Purco v. Koenig and Its loss of Use Implications

Recovery of loss of use damages is an important part of the lives of car rental companies and of the industry’s loss recovery experts.

“Especially these days, every company nationwide is seeing increased utilization,” says Jim Maher, vice president of Midwest Car Corp., a franchisee of National Car Rental and Alamo Rent A Car based in Kaukauna, Wis. “By the time you get [the damaged car] parked, handled, get the estimate written and the parts in, it could be two weeks out of the fleet for repair. We’re averaging 80 percent utilization. That could be eight days down, right there.”

“Any owner will tell you the harm they incur goes beyond the mere physical damage to the car,” says David Purinton, owner and president of PurCo Fleet Services Inc., a risk management company specializing in car rental loss prevention. “They have also lost the use of the car, and they have the administrative hassle of having to deal with getting estimates, getting the car repaired, shuffling the car around, working with the body shop, often having to sell the car at auction or in a buyback, and numerous other details; not to mention trying to establish the amount of the claim as well as working with the party who damaged it and their insurance companies to recover for the losses.”

PurCo has litigated numerous car rental cases, including PurCo Fleet Services Inc. v. Judith Koenig, a recent Colorado Court of Appeals decision. The Court reversed a lower court decision that had ruled PurCo could not recover loss of use damages or administrative fees, concluding that in Colorado, car rental companies are entitled to recover loss of use and appropriate administrative fees.

How did the Court arrive at this decision and what are the implications for the car rental industry?

The Accident and the Trials

On September 13, 2005, Judith Koenig rented a car from the National Car Rental licensee at the Durango Airport in Colorado. While driving the car, she hit a deer and damaged the vehicle.

PurCo, the damage recovery company working with the National licensee in Durango, demanded payment from Koenig for the damage, as well as loss of use damages and a contractual administrative charge. Koenig’s insurer paid for the damage to the car, but refused to pay PurCo for loss of use or the administrative charge. PurCo then filed suit to collect the unpaid amounts.

The Trial Court denied PurCo a trial, ruling that no loss of use damages could be recovered under Colorado law in the circumstances of this case. The Court also ruled for Koenig, dismissing PurCo’s administrative charge claim.

PurCo appealed the decision. The Appellate Court concluded the Trial Court had erred in its ruling when it denied PurCo its loss of use and administrative charge claims.

The Court did not rule that PurCo had in fact incurred loss of use damages or determine an amount; however, it sent the case back to the Trial Court and granted PurCo the right to a trial to determine this. The ruling in this case gives guidance on how to assess loss of use damages and an appropriate award amount in Colorado.

Some Background

The PurCo Court observed that, in loss of use cases involving personal autos, it has become generally accepted to award the plaintiff the cost of renting a replacement vehicle for the days the car is being repaired and unavailable (whether a car was actually rented or not).

The Colorado Court suggested that in Colorado, there may be a difference in the loss of use suffered by commercial entities where the property damaged was used to produce income.

Most of the cases the Court referenced were non-auto and non-rental related, such as a shipping company or airline having to prove a loss when a substitute vessel could be used in place of the damaged one, and even a case in which no damages were awarded for loss of use of cable system because service was rerouted to another part of that system (see Auto Rental News Nov/Dec 2009 for coverage of that case). The Appellate Court recognized that there is significant disagreement in case histories as to whether any economic loss needs to be shown to recover for loss of use of commercial vehicles.

The Court settled for the principle established in Colorado law that loss of use can be recovered when the owner of the damaged property can prove an actual loss.

“Regardless of Fleet Utilization”

The Court acknowledged that parties are free to “contract away” certain rights by signing a rental agreement. In loss of use cases, wording in a rental contract could modify or eliminate the need to show an actual, economic loss, the Court stated. The rental contract that Koenig signed contains a loss of use provision that states that the National licensee has the right to collect “loss of use (regardless of fleet utilization).”

The Court noted that the phrase “regardless of fleet utilization” is found in many rental contracts. However the Court could not find any reported cases that had previously interpreted this language for car rentals, so it looked at legal precedents in other areas.

