Yes, your credit card may include free rental car insurance, but there is some fine print you should know about.

Oct 2, 2017 at 11:30AM
One perk of having a credit card is that many offer additional insurance coverage when you rent a car. This is typically known as a “collision damage waiver,” which may cover some of the financial losses when you return a damaged rental car.

That said, not all losses are covered, and some cards offer better rental car insurance than others. Here’s the skinny on rental car insurance provided by a credit card.

Rental car risks

Renting a car can actually be a pretty big financial risk. As a renter, you’re not only responsible for paying to fix any damage to the car, but you’re also on the hook for any “loss of use” costs that are incurred while the car waits for repair.

In other words, if a free-range shopping cart in a parking lot decides to headbutt your rental car, doing $500 of cosmetic damage, you’re responsible for the repair costs. In addition, you’ll also have to pay for the time the car sits waiting for repair, often at full daily rental rates. This is how small scratches and dents can become $1,000 headaches.

Frankly, the “loss of use” provision in car rental agreements has caused a lot of controversy and led to many unhappy customers. But state courts have generally upheld it as a reasonable term in the contract, and it can be found in most rental contracts.

A man and a woman riding in a convertible

IMAGE SOURCE: GETTY IMAGES.

What’s covered by credit cards?

Insurance provided by credit cards typically covers the financial damage to the rental car because of collision or theft, plus the “loss of use” expense while the car waits for repair.

In most cases, credit cards’ insurance only covers damage to standard rental automobiles, not luxury cars, large vans, trucks, and some particularly large SUVs, for example. This is explained in your benefits guide you receive with your card. Since the coverage usually extends up to the value of the car, credit card companies don’t want to have to pay out on a Ferrari, and I suppose I can’t blame them. Not only are larger and more luxurious cars and trucks typically more expensive to repair, but many are also faster or more difficult to handle.

Importantly, the coverage provided by a credit card doesn’t extend to bodily injury or liability (damage to other people or other property). Thus, if you get into a collision with another car, you could have responsibility for the other driver’s financial losses, which is why it’s good to have your own car insurance when renting a car. Causing property damage might ruin your day, but causing bodily injury can ruin your year if you don’t have insurance, particularly if lawyers get involved.

Even with its limitations, rental car insurance provided by a credit card is a tremendous value. That’s because buying similar collision damage waiver coverage from the rental car company will cost you $9 to $15 per day you rent the car and because rental car insurance from your credit card company will typically pick up the tab on expenses your car insurance won’t cover.

Do you have primary or secondary coverage?

Card companies typically offer rental car collision damage waivers when you pay for the cost of the rental with the card and decline the rental car company’s collision damage waiver protection offered by the rental car agency. The insurance offered by a credit card comes in two types: primary or secondary.

  • Primary: This acts as a first line of insurance coverage. You do not have to file a claim with any other source of insurance (like your personal auto insurance). For this reason, primary insurance is the best type of insurance.
  • Secondary: Acts as “backup” insurance coverage. You have to file a claim with other sources of insurance (like your personal auto insurance). Thus, secondary insurance typically only covers your deductible on your personal insurance or amounts in excess of what your personal auto insurance covers.

Suppose you have a run-in with a light pole and do some cosmetic damage to the rental car. If you have primary insurance from your credit card, you’ll simply make a claim on the insurance provided by your card and they’ll take care of it from there. Your existing auto insurer won’t be notified, so you’ll dodge a costly increase in auto rates that typically follow a claim.

If you have secondary insurance, the process is more complicated. You’ll have to make a claim with your personal insurance and also with the card’s secondary insurance. The secondary insurance provided by your credit card will only cover what your personal insurance won’t pay, which might just be your deductible.

For this reason, the value of secondary insurance really depends on the deductible on your current car insurance policy. If you have a $0 deductible, secondary auto insurance from a credit card is, in many cases, almost useless. If your deductible is $1,000, then the secondary insurance is good to have, because it will pay the $1,000 deductible for you.

Of course, secondary insurance won’t pay for the increased premiums you’ll pay on your car insurance for years after making a claim. That’s why primary insurance is the best — you can avoid the claim and the resulting increase in your premiums.

Best cards for rental car coverage

Secondary rental car insurance comes along with most credit cards on the market today. But because of its limitations, the value provided by secondary rental car coverage is merely good — and far from great.

Frequent car renters would be better off with a card that offers primary rental car insurance. Fool.com has looked at the fine print on most major credit cards, and in our research we’ve found that the best card for primary rental car insurance carries an annual fee of $95 per year, which is waived in the first year. Other cards offer primary insurance, but have annual fees as high as $450.

If you are a frequent car renter, having primary rental car insurance can be more than worth the annual fee. I actually have one card in my wallet for precisely this reason: I rent cars a lot, and generally distrust the car rental companies to play fair when it comes to damage to the car. I can’t count how many times I’ve worried that a pre-existing dent at the time I rented the car would become my problem when I returned the car. Being a relatively young, unmarried male, the last thing I need is a claim on auto insurance that would put me in an even riskier cohort of drivers.

Anyone who rents cars knows the drill. The salespeople shrug off scratches or dents on the walk around the car prior to renting, but they’re not necessarily so forgiving when the car comes back. Dents that were “no big deal” when you left the lot are suddenly worthy of repair when you return.

Having primary insurance gives me the peace of mind to know that if it comes back with a scratch or dent, I’m not going to be out $1,000 or more to pay for the damages. The other benefits are great, too, and more than cover the annual fee on their own, but the primary insurance coverage is a tremendous layer of protection to have.

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James fuller

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