Understanding Rental Car Insurance: The Importance of Following Rental Agreements

When insurers deny damage or liability coverage to drivers who crash their rental cars, trucks, or vans, people may assume it’s due to gaps in their personal auto insurance. However, drivers of rentals are also losing coverage because they aren’t following the terms of their rental agreements.

Jamie Davison of McLeish Orlando LLP highlights this issue in a blog published by Mondaq. “Rental agreements place restrictions on the use of a vehicle, which can cause insurance implications,” Davison writes. “The rental agreement will provide the terms of the contract, which must be followed for insurance to be applicable. If these terms are not followed, you run the risk of your insurance being voided.”

Typical rental agreements include terms of use, such as the purpose for which the vehicle is used, kilometer limits, and reservation details (such as who is the renter, who can drive, hours of use, and when the vehicle must be returned).

An example of this occurred in a priority dispute between Economical Insurance and Trafalgar Insurance Company. Jatinderjit Rakhra was injured while driving a 2009 Chevrolet Aveo rented from Satkar Auto Services and Sales, whose insurer was Economical Insurance. Rakhra rear-ended a vehicle insured by Trafalgar Insurance.

The Ontario Superior Court upheld an arbitrator’s finding that the Aveo was excluded under the Economical policy because the rental was not being used for the purpose cited in the rental agreement. Specifically, while rented, it was not being used for Satkar’s commercial business for which it was insured.

At the time of the accident on Oct. 3, 2012, Economical insured Satkar under a standard Ontario Garage Policy. The OAP 4 policy provided insurance coverage for automobiles owned by Satkar and used in its business. The court found the lease agreement Satkar arranged was not within the scope of its used car sales business, and hence it was excluded from Economical’s policy.

“In August of 2011, (before the accident) Satkar gave the Aveo to Flash Car and Truck Rentals to use as a rental vehicle under a written ‘lease to buy’ agreement, whereby Flash made monthly lease payments to Satkar and at the end of the term of the lease ownership would be transferred to Flash,” the Ontario Superior Court found.

Making this agreement was not within the scope of Satkar’s business, an arbitrator ruled. For this reason, Economical said the Aveo was excluded under its Garage Policy. “[The arbitrator] found that the ‘lease to own’ arrangement was far different than ‘used car sales,’ particularly where the vehicle was being used as part of a rental fleet given the increased risk of exposure far beyond that contemplated in the underwriting process,” the Ontario Superior Court confirmed. “[The tribunal] specifically found that Economical did not insure rental companies because of the increased risk of claims, particularly claims for [accident benefits].”

When renting and using a moving vehicle, it is important to keep the rental agreement in mind. “Many rental agreements specify what the vehicle could be used for, and when the vehicle can be used,” Davison warns. “That means if you rent a vehicle specifically for moving between the hours of 9 a.m. and 5 p.m., if you use that vehicle for something outside the intended use, or outside of the time frame in the agreement, you may lose all insurance coverage.”