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Motor Insurance
Wednesday, August 1, 2007
Waivers are not insurance

Every decade or so, someone takes the view that car hire firms, because of the waivers they use, are offering insurance, are not registered to do so, and the FSB investigates the issue.  It is then discovered that car hire firms are not offering insurance and the matter is laid to rest - for a decade or so - and so the cycle continues. I note it was in 1999 that I last addressed this issue, so the decade is once again upon us.

When a customer (the renter) hires a car from a Car Hire Firm he (she) is presented with a contract to sign. The contract generally has a number of blocks to tick (or initial).  Firstly the customer is asked to accept or decline the Collision Damage Waiver (CDW) and secondly the Theft Loss Waiver (TLW) and thirdly Personal Accident Insurance (PAI). If the renter accepts any of these three, additional charges are levied. In the mind of the renter, and the public, by paying the additional amount he has paid a premium and hence insurance is involved.
If the hire company is providing insurance, or carrying on the business of insurance, so the argument goes, then it would have to be registered as an insurance company and licenced for the class of insurance in terms of the Short-term Insurance Act 1998, or if the rental company is providing a service as an intermediary or providing insurance advice, registered in terms of FAIS. With this background the some of the risks which are involved are examined.

Loss or damage to its vehicles

The most obvious risk is the loss or damage to the leased vehicle. The vehicle belongs to the car hire company, which is clearly exposed to the risk that the vehicle may be lost or damaged. Managing this risk costs money, and yet is a legitimate business risk, the cost of which must be passed on to the user of the vehicle, in one way or another.  It is thus quite legitimate, for example, for rental company to insure its own vehicles and pass this cost onto the persons who lease the vehicle.
A car rental client can accept full responsibility for the vehicle and pay only hire charge, and refuse to pay for the waivers. The risk of loss or damage to the vehicle then shifts to the renter who is paying a much reduced fee.
The renter could then, to the argument goes, use the savings to purchase insurance to cover the risk of loss or damage to the vehicle. On the other hand the renter may be quite happy for the rental company to manage its own risk. In this event the renter pays the risk costs, as well as the hire fee.
Under these circumstances it is very difficult indeed to understand why anyone believes the risk waivers constitute insurance; it is exactly opposite. The matter is not one of insurance at all.

Personal Accident Insurance

PAI is a different matter. It is insurance. If the renter accepts the PAI option, there is clearly insurance involved. This does not mean that the car rental company is providing insurance ie acting as a insurer. It could be acting as an intermediary to procure insurance. As long as the risk is carried by a registered insurer, the hire company is not the insurer.
One may well argue that currently risks associated with hiring vehicles are not dealt with satisfactorily but what cannot be argued is that the waivers constitute insurance. By Robert W Vivian, Professor of Finance and Insurance, School of Economic and Business Sciences, University of the Witwatersrand

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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