BILL ANALYSIS Ó AB 1981 Page 1 Date of Hearing: May 6, 2014 ASSEMBLY COMMITTEE ON JUDICIARY Bob Wieckowski, Chair AB 1981 (Brown) - As Amended: March 28, 2014 As Proposed to be Amended SUBJECT : RENTAL VEHICLES: DAMAGE WAIVER PRICE INCREASE KEY ISSUE : SHOULD CAR RENTAL COMPANIES BE ALLOWED TO CHARGE CONSUMERS MORE FOR DAMAGE WAIVERS? SYNOPSIS This bill is sponsored by the largest car rental companies to increase fees on rental car consumers who purchase a damage waiver. Under existing law, the fee is capped at $9 and $15 per day, depending on the cost (MSRP) of the vehicle. This bill, as proposed to be amended, would raise those fees to $11 and $17 per day based on the size of the vehicle rather than the price. In addition, by eliminating the relationship between the fee and the cost of the vehicle, the bill would allow rental companies to charge unlimited fees for many more vehicles that are substantially less expensive. As a result, the rate in California will increase significantly over current rates. These price increases will impose greater costs on California consumers than those currently imposed in New York and Illinois, the two other large states that limit the maximum amount rental car companies can charge for damage waivers. The industry argues that price increases are justified because cars have become more expensive to fix. The industry further argues that capping the price of damage waivers is simply price control and no longer an effective tool for consumer protection. They accept however that these caps have been put in place to hold down consumer costs, and the author states that this bill as proposed to be amended will continue to do that while allowing some reasonable increases. SUMMARY : Increases consumer fees for rental car damage waivers. Specifically, this bill , as proposed to be amended: 1)Increases the damage waiver fee for the two smallest classes of rental cars from $9 to $11 each day. AB 1981 Page 2 2)Increases the damage waiver fee for intermediate, standard and full-size cars from $15 to $17 per day. 3)Imposes no limits on the price of damage waivers for all cars in body-size categories above full-size, regardless of MSRP, in place of existing law that allows an unlimited fee for damage waivers only when the vehicle as an MSRP of at least $47,000. EXISTING LAW governs contracts between vehicle rental companies and their customers and authorizes a rental company to sell a damage waiver for each full or partial 24-hour rental day at specified rates determined by criteria that include the rental company designation of the vehicle based upon MSRP and model year adjusted annually to reflect changes from the previous year in the Consumer Price Index, as defined. The current per-day rates are $9 for smaller and less expensive cars, $15 for larger and more expensive vehicles, and no limit for vehicles costing more than $47,000. (Civil Code section 1936.) FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. COMMENTS : The author sets forth the reason for the bill as follows: It has been 26 years since the rate caps have been established and 13 years since they have been adjusted. As vehicles become more technologically sophisticated, they also become more costly to fix when a collision or other damage occurs. California is one of the few states that cap the rate. In fact, there are 47 states that allow damage waiver to be offered, but do not cap the rate. Maintaining a rate cap does not incentivize rental companies from offering competitive rates. AB 1981 will maintain the cap of DW rates for the two smallest categories of vehicles, but increase the rate cap ? to more closely reflect the market. In 2016 onward, the DW rate will be adjusted based on CPI. This will allow companies to compete and offer competitive rates. California And Other Large States Have A Long History of AB 1981 Page 3 Limiting The Maximum Rate Consumers Can Be Charged For Rental Car Damages Waivers: As the sponsors note, California and a handful of other states including New York and Illinois currently limit the price car rental companies may charge for damage waivers. The current cap in New York ($9 and $12 each day, based on the price of the car) is lower than the current rate in California ($9 and $15 per day based on car price, with no cap for expensive cars - i.e., those starting at an MSRP of approximately $47,000). (See N.Y. Gen. Bus. Law § 396-z(2)(a).) The current rate in Illinois is a flat $13.50 per day for all cars, following an increase from $12.50 at the request of the industry last year. Thus, this bill would increase that price protection differential between California and New York, as well as between California and Illinois. These fee caps reflect a history of legislative concern about the sale of this product. The car rental industry generally argues that this history is long in the past and should no longer concern current policymakers. Nevertheless, controversy about the price and practices involved in the sale of this product continue. Just last year, for example, Hertz paid $3million to settle a class action lawsuit alleging that its damage waiver was unconscionable in that it provided illusory coverage for a premium price. (See Davis Landscape, Ltd. v. Hertz Equipment Rental Corporation, D. Ct. N.J (http://law.justia.com/cases/federal/district-courts/new-jersey/n jdce/2:2006cv03830/192957/244.) In addition, a number of lawsuits have recently been filed against car rental companies alleging that customers were unwittingly signed up for damage waivers even though they had verbally declined it. (See "A Quick Electronic Signature at the Car Rental Office, and Then Trouble," New York Times, April 5, 2013.) Indeed many consumer advocates do not recommend purchasing damage waivers at all - particularly because the renter's credit card and personal automobile insurance policy typically cover damage to rental vehicles already. In addition, car rental companies now face new third-party competition from companies offering car rental insurance for $7.99 per day including all car rental company fees. (See us.protectyourbubble.com.) Has The Industry Shown Justification For Raising These Rates? Perhaps for the reasons cited above, Enterprise notes that the number of consumers who purchase damage waivers has fallen over the years, to the point where most of those who purchase the AB 1981 Page 4 product are a segment of business travelers on expense accounts. It may be that the dwindling number of consumers who purchase damage waivers may diminish the total profit car rental companies earn from this product. However, the car rental companies have not claimed that they are making less money, and they have declined to respond to the Committee's questions about profits they derive from the sale of damage waivers, asserting they would be exposed to liability for illegal