FTC Staff Comment to the Hon. Gwyn Shea Concerning Texas H.B. 476 to Alter Current Methods of Allocating the Costs and Risks of Damage or Theft of a Rental Vehicle

100 N. Central E.pr_ay
Suite 500
OaHas. TX 75201
(214) 767·5503
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
DALLAS REGIONAL OFFICE
COMMISSION AUTHORIZED
V890041
Office of the Regional Director
March 	27, 	1989
The 	Honorable 	Gwyn 	Shea
Texas 	State 	House 	of 	Representatives
State of 	Texas
P.O. 	Box 	2910
Austin, 	Texas 	78768-2910
Dear Ms. 	Shea:
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased to 	have
the 	opportunity 	to 	respond 	to 	your 	request 	for 	comment on Texas
House 	Bill 	476 	(-the 	Bill"), 	which 	is 	currently pending 	before
the 	Texas 	House 	of 	Representatives. 1 	We 	are 	providing 	these
remarks 	in 	response 	to your 	letter of 	March 	16, 	1989. 	Our
comment 	addresses 	aspects 	of 	the 	Bill 	that 	may adversely 	affect
consumers. 	We would 	be 	pleased 	to 	offer 	additional 	assistance 	on
any 	particular 	amendments 	that 	are 	offered.
The 	Bill 	would 	alter 	the 	current methods 	of 	allocating 	the
costs 	and 	risks 	of 	damage 	to 	(or 	theft 	of) 	a 	rental 	vehicle. 	In
addition, 	it 	would prohibit 	rental 	car companies 	from 	requiring
renters 	to 	provide, 	during 	the 	term 	of 	the 	rental 	agreement 	or
pending 	resolution 	of 	any 	dispute, 	any 	security, 	deposit, 	or 	.
payment 	for 	damage. 	We 	are concerned 	that 	these 	provisions 	might
result 	in 	increased costs 	to 	consumers 	who 	rent 	automobiles
without 	providing 	significant benefits 	to 	the 	majority of
automobile 	renters 	or 	to 	the 	public 	at 	large.
The 	Federal 	Trade 	Commission 	is 	charged with promoting
competition and 	prote~ting consumers 	from 	unfair and 	deceptive
commercial 	practices. 	In 	fulfilling 	this 	mandate, 	the 	staff 	of
the 	Federal 	Trade 	Commission often submits 	comments, 	upon
request, 	to 	federal, 	state, 	and 	local 	governmental 	bodies 	to 	help
assess 	the 	competitive 	and consumer welfare 	implications 	of
pending 	policy 	issues. 	In enforcing the 	Federal 	Trade .Commission
1 	These 	comments 	are 	the views 	of 	the 	staff 	of 	the 	Dallas
Regional 	Office 	and 	the 	Bureau 	of 	Consumer Protection of 	the
Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of
the 	Commission or any 	individual 	Commissioner.
2 	~ 	15 	U.S.C. 	S 41 	~ ~.

The 	Honorable 	Gwyn 	Shea 	Page 	2
Act, 	the 	Commission 	has 	gained considerable 	experience 	in
analyzing 	the 	market 	impact 	of 	various 	private 	and 	governmental
restraints 	on competition and 	the 	costs 	and 	benefits 	to 	consumers
of 	these 	restraints.
The 	Commission and 	its 	staff 	have 	considered other matters
involving 	the 	car 	rental 	industry. 	The Commission 	recently
commented on Guidelines 	prepared by 	the 	National 	Association 	of
Attorneys 	General's 	Task 	Force 	on ~ar Rental 	Industry 	Advertising
and 	Practices 	("NAAG Guidelines"). 	The 	allocation of 	liability
portion of 	the 	Bill 	is 	very 	similar 	to 	portions 	of 	these 	NAAG
Guidelines. 	.
