BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                AB 1981
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        ASSEMBLY THIRD READING
        AB 1981 (Brown)
        As Amended May 13, 2014
        Majority vote 

         JUDICIARY           10-0                                        
         
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        |Ayes:|Wieckowski, Wagner,       |     |                          |
        |     |Alejo, Chau, Dickinson,   |     |                          |
        |     |Garcia, Gorell,           |     |                          |
        |     |Maienschein, Muratsuchi,  |     |                          |
        |     |Stone                     |     |                          |
        |-----+--------------------------+-----+--------------------------|
        |     |                          |     |                          |
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         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."









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        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  








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        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 










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