BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2013-2014 Regular Session AB 1981 (Brown) As Amended June 15, 2014 Hearing Date: June 24, 2014 Fiscal: No Urgency: No TH SUBJECT Rental Vehicles: Contracts: Damage Waivers DESCRIPTION Existing law governs contracts between vehicle rental companies and their customers and authorizes a rental company to sell damage waivers at a maximum rate of $9 or $15 per rental day, based in part on the manufacturer's suggested retail price (MSRP) and model year of the rented vehicle. This bill would remove the MSRP as one of the criteria for determining the rate of a damage waiver sold by a rental company, and would instead set the rate of damage waivers according to the vehicle's classification using criteria set by the 2014 Association of Car Rental Industry Systems Standards for North America. This bill would increase the maximum rate of the damage waiver to $11 per rental day for vehicles designated as an "economy car," "compact car," or another term denoting the two smallest categories of vehicles described by the standards. This bill would also increase the maximum rate of the damage waiver to $17 per rental day for vehicles in the next 3 body-size categories of vehicles designated in the standards. However, vehicles that are older than the previous year's model year would be capped at $11. (This analysis reflects author's amendments to be offered in Committee.) BACKGROUND A damage waiver is an optional product offered by most rental (more) AB 1981 (Brown) Page 2 of ? car companies to their customers. The damage waiver is a contractual agreement between a rental car company and a renter in which the company, in exchange for a fee, agrees to waive the renter's liability for damage to or loss of the car during the rental period. Damage waivers do not relieve a renter of all liability, however. For example, a renter may still be liable if the damage or loss results from the authorized driver's intentional, willful, wanton, or reckless conduct. In 1988, in order to address concerns that rental car customers were being subjected to coercive damage waiver sales techniques at the rental counter, California enacted a $9 cap on the amount that rental car companies could charge for the product. (See AB 3006, Connelly, Ch. 1523, Stats. 1988.) This cap applied to all rental vehicles. AB 3006 was sponsored by Attorney General John Van de Kamp and initially proposed to prohibit damage waivers entirely. At the time, the sponsor argued that damage waivers were a "complex and unfair scheme" that was "adhesive in nature, contrary to public policy, and violative of the common law allocation of lessors' and lessees' respective responsibilities." As a result of a "carefully negotiated compromise" between the author, the Attorney General, consumer groups, and industry, the bill was amended to provide for a comprehensive scheme regulating damage waivers. Since then, there have been several attempts, supported by the rental car industry, to either increase or eliminate entirely the cap on the amount that a rental car company may charge for a damage waiver. In 1998, AB 2314 (Papan, 1998) would have repealed the $9 damage waiver cap for the rental of any vehicle above the compact car class. That bill died in this Committee. The next year, AB 966 (Papan, 1999) would have, among other things, eliminated the $9 cap and required a rental car company to clearly disclose the existence and amount of a damage waiver in any advertisement. That bill also died in this Committee. In 2001, AB 491 (Frommer, Ch. 661, Stats. 2001) provided that rental cars with an MSRP of $19,000 or less were subject to the $9 cap. That bill also increased the $9 cap to $15 for new rental cars with an MSRP of between $19,001 and $34,999. AB 491 also eliminated the cap for rental cars over $35,000. In 2009, the introduced version of AB 833 (Perez) would have increased the damage waiver cap to $22 for all rental cars. That provision was subsequently removed from the bill when the bill was pending in the Assembly Judiciary Committee. AB 1731 (Tran, 2010) would have kept the $9 and $15 per day caps intact, but would have changed which rental cars were subject to each rate limitation by deleting the AB 1981 (Brown) Page 3 of ? MSRP references and providing instead that the damage waivers for rental cars in the rental company's lowest two rental classes would be capped at $9 per day. For intermediate, standard, full, and premium class vehicles, rental car companies would have been permitted to charge $15 per day. That bill died in this Committee. Two years later, AB 2379 (Huber, 2012) would have increased the $9 and $15 caps to $11 and $18, respectively, and