When a negligent party damages your rental vehicle, in most states there’s no question of your legal entitlement to loss-of-use. It’s a forgone conclusion that the party owes for compensatory damages. Unfortunately, when the renter is at fault, the issue is complicated by your desire to keep your customers happy.

In this article, we’ll identify some of the problems commonly experienced with recovery of loss-of-use. We’ll also show you how to integrate the solutions with your overall customer service-oriented approach to business. Accordingly, this article will be geared toward the renter’s (first party) contractual responsibility.

What is loss-of-use? According to the American Law Institute, ownership of personal property, such as an automobile, entitles the owner to compensation when that property is detained because of the negligence of another. Most rental contracts go a step further, making the renter of the vehicle contractually responsible for both physical damages and loss-of-use, regardless of fault. The value of this use is generally measured as what it would cost to procure a substitute — in other words, the property’s reasonable rental value for the period of the deprivation.

When someone damages a rental vehicle, the rental operator is deprived of the ability to use that vehicle. The lease payments continue while the repair shop controls its use. During the repair process, the vehicle is still depreciating. This economic shortfall is a real expense that’s suffered.

Regardless of the intended use of the vehicle — whether you intended to rent the vehicle, use it as a demo or display it on your lot — you are unable to do so while the vehicle sits at the repair facility. The rental operator is entitled to compensation for this form of loss. To that end, in addition to physical damages, loss-of-use is assessed and included in the damage claim.

Unfortunately, when trying to recover loss-of-use from the insurance industry, the rental operator frequently runs into a brick wall. It seems various members of the insurance industry view loss-of-use as though it’s not a real loss. If they don’t get an invoice for it, it doesn’t exist. As a result, some insurance companies have a difficult time justifying payment for loss-of-use. [PAGEBREAK] For example, these are some responses we occasionally get from the insurance industry when we bill for loss-of-use:

• “We will only consider paying loss-of-use if you can prove that all your other cars were rented and you had to turn away business.” (The old “fleet utilization” argument, confusing lost revenue with loss-of-use.)

• “We never pay loss-of-use to car rental companies.” (The “just because” argument)

• “I’ve been an adjuster for 20 years and I’ve never paid loss-of-use in my life.” (The “change is bad” argument or the “I’ve been getting away with not paying it for 20 years” argument)

• Lastly, sometimes there’s no response. The insurance company will simply issue a check and let you figure out what was paid. After doing the math, you determine that the check represents the damages only, less the deductible. No explanation is given. It’s as if the loss-of-use line on the payment demand did not exist. Sometimes insurance companies go a step further by adding release verbiage such as, “Full & Final Settlement” on the check.

Clearly, out of all of these scenarios, only one bears serious consideration: the fleet utilization argument. The others range from blatant discrimination (“just because you are a car rental operator”) to closed-mindedness (“because I’ve never done so before”). The last one really isn’t a response at all.

Are they right or wrong with the fleet utilization request? For the answer to that question, we must refer back to the legal perspective. As we previously illustrated, the legal system recognizes that controlling the use of property is, in and of itself, a valuable right. When one is deprived of this right, the amount of the loss is generally measured by the property’s rental value for the period the car was detained.

The fact that the owner of the vehicle happens to be a car rental operator should have no bearing on the basic measure of damages applied to the loss. Accordingly, the fleet utilization argument doesn’t appear to be consistent with the legal system’s view of loss-of-use (other than in the state of Massachusetts, but there’s an exception to every rule). [PAGEBREAK]

If this is so, why then must we constantly make the same argument to the same people over and over again? In our opinion, it’s a matter of simple economics. To succeed in the insurance business, a company’s revenue from premiums must exceed its losses. That means the less an insurance company pays out in claims, the more profitable it will be.

There’s no incentive for insurance companies to consider changing their point of view on loss-of-use because it would result in larger claim payments.

Also, they have been getting away with not paying it for years, so why change?

Now that we’ve addressed loss-of-use from these perspectives, we’d like to share some of our methods for overcoming a few typical claim scenarios. To get the desired result, you must pay attention to why we emphasize each of the points we make. You can only accomplish this if you understand the underlying principles. Here’s a list of some of the objectives:

• To have the insurance company fully indemnify its insured, or at least have it pay to the fullest extent of the insured’s policy. Plus, in the process, to keep the insurance company from interfering with your right to collect loss-of-use from your customer or the customer’s secondary carrier, such as a credit card company.

• To make sure it doesn’t look like you’re taking advantage of the renter by collecting loss-of-use. (Some of the objections already discussed imply that your loss-of-use claim lacks validity, casting your claim in a negative light.)

