FTC Staff Comment to the Hon. Wayne R. Bryant Concerning New Jersey A.B. 3597 to Alter Current Methods of Allocating Costs and Risks of Damage or Theft to Rental Cars

.£ FEDERAl. PlAZA. nnd FL.
NEW VOAK. N.Y. 10271
(212) 2M-1200
l.~ITE[o ST.\TES OF :\MERJCA
FEDERAL TRADE COMMISSION
:-<EW YORK REGIONAL OFFICE aJMMISSJON AUTHORIZED
V890036
March 	6, 	1989
The 	Honorable Wayne 	R. 	Bryant
The 	Assembly
State 	of 	New 	Jersey
309 	Market 	Street
Camden, 	N.J. 	08102
Dear Hr. 	Bryant z
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased 	to
have 	the 	opportunity 	to 	respond 	to 	your 	request 	for 	comment
on 	Assembly 	Bill 	3597 	("the 	Bill"), 	which 	is 	currently
pending 	before 	the 	New 	Jersey 	Assembly. 1 	We 	are 	providing
these 	remarks 	in 	response 	to 	your 	letter 	of 	February 	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 	vehi-
cle. 	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 	parts 	of 	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 	protectin~ consumers 	from 	unfair 	and 	decep-
tive 	commercial 	practices. 	In 	fulfilling 	this 	mandate, 	the
1 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	New
York 	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 	see 	15 	U.S.C. 	S 	41 	et 	seq.
13/njcn:nt.24h 	030889 	14: 58

The 	Honorable 	Wayne 	R. 	Bryant
March 8, 	1989
staff 	of 	the 	Federal 	Trade Commission often 	submits 	comments,
upon 	request, 	to 	federal, 	state, 	and 	local 	governmental
bodie8 	to 	help 	asseS8 	the 	competitive 	and 	consumer 	welfare
implications 	of 	pending 	policy 	issues. 	In 	enforcing 	the
Federal 	Trade 	Commission 	Act, 	the 	Commission 	has 	gained
considerable 	experience 	in 	analyzing 	the 	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 	Car 	Rental
Industry Advertising and 	Practices 	("NAAG Guidelines").3 	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 	alloca-
tion 	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 	instances,4 	and 	prohibits 	the 	offering 	of
3 	Letter 	from 	the 	Federal 	Trade 	Commission 	(Commis-
sioner 	Strenio 	not 	joining) 	to 	Robert 	T. 	Stephan, 	Attorney
General, 	Kansas 	(February 	24, 	1989). 	A 	copy 	is 	attached.
The 	Guidelines 	will 	be 	further 	considered 	by 	the 	Attorneys
General 	at 	their March meeting.
4 	Section 	4 	provides 	that 	an 	"authorized 	driver" 	--
defined 	as 	Ha 	renter 	who 	drives 	a 	private 	passenger
automobile 	rented 	under 	the 	terms 	of 	a 	rental 	agreement 	or
any 	of 	the 	following 	other 	drivers 	of 	the 	vehicle: 	the
renter's 	spouse 	if 	the 	spouse 	is 	a 	licensed 	driver 	and
satisfies 	the 	rental 	company's 	minimum 	age 	requirement; 	any
employee 	or 	co-worker 	of 	the 	renter 	who 	is 	engaged 	in
business 	activity 	with 	the 	renter 	and 	is 	a 	licensed 	driver
satisfying 	the 	rental 	company's 	minimum 	age 	requirement; 	any
person who 	operates 	the 	vehicle during 	an emergency 	situation
or 	while 	parking 	the 	vehicle 	at 	a 	commercial 	establishment;
or 	any 	person 	expressly 	listed 	by 	the 	rental 	company 	on 	the
rental 	agreement 	as 	an 	authorized 	driver" 	-- 	may 	be 	held
( continued •.. )
13/njcrnlt.24h 	2 	030889 	14:58

The 	Honorable Wayne R. 	Bryant
March 	8, 	1989
a 	separate 	Collision 	Damage 	Waiver 	("COW"). 5 	In 	practical
effect, 	legislative 	restriction of 	the 	offering of 	a 	distinct
COW 	product 	is 	tantamount 	to 	mandating 	that 	car 	rental 	com-
panieg 	bundle 	COW 	coverage 	into 	every 	car 	rental 	transac-
tion. 	Any 	legislatively 	imposed 	bundling 	requirement 	will
restr~ct consumer 	choice 	amonq 	COW-like 	coverages 	of 	rental
cars, 	resul ting 	in 	some 	consumers 	having 	to 	bear 	greater
costs, 	primarily 	in 	the 	form 	of 	higher 	base 	prices, 	than they
otherwise might 	have 	incurred 	to 	cover 	the 	accident 	and 	theft
losses 	statutorily 	shifted 	to 	the 	rental 	car 	companies.
Recent 	news 	reports 	suggest 	that 	this 	may 	be 	happening 	to
4 ( ••• continued)
liable 	for 	damage 	or 	loss: 	caused 	intentionally 	by 	an
authorized 	driver; 	resulting 	from 	an 	authorized 	driver's
willful 	or 	wanton 	misconduct, 	intoxication 	or 	drug 	use
(provided 	that 	the 	driver 	is 	consequently 	convicted 	in
connection 	with 	that 	intoxication 	or 	drug 	use); 	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; 	or 	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,
or 	is 	carrying 	persons 	or 	property 	for 	~ire; 	or 	that 	happens
during 	unauthorized 	use 	of 	the 	vehicle 	outside 	the 	United
States 	or Canada, 	or while 	a 	driver other 	than 	the 	authorized
driver 	is 	operating 	the vehicle. 	Assembly 	Bill 	3597 	S 	4.
5 	Assembly 	Bill 	3597 	S 	2 	(d).
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.
7 	These 	options 	include 	purchasing 	no 	insurance 	and
assuming 	the 	full 	risk 	("going 	naked P ), 	purchasing 	CDW,
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.
13/njcrrnt.24h 	3 	030889 	14: 58

