At first glance, Hampton Car Rental seems a most unlikely candidate for a business-closing insurance crisis. That’s especially true when you consider that the company’s fleet hasn’t been involved in a major traffic accident in the past five years.

The business is located in Hampton Bays in the heart of the Hamptons, New York’s pastoral haven known for its seafood restaurants and pristine beaches. Its slower pace of life makes Hampton Bays an attractive summertime destination for stressed-out New Yorkers eager to escape the frenetic pace of the city.

Hampton Car Rental owners Michael and Lorraine Dubrowsky have run the company for 12 years, cultivating a loyal client base of vacation homeowners, returning tourists and locals in need of a replacement car.

But like scores of other independent operators and franchisees in New York, the Dubrowskys this summer began making plans to liquidate their company’s assets in preparation for closing its doors.

In June, the Dubrowskys received notice that their insurance provider was raising their rates from $113 a month per car to $234 a month per car, beginning in October when operators must renew fleet registrations with the DMV. Eventually, the couple received a lower quote from a competing provider, but that rate was still prohibitively high. Nonetheless, the second quote at least bought them more time to sell off assets, including fleet after the peak season, and to decide on a new career path for Michael.

“What bothers us is that we’ve invested all this time — 12 years — into our business and now we have no choice but to close it,” Lorraine says. “Mike is 42 and I’m 40. This business has let me spend more time at home with the kids, and I don’t want to go back to work. I want to be home for my children. And Mike is faced with having to establish a new career at the age of 42.” 

Unlike the major national car rental companies, independents and franchisees aren’t self-insured. They don’t have the option of spreading New York’s extra insurance costs across nationwide operations. They can’t absorb such a rate hike without passing along those expenses to customers. But if they did pass along the added costs, their rental rates would no longer be competitive with that of the major corporate rental car companies.

The current insurance crisis is not only forcing business owners out of the market, it is depriving them of the opportunity to sell their companies. After investing years into building a business, entrepreneurs have little to show for all their hard work and sacrifice. An RAC with no hope of getting fleet insurance doesn’t exactly draw top dollar.

At the root of the crisis is New York’s unlimited vicarious liability. This antiquated public policy continues to create unlimited exposure for rental operators at a time when insurance companies are tightening their underwriting standards.

Patrick Tucci Jr., president of the New York Vehicle Rental Association (NYVRA) and rental manager at the Americar/Payless location in North Syracuse, estimates that this year’s insurance crisis has placed 300 to 350 independents and franchisees at risk. The majority of those are not expected to survive.

Nick Serafini, who operates a Thrifty Car Rental franchise in Vestal, N.Y., was down to a skeleton fleet in September. Dollar Thrifty Automotive Group requires that its New York franchisees hold $2 million in excess liability coverage, in addition to $1 million in primary coverage, to qualify for the company’s fleet leasing program. Serafini’s $2 million in excess coverage expired in August.

“Soon only the major players — Hertz, Avis, National, Enterprise — will be left, and the rates will skyrocket,” Serafini says. “The only reason why they are here is because they have to service their customers in all states. The local independents will be gone. The cost of operating a car rental business in New York state has escalated to such a level that it’s impossible to operate.” 

Serafini is also president of Americar/Payless in North Syracuse, which managed to secure insurance. He has worked in the rental industry more than 30 years.

At press time, casualties of the insurance crisis were mounting, lending credence to Serafini’s forecast. Many RAC owners had failed to get even a single insurance quote, let alone an affordable one.

NYVRA’s recent membership drive was a bust. Most of the RACs targeted for membership renewal had already gone out of business. Once a strong lobbying voice for the industry, NYVRA has seen its ranks dwindle to just a handful of operators scattered throughout the state. Retaining a professional lobbyist in Albany is no longer an option.

“It’s scary how many [membership renewal] invoices we’re getting back with no forwarding address,” Tucci says. “Probably three out of every five are being returned. And for most of those companies that have not closed, it’s just a matter of time. If they can’t get insurance, they can’t operate.”

