BILL ANALYSIS Ó AB 1981 Page 1 ASSEMBLY THIRD READING AB 1981 (Brown) As Amended May 13, 2014 Majority vote JUDICIARY 10-0 ----------------------------------------------------------------- |Ayes:|Wieckowski, Wagner, | | | | |Alejo, Chau, Dickinson, | | | | |Garcia, Gorell, | | | | |Maienschein, Muratsuchi, | | | | |Stone | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- SUMMARY : Increases consumer fees for rental car damage waivers. Specifically, this bill : 1)Increases the damage waiver fee for the two smallest classes of rental cars from $9 to $11 each day. 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 the manufacturer suggested retail price (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. FISCAL EFFECT : None 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 but increase [it] ? to more closely reflect the market." AB 1981 Page 2 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 New York General Business Law Section 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 $3 million to settle a class action lawsuit alleging that its damage waiver was unconscionable in that it provided illusory coverage for a premium price. 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. 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.) Perhaps for the reasons cited above, Enterprise Holdings 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 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 Assembly Judiciary 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 AB 1981 Page 3 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% of its total profit from this product alone in 2013, reportedly up from 4% in 2011. 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. Avis likewise recently announced significantly higher profits in 2013. (See Avis Budget Group Profits Up in Q3 2013, Auto Rental News, November 1 2013.) Under this bill, the rate consumers can be charged for damage waivers will increase by 22% (from $9 to $11 each day) for some vehicles, and 13% ($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. 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. There is no known opposition to the bill. Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334 AB 1981 Page 4 FN: 0003529