price-fixing if they did, despite the fact that the price of this product is set by the Legislature, not the companies. The rationale offered for the bill is that the rate has not increased since 2001, and that other consumer costs as well as the cost of car repair have increased since that time. The profitability of this product, however, would appear to be based not on the price of consumer products generally, or even the price of car repair, but rather on the loss rate - that is, the frequency and extent of damages incurred by customers who purchase the damage waiver. In any event, it appears that profits from the sale of damage waivers may indeed be increasing rather than decreasing, regardless of any general increase in consumer prices. At least one company recently reported earning 5 percent of its total profit from this product alone in 2013, reportedly up from 4 percent in 2011. (See Avis Budget Group 2013 Annual Report, available at http://www.shareholder.com/visitors/dynamicdoc/document.cfm?docum entid=3135&company id=ABEA-36XVJR&page=1&pin=&language=EN resizethree=yes&scale=100&zid=d4adc23c.) Although this figure is not known for the privately-held Enterprise Holdings, the largest car rental company, the company reported record profits in 2012 for the third year in a row. (See http://www.enterpriseholdings.com/press-room/enterprise-holdings- announces-record-profitability-fiscal-2012-highlights-and-updated -sustainability-report.html.) Avis likewise recently announced significantly higher profits in 2013. (See Avis Budget Group Profits Up in Q3 2013, Auto Rental News, Nov. 1 2013 (http://www.autorentalnews.com/channel/rental-operations/news/sto ry/2013/11/avis-budget-group-profits-up-in-q3-2013.aspx.) This Bill As Proposed to Be Amended Increases The Fee Car Rental Companies May Impose On Consumers Who Purchase Collision Damage Waivers And Disconnects The Amount of the Fee From The Cost of The Vehicle: Under this bill as proposed to be amended, the AB 1981 Page 5 rate consumers can be charged for damage waivers will increase by 22 percent (from $9 to $11 each day) for some vehicles, and 13 percent ($15 to $17 per day) for others. In addition, there will be no limit on the price consumers will potentially pay for vehicles in the body size categories above full-size, regardless of the price of the vehicle. Currently rental companies can impose unlimited damage waiver fees only when the vehicle has an MSRP of at least $47,000.00. Under this bill, the damage waiver fee will be unlimited for many more vehicles than under current law. For example, the suggested industry model for the "premium" car classification that would have an unlimited damage waiver fee is a Buick Lucerne. When that vehicle was discontinued in 2011 it had an MSRP of less than $30,000. Thus, rental companies would be allowed to charge unlimited damage waiver fees for a car costing less than $30,000 under this bill, rather than cars priced at more $47,000 under existing law. The bill does not currently provide any concomitant consumer protections. ARGUMENTS IN SUPPORT : The sponsors of the bill, representing the largest car rental companies - Enterprise Holdings, Inc., Avis Budget Group, Hertz, and the California Travel Association - write in support of the bill as follows: Among other things, the provisions passed in 1988 placed new restrictions on the advertising and sale of "damage waiver." ? In 2001, the daily cap ? was changed to allow damage waiver to be sold at slightly increased rates, based on the MSRP of the vehicle rented. The MSRP's were tied to the Consumer Price Index (CPI) to reflect the natural inflation of vehicle prices over time. It has been 26 years since the original law was passed and 13 years since the DW rate caps in the statute have been adjusted. Although the MSRP in the current limitation includes an adjustment for CPI, the cap on rates for DW are not tied to the CPI and have remained stagnant. Currently, 47 other states allow DW to be offered, but do not cap the rate. AB 1981 maintains and does not weaken the current consumer protections and rental car company requirements currently included in statute. ? The provisions of AB 1981 are important for two reasons. AB 1981 Page 6 First, as cars and other vehicles have become more sophisticated, they also have become more expensive to fix when a collision or other damage occurs. Unfortunately, because of current statute, the DW rate has remained stagnant for the last 13 years. Second, capping the price of DW in statute is simply price control and no longer an effective tool for consumer protection. AB 1981 does not alter in any way the numerous disclosure requirements in current statute, arguably the most effective protection for consumers who may purchase DW. In addition, unlike 25 years ago when this provision was put in place, today's extensive use of the internet to find and compare rental cars and rates allows consumers to see the total price of their rental vehicle across all companies and all classes of vehicles before they enter into any agreement to rent a vehicle. Author's Amendments. The author offers the following amendments to replace the current section 1936(h): (h) Notwithstanding any other provision of law, a rental company may sell a damage waiver subject to the following rate limitations for each full or partial 24-hour rental day for the damage waiver. (1) For rental vehicles that the rental company designates as an "economy car," "subcompact car," "compact car," or another term having similar meaning to the two smallest body-size categories of vehicles described in the Association of Car Rental Industry Systems Standards for North America as of January 1, 2014 , when offered for rental,or another vehicle having a manufacturer's suggested retail price of nineteen thousand dollars ($19,000) or less,the rate shall not exceednine ($9)eleven dollars ($11). ( 2)For rental vehicles in the middle three body-size categories of vehicles described in the Association of Car Rental Industry Systems Standards for North America as of January 1, 2014, and that are also either vehicles of next year's model, or not older than the previous year's model, the rate shall not exceed seventeen dollars ($17). For those rental vehicles older than the previous year's model-year, the rate shall not exceed eleven dollars ($11). AB 1981 Page 7(i) The manufacturer's suggested retail prices described in paragraph (2) of subdivision (h) shall be adjusted annually to reflect changes from the previous year in the Consumer Price Index. For the purposes of this section, "Consumer Price Index" means the United States Consumer Price Index for All Urban Consumers, for all items.REGISTERED SUPPORT / OPPOSITION : Support Avis Budget Group Enterprise Holdings, Inc. Hertz Opposition None on file Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334