Earlier this year, NYVRA explored the possibility of organizing a risk retention group for members, Tucci says. But risk retention groups are highly regulated and expensive to organize.

“It would be impossible to form one in just a few months,” Tucci says.

A group representing NYVRA met with the New York State Insurance Department in August. But department representatives could offer little more than sympathy.

Vicarious Liability, No-Fault Fueling Crisis
So what all prompted the current insurance crisis?

“The biggest problem is vicarious liability because it creates an unlimited amount of exposure in the state of New York,” says Mark Plousis, assistant vice president and director of the commercial auto division of Philadelphia Insurance Companies.

Unlike such states as California, Florida and Minnesota, New York places no statutory limits on damages. After an accident results in serious injury or death, juries are free to award huge damages against a rental operator, even though that operator did absolutely nothing wrong. As the owner of the vehicle, the RAC is vicariously liable for the negligence of a permissive driver. 

“A second big factor is no-fault. Because the PIP [personal injury protection benefit] in New York is $50,000 per person, that’s a huge factor in doing business in New York, ” Plousis says. Moreover, insurance fraud in no-fault claims is widespread in the state.

Also contributing to the state’s extra exposure is New York City’s density in vehicle and pedestrian traffic.

“If a pedestrian gets hit, you owe $50,000 because of the no-fault, plus any kind of bodily injury claim,” Plousis explains. “That can be up to whatever your limits are. Some carriers will only offer statutory limits — $25,000/$50,000. Or maybe they’ll offer $100,000/$300,000. But a lot of carriers today are very reluctant to put out the $1 million coverage.”

What many rental operators are asking, though, is why rates skyrocketed this year. Vicarious liability and no-fault are not new problems.

What has changed is that investors in insurance companies can no longer expect major returns on investment when they take premium dollars and invest in the stock market. In a lackluster economy, insurance companies naturally become more conservative in assuming risk.

There are also fewer insurance companies serving car rental today, especially in New York. Less competition means higher rates. Moreover, insurance companies have seen the cost of re-insurance coverage soar in the past year.

“When investments started to shrink, the loss ratio became what insurance companies had to look at more closely,” explains Salvatore Scuderi, senior vice president with Lancer Insurance Co. “Companies had to start looking at the business they had been writing and ask themselves: Where am I going to put my capital or my surplus? Insurance companies write as a percentage of their surplus. Also, re-insurers today want more money, and 9/11 has put even more restrictions on re-insurers. As an insurance company, we buy protection from other insurance companies, and that has an effect on what we’re going to charge.” 

The Neverending Quest for Deep Pockets
The New York State Trial Lawyers Association, one of the state’s most powerful lobbying forces, has stonewalled repeated efforts to either repeal vicarious liability or to impose limits. New York Assembly Speaker Sheldon Silver himself is an attorney with the firm of Weitz & Luxenberg, which handles personal injury cases.

New York has hosted some of most notorious vicarious liability lawsuits involving a rental car company. (See the sidebar on page 24). But the majority of personal injury lawsuits brought against rental companies in New York aren’t tied to a catastrophic accident. Attorneys say most cases involve “soft-tissue injury” claims and settle for less than the state’s statutory minimums for a rental operator’s liability coverage. Often, attorney fees dwarf the damages paid out to plaintiffs.

“Rental companies in New York have the first $25,000/$50,000 in primary coverage, which also means they have the duty to defend,” explains Corey Tavel, an attorney with Smith Mazure in New York City. “So they have to pay for the lawyer to represent the rental company and the driver.” Smith Mazure often represents rent-a-car companies in liability lawsuits.

In New York, the rental company’s coverage is primary, and the renter’s personal auto insurance is secondary. To ensure that the renter’s insurance company pays its share, rental operators need to place the customer’s carrier on notice as soon as possible after an accident. Otherwise, the insurer may claim it was notified too late and shirk its share of liability for damages.

“Late notice can be a good defense for a household automobile carrier if they aren’t given prompt notice of the accident,” says J. Jay Young, also an attorney with Smith Mazure. “We would prefer for this to be done before the lawsuit is even started. There is no reason to pay a law firm to do that if the rental operator knows who the household carrier is.”