The 	Honorable Wayne R. 	Bryant
March 	9, 	1999
some 	consumers 	in 	at 	least 	one 	state. 	A 	recent 	article 	in
The 	NeY 	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 	lIlajor 	company 	has 	raised 	prices 	across
the 	board. 8
Our 	analysis 	of 	the 	COW 	issue 	comes 	to 	a 	differen§
conclusion 	from 	that 	reached 	in 	the 	NAAG 	Guidelines.
According 	to 	the 	Guidelines, 	COW 	sales 	are 	troubling 	in 	part
because 	consumers 	lack 	adequate 	information 	and 	the
o	encounter deception or 	high pressure 	at 	the 	rental 	counter. 1
Where 	consumers 	suffer 	from 	insufficient 	or 	confusing
information, 	remedies 	requiring 	the 	disclosure 	of 	more 	or
better 	information often may 	resolve 	the 	problem. 	Therefore,
providing 	consumers 	information 	on 	COW 	may 	be 	more 	effective
9 	N.Y. 	TimeS, 	Jan. 	7, 	1999, 	Slat 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, 	1999, 	"the 	company's 	rates 	will 	go 	up 	about 	9%, 	or 	$3 	to
$4 	per 	day 	for 	rentals 	in 	New 	York." 	N.Y. 	Daily 	News, 	Feb.
13, 	1989, 	at 	23.
9 	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. 	SiUl NAAG Guideline 	3.1-
10 	See 	generally 	NAAG 	Guideline 	3.1 	(c) 	and 	follOWing
discussion.
13/njcrrnt.24h 	4 	030999 	14:59

The 	Honorable Wayne 	R. 	Bryant
March 	8, 	1989
and 	less 	costly than 	requiring 	that COW 	be 	sold 	in 	the 	rental
bundle 	regardless 	of whether consumers 	want 	it. 11
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 	eXIl~ore 	fully
the 	efficacy 	of 	information-generating 	measures. 	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 Regyirements
Another 	provision 	of 	the 	Bill 	states 	that 	"no 	security
or 	deposit 	for 	damage 	in 	any 	form 	may 	be 	required 	or
requested 	by 	the 	rental 	company 	durirJ 	the 	rental 	period 	or
pending 	resolution 	of 	any 	dispute." 	Thus, 	for 	example,
under 	the 	Bill 	a 	rental 	car 	company 	would 	be 	prohibited 	from
securing 	the 	lending 	of 	an 	automobile 	worth 	thousands 	of
dollars 	through 	a 	whold w on a 	consumer's 	credit 	card 	account,
even 	if 	the 	hold 	were 	to 	be 	limited 	to 	the 	anticipated 	cost
of 	the 	rental 	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 	car 	rentals 	or 	for 	damages 	for 	which 	the 	Bill
"The 	Efficient
L. 	& 	Econ. 	491
Beales, 	Craswell 	& 	Salop,
Consumer 	Information," 	24 	J.
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. 	Never-
theless, 	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 	COW.
11 	s..aa
Regulation 	of
(1981).
12
13 	Assembly 	Bill 	3597 	S 	6.
13/njc::mt.24h 	5 	030889 	14: 58

The 	Honorable Wayne R. 	Bryant
March 	8, 	1989
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 	bea1 debts 	incurred 	by 	less 	scrupulous
and 	less 	careful 	persons. 	4
We 	note 	for 	your 	consideration 	that 	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 Guide-
lines, 	instead, 	tends 	to 	focus 	on 	ensuring 	adequate 	disclo-
sure 	of 	and 	consumer 	consent 	to 	deposit, 	credit 	card 	account
hold, 	and 	similar 	rental 	car 	company 	requirements .15 	This
approach, 	although 	not 	cost-free, 	entails 	fewer 	costs 	to
consumers 	than would 	be 	imposed by the 	Bill.
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 	consider 	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.
14 	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.
15 	See, 	e.g., 	NAAG Guideline 	3.4.
l3/njcnnt.24h 	6 	030889 	14: 58

The 	Honorable Wayne 	R. 	Bryant
March 	8, 	1989
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.
Sincerely,
~~}$-Michae~ Bloom
Director
New York 	Regional 	Office
13/njcrrnt.24h 	7 	030889 	14:58