Lessor Liability
The 	Bill 	would make 	significant 	changes 	in 	the 	allocation of
the 	risk 	that 	a 	rental 	vehicle 	will 	be 	damaged 	or 	stolen. 	The
Bill 	would 	require 	car 	rental 	companies, 	as 	an 	integral 	(and
therefore 	not 	separately billable) 	part 	of 	every 	rental
transaction, 	to 	assume 	all 	responsibility 	for 	any damage 	in most
ins~ances,4 and 	appears 	to be 	designed 	to 	prohibit 	the 	offering
3 	Letter 	from 	Federal 	Trade 	Commission 	(Commissioner
Strenio 	not 	joining) 	to 	Robert 	T. 	Stephan, 	Attorney General,
Kansas 	(February 	24, 	1989). 	A copy 	is 	attached. 	The
preliminarily approved Guidelines 	were 	adopted with 	revisions 	by
the 	Attorneys 	General 	at 	their March meeting.
4 	Section 	4(a) 	provides 	that 	an 	"authorized driver" 	--
defined 	in 	Section 	3(6) 	as 	"(A) 	the 	person 	to 	whom 	a 	private
passenger 	automobile 	is 	rented; 	(B) 	the 	spouse 	of 	a 	person
renting 	a 	private 	passenger 	automobile 	if 	the 	spouse 	is 	a
licensed 	driver 	and meets 	the 	rental 	company's 	minimum 	age
requirements; 	(C) 	the 	employer or coworker of 	a 	person 	renting
the 	private 	passenger 	automobile 	if 	the 	employer or 	coworker 	is
engaged 	in business 	activity with 	the 	person 	to 	whom 	the
automobile 	is 	rented and 	is 	a 	licensed driver 	and 	satisfies 	the
rental 	company's 	minimum 	age 	requirements; 	(D) 	a 	person who
operates 	a 	rented 	private passenger automobile 	during 	an
emergency or while 	parking motor vehicles 	at 	a 	commercial
establishment; 	or 	(E) 	a 	person who 	is 	expressly 	listed as 	an
authorized driver 	by 	the 	rental 	company on 	the 	rental 	agreement"
-- may 	be 	held 	liable 	for 	damage 	or 	loss: 	caused 	intentionally
by 	an 	authorized driver 	or 	resulting 	from 	an 	authorized driver's
wilful 	and wanton misconduct; 	arising 	out 	of 	an 	authorized
driver's 	legal 	intoxication or 	illegal 	drug 	use 	(as 	defined 	or
determined under 	the 	law 	of 	the 	state 	in which 	the 	damage
(continued .•• )

The 	Honorable Gwyn 	Shea 	Page 	3
of 	a 	separate 	Collision Damage Waiver 	("CDW").S 	In practical
effect, 	legislative 	restriction of 	the 	offering of 	a 	distinct COW
product 	is 	tantamount 	to 	mandating 	that 	car 	rental 	com~anies
bundle 	COW 	coverage 	into 	every car 	rental 	transaction. 	Any
legislatively 	imposed bundling requirement 	will 	restrict 	consumer
4( ••. continued)
occurred); 	that 	occurs 	while 	an 	authorized driver 	is 	engaged 	in 	a
speed contest; 	where 	the 	rental 	transaction 	is 	based 	on
information 	supplied by 	the 	renter with 	the 	intent 	to 	defraud
the 	rental 	company; 	that 	occurs 	while 	the 	authorized 	driver 	is
engaged 	in 	a 	criminal 	act 	in which 	the vehicle 	usage 	is
substantially related 	to 	the 	nature 	of 	the 	criminal 	activity;
where 	the 	vehicle 	is 	used 	to 	transport 	persons 	or 	property 	for
hire; 	or 	that 	occurs 	during 	unauthorized 	use 	of 	the 	vehicle
outside 	the 	United States 	or Canada. 	House 	Bill 	476 	S 	4(a).