would have automatically allowed those caps to adjust in line with the Consumer Price Index. That bill died in the Assembly Judiciary Committee. This bill would take a somewhat less comprehensive approach toward altering the damage waiver fee caps and calculation methodologies set by AB 3006 and AB 491. This bill would remove a rental vehicle's MSRP as a criterion for setting the damage waiver rate and instead would set up two rate classes capped at $11 and $17 per rental day based on the rental vehicle's classification in the 2014 Association of Car Rental Industry Systems Standards for North America. However, as under existing law, damage waivers for vehicles that are older than the previous year's model year would be capped at the lower rate. CHANGES TO EXISTING LAW Existing law defines a "damage waiver" as a rental car company's agreement not to hold a renter liable for damage to or loss of the rental car, any loss of use of the rental car, or any storage, impound, towing, or administrative charges. (Civ. Code Sec. 1936(a)(5).) Existing law specifies that a damage waiver must provide that a renter has no liability for damage, loss, loss of use, or a related cost or expense. (Civ. Code Sec. 1936(e)(1).) Existing law states that a rental car company may provide that a damage waiver does not apply in certain circumstances, including, among others, when the damage or loss results from the authorized driver's intentional, willful, wanton, or reckless conduct or from that driver's operation of the vehicle under the influence of drugs or alcohol. (Civ. Code Sec. 1936(f)(1).) Existing law provides that a damage waiver is optional and a consumer may not be required to purchase a damage waiver. A rental car company must also provide a consumer with specified notices regarding the damage waiver. (Civ. Code Secs. 1936(g), (k).) AB 1981 (Brown) Page 4 of ? Existing law provides that a rental car company may sell a damage waiver subject to the following rate limitations for each full or partial 24-hour rental day and provides that the MSRPs described below shall be adjusted annually to reflect changes from the previous year in the Consumer Price Index: 1)$9 per day for rental vehicles that the rental car company designates as an "economy car," "subcompact car," "compact car," or another term having similar meaning, or another vehicle having an MSRP of $19,000 or less; and 2)$15 per day for rental vehicles that have an MSRP from $19,001 to $34,999, and that are also either vehicles of next year's model, or not older than the previous year's model. If the vehicle is older than the previous year's model-year, the rate for a damage waiver may not exceed $9. (Civ. Code Sec. 1936(h), (i).) This bill would provide, in place of the damage waiver fee caps and calculation methodologies above, that a rental car company may sell a damage waiver subject to the following rate limitations for each full or partial 24-hour rental day: 1)For rental vehicles that the rental company designates as an "economy car," "compact car," or another term having similar meaning to the two smallest body-size categories of vehicles established by the Association of Car Rental Industry Systems Standards for North America, as of January 1, 2014, when offered for rental, the rate shall not exceed eleven dollars ($11). 2)For rental vehicles, that the rental company designates as an "intermediate car," "standard car," or "fullsize car," or another term having similar meaning to the next three body-size categories of vehicles established by the Association of Car Rental Industry Systems Standards for North America, as of January 1, 2014, and that are also either vehicles of the next model year or not older than the previous year's model, when offered for rental, the rate shall not exceed seventeen dollars ($17). For rental vehicles that are older than the previous year's model year, the rate shall not exceed eleven dollars ($11). This bill would make additional non-substantive changes. COMMENT 1. Stated need for the bill AB 1981 (Brown) Page 5 of ? The author writes: It has been 26 years since the [rental vehicle damage waiver] rate caps [were] established and 13 years since they [were last] 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[s] to be offered, but do not cap the rate. Maintaining a rate cap does not incentivize rental companies from offering competitive rates. For purposes of clarity for consumers, AB 1981 will eliminate MSRP as the measure of vehicle class/value and substitute it with the Association of Car Rental Industry Systems Standards (ACRISS) car classification code (economy, compact, intermediate, standard, fullsize). . . . In addition, AB 1981 will