BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1981
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          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.









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          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
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          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  








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          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  








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          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.  








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               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 exceed  nine ($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).  









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           (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