Our 	reading 	of 	the 	Bill 	leaves 	us 	uncertain whether 	the
limitation of 	liability 	in 	Section 	4(a) 	applies 	to 	an
unauthorized 	driver 	or 	to 	a 	renter who 	permits 	an 	unauthorized
person 	to 	drive 	the vehicle. 	The 	legislature may wish 	to 	adopt
appropriate 	clarifying amendments.
5 	According 	to 	Section 	2 of 	the 	Bill, 	the 	purpose 	of 	this
Bill 	"is 	to 	prohibit 	rental 	companies 	from 	imposing 	liability on
persons 	who 	rent 	automobiles 	subject 	to 	certain 	stated exceptions
and 	to 	prohibit 	the 	sale 	of 	collision damage 	waiver 	in 	connection
with 	private 	passenger 	automobile 	rental 	agreements 	for 	a 	period
of 	30 	days 	or 	less." 	House 	Bill 	476 	S 	2. 	Although 	the 	Bill
does 	not 	specifically articulate 	a 	ban on 	the 	sale 	of 	COW, 	it
appears 	that 	the 	effect 	of 	the 	Bill would 	be 	to 	prohibit 	such
sales.
6 	Hereinafter we 	refer 	to measures 	that 	would 	restrict 	the
offering of 	a 	distinct COW product 	as 	"COW-bundling" 	measures, 	in
. recognition of 	their 	practical 	effect.

The 	Honorable Gwyn 	Shea 	Page 	4
choice 	among COW-like 	coverages 	of 	rental 	cars. 7 	As 	a 	result,
some 	consumers 	will 	have 	to 	bear 	greater costs, 	primarily 	in 	the
form 	of 	higher base 	prices, 	than 	they 	otherwise might 	incur, 	to
cover 	the 	accident 	and 	theft 	losses 	statutorily 	shifted 	to 	the
rental 	car companies. 	Recent 	news 	reports 	suggest 	that 	this 	may
be 	happening 	to 	some 	consumers 	in 	at 	least 	one 	state. 	A recent
article 	in The 	New York Times 	regarding 	adoption of 	COW-bundling
legislation 	in 	Illinois 	said:
[C]ar-rental 	companies 	have 	raised 	their 	rates 	in 	Illinois,
where 	the 	ban on collision waivers 	took 	effect 	Jan. 	1.
Hertz 	raised 	its 	prices 	by 	8 percent 	in 	Illinois 	and 	by 	2.5
to 	5 	percent 	elsewhere 	in 	anticipation 	of 	a 	decline 	in
waiver 	sales 	to 	American 	Express's 	22.1 	million cardholders.
Alamo 	and 	Budget 	have 	also 	followed 	Hertz's 	lead by 	raising
prices 	in 	Illinois, 	but 	no 	other major 	company 	has 	raised
prices 	across 	the 	board. 8
Some 	believe 	that 	COW 	sales 	are 	troubling 	in 	part 	because
consumers 	lack 	adequate 	information 	and 	they 	encounter deception
or 	high pressure 	at 	the 	rental 	counter. 9 	However, 	where
consumers 	suffer 	from 	insufficient 	or confusing 	information,
remedies 	requiring 	the 	disclosure 	of 	more 	or better 	information
often may 	resolve 	the 	problem. 	Providing consumers 	information
on COW may 	be 	more 	effective 	and 	less 	costly 	than 	requiring 	that
7 	These 	options 	include 	purchasing no 	insurance 	and
assuming 	the 	full 	risk 	("going 	naked"), 	purchasing COW, 	relying
on 	personal 	automobile 	liability 	insurance 	that 	extends 	to 	rented
cars, 	and 	using 	coverage 	provided by 	a 	third 	party 	such 	as 	a
credit 	card 	provider. 	Initially, 	credit 	card 	providers 	extended
these 	benefits 	to 	holders 	of 	their 	"prestige" 	cards, 	such 	as
"gold," 	"platinum," 	and 	corporate 	cards. 	Recently, 	however,
American 	Express 	extended 	rental 	car damage 	coverage 	to 	its 	basic
"green" 	card. 	Other credit 	card companies 	are 	expected 	to 	follow
suit. 	The 	Record, 	Jan. 	15, 	1989, 	at 	B2, 	col. 	2.