• To make the renter understand what loss-of-use is and why it’s necessary for you to charge for it. Educate the customer as to what he’s being charged for and why it’s justified.

• To keep the customers you worked so hard to get, even if you’re forced to collect loss-of-use from them directly.

• To avoid a lengthy verbal argument with the insurance representative that only serves to prolong your claim and tie up your money. [PAGEBREAK]

We’ve developed a reliable method to accomplish these goals. By sending a copy of all correspondence to the renter, we want to either acquire payment from the insurance company or obtain a written explanation of why the company is denying this claim element. When these letters are sent to renters (the insured), they will automatically be made aware of the following:

• They are contractually responsible for loss-of-use.
• The rental operator is legally entitled to loss-of-use compensation.
• Their policy may not contain coverage for this element of the claim.
• Their insurance company may have refused to pay loss-of-use based upon unsupported reasoning.
• The rental operator put a lot of effort into trying to find another source of payment before asking the customer to pay out of his pocket.
• Their contractual obligation may be considered a consumer debt if it is not satisfied.

In the worst-case scenario, if the rental operator is forced to take legal action to collect the unpaid balance, the renter’s credit could become injured.

By carbon copying the renter on all correspondence and using the correct wording, we hope to achieve payment in full from either the insurance company or the renter without losing the customer. While doing this, we can also reinforce the perception that the rental company is a group of knowledgeable professionals that keeps the customer’s best interest in mind.

Now let’s get down to the nuts and bolts. To justify loss-of-use claims, you must substantiate how long you were deprived of your vehicle and the reasonable rental value of that time. The daily rental rate on the rental contract specifies how much your customer actually paid to rent the vehicle. This substantiates the reasonableness of the amount charged.

Your repair garage can provide you with an invoice showing the length of repair time, or you can estimate the length of repair time by dividing the total number of labor hours by the number of hours the repair facility devotes to one vehicle in one day. [PAGEBREAK]

We’ve found that the ratio of four labor hours to one day of loss-of-use is a conservative and widely accepted method for estimating repair time. For example, 20 labor hours divided by four equals five days of loss-of-use. At the daily rental rate of $30, the loss-of-use would then equal $150.

First and foremost, it’s critical to start the claims process with a solid foundation. Send all of your supporting documents the first time. If case law supports your entitlement to loss-of-use, send that documentation with your initial bill to the insurance company.

Send your documents via certified mail. To create accountability, you must be able to prove that your documents were received. Without that, any time limits you impose for a response or deadlines you create for payment can be ignored.

Make sure you send your customer, not just his insurance company, a bill. Your customer signed the rental contract and rented the car. Accordingly, the claim is really against the renter as opposed to his or her insurance company. It’s important to make this distinction.

When you bill the customer, indicate that you’ve presented documents to the insurer. However, make it clear that your customer is primarily responsible for the loss, specifically any portion of the claim that the insurance company doesn’t cover.

Make sure your copies are legible. Your letter and accompanying payment demand directly reflect upon your company’s image. The more professional and concise your letter is, the better the results you’ll get from individuals reviewing it.

Call your customers. Many times they have coverage for their deductible by virtue of the credit card they used to rent the vehicle. Many people are unaware of this benefit and are very grateful when you bring it to their attention. More importantly, this can assist in recovery of the loss-of-use portion of the claim, should the insurance policy contain no coverage. Even if the customer has no credit card coverage, the fact that you tried to help in this manner is good for customer relations.

Once the claim has been billed, we try to obtain payment for the lion’s share of the claim as soon as possible. If this means we must collect the physical damages first and revisit the loss-of-use portion of the claim later, then so be it. [PAGEBREAK]

If the insurance representative doesn’t want to pay loss-of-use, we don’t force the issue. Instead, we request a payment for the undisputed physical damages. We ask the insurer to explain, in writing, reasons for not paying other portions of the claim.

When we have the partial payment, we typically respond to one, or a combination, of the following scenarios:

• We receive a partial payment with no explanation of what the check amount represents. In this case, we advise the insurer in writing that we don’t accept this amount as full payment of the claim and we will apply their check as a partial payment. In most states, failure to provide a clear and proper explanation when denying any portion of a claim is considered an unfair claims practice. If this pertains to your situation, then quote the unfair claims settlement practice that applies and impose a deadline. Point out that you’re willing to entertain good-faith claims negotiations. (Extend the olive branch in spite of the inappropriate actions of the insurer.) For states without a statutory requirement for an insurer to supply an explanation, ask for one anyway. You’ve already put all concerned parties on notice that you don’t accept the partial payment as settlement of the claim. Further advise the insurer that you demand an explanation within a reasonable time frame. Reiterate that the customer is still contractually obligated to pay the balance.