Tavel also encourages operators to ask to photocopy a customer’s insurance card for the company’s records. Most customers will voluntarily comply.

In New York, rental operators’ vicarious liability is spelled out in Section 388 of the state’s vehicle and traffic law.

“The owner is liable for any acts of a permissive user of the vehicle,” Young says. “Whether the owner is negligent or not is irrelevant. The plaintiff must prove ownership, permissive use and negligence on the part of the driver. Then come the damages.” 

It’s not surprising that the New York State Trial Lawyers Association has fought so hard for so long to keep vicarious liability law intact. In a vicarious liability case, the task at hand for plaintiff attorneys is pretty straightforward.

“Vicarious liability is one way that plaintiff attorneys look for deep pockets,” Young says. “It’s probably the easiest way. It’s easier than a product liability case and easier than a negligent entrustment case. You have ownership, permissive use, liability, then damages. That’s as easy as it gets.”

Only the Strong Are Still Standing
Ironically, the state where car rental operators assume the greatest amount of exposure is also the state where anti-discrimination laws hinder their ability to manage risk. For example, New York rent-a-car companies cannot refuse a rental based on the age of a customer, provided that renter is at least 18. (Operators can, however, charge an extra fee for drivers under 25.)

Customers can give other licensed drivers permission to use the rental car, even though they’re not listed as authorized drivers on the rental agreement. Customers can’t be required to have a credit card. A counter agent may be handing over a $15,000 car to a teenager he just met, but he can’t require a credit card.

Running a small car rental company in New York is like running a marathon through a land mine field — in bare feet. The possibility of imminent disaster is always lurking.

In such a business climate, you might assume that most operators were quickly resigned to defeat after failing to draw an affordable insurance quote. But the majority of those forced out of business this year called it quits only after making countless phone calls and exhausting all viable options.

For some operators, the only exit strategy they’d ever contemplated was deciding which parkway off-ramp to take when picking up a customer. They love the business, and letting go isn’t easy.

Thirteen years of operating under section 396-z of the General Business Law — the infamous provision that limited a customer’s collision liability to just $100 and prohibited collision damage waiver sales — had a curious effect on New York’s rental industry. [PAGEBREAK]

The 396-z provision was finally repealed last year after years of industry lobbying. But during its reign, Section 396-z created its own Darwinian natural selection process for independents and franchisees. With few exceptions, only the fittest of the Super Fit survived.

Among those survivors is All in One Auto Group in Wantagh, near Long Island’s Jones Beach. Owned by Ella Stevens and Richard Yorek, All in One is the quintessential family-run rental business. The general manager is Yorek’s daughter, Christina Annousas, who began working for the business when she was 14. Yorek, a former race car driver, buys and sells the cars and performs fleet maintenance. Stevens handles a lot of the back-office duties.

Stevens and Yorek launched their company back in 1985 with five cars. In June, at the height of this year’s tourism season, the fleet numbered 30.

The business grew gradually over the years, attracting a loyal client base of returning tourists and locals. All in One became known for its personalized customer service and low prices.

“There’s a different type of feeling in a mom-and-pop business,” Yorek says. “We own all our cars. The money we invest in our cars is our life savings. We hold a lot of responsibility and are willing to make the sacrifices. When you have that kind of commitment, you are determined to make it work.”

Stevens emerged as a leader in the local business community, becoming active in the chamber of commerce, an educational foundation, a regional Republican club and charity fundraisers.

The company’s annual tree-lighting ceremony each December is a community tradition.

But this past summer, at peak season, the All in One team was forced to consider shuttering the business.

When Stevens read an e-mail notifying her that the company’s insurance rates were rising 148%, she initially assumed the quote was a mistake. But she quickly learned it was no typo.

“We didn’t have any losses that were giving them reason to do this,” Stevens says. “We didn’t understand where this tremendous rate increase was coming from.” 