8 	N.Y. 	Times, 	Jan. 	7, 	1989, 	§ 	1 	at 	52, 	col. 	1.
More 	recently, 	a 	Hertz 	spokesman has 	indicated that 	due 	to 	a
New York COW-bundling 	law due 	to 	go 	into 	effect 	on April 	1, 	1989,
"the company's 	rates 	will 	go 	up 	about 	8%, 	or 	$3 	to 	$4 	per 	day 	for
rentals 	in New York." 	N.Y. 	Oaily News, 	Feb. 	13, 	1989, 	at 	23.
9 	~ generally NAAG Guideline 	3.1 	(c) 	and 	following
discussion.

The 	Honorable Gwyn 	Shea 	Page 	5
COW 	be 	sOOd 	in 	the 	rental 	bundle 	regardless 	of 	whether 	consumers
want 	it. 1
Accordingly, 	we believe 	that 	a 	legislature 	considering
regulation of 	cow ought 	first 	to 	determine 	whether 	information
now 	conveniently 	available 	to 	consumers 	permits 	rational
decisionmaking with 	respect 	to 	cow. 	In 	the event 	that 	the
legislature 	determines 	that 	currently 	available 	information 	is
inadequate, 	it 	then ought 	to 	explore 	fully 	the 	efficacy of
information-generating measures. 11 	On 	the 	other 	hand, 	if
consumers 	are 	encountering 	unfair 	or 	deceptive 	marketing
practices 	at 	some 	car 	rental 	counters, 	the 	most 	direct 	and
efficient 	remedy may 	be 	law enforcement 	action 	against 	the
offenders.
Prohibition of 	Security Requirements
Another 	provision 	of 	the 	Bill 	states 	that 	"[s]ecurity or 	a
deposit 	for 	damage 	in 	any 	form may 	not 	be 	required 	or 	requested
by 	the 	rental 	company during 	the 	rental 	period or pending
resolution 	of 	any 	dispute. "12 	Thus, 	for 	example, 	under 	the 	Bill
a 	rental 	car company would 	be 	prohibited 	from 	securing 	the
10 	£aa Beales, 	Craswell 	& Salop, 	"The 	Efficient 	Regulation
of 	Consumer 	Information," 	24 	J. 	of 	L. 	& Econ. 	491 	(1981).·
Our 	analysis 	of 	the 	cow 	issue 	comes 	to 	a 	different
conclusion 	than 	that 	reached 	in 	the 	NAAG Guidelines. 	The
Guidelines 	make 	three 	alternative 	legislative 	proposals, 	two 	of
which 	would 	irrevocably 	allocate most 	of 	the 	risk of 	damage 	to 	or
loss 	of 	a 	rental 	car to 	the 	rental 	car company. 	The 	final
legislative proposal 	would 	permit 	a 	rental 	car 	company 	to 	hold
consumers 	liable 	for 	damages 	resulting 	from 	their 	negligence 	or
intentional 	misconduct 	provided 	that 	the 	rental 	car company
offered 	to 	sell 	to 	consumers 	a 	waiver 	at 	a 	regulated 	price
related 	to 	the 	company's 	loss 	experience. 	~ NAAG Guideline 	3.1.
