact that the experience modifier has on the actual premium an employer pays for insurance:

Manual Premium	Exp Mod	Discount/Surcharge	Modified Premium
$62,106	.73	$16,769 Discount	$45,337
$62,106	1.00	No Impact	$62,106
$62,106	1.43	$26,706 Surcharge	$88,812

The last aspect of the experience rating modifier that impacts the calculation is the frequency of claims. The formula places a higher penalty on an employer who has 10 injuries costing $5,000 each versus an employer who has one injury costing $50,000. Although the ultimate expense may be the same, the employer with one claim is considered a much better risk. A history of frequent losses normally implies there are poor safety standards in place and little management commitment to improving safety. In Texas, as in most states, large claims are “capped” so that the amount that exceeds the cap is not counted at all in the calculation. The current cap in Texas is $107,000. This capping process reduces the penalty to the employer when there are “shock” losses.

The examples below show the impact of losses on the experience modification calculation as well as the impact of frequency versus severity in the calculation.

Example #1 Hypothetical Account

Claims History
Claims	Policy Yr	Actual	Primary
Under $2000	01	5,660	5,660
Under $2000	02	5,303	5,303
Under $2000	03	3,018	3,018
#51261701	01	72,848	5,000	Lost Time Claim
BJM3976	03	4,708	4,708	Lost Time Claim
BJM9986	03	4,708	4,708	Lost Time Claim
		94,804	26,956
Premium Calculation
Class Code	3628	8742	8810	Mod	Adj Prem
Est Payroll	1,000,000	100,000	1,400,000
Divide/100	10,000	1,000	14,000
Prem Rate	3.50	.75	0.36
Premium	35,000	750	5,040
			40,790	1.275	52,007

Example #2 - What if there had been no Lost Time Claims?

	Premium	Mod	Adj Prem
Example #1	40,790	1.275	52,007
Example #2	40,790	.80	32,632

Example #3 - What if instead of three lost-time injuries, there was only one, but the total loss was the same?

	Premium	Mod	Adj Prem
Example #1	40,790	1.275	52,007
Example #2	40,790	.80	32,632
Example #3	40,790	1.120	45,684

 

 

 

 

Remember, experience modifiers are not arbitrary numbers assigned by the insurance carrier; they are calculations based on the employer’s actual losses. You can reward yourself and your business by implementing safety programs that will reduce losses.

This article was derived from an article written by Jan Kearbey, CIC, CISR, CPIW, CWCP, Director of Education & Production for Service Lloyds Insurance Company of Austin, Texas, and was originally printed in Service Lloyds Connection Volume II, Issue 3.

This article was prepared and made available to your agent by the Independent Insurance Agents of Texas, which is solely responsible for its content. Please read your insurance policy. If there is any conflict between the information in this article and the actual terms and conditions of your policy, the terms and conditions of your policy will apply. The Independent Insurance Agents of Texas is a non-profit association of more than 1,500 insurance agencies in Texas, dedicated to helping its members succeed, in part by providing technical resources that explain insurance policies sold to their customers.