A carrier informs an agent that physical damage to a rental car is excess over other collectible insurance. The agent finds similar wording in the policy—but the rental agreement states that the carrier is responsible for damage.

Q: "The rental company also claims their insurance does not cover damage to vehicles while rented. After more than 30 years in the business and several years of teaching, this is the first I have heard of this. I would appreciate your input."

A: “In the ISO PAP, physical damage coverage is not only excess over any other collectible insurance, but also excess over any other source of recovery. And that’s just the beginning of potential problems with non-owned autos—this is also an issue with loaner cars and new or used vehicles you test drive.

The ISO PAP says it provides excess coverage over any other source of recovery. Presumably, that would include any first-party insurance or self-insurance of a rental car company. So if the loss is covered in full, it’s arguable that the PAP physical damage coverage would not respond at all—otherwise it should respond to pick up a deductible (after application of your own deductible, of course).

The liability coverage won’t respond because of the CCC exclusion. So for carriers taking this position, the extension of physical damage coverage to non-owned autos would be largely illusory unless the auto is uninsured. In that case, the PAP responds in full less the deductible. Note: This isn’t the case in states like Texas, or with some proprietary auto policies where physical damage to non-owned autos is still covered by the liability section.

This is just one of the reasons—diminished value is another—why purchasing the rental company loss damage waiver is is usually a good idea. But that's unlikely an option with loaner cars or when test driving a car. Rarely, if ever, would you need to discuss this potential coverage gap issue in a loaner or test driving situation, and equally rare would be an explicit waiver of subrogation prior to loss.

The Big “I” Virtual University’s national Technical Affairs Committee has brought this to the attention of ISO, which has expressed interest in examples of claims and court cases or at least company positions on this issue. I’m personally aware of three claims that have been denied except for paying the deductible under a garage policy. If you have information to share, feel free to mailto:bill.wilson@iiaba.net.

Bill Wilson is director of the Big “I” Virtual University.

 This question was originally submitted by an agent through the VU’s Ask an Expert Service. For more information on rental car-related coverage issues, visit the VU. Answers to other coverage questions are available on the VU website. If you need help accessing the website, email logon@iiaba.net to request login information.