BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 1731 (Tran)
As Amended June 17, 2010
Hearing Date: June 29, 2010
Fiscal: No
Urgency: No
SK:jd
SUBJECT
Vehicle Rental Agreements: Damage Waivers
DESCRIPTION
Existing law permits a rental car company to sell a damage
waiver to a consumer and caps the daily amount of that charge
depending on the manufacturer's suggested retail price (MSRP) of
the vehicle rented. This bill, sponsored by Enterprise Holdings
(operator of Enterprise, Alamo, and National rental car
companies), would delete the MSRP amounts and instead tie the
cap to the class of vehicle rented.
BACKGROUND
A damage waiver is an optional product offered by most rental
car companies to their customers. The damage waiver is a
contractual agreement between the rental car company and the
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
(more)
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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, 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repealed the $9 damage waiver cap for the rental of any vehicle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 (now approximately $23,000
as adjusted for inflation) or less were subject to the $9 cap.
That measure also increased the $9 cap to $15 for new rental
cars with an MSRP of between $19,001 and $34,999 (now
approximately $43,000 as adjusted for inflation). AB 491 also
eliminated the cap for rental cars over $35,000 (now $43,000).
Last year, 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.
While this bill would keep the $9 per day and $15 per day caps
intact, it would instead change the rental cars subject to each
rate limitation by deleting the MSRP references and instead
provide that the damage waiver for rental cars in the company's
lowest two rental classes is capped at $9 per day. For
intermediate, standard, full, and premium class vehicles, rental
car companies would be permitted to charge $15 per day, as
specified.
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
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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 provides that a rental car company may provide that
a damage waiver does not apply in certain circumstances,
including, among others, that 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
notice regarding the damage waiver. (Civ. Code Secs. 1936(g),
(k).)
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 (now approximately $23,000
as adjusted for inflation) or less; and
2)$15 per day for rental vehicles that have an MSRP from $19,001
to $34,999 (now approximately $43,000 as adjusted for
inflation), 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 revise the above limitations to instead provide
that a rental car company may charge the following for a damage
waiver:
1)$9 per day for rental vehicles in the rental car company's
lowest two rental classes; and
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2)$15 per day for rental vehicles in the following classes:
intermediate, standard, full, and premium that are 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.
This bill would make a conforming change by deleting existing
law's provision that the MSRP be adjusted annually to reflect
changes from the previous year in the Consumer Price Index.
COMMENT
1. Stated need for the bill
The author writes:
The [damage waiver (DW)] pricing formula adopted in 2001 is
flawed in that it provides that only one side of the equation
- the price of the vehicle - be adjusted annually for
inflation. A parallel adjustment of the cost of DW was not
included. As a result, nearly 60% [of] Enterprise Holdings
fleet is now at the lower DW limit. The tier pricing
structure adopted by AB 491 in 2001 was designed to insure
that only rentals designated as a compact car or lower be at
the lowest price point. Additionally, MSRP has proven very
complex and expensive to administer. Enterprise Holdings has
over 100,000 vehicles in their California fleet and tens of
thousands of MSRPs. Even identical cars can have different
MSRP as a result of being purchased at different times.
Sponsor Enterprise Holdings writes:
Current law has a flaw in that there is no . . . provision
adjusting the damage waiver limitations. As a result of this
anomaly, nearly 60 percent of Enterprise Holdings (which
includes Enterprise, Alamo and National rental fleets)
vehicles are now subject to the $9 limit. Increasingly, this
is proving to be economically untenable.
Current law also has proven impossible to administer simply.
Enterprise purchases approximately 100,000 cars annually in
California. Two vehicles of the same make and model with
different options will have MSRPs and potentially different
damage waiver limitations. It is not exaggerating to say that
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there are thousands of different MSRPs that have to be dealt
with each year.
AB 1731 simplifies the calculation, administration and
charging of damage waiver by allowing the pricing of damage
waiver by vehicle class. It preserves the commitment to
having affordable protection for the compact and lower classes
by requiring a maximum rate of only [$9] for these entry level
classes. It caps Damage Waiver for the highest class at
[$15]. By comparison, with pure cost of living adjustment the
original $9 cap would now be $16.11 and the $15 limit would be
$26.85.
2. Bill would base damage waiver amount on vehicle class; rental
car companies could manipulate classes and increase costs on
consumers during difficult economic times
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 $23,000 or
less. Rental car companies are also prohibited from charging
more than $15 per day for rental vehicles that have an MSRP from
$23,001 to $43,000. This bill would delete these MSRP
references and instead provide that the existing $9 per day cap
would apply only to rental cars in the company's lowest two
rental classes. A rental car company would be able to charge
$15 per day for rental cars in the following classes:
intermediate, standard, full, and premium class. As a result,
this bill raises the policy question of whether it is
appropriate to revise what is essentially a "bright-line"
standard (MSRP) to a standard that is much more easily
manipulated (rental car classes).
The bright-line MSRP standard was amended into California law in
2001 as part of AB 491 which provided for the current scheme
tying the amount of damage waiver that may be charged to the
MSRP of the vehicle. At the time, it was stated that the bill
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. This link to the MSRP is arguably the most
reasonable, bright line standard by which to draw the line
between the lower and higher damage waiver caps.