increase the rate cap for damage waivers by two dollars. The rate for the first tier (economy and compact) will be changed from $9 to $11 per day. The second tier (intermediate, standard, and fullsize) will be increased from $15 to $17 per day. 2. Revising existing rate cap structure Existing law prohibits rental car companies from charging more than $9 per day for a damage waiver on vehicles designated by the company as being an "economy car," "subcompact car," or "compact car," or another vehicle having an MSRP of $19,000 (in 2001 dollars) or less. Rental car companies are also prohibited from charging more than $15 per day for rental vehicles that have an MSRP from $19,001 to $34,999 (in 2001 dollars). This bill would delete these MSRP references and instead set up two rate classes capped at $11 and $17 per rental day based on the rental vehicle's classification using the 2014 Association of Car Rental Industry Systems Standards for North America. With the author's proposed changes, this bill raises the policy question of whether it is appropriate to revise what is essentially a "bright-line" value-based standard (MSRP) to a standard that is less clearly related to the value of the asset being protected. The bright-line MSRP standard was amended into California law in 2001 as part of AB 491 which provided for the current structure tying the damage waiver daily cost to the MSRP of the vehicle. At the time, it was stated that the bill and its rate structure AB 1981 (Brown) Page 6 of ? would preserve the $9 charge for a significant number of rental cars. AB 491 was a carefully negotiated compromise between Attorney General Bill Lockyer, the rental car industry, and other stakeholders. The bill's express link to the covered vehicle's MSRP was thought to be the most reasonable, bright line standard by which to draw the line between the lower and higher damage waiver caps. This bill, in contrast, draws the line between the higher and lower caps by reference to an industry vehicle classification system - the 2014 Association of Car Rental Industry Systems Standards for North America (ACRISS). Staff notes that the 2014 reference date currently in the bill creates essentially a new bright-line static standard, and is therefore not subject to manipulation like previous proposals to tie rate classes to vehicle classifications set up by the rental car companies themselves. (See e.g. AB 1731 (Tran, 2010).) The question remains, however, whether the Legislature ought to change the existing rate setting system. Supporters note that the new damage waiver fee structure would aid pricing transparency, especially for consumers who reserve rental cars on the Internet. Under the existing scheme, a prospective renter is frequently unable to obtain an accurate quote on the price of a damage waiver since it is tied to the MSRP of the actual car being rented. Because rental car fleets are constantly in flux, a rental car company may not know which car will ultimately be assigned to a particular consumer until they arrive to pick up the car. As Enterprise Holdings states in its letter of support, the existing rate structure may not allow a consumer to "see the total price of their rental vehicle across all companies and all classes of vehicles" before they enter into a rental agreement (assuming they purchase the damage waiver). However, it is important to note that by shifting away from an MSRP based rate structure towards an industry classification based structure, more vehicles may end up in the higher rate tier than under the existing system, thereby raising the general cost of damage waivers for rental cars. This added cost would, of course, be in addition to the $2 increase implemented across all rate categories also proposed in this bill. All told, these changes would make damage waivers more expensive for consumers who opt to purchase them as part of their rental agreement. The Committee is unaware of any evidence - and the supporters have submitted none - indicating that the existing rate structure is AB 1981 (Brown) Page 7 of ? uneconomical or fails to adequately cover losses paid out through damage waivers. Without evidence to the contrary, the increases in damage waiver rate caps proposed in this bill may simply make this product more profitable for rental car companies without delivering any increased benefit to consumers. 