FTC Staff Comment to the Hon. Thomas F. Allgood Concerning Georgia H.B. 565 to Require Auto Rental Companies to Assume Liability for Vehicle Damage
us-ftc-advocacy-filings-3a007770f748c27089708c5479cc3c6bFTC Staff Comment to the Hon. Thomas F. Allgood Concerning Georgia H.B. 565 to Require Auto Rental Companies to Assume Liability for Vehicle DamageAdvocacy Filing
Matter Number
V890085
Room 1000
1718 Peachtree St., NW.
Atlanta, Georgia 30367
(404) 347-4836
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
ATLANTA REGIOKAL OFFICE
V890085
COMMISSION AUTHORIZED
November 20, 1989
The Honorable Thomas F. Allgood
Majority Leader
Georgia State Senate
Post Office Box 1523
Augusta, Georgia 30904
Dear Senator Allgood:
The staff of the Federal Trade Commission is pleased to have
the opportunity to respond to your August 15, 1989, letter
requesting comments on both Georgia House Bill 565 ("H.B. 565")
and the proposed substitute for H.B. 565 ("the substitute
bill,,).l We understand that H.B. 565 has passed the House and
that the Senate will be considering it, along with the proposed
substitute, during the next legislative session. Our comments
address the implications for consumers of the two bills. We
would be pleased to offer additional assistance on any particular
amendments that are offered.
Both bills concern the costs and risks associated with
damage to a rental vehicle and with the sale of so-called
collision damage waivers ("CDW"). Under these arrangements,
vehicle rental companies, for a fee, agree to hold the consumer
harmless for damage to a rental vehicle. H.B. 565 would require
the rental companies to assume the liability for damage to the
vehicle in most situations, thus effectively mandating the
purchase ofCDW. It would also prohibit the companies from
requiring renters to put up any security or deposit for those
damages for which the renter remains responsible. We are
concerned that these aspects of the bill might result in
increased costs to consumers who rent vehicles without providing
significant benefits to the majority of renters or to the public
at large.
The substitute bill would prohibit the rental companies from
offering a CDW unless a required disclosure -- the main provision
of which advises the consumer to determine whether his personal
automobile insurance policy affords him coverage for damage to a
rental vehicle -- appears on the face of the rental agreement.
These comments are the views of the staff of the Atlanta
Regional Office and Bureau of Consumer Protection of the Federal
Trade Commission. They are not necessarily the views of the
Commission or any individual Commissioner.
The Honorable Thomas F. Allgood -- Page 2
If there is a problem with the sale of COW, we believe that, in
general, the disclosure approach taken by the substitute bill is
more likely to serve the interests of consumers than that taken
by H.B. 565.
The Federal Trade Commission is charged with promoting
competition and protecting consumers from unfair and deceptive
commercial practices. 2 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
them assess 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, including matters involving the car rental
industry. The Commission commented on both the Preliminary and
Final Guidelines prepared by the National Association of
Attorneys General's ("NAAG") Task Force on Car Rental Industry
Advertising and Practices. 3 In 1989, the Commission has brought
enforcement actions against two car rental companies, Alamo and
General, for failing to disclose certain mandatory charges to
consumers seeking to obtain price information. 4 In addition, the
Commission staff has sent comments to executives and legislators
considering COW regulation in Illinois, New York, New Jersey,
2 See 15 U.S.C. S 41 et seg.
3 See, Letter from the Federal Trade Commission
(Commissioner Strenio not joining) to Art Weiss, Deputy Attorney
General, Kansas, (November 4, 1988) commenting on National
Association of Attorneys General, Draft Guidelines of the Task
Force on Car Rental Industry, Advertising and Practices (1988);
and Letter from the Federal Trade Commission (Commissioner
Strenio not joining) to Robert T. Stephan, Attorney General,
Kansas (February 24, 1989), commenting on National Association of
Attorneys General, Final Guidelines of the Task Force on Car
Rental Industry Advertising and Practices (1988) ("NAAG
Guidelines.") The allocation of liability portion of H.B. 565 is
very similar to portions of these NAAG Guidelines.