Calls to other insurance agents and brokers, seeking lower quotes, just added to her frustration. To make matters worse, there were delays in receiving the company’s loss run records, which Stevens needed in order to apply for a new policy. The loss run was a major asset because it reflected All in One’s attention to qualifying customers and managing risk.

Searching for affordable insurance became the focus of Stevens’ work day. But as the Sept. 30 expiration date on the existing policy approached, the family had no choice but to begin taking steps to liquidate company assets.

“It was summer, at the height of the season,” Stevens recalls. “We had financing in place to increase and upgrade our fleet, but instead we had to start liquidating our fleet.”

Before long, the company’s fleet was cut in half. With the future of the business in question, stress took its toll on the entire family as well as on longtime employee Adriana Bailey.

“We started wondering, now what are we going to do?” Yorek says. “If we close the doors, somebody isn’t going to eat, bills aren’t going to be paid, homes are going to be in jeopardy.”

Eventually, Stevens began searching for potential tenants of the family-owned building that housed All in One. She wanted to ensure there would be enough money to pay the mortgage and taxes. She also started researching other business ventures and contemplated opening a daycare center.

“I was hysterical,” Annousas recalls. “I didn’t know what I was going to do. Car rental is what I know.”

In a last-ditch effort, Stevens contacted the Association for Car and Truck Rental Independents and Franchisees (ACTIF) and asked for help. ACTIF Associate Director Maggie Tatton referred her to Scuderi of Lancer Insurance Co., who in turn referred Stevens to a broker.

Eventually, this led to a quote that All in One could live with. The business was saved.

“It was like the weight of a car was just lifted off my chest,” Annousas says. “I could finally breathe.”

“And we could then think about the future of our business again,” Stevens adds. 

The Pitfalls of Hunting for Insurance
For Stevens, persistence paid off. For many others, it hasn’t yet.

And like job hunting after a layoff, insurance hunting can test a person’s patience and self-esteem. When so much is at stake, it’s hard not to take rejection personally.

“On the one hand, I fully understand why the insurance companies feel like they have to take this stance,” explains Sharon Faulkner, a Thrifty franchisee in Albany. “On the other hand, I can’t understand it at all. Why don’t they want to take my money and insure me like they’ve done for more than 30 years? They’ve never lost a penny on me. I feel like such a pariah.”

Faulkner, one of the industry’s most visible activists, has until March to secure $2 million in excess liability coverage in order to qualify for Thrifty’s fleet leasing program. Serving Albany’s airport market, her Thrifty business is in direct competition with Hertz and Avis. Faulkner doesn’t believe she can compete, she says, without a fleet of high-quality new cars.

In the meantime, she and her husband Bob are looking into alternative leasing plans. The couple wants to remain in the Albany area at least another couple years until their teenage son graduates from a local private academy.

“Some days I’m optimistic and I think the $2 million is going to come through,” she says. “There’s got to be someone out there who is going to help us. But after talking to another agent who gives me a quote three or four times what I paid last year, I get depressed.”

What about the possibility of leaving car rental altogether?

“I’m over 50 and we have a depressed job market. I’ve been running my own company for 30-some-odd years. Who will want to hire me?” she responds.

“But maybe I can become a Wal-Mart greeter,” she adds with a laugh.

Sandy Rosenberg and Santiago Ynacay, business partners who operate East Coast Rent A Car in Forest Hills, can identify with Faulkner’s frustration. After the company’s insurance policy was terminated in August, East Coast RAC entered an assigned risk program to buy time — a costly move, to say the least.

“It’s a prohibitive amount of money — about $500 per month, per car,” Rosenberg says. “Not only that, but I had to put down 25% of six months of premium — nearly $100,000.” He gave himself an Oct. 31 deadline to secure a new policy.

Though he’s only worked in car rental five years, Rosenberg desperately wants to keep his company afloat. The business appeals to him on multiple levels, he says. He loves working with the public, and he relishes the challenges of forecasting demand, managing fleet size, managing risk, and keeping utilization high and overhead low.

 But the uncertainty surrounding the company’s future is keeping him up at night. “These past two months have devastated me, both physically and mentally,” Rosenberg admits. “But I haven’t given up. I’m networking and doing everything I can. I’m never one to quit.”

