FTC Staff Comment to the Hon. Peter von Reichbauer Concerning Washington H.B. 1068 to Modify Current Methods of Allocating Costs and Risks of Damage to a Rental Car

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The 	Honorable 	Peter 	von 	Reichbauer
Washinqton 	State 	Senate
Financial 	Institutions 	and
Insurance 	committQQ
408 	John 	A. 	Cherberq 	Building
Olympia, 	Washington 	98504
OQar 	Senator von 	Reichbauer:
V890053
~;)jMMISSION AUTHORIZED
March 	27, 	1989
The 	staft 	of 	the 	Federal 	Trade 	Commission 	is 	pleased to 	have
the 	opportunity 	to 	respond 	to 	your 	request 	for 	comment 	on House
Bill 	No. 	1068 	("the 	Bill"), 	which 	is 	currently 	pending before 	the
state 	Senate 	Financial 	Institutions 	and 	Insurance 	Committee. 1 	We
are providinq these 	remarks 	in 	response 	to 	your 	letter 	of March
2, 	1989. 	Our comment 	addresses 	aspects 	of 	the 	Bill 	that 	may
adversely 	affect 	consumers. 	We 	would 	be 	pleased 	to 	offer
additional 	ass;atance 	on 	any 	particular 	amendments 	that ,are
offered.
The 	Bill 	would 	alter 	the 	current methods 	of 	allocatinq 	the
cos~s and 	risks 	of 	damage 	to 	a 	rental 	vehicle. 	In 	a~~ition, it
would 	prohibit 	rental 	car companies 	from 	requirin9 	renters 	to
provide, 	durinq 	the 	term 	of 	the 	rental 	aqreement 	or 	pending
resolution 	ot 	any 	dispute, 	any 	deposit 	or 	other 	security 	for
dama;_ 	eo 	the vehicle. 	We 	are 	concerned 	that 	these 	provisions
miqh~ ~esult in 	increased 	costs 	to 	consumers who 	rent
automobiles 	without 	providing 	significant 	benefits 	to 	the
majority 	of 	automobile 	renters 	or the 	pUblic 	at 	large.
The 	Federal 	Trade 	Commission 	is 	charqed with 	promoting
competition 	and 	protecting 	consumers 	trom 	unfair 	and 	deceptive
commercial 	practices. 2 	In 	fUlfilling 	this 	mandate, 	the 	staff 	of
1 	These 	comments 	are 	the 	views 	of 	the 	staft 	or 	the 	San
Francisco 	Reqional 	Office 	and 	tha 	Bureau 	or 	Consumer 	Protection
of 	the 	Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the
view~ of 	the 	Commission 	or 	any 	individual 	Commissioner.
2 	~ 	15. 	U.S.C. 	i 	41 	at 	$~g.

The 	Honorable 	Peter 	von 	Reichbauer
March 	27, 	1969
-~-
th~ 	Federal 	Trade 	Commission 	often 	sUbmits 	comments, 	upon
request, 	to 	federal, 	state, 	and 	local 	governmental 	bodies 	to 	help
ass~ss the 	competitive 	and 	consumer 	welfare 	implications 	of
pending 	policy 	issues. 	In 	en!orcinq 	the 	r.~.ra~ Trade 	commission
Act, 	the 	Commis~ion has 	gained 	considerable 	experience 	in
analyzing 	the 	market 	impact 	of 	various 	private 	and 	qovernmental
restraints 	on 	competition 	and 	the 	costs 	and 	benefits 	to 	consumers
of 	the •• 	restraints.
The 	Commission 	and 	its 	staft 	have 	considered 	other 	matters
involving 	the 	car 	and 	car 	rental 	indu5try. 	The 	Commission
recently 	commented 	on 	Guidelines 	prepared 	by 	the 	National
Association 	of 	Attorneys 	General's 	Task 	Force 	on 	Car 	Rental
Industry 	Advertising 	and 	Practices 	(IINAAG 	Guidelines,,).3 	The
allocation 	of 	liability 	portion 	of 	the 	Bill 	is 	very 	similar to
portions 	of 	the 	NAAG 	Guidelines.