3. Damage waivers are often unnecessary Staff also notes that for many consumers, rental car damage waivers may be unnecessary. According to the United Services Automobile Association (USAA), a Fortune 500 financial services company that sells personal automobile insurance: [g]enerally, coverage from your primary auto insurance will extend to a rental vehicle. If you cause an accident while driving the rental, your liability insurance would pay up to your policy limits for the damages to other cars or property. Likewise, if you carry collision coverage on your regular policy, that would pay for accident-related damages to the rental car you're driving. Finally, your comprehensive coverage would take care of damages to the rental vehicle not related to a traffic accident, such as theft or vandalism. (Do You Need Rental Car Insurance? < https://www.usaa.com/inet/pages/advice-auto-rentalcarinsuranceq uestions?akredirect=true> (as of June 21, 2014).) Further, for some consumers, additional rental car damage protection is provided by their personal credit card: Many credit cards come with benefits such as rental car insurance, which can supplement - or even serve in place of - your regular auto insurance policy. . . . For the coverage to apply, you usually have to reserve and pay for the rental car using that card. The terms and conditions vary widely, depending on which card you have. Some cards offer primary coverage, which doesn't require you to make a claim on your regular auto policy. Other cards offer secondary coverage, in which case the coverage would only pay your deductible or other potential claim costs. (Id.) Existing law requires rental car companies to expressly notify consumers at point-of-sale that their personal insurance policy or the credit card they use to pay for the car rental AB 1981 (Brown) Page 8 of ? transaction may provide coverage for all or a portion of the renter's potential liability. (See Civ. Code Sec. 1936(g)(1) [written notifications]; Civ. Code Sec. 1936(g)(2) [oral notifications].) While not strictly raised by the author's bill, the Committee may wish to investigate whether the existing disclosure requirements related to damage waivers adequately inform consumers that this product may be unnecessary, particularly for those consumers who reserve rental vehicles online and may not receive an oral disclosure. 4. Author's amendments The author proposes the following amendments, which amend the bill as described in this analysis: On page 10, strike lines 39 through 40 On page 11, strike lines 1 through 4, and insert: (1) For rental vehicles that the rental company designates as an "economy car," "compact car," or another term having similar meaning to the two smallest body-size categories of vehicles established by the Association of Car Rental Industry Systems Standards for North America, as of January 1, 2014, when offered for rental, the rate shall not exceed eleven dollars ($11). On page 11, strike lines 5 through 14, and insert: (2) For rental vehicles, that the rental company designates as an "intermediate car," "standard car," or "fullsize car," or another term having similar meaning to the next three body-size categories of vehicles established by the Association of Car Rental Industry Systems Standards for North America, as of January 1, 2014, and that are also either vehicles of the next model year or not older than the previous year's model, when offered for rental, the rate shall not exceed seventeen dollars ($17). For rental vehicles that are older than the previous year's model year, the rate shall not exceed eleven dollars ($11). 5. Chaptering-out issues Staff notes that AB 2747 (Committee on Judiciary), the Assembly Committee on Judiciary's Omnibus Bill, would amend the same section as this bill and double-jointing language must be added AB 1981 (Brown) Page 9 of ? to the bill before it leaves the Senate to avoid any chaptering-out of this bill's provisions. Support : Avis Budget Group, Inc.; California Travel Association; Hertz Opposition : None Known HISTORY Source : Enterprise Holdings Related Pending Legislation : AB 2747 (Committee on Judiciary), the Assembly Committee on Judiciary's Omnibus Bill, would extend until January 1, 2020, a sunset provision pertaining to a requirement for rental companies to accept service of a summons and complaint against a renter who resides out of this country for an accident or collision resulting from the operation of the rental vehicle in this state, as provided. This bill is set for hearing in the Senate Committee on Judiciary. Prior Legislation : AB 2379 (Huber, 2012) See Background. AB 1731 (Tran, 2010) See Background. AB 833 (Perez, 2009) See Background. AB 491 (Frommer, Ch. 661, Stats. 2001) See Background. AB 966 (Papan, 1999) See Background. AB 2314 (Papan, 1998) See Background. AB 3006 (Connelly, Ch. 1523, Stats. 1988.) See Background. Prior Vote : Assembly Floor (Ayes 64, Noes 3) Assembly Committee on Judiciary (Ayes 10, Noes 0) ************** AB 1981 (Brown) Page 10 of ?