Ynacay has worked in car rental locally for 17 years. Some of his customers have followed him from company to company. He has seen the insurance crisis force some of his mentors, such as Thrifty franchisee Rick Norris, out of business. It’s becoming more difficult to stay optimistic, he says.

“It’s so frustrating,” Rosenberg adds. “It’s so unfair what all this is doing to so many families. We’re talking about all the independents’ principals and their employees. A lot of these people have worked in car rental their whole lives. Many of these companies are family businesses they started from scratch. Where do you go at this stage of your life to find a job? It’s going to be a difficult transition for a lot of people.”

Liability That Knows No Bounds
Because New York’s vicarious liability law imposes no statutory limits, cases involving death and catastrophic injury can lead to astronomical awards when a case goes to trial.

In April 2000, the car rental industry took notice after a Buffalo, N.Y., jury awarded $47.4 million to the parents of a former law student who suffered brain damage in a road-rage accident in 1998. Enterprise Rent-A-Car was held vicariously liable as the owner of one of the cars involved. The company was not, however, found negligent in any way.

In June 2000, New York State Supreme Court Justice Christopher J. Burns rejected requests to throw out the verdict. He did, however, reduce the award by $5 million. A state Appellate Court in December 2001 reduced the amount by an additional $23.4 million.

The injured law student, David Rappold, was a passenger in a car driven by his friend, Eric Barton, who had rented a car from Enterprise. The accident occurred when another motorist, Laurence Trembling, drove his pickup truck in front of Barton’s car as Barton attempted to pass the truck. 

As a result, Barton’s car crashed into an embankment. The two men had allegedly been speeding and cutting each other off for a while. Both Trembling and Barton were sentenced to brief jail terms in September 1999.

According to industry estimates, vicarious liability claims cost the car rental industry more than $100 million annually. Here are just a few more examples of major vicarious liability cases in New York in the past few years:

• Fu v. Fu (1999) — In 1993, two friends rented a car in New Jersey from Freedom River Inc., a Philadelphia licensee of Budget Rent-A-Car Corp. They were the only authorized drivers identified in the rental agreement. The wife of one of the authorized drivers, Hong Fu, drove the car and was involved in a car accident in New York. Li Fu, Hong Fu’s sister and the wife of the other renter, suffered serious injuries in the accident. An arbitrator applied New York law and found Hong Fu and Freedom River liable for $3.75 million. The New Jersey Supreme Court affirmed the judgment.

•Brown v. Welcome Corp. (1997) — Welcome Corp., a Thrifty licensee, rented a car to Scott Freeman in Norfolk, Va. The rental contract listed Freeman as the only authorized driver. He gave the car to an employee, Harrell Davis, to use for business. Frank Dibello, another employee working for Freeman, took the car without the permission of either Freeman or Davis and drove it to New York, where he was involved in an accident. Welcome Corp. was held vicariously liable under New York law and settled the case for $75,000 plus more than $100,000 in defense costs.

•Larocca v. Budget Rent-A-Car Corp. (1995) — Rosalba Larocca rented a car from Budget in New York. She gave her son, who had a suspended driver’s license, permission to drive the vehicle. The son lost control of the vehicle on the New Jersey turnpike in a one-car accident. Larocco was a passenger and suffered injuries. She sued her son for his negligence, and the jury found Budget vicariously liable under New York law. A jury returned a verdict of $450,000 against Budget.

•Zafra v. National Car Rental Inc. (1995) — A woman rented a car in New York. Her 19-year-old daughter took the car and drove to Vermont with friends. While driving in Vermont, she turned around to tell her friends in the back seat to quiet down and the car veered off the road and rolled over. One of the passengers was injured and sued the driver and National. Though the accident occurred in Vermont, the court applied New York law. National settled the claim for $985,000. Though National was insured for $1 million, the insurance company denied the claim because the driver was underage — a violation of the insurance coverage. New York law, however, prohibits car rental companies from refusing to rent to anyone 18 years or older.