This bill, on the other hand, draws the line between the higher
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and lower caps by using an easily manipulated classification -
rental vehicle classes. Although most of the rental car
companies appear to use similar terms when describing their
rental car classes, the companies themselves are the ones that
determine which car fits into which class. As a result, it
would be possible for a rental car company, under this bill, to
reclassify a car with the end result being that a consumer would
pay a higher damage waiver charge for that car under the bill
than they would under existing law.
Opponent Consumer Federation of California (CFC) opposes the
measure in part for this reason, stating that it gives rental
car companies "unfettered discretion to reclassify cars in order
to increase fees." An example illustrates how a rental car
company could manipulate its categorical classes to obtain a
higher CDW rate:
Under current law, a rental car company may not charge more
than $9 per day for a rental car valued at under $23,000.
Under the bill, however, that same car could be reclassified
into the intermediate or standard class and thus the rental
car company could charge up to $15 per day instead (unless the
vehicle was older than the previous year's model year, in
which case the damage waiver would be $9). The company could
do this by establishing two new classes of rental vehicles:
one containing cars priced under $13,000 and another with cars
priced under $17,000. In this hypothetical, cars priced at
$17,001 to $23,000, which had previously been subject to a $9
per day cap because they had an MSRP of less than $23,000
would now be subject to the $15 per day cap.
In addition, while most rental car companies generally use the
same name for each category, this is not always the case. For
example, the names of the categories used by Enterprise appear
to most closely match the terms used in this bill:
"intermediate, standard, full, and premium" classes. Avis uses
similar terms but also has a "specialty" class and Alamo has a
"midsize" class. Hertz uses "compact/midsize" in addition to
"fullsize/standard" and "premium." Several of the companies
also have categories for other cars like hybrids, some of which
may currently be subject to the $9 cap. It is not clear under
the bill where cars in these categories would fit in.
Furthermore, if they are cars that are currently subject to the
$9 per day cap, under this bill they would instead be subject to
the $15 per day cap if they do not fall within the two lowest
rental classes.
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By specifying that cars in certain vehicle classes are subject
to the $9 or $15 cap, the effect of this bill would be to
provide that cars in classes not specified in the bill are
uncapped. The sponsor of this measure, Enterprise Holdings,
lists on its Enterprise-Rent-a Car Web site the following 14
vehicle classes from which a renter may choose: (1) economy; (2)
compact; (3) intermediate; (4) standard; (5) full size; (6)
premium; (7) luxury; (8) minivan; (9) intermediate SUV; (10)
standard SUV; (11) large SUV; (12) pickup truck; (13) large
pickup; and (14) cargo van. The last eight classes (#7-#14) are
not specifically described in this bill. Under existing law,
cars in those eight classes with an MSRP of under $23,000
(likely very few) would be capped at $9 while those cars with an
MSRP of under $43,000 (likely a much larger number) would be
capped at $15. This bill, by not specifically specifying those
eight classes, would appear to provide that the damage waiver
for cars in those eight classes is actually uncapped. In other
words, under the bill, a rental car company would not be limited
in how much it could charge a renter for a damage waiver for
cars in those eight classes.
This, in fact, is what the sponsor aims to do and proposes to
amend the bill to provide as follows: (3) Rental vehicles in
classes not described in paragraphs (1) and (2) are not subject
to rate limitations.
This language very clearly and expressly states that a vehicle
in a rental class that is not named is uncapped.
A recent Ninth Circuit decision, Shames v. California Travel and
Tourism Commission __ F.3d__ (9th Cir., June 8, 2010) highlights
the need to look closely at charges imposed on rental car
customers. In that antitrust case, the court ruled that the
imposition of industry-wide fees that were passed on to rental
car customers was a "foreseeable consequence of the legislative
grant of authority" in approving assessments of the rental car
industry for funding for the California Travel and Tourism
Commission. While it is important to note that there was not
legislative intent to permit rental car companies to fix prices,
this bill likewise deserves scrutiny to ensure that rental car
customers are protected against added costs.
FOR THE REASONS DESCRIBED ABOVE, IS IT APPROPRIATE TO NO LONGER
TIE DAMAGE WAIVER CAPS TO A RENTAL CAR'S MSRP, AN ARGUABLY
BRIGHT-LINE STANDARD, AND INSTEAD TIE THOSE CAPS TO RENTAL CAR
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"CLASSES," ALLOWING RENTAL CAR COMPANIES TO DETERMINE WHICH CARS
ARE SUBJECT TO WHICH CAP?
SHOULD THE COMMITTEE DETERMINE THAT IT IS APPROPRIATE TO ADDRESS
DAMAGE WAIVER CAPS, THE COMMITTEE MAY WISH TO INSTEAD RETAIN THE
LINK TO MSRP AND MODESTLY INCREASE THE DAMAGE WAIVER CAP TO, FOR
EXAMPLE, $9.50 AND $16.00.
3. Impact of the bill; no demonstrated evidence for why current
damage waiver scheme is insufficient
The sponsor has asserted the need for this bill by stating that
the existing damage waiver scheme is "economically untenable."