• We receive a partial payment, but this time it’s marked, “Full and Final Settlement.” In this case, we will cite the insurer for inappropriate settlement verbiage and point out that this amount is not the result of a negotiation. Cite the appropriate unfair claim settlement practice laws. This adds to your credibility while pointing out that the insurance company may not be acting fairly. Even if the state has no statutory restrictions on settlement verbiage, put the insurance company on notice that you don’t accept the payment as settlement.

Point out that this amount is not the result of a negotiation. Advise the insurer via certified mail that unless otherwise directed, you will cash the check and apply the amount as a partial payment. Give the insurance company a deadline for its response. Don’t cash the check until the deadline has expired. A return receipt is crucial in this scenario.

We generally use a 15-day time frame because it’s usually sufficient for the return receipt to get back while leaving ample time for the insurer to respond. In some states, insurance companies have 30 days to respond to correspondence.

• We receive a partial payment accompanied by a letter of explanation citing the fleet utilization argument. Prove your entitlement to loss-of-use legally, logically and, perhaps most importantly, in simple enough terms for the renter to readily understand. Use the loss-of-use versus loss-of-revenue argument, and make the concept easily understandable. We use the traveling salesman’s vehicle analogy: A traveling salesman’s vehicle is damaged because of the negligence of another person. His vehicle is out of service for 10 days while it’s being repaired.

In addition to the physical damages to his vehicle, the salesman is entitled to compensation for loss of the vehicle’s use. This is measured by a reasonable rental rate of a similar vehicle for the number of days his car was put out of service. For example, $29.99 per day x 10 days = $299.90 loss-of-use.

In addition to loss-of-use, our traveling salesman may also be entitled to lost revenue. If he normally makes three sales per day (excluding weekends) and makes $25 per sale, he could make a claim for $600 in lost revenue (eight working days out of the 10 the vehicle was down, times three sales per day at $25 per sale) in addition to the above referenced claim for loss-of-use. Naturally, the proof required for the loss-of-revenue claim will differ from that required in the loss-of-use claim.

Separate the renter’s interests from that of his insurance carrier. Remember that the claim against the renter is based upon the terms of the rental contract. The insurance company was not a party to the rental contract. The rental car company is not a party to the insurance policy. As a result, any restrictive language contained in the renter’s policy cannot limit the car rental company’s right to recovery.

Be flexible and offer a compromise settlement. It’s OK to disagree if you can resolve the claim without having to collect from the insurance company’s client (your customer). This shows your willingness to be reasonable and it adds to the “good guy” perception you’re creating with your customer. [PAGEBREAK]

• We receive a partial payment accompanied by a letter explaining that the renter’s policy doesn’t contain coverage for loss-of-use. If there’s no coverage for loss-of-use and the insurer is willing to put this in writing, you’ll be forced to seek this portion of the claim from your customer directly. Fortunately, the insurance company has made your job much easier. Simply enclose a copy of the explanation stating there was no coverage for loss-of-use, along with a bill to your renter for the balance due. You previously sent a bill that included loss-of-use. Now you’re enclosing a statement from the insurer indicating no coverage for this claim element. These steps will facilitate payment.

If credit card coverage does exist, you’ll find that this letter will help you obtain payment more promptly. Remember, the renter chose the policy, not you. Although it may be unfortunate for the renter to pay out of pocket, you did try everything you could to collect this portion of the claim from another source. So, by taking the time to copy the renter on all the correspondence you’ve sent the insurance company, you’ve thoroughly educated your customer about loss-of-use. Though this is an entitlement few consumers know even exists, your customer is now well versed in what loss-of-use is and why it’s a necessary element of a damage claim.

The renter now knows that he or she is contractually liable for the charges, even if the insurance company refuses to pay them. When made aware of this, customers will usually call the insurer to ask why they’re not being indemnified. As a result, the renter acts as your ally, helping you to collect the loss-of-use. By working together, you have strengthened your business relationship. Remember, the renter is also the insurance company’s customer and the insurer doesn’t want to lose its client either. Use this to your advantage.

Guy Cicconi and James O’Neill are the principals at Premier XXI Claims Management, which specializes in serving car rental companies. The company is based in Lester, Penn. Cicconi, a graduate of St. Joseph’s University in Philadelphia, has more than 20 years of business experience in the automotive field. James O’Neill is an experienced claims negotiator who has worked in the car rental field since 1994.