BILL ANALYSIS �
AB 1981
Page 1
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
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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