Lessons Learned from a Class Action Suit on Damage Waiver

Whether to offer a damage waiver remains one of the most hotly debated issues in the equipment rental industry. Comments range from: “It has no value to the customer and amounts to a hidden rent increase,” to: “It provides significant value and legitimately offsets the rental company’s long-term costs associated with repairing and replacing damaged equipment; you’re leaving money on the table if you don’t include a damage waiver.”

Whatever your current view may be, it seems everyone would benefit by taking a close look at what these programs consist of and how they can be administered most effectively. Fortunately (for some), a current case being litigated in New Jersey provides a good starting point.

The “Hertz” Case

The “Hertz Case” (the class-action lawsuit filed on behalf of thousands of “class” plaintiffs against Hertz Equipment Rental Corporation, “HERC”) provides some important insights, not only regarding how customers perceive damage waivers, but also how rental companies might adjust their damage waiver programs to avoid similar lawsuits going forward.

For those unfamiliar with the Hertz Case, here is a brief summary:

1. Miguel V. Pro (a Texas landscaper) and Davis Landscape, Ltd. (a Pennsylvania corporation), sued HERC in November of 2006,[1] claiming HERC violated the New Jersey Consumer Fraud Act (“NJCFA”) by charging them a “Damage Waiver” fee without properly disclosing its terms (HERC’s form of rental contract applies New Jersey law, the reason the suit was filed there).
   
2. On December 11, 2008, the case was certified as a “class action” (a suit in which multiple plaintiffs can be included in a single “class” and have their claims resolved against a defendant in a single lawsuit).
   
3. As of August 5, 2010, 746,959 plaintiffs had joined the suit (that is not a typo; 746,959 plaintiffs were suing HERC in this class action lawsuit as of 8/5/10; there may be considerably more now).
   
4. The case seeks “disgorgement” (basically, a refund) of all Damage Waiver fees paid by the plaintiffs, plus interest, attorneys’ fees, court costs and “such other and further relief as is just and proper.” Doubly (or perhaps more) unfortunate for HERC, the NJCFA has real teeth, meaning a loss could result in a large judgment.
   
5. According to the case administrator, with whom I spoke on June 27, 2012, the case has not yet been set for trial.

It is important to remember that the case has not yet been decided, and indeed, may not be for a long time, if ever (the case could be settled or dismissed, for example). And even if it finally does go to trial, HERC may not be liable for anything. In fact, as I read the Class Action Complaint, it occurred to me that, at least contractually, HERC did little differently from what most rental operators around the country have been doing for years (and they did some things better, perhaps too many things).

According to the Complaint, HERC:

a. Automatically included a damage waiver fee (whether 14% is reasonable is a matter of opinion