The Court cited some commercial cases involving fleets of ships and buses in which Courts declined to award damages where the damaged party was able to utilize another ship or bus from its fleet in place of the damaged one.

Here, the Court understood the phrase “regardless of fleet utilization” to mean that the National licensee would not be denied loss of use damages just because it might have been able to substitute one of its other rental cars for the damaged car. So, the Court concluded, the National licensee incurred some amount of damages. With other available rental cars out of the picture, the Court held that the language meant that the National licensee incurred some type of loss by the unavailability of this particular car during the repair period.

Nevertheless, the Court concluded that this contract language does not completely eliminate the need for the owner of a commercial vehicle to prove it lost the opportunity to earn revenue from the vehicle as a result of the defendant’s actions, at least in Colorado.

Demonstrating Loss Prerequisites

Thus, to prove its case, PurCo would be required to show that the National licensee lost the opportunity to earn income by showing what the Court called “loss prerequisites.”

The Court said there are two loss prerequisites required here: first, that for each day for which the damaged rental vehicle was unavailable, PurCo must prove that the rental agency location was open for business (or, if it was not actually open, made cars available to rent on those days); and second, there was at least one customer who desired to rent a vehicle (even if not necessarily this vehicle) to be used on that day.

Loss of Use Damages — How Much?

If PurCo could prove a loss, then how much should it be compensated? Numerous courts and commentators have stated that an appropriate measure of loss of use damages is “rental value.” Rental value could take two forms: “Lease-in” rental value considers the cost the RAC would incur to put a replacement vehicle on the road, while “lease-out” rental value is essentially the rental rate the customer would pay.

The National licensee was not going to physically replace the damaged vehicle with another one while it was in the shop. Certainly the economics of the car rental business don’t make sense to do so. Therefore, PurCo was looking to recover the daily rental rate that the National licensee would have been able to charge for renting out the damaged vehicle during the repair period.

This Court concluded, however, that in Colorado the rental value loss should be measured instead by the lost opportunity to generate income from the car. Says the Court:

“…we conclude that where, as here, the plaintiff is in the business of renting out the chattel [vehicle] for the purpose of earning a profit, and seeks damages based on lease-out rental value, the appropriate measure of damages is the net profit it would have received from rental of the chattel during the time period reasonably needed for repairs, less any expenses saved.”

PurCo will return to the Trial Court to prove the loss prerequisites and the amount of the loss in further proceedings.

Administrative Charges

PurCo also sued to recover an administrative charge for the expenses incurred in processing a damage claim. The Appellate Court disagreed with the Trial Court’s conclusion that the administrative charge provision reflects “a failed attempt to collect liquidated damages.”

The Court agreed that PurCo had the right to collect this fee and thus reversed the ruling entered against PurCo regarding the fee. Like loss of use, the amount of the appropriate administrative fee in this case is to be determined in further proceedings.

To Be Continued The case is a “to-be-continued” saga.

There is significant disagreement in court cases in different states regarding the meaning of loss of use and how to calculate damages. It should be noted that the PurCo v. Koenig decision applies only in Colorado, though other courts could look to this decision in making their own determinations under the laws of different states. As the PurCo Court noted, loss of use definitions and applications have varied in other states, as well as in previous Colorado cases. Certainly the car rental industry will watch the ongoing proceedings with interest, as they may very well result in further development of the law in this area.

“This was a David v. Goliath win,” says PurCo’s Purinton. “Our beef was not with the renter Judith Koenig, but with the insurance company advancing arguments for her. Insurance companies sometimes fight loss of use and administrative charges, even though they collect premiums to cover them. This case recognizes what any rental car owner already knew: these damages are real and they affect an owner’s bottom line.”

“PurCo definitely represents the industry well,” says Maher, whose company has used PurCo for all its damage recovery for 20 years. “They’re willing to take a stand and litigate issues like this for the cause of car rental.”

There is universal agreement in the rental industry, however, that RACs need to learn how to combat the self-interested arguments on utilization, lost revenue and lost profit put forward by renters’ insurance companies, as well as the need to insert definitions of loss of use in rental contracts that will stand up to legal challenges and protect valuable economic rights established by the law.