Lessor 	Liability
The 	Bill 	would 	make 	significant 	changes 	in 	the 	allocation 	ot
the 	risk 	that 	a 	rental 	vehicle 	will 	be 	damaqed. 	The 	Bill would
require ·car 	rental 	companiss, 	as 	an 	integral 	(and 	there tore 	not
separately billable) 	part 	of 	every 	rental 	transaction, 	to 	assuma
all 	responsibility 	for 	any 	damage 	in most 	instances,4 	and
3 	Latter 	from 	the 	Federal 	Tra~e commission 	(Commissioner
Strenio 	not 	joininq) 	to 	Robert 	T. 	stephan, 	Attorney 	General,
Kansas 	(Fsbruary 	24, 	1989). 	A copy 	is 	attached. 	The
preliminarily 	approved 	Guidelines 	were 	adopted 	with 	revisions 	by
the 	Attorneys 	General 	at 	their March meeting.
4 	Section 	3, 	subsection 	1 	provides 	that 	an 	"authorized
driver"--aefined 	as 	the 	person 	to 	Whom the 	vehicle 	is 	rented 	and,
if 	a 	licensed 	driver 	and 	satisfying 	the 	company's 	minimum 	aqe
requirement: 	(a) 	the 	spouse 	of 	such 	person; 	(b) 	the 	renter's
employer, 	employee, 	or 	coworker 	if 	engaged 	in 	business 	activity
with 	the 	renter1 	and 	(c) 	a 	person 	expressly 	listed 	by 	the 	rental
company 	on 	the 	rental 	agreement 	as 	an 	authorized 	driver--may 	be
held 	liable 	for 	damage 	or 	loss: 	(a) 	caused 	intentionally 	by 	an
authorited 	driver 	or 	as 	a 	result 	of 	his 	or 	her 	willful 	and 	wanton
misconduct: 	(b) 	arising 	from 	an 	authorized 	driver's 	operation 	of
the 	vehicle 	While 	illegally 	intoxicated 	or 	under 	the 	influence 	of
an 	illegal 	drug: 	(c) 	caused 	while 	the 	authorized 	driver 	is
en9ag~d in 	a 	speed 	contest; 	Cd) 	where 	the 	rental 	transaction 	is
based 	on 	false 	or 	incomplete 	information 	supplied 	by 	the 	renter
with 	the 	intent 	to 	defraud 	the 	rental 	company; 	(e) 	arisinq 	from
the 	use 	the 	vehicle 	While 	engaging 	in 	a 	criminal 	act 	in 	which 	the
vehicle 	usage 	is 	~ubstantially related 	to 	the 	criminal 	actiVity:
or 	(f) 	arising 	from 	the 	unauthorized 	use 	of 	the 	vehicle 	outside
the 	United 	Statas 	or 	Canada. 	Amended 	House 	Bill 	1068 	§ 	3(1).
\~	.-'

ThQ 	Honorable 	Peter 	von 	Reichbauer
March 	27, 	1989
-)-
prohibits 	the 	offering 	of 	a 	separate 	Collision 	Damage 	waiver
("COW").5 	In 	practical 	effect, 	legisla'tive 	restriction 	of 	the
offerinq 	of 	a 	distinct 	CDW 	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 	choice 	among 	COW-like
ooveraqes 	of 	rental 	cars.' 	As 	a 	result, 	some 	consumers 	will 	have
to 	bear greater 	costs, 	primarily 	in 	the 	torm 	ot 	higher 	base
prices, 	than 	they 	otherwise 	might 	incur 	to 	cover 	the 	accident
losses 	statutorily 	shi!ted 	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 	a~option of 	COW-bundling 	legislation 	in 	Illinois 	said:
[C)ar-r~nta1 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 	an~ by 	2.5 	to 	S 	percent 	elsewhere 	in
anticipation 	ot 	a 	decline 	in waiver 	sales 	to 	American
Express·s 	22.1 	million 	car~holders. 	Alamo 	and 	BUdget
have 	also 	followed 	Hertz·s 	lead by 	raising 	prices 	in
Illinois, 	but 	no 	othar major 	company 	has 	raised 	prices
across 	the 	board. S
Our 	analysis 	of 	the 	CDW 	issue 	comes 	to 	a 	difterent
5 	Amena~d House 	Bill 	106S 	§ 	3(5).
6 	Herainatter we 	refer 	to measures 	that 	would 	restrict 	tha
offering 	ot 	a 	distinct 	COW 	product 	as 	"CDW-bundling ll 	measures, 	in
recognition 	of 	their 	practical 	effect.