In particular, as noted above, the sponsor states that nearly 60
percent of vehicles in Enterprise Holdings' fleet are currently
subject to the $9 damage waiver cap.
In order to better understand the justification for an increase
in the damage waiver charge and therefore be able to provide to
the Committee information so that it could evaluate whether the
current charge is insufficient and such an increase is
justified, Committee staff requested additional information from
the rental car companies affected by the measure. Enterprise
Holdings was the only rental car company that responded to the
questions, and the company provided information detailing the
number of rental vehicles the company has in each of the
different segments. These numbers from Enterprise Holdings,
which represent Enterprise, Alamo, and National rental car
companies, further demonstrate the impact of the bill on rental
car customers.
Enterprise Holdings indicates that approximately 60 percent of
its current fleet is subject to the current $9 per day cap and
about 30-35 percent is subject to the $15 per day cap. Under
this bill, those numbers would change significantly:
approximately 10-12 percent of the fleet would be capped at $9
and 78-85 percent would be subject to the $15 cap. As a result,
it would appear that, under this bill, Enterprise Holdings could
now charge $15 per day for damage waivers for a significant
percentage of its rental car fleet. In addition to increasing
the costs on consumers who purchase this product, this would
appear to also be inconsistent with the notion that the
structure of AB 491 would preserve the $9 damage waiver charge
for a significant number of rental cars.
SHOULD THE LINK TO MSRP BE DELETED WHEN IT CANNOT BE SHOWN THAT
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THE CURRENT DAMAGE WAIVER SCHEME IS INSUFFICIENT?
4. Additional impact on consumers
In addition to potentially paying more for a damage waiver under
this bill than under existing law, as described above in Comment
2, this bill would arguably result in giving a rental car
company a greater incentive to encourage consumers to purchase
this particular product. Because of the coercive sales tactics
used by rental car companies to push damage waivers in the late
1980s, AB 3006 included language prohibiting a rental car
company from requiring that a consumer purchase a damage waiver
and also prohibited rental car companies from engaging in
unfair, deceptive, or coercive conduct to induce a consumer to
purchase a damage waiver.
Despite these protections, however, because the bill would
permit a rental car company to reclassify vehicles and thereby
potentially increase the number of cars subject to the $15 per
day cap rather than $9 per day cap, it could have the result of
further incentivizing rental car companies to promote damage
waivers and persuade consumers to purchase them.
Should the Committee approve the change in classification -
which would permit rental car companies to charge increased fees
to consumers for coverage that many already have pursuant to
their insurance or credit card - the Committee should also
consider prohibiting those rental car companies from providing
any incentive or reward to employees that is based upon the
number of damage waivers actually sold. Those incentives,
combined with the increased amounts that may be collected, would
create a situation where employees are under even greater
pressure to sell damage waiver products to consumers. That
proposed restriction on incentives would not prohibit incentive
compensation to those employees who sell additional products,
such as pre-paid fuel, or even an upgrade (although that upgrade
may take the car out of the classes defined by this bill).
SHOULD THE BILL PROHIBIT A RENTAL CAR COMPANY FROM PROVIDING ANY
INCENTIVE OR BONUS TO AN EMPLOYEE FOR THE SALE OF A DAMAGE
WAIVER?
5. Support
The California Chamber of Commerce supports this measure,
stating:
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Current law governs the sale of damage waivers by car rental
companies, and in 1988, fixed dollar amounts, based on the
manufacturer's suggested retail price (MSRP), were set into
law to ensure that renters of the compact and lower classes of
cars would have affordable protection available to them.
Since that time, the cost of living has increased 65%, and the
cost of repair and parts has risen even faster due to changes
in the ways cars are made. As a result, the fixed amounts
rental car companies are legally permitted to charge are
insufficient to cover the increased exposure they now face.
In addition, the law fails to take into account that not all
cars older than one year are of equal value, and thus it often
provides inadequate coverage for cars in rental company
fleets.
6. Opposition
In addition to the concerns expressed above, the Consumer
Federation of California (CFC) also writes:
This bill underscores the need for greater regulatory
oversight of collision damage waiver (CDW) fees. As you know,
these waivers do not constitute formal auto insurance and are
therefore exempt from the rate regulation process of the
Department of Insurance. CFC believes that rate increases,
such as the ones proposed by AB 1731, should be subject to CDI
oversight and its regulatory process. This approach could
more adequately assess the full impact of increased CDW fees
alongside the various other costs associated with renting a
vehicle. . . . CFC is also concerned that [the bill] allows
for selective use of inflationary increases; they are relied
upon only to increase costs to consumers rather than reducing
financial burdens on Californians. In closing, the Consumer
Federation of California opposes AB 1731 because it loosens
key consumer protections and imposes unjustified rate
increases associated with car rentals.
Support : California Chamber of Commerce
Opposition : Consumer Federation of California
HISTORY
Source : Enterprise Holdings
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Related Pending Legislation : None Known
Prior Legislation : See Background, Comment 2.
Prior Vote :
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 72, Noes 1)
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