11 	The 	authors 	of 	the 	NAAG Guidelines 	state 	that 	they 	do
"not 	believe 	that 	this 	[COW] 	information 	gap can be 	filled 	by
more 	disclosures 	•.... " 	Comment 	to 	NAAG Guideline 	3.1 	(C). 	No
explanation 	is 	offered 	for 	this 	belief. 	Nevertheless, 	if 	this
conclusion 	is 	supported, 	traditional 	law enforcement 	efforts
might 	be 	adequate 	to 	prevent 	deception or 	unfairness 	in 	the
marketing of 	COW. 	These 	alternatives 	are 	worth exploring 	in
detail 	before 	concluding 	that 	mandated purchase 	of 	cow 	is 	the
proper 	solution to 	the 	problem of 	unwanted purchase 	of 	CDW.
12 	House 	Bill 	476 	S 4(c).

The Honorable 	Gwyn Shea 	Page 	6
lending of 	an 	automobile 	worth 	thousands 	of 	dollars 	through 	a
"hold" 	on 	a 	consumer's 	credit 	card 	account, 	even 	if 	the 	hold were
to 	be 	limited 	and 	the consumer manifested 	informed 	consent. 	If
enacted, 	this 	provision may 	increase 	the 	number 	of 	instances 	in
which 	rental 	car companies 	are 	unable 	to 	obtain payment 	for
damages 	for 	which 	the 	Bill makes 	the 	renter 	responsible. 	Rental
car 	companies 	may 	then 	have 	no 	recourse 	but 	to 	increase 	rental
rates 	to 	cover 	any 	increase 	in unpaid charges, 	effectively
requiring 	honest 	and 	careful 	consumers 	to 	~ear debts 	incurred 	by
less 	scrupulous 	and 	less 	careful 	persons. 1
Conclusion
It 	is 	not 	clear 	that 	the 	Bill would provide 	net 	benefits 	to
consumers. 	We 	hope 	you 	will 	take 	into 	account 	the 	prospect 	that
the 	changes 	in 	liability 	for 	damaged 	or 	stolen 	rental 	vehicles,
~, 	the mandatory 	"bundling" 	of 	COW 	into 	the 	rental 	car 	rates,
could mean, 	on 	balance, 	higher 	rental 	prices 	for 	consumers. 	In
addition, 	we 	suggest 	that 	you 	consi~er whether 	it 	is 	advisable 	to
shift 	to 	some 	consumers 	part 	of 	the 	losses 	that 	may be 	caused 	by
other consumers, 	as 	may 	result 	from 	the 	provisions 	of 	the 	Bill
relating 	to 	the 	holding of 	security.
13 	Further, 	the 	proscription of 	security-taking, 	insofar 	as
it may 	lead 	some 	drivers 	to 	conclude 	that 	they 	have 	a 	lesser
financial 	stake 	in 	avoiding 	all 	harm 	to 	rental 	cars, 	may 	result
in 	reduced 	care by some 	consumers.
Significantly, 	although 	the NAAG Task 	Force 	expressed
concern regarding 	certain rental 	car companies' 	practices
relating 	to 	deposits, 	credit 	card holds, 	and 	the 	like, 	the 	NAAG
Guidelines 	would 	not 	bar these 	practices 	generally. 	The
approach adopted 	in 	the NAAG Guidelines, 	instead, 	tends 	to 	focus
on ensuring adequate 	disclosure 	of 	and 	consumer consent 	to
deposits, 	credit 	card 	account 	holds, 	and 	similar rental 	car
company requirements. 	~,~, NAAG Guideline 	3.4. 	This
approach, 	although 	not 	cost-free, 	entails 	fewer 	costs 	to
consumers 	than would be 	imposed by 	the 	Bill.

The 	Honorable Gwyn Shea 	Page 	7
We 	hope 	that 	these 	comments 	will 	help you 	in your
determination of 	whether 	the 	Bill 	is 	likely 	to 	achieve 	the 	goal
of 	protecting consumers 	and 	fostering 	a 	competitive 	environment
in 	the 	car 	rental 	industry.
We 	appreciate 	the 	opportunity 	to 	comment.
/
Tomas 	B. 	Carter
Director
Dallas 	Regional 	Office
Attachment