4 In re Alamo Rent-A-Car, Antitrust & Trade Reg. Rep. (BNA)
No. 1397, at 13 (January 5, 1989); In re General Rent-A-Car
Systems, Antitrust & Trade Reg. Rep. (BNA) No. 1407, at 420
(March 16, 1989).
The Honorable Thomas F. Allgood -- Page 3 Texas, Washington and Florida.~ Finally, in 1989, the Commission published a brochure entitled "Car Rental Guide," to help consumers evaluate rental car policies. H.B. 565 Depending on the terms of the rental agreement, consumers who currently rent vehicles in Georgia may be held responsible for all or a substantial part of any damage to that vehicle. However, for a separate fee, the consumer ordinarily has the option of purchasing a CDW under which the rental company agrees to assume some or all of the risk of damage to the vehicle. Whether it is in a consumer's interest to purchase a CDW depends on a number of factors. These include the circumstances under which he is responsible for damage to the rental vehicle, his potential liability if he elects not to purchase the CDW, and the amount of comparable coverage he may already have under his personal automobile insurance policy, by paying with a particular credit card, or by belonging to a motor or travel club or some business or professional organization. It may be that consumers confronted with a choice about CDW lack sufficient information about the risks and alternatives involved. If the Georgia legislature finds that a significant information problem exists, then government regulation designed to provide adequate information to consumers may be appropriate. Lessor Liability H.B. 565 requires rental companies, as an integral (and therefore not separately billable) part of every rental transaction, to assume all responsibility for damage to the 5 See, Letter from C. Steven Baker, Director, Chicago Regional Office, to the Honorable James R. Thompson, Governor of Illinois (Dec. 22, 1988); Letters from Michael J. Bloom, Director, New York Regional Office, to the Honorable Peter M. Sullivan, New York Assembly (March 16, 1989) and the Honorable Wayne R. Bryant, The Assembly, State of New Jersey (March 16, 1989); Letter from Thomas B. Carter, Director, Dallas Regional Office, to the Honorable Gwyn Shea, Texas State House of Representatives (March 27, 1989); Letter from Janet M. Grady, Director, San Francisco Regional Office, to the Honorable Peter Von Reichbauer, Washington State Senate (March 27, 1989); and Letter from Paul K. Davis, Director, Atlanta Regional Office, to the Honorable Elaine Gordon, Florida House of Representatives (April 17, 1989).
6
The Honorable Thomas F. Allgood -- Page 4
vehicle in most situations. 6 This requirement, which effectively
would mandate that consumers purchase COW coverage with every
rental transaction, would restrict consumer choice among COW-like
coverages. 7 As a result, some consumers will incur greater
costs, primarily in the form of higher base prices, than they
otherwise would to cover the accident losses statutorily shifted
The Bill provides that an "authorized driver" may be
held liable in a limited number of situations for damage or loss:
(1) caused intentionally or as a result of the authorized
driver'S wilful or wanton misconduct; (2) arising out of the
authorized driver's operation of the vehicle while illegally
intoxicated or under the influence of any illegal drug: (3)
caused while the authorized driver is engaged in any illegal
speed contest or drag racing; (4) based on information supplied
by the renter with the intent to defraud the company; (5) arising
out of the use of the vehicle while committing or otherwise
engaged in a criminal act in which the use of the vehicle is
substantially related to the nature of the criminal activity: (6)
arising out of the use of the vehicle to carry persons or
property for hire; (7) arising out of the use of the vehicle
outside the United States or Canada and such use is not
authorized by the rental agreement. An authorized driver is
defined as "the person to whom the vehicle is rented or leased;
the spouse of such person if the spouse is a licensed driver and
satisfies the rental company's minimum age requirement; the
person's employer or a co-worker of the person if the employer or
co-worker is engaged in business activity with the person, is a
licensed driver, and satisfies the rental company's minimum age
requirements; any person who operates the vehicle during an
emergency situation; any person who is employed to park vehicles
at a commercial establishment; or any person who is expressly
listed by the rental company on the rental agreement and
authorized to operate the vehicle. House Bill 565 §§ 10-1-731 &
732.
7 These options include refusing to purchase insurance and
assuming the full risk ("going naked"), purchasihg COW, relying
on personal automobile liability insurance that extends to rented
cars, or using coverage provided by a third party such as a
credit card company, a travel club, or a professional
organization. Initially, credit card providers extended these
benefits to holders of their "prestige" cards, such as "gold,"
"platinum," and corporate cards. However, American Express has
extended rental car damage coverage to its basic "green" card.
The Record, Jan. IS, 1989, at B2, col. 2. Visa and Master
Charge, on the other hand, have not extended coverage to their
basic cardholders.
8 The Honorable Thomas F. Allgood -- Page 5 to the rental companies. 8 A recent article in Business Week regarding adoption of COW-bundling legislation in Illinois appears to support this point: As legislators in Florida and other states toil over their bills, they will look closely at what has happened in Illinois and New York, where the COW is for the most part gone. In Illinois, Hertz and Budget Rent a Car Corp. say that since the COW was banned, they have raised their rates around 8%. Weekend rental rates in Hertz's Chicago locations have gone up about 12%. Hertz, Avis, and Budget say they need higher prices to cover the costs of insurance, capital improvements, and interest payments. 9 According to the NAAG Guidelines, consumers lack adequate information about COW and they encounter deceptive or high pressure sales tactics designed to sell COW at the rental counter. 10 However, where consumers suffer from insufficient or Many consumers who would have declined purchasing COW would be injured because they would be required, in essence, to pay for coverage twice: first for the coverage provided by their own insurance, which reflects their own driving records, and also for rental car company-provided insurance, which pools good and bad drivers. Moreover, it is possible that in response to this change some consumers would become less careful with rental vehicles. If this were to happen, rental companies would experience higher repair costs and an increase in the proportion of vehicles under repair at any given time. Increased costs are likely to be passed through to consumers as higher rates. For a theoretical treatment of this issue, see Brown, Toward an Economic Theory of Liability, 2 J. of Legal Stud. 323 (1973); Diamond, Single Activity Accidents, 3 J. of Legal Stud. 107 (1974); and Shavell, Strict Liability vs. Negligence, 9 J. of Legal Stud. 1 (1980). 9 Business Week, May 1, 1989, p. 97. Alamo has put a 20% rate increase into effect in Illinois. The N.Y. Times, April 2, 1989, § 5 at 3. 10 See generally NAAG Guideline 3.1 (c) and following discussion. 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 (continued ... )
The Honorable Thomas F. Allgood Page 6 confusing information, remedies requiring the disclosure of more or better information often may resolve the problem without the need for more intrusive regulatory action. In addition, providing consumers information on COW may be more effective and less costly than requiring that COW be purchased whether or not consumers want it. 11 Accordingly, we believe that a legislature considering whether to regulate the risks associated with damage to a rental vehicle should first determine whether information now conveniently available to consumers permits informed decisionmaking with respect to cow. In the event that the Senate determines that currently available information is inadequate, we suggest that it then explore the efficacy of information disclosure measures. 12 And, if consumers are encountering unfair or deceptive marketing practices at some car rental counters, the most effective remedy may be law enforcement action against the offenders. Prohibition of Security Requirements Another provision of H.B. 565 states that "no security or deposit for damages in any form may be requested or required by the rental companl during the rental period or pending resolution of any dispute."1 Thus, for example, under the bill, a rental car company would be prohibited from securing the rental of an automobile worth thousands of dollars through a "hold" on a consumer's credit card account, even if the consumer agreed and the hold were limited in time and amount. If enacted, this 10( ... continued) rental car company offered to sell to consumers a waiver at a regulated price related to the company's loss experience. See NAAG Guideline 3.1. 11 See Beales, Craswell & Salop, "The Efficient Regulation of Consumer Information," 24 J. L. & Econ. 491 (1981). 12 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. Neverthe- less, 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. 13 S 10-1-734.