7 	The•• 	options 	include 	purchasing 	no 	insurance 	and
assuming 	the 	full 	risk 	(llgoing 	nakad ll ), 	purchasing 	COW, 	relying
on 	personal 	automobile 	liability 	insurance 	that 	extends 	to 	rented
cars, 	an~ using 	coverage 	provided 	by 	a 	third 	party 	such 	as 	a
credit 	card 	provider. 	Initially, 	credit 	card 	providers 	extended
these 	benefits 	to 	hol~ers of 	their 	"prestige" 	cards, 	such 	as
Ilgo1d," 	"platinum," 	and 	corporate 	cards. 	Recently, 	however,
American 	Express 	extended 	rental 	car 	damage 	coverage 	to 	its 	basic
"green" 	card. 	other 	credit 	card 	companies 	are 	ey.pected 	to 	follow
suit. 	The 	B~cotd, ~an. 	15, 	1989, 	at 	B2, 	col. 	2.
8 	N,Y. 	Times, 	~an. 	7, 	1989, 	§ 	1 	at 	~2, 	col. 	1.
More 	recently, 	a 	Hertz 	spok~sman has 	indicated 	that 	due 	to 	a
New 	York 	CDW-bundling 	law 	due 	to 	go 	into 	effect 	on 	April 	1, 	1989,
"the 	company's 	rates 	will 	go 	up 	about 	st, 	or 	$3 	to 	$4 	per 	day 	for
rentals 	in 	New 	York." 	N.Y. 	Daily 	Ne"'s, 	Feb. 	13, 	1989, 	at 	23.

-~-	The 	Honorable 	Peter 	von 	Reichbauer
March 	27, 	1989
conclusion 	from 	that 	reached 	in 	the 	NAAG 	Guidelines. 9 	According
to 	the 	Guidelines, 	COW 	sales 	are 	troubling 	in 	part 	because
consumers 	lack 	adequate 	information 	and 	they 	encounter 	deception
or high 	pressure 	at 	the 	rental 	counter. 10 	However, 	where
eonsumers 	sufter 	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 	affective 	and 	less 	costly 	than 	requiring 	that
COW be 	sold 	in 	the 	rental 	bundle 	regardless 	of 	whether 	consumers
want 	it. ll 	.
.Accordingly, 	we 	believe 	that 	a 	leqislature 	considerin;
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. 12 	ror 	example, 	the 	Washington
state 	Senate has 	voted 	to 	adopt 	a 	bill, 	substitute 	Bill 	5148,
aimed 	at 	increasing 	consumers' 	information 	concerning 	rental 	car
liability 	and 	COW 	information. 	This 	bill 	would 	require 	clear 	and
conspicuous 	disclosure 	of 	renter's 	liability 	and 	COW 	availability
in 	separate 	attachments 	to 	rental 	contracts 	and 	in 	signs 	posted
at 	the 	place where 	the 	renter 	signs 	the 	rental 	agreement. 	On 	the
.g 	The 	Guidelines 	make 	three 	alternative 	legislative
proposals, 	two 	of 	which 	would 	irrevocably 	allocate 	most 	of 	the
risk 	of 	dama9. 	to 	or 	loas 	of 	a 	rental 	car 	to 	the 	rental 	car
company. 	The 	final 	legislative 	proposal 	woul~ permit 	a 	rental
car 	company 	to 	hold 	consumers 	liable 	tor 	damages 	reSUlting 	trom
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.
10 	See 	generally 	NAAG 	Guideline 	3.1 	(c) 	and 	following
discussion.
11 	~ 	Beales, 	Crasv.'ell 	& Salop, 	"The 	Etficient 	RegUlation
of 	Consumer 	Information," 	24 	J. 	of 	L. 	& Econ. 	491 	(1981).
)2 	The 	authors 	of 	the 	NAAG 	Guidelines 	state 	that 	they 	ao
"not 	believe 	that 	this 	[CDW] 	information 	gap 	can 	be 	filled 	by
more 	disclosures 	.... " 	Comment 	to 	NAAG 	Guideline 	3.1(0). 	No
explanation 	is 	offered 	for 	this 	belief. 	Nevertheless, 	if 	this
conclusion 	is 	supportecl, 	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 	CO\~ is 	the
propQr 	solution 	to 	the 	problem 	of 	unwanted 	purchase 	of 	CDW.

The 	Honorable 	Peter 	von 	~eichbauer
March 	27, 	1989
-5-
other 	hand, 	it 	consumers 	are 	encounterin9 	unfair 	or 	deceptive
marketing 	practices 	at 	some 	car 	rental 	counters, 	the 	most 	direct
and 	efficient 	remedy 	may 	be 	law 	enforcement 	action 	against 	the
offendere.
Prohibition 	of 	Security 	Beguirernent a
Another 	provision 	of 	the 	aill 	states 	that 	"(t)he 	rental
company ~ay not 	requeB~ or 	require 	a 	deposit 	or 	other 	security
for 	damaqe 	to 	th~ vQhicle 	durin9 	the 	rental 	period 	or 	pending
resolution 	of 	any 	dispute.,,13 	ThUS, 	tor 	exarople~ under 	the
Bill 	a 	rental 	car 	company would 	be 	prohibited 	from 	securing 	the
lending 	of 	an 	automobile 	worth 	thousands 	of 	dollars 	through 	a
"hold" 	on 	a 	consumer's 	credit 	card 	account, 	even 	it 	the hold 	were
limited 	and 	the 	consumer manifested 	informed 	consent. 	If
enacted, 	this 	proviaion 	may 	incr.as~ 	the 	number 	of 	instances 	in
which 	rental 	car 	companies 	are 	unable 	to 	obtain 	payment 	tor
damages 	for 	Which 	the 	Bill 	makes 	the 	renter 	responsible. 	Rental
ear 	companies 	may 	then 	have 	no 	recourse 	but 	to 	increase 	rental
rat.s 	to 	cover 	any 	increase 	in 	unpaid 	charges, 	effectively
requiring 	honest 	and 	careful 	consumers 	to 	Dear debts 	incurred 	by
less 	scru~ulous and 	less 	careful 	persons. 14
w. 	note 	for 	your 	consideration 	that 	although 	the 	NAAG Task
Forc~ 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 	qenerally. 	The
approach 	adopted 	in 	the 	NAAG 	Guidelines, 	instead, 	tends 	to 	focus
on 	ensurinq 	adequate 	disclo5ure 	ot 	and 	consumer 	consent 	to
daposits, 	credit 	card 	~ccount holds, 	and 	similar 	rental 	car
company 	requirements. IS 	This 	approaCh, 	although 	not 	cost~free,
entails 	fewer 	costs 	to 	consumers 	than 	would 	De 	imposed 	by 	the
Bill.
ConelupiQP
It 	is 	not 	clear 	that 	the 	Bill 	would 	provide 	net 	benefits 	to
consumers. 	We 	hope 	you 	will 	taka 	into 	account 	the 	prospect 	that
the 	changes 	in 	liability 	tor 	damaged 	rental 	vehicles, 	~, 	the
mandatory 	"bundling" 	of 	COW 	into 	the 	rental 	car 	rates, 	could
mean, 	on 	balance, 	higher 	rental 	prices 	tor 	consumers. 	In
13 	House 	Bill 	1068 	§ 	3(4).
14 	Further, 	the 	proscription 	of 	security-taking, 	insofar 	as
it 	may 	lead 	so~e 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.
l~ 	Seed 	e,g., 	NAAG 	GuidelineJ,4.

The 	Honorable 	Peter 	von 	Reichbauer
March 	27, 	19S9 -6-
addition, 	we 	suggest 	thot 	you 	consider whether 	it 	is 	advisable 	to
shift 	to 	some 	eonsumers 	part 	of 	the 	losses 	that 	may 	be 	caused 	by
other 	consumers, 	as 	may 	result 	from 	the 	provisions 	of 	the 	Bill
relatinq 	to 	the 	holding 	of 	security.
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 	tosterinq 	a 	competitive 	environment
in 	the 	ear 	rental 	industry.
We 	appreciate 	the 	opportunity 	to 	comment.
Sincersly,
/1. k 	kU../t'~
anet 	M. 	Gr~
iractor
an 	Franciseo 	Regional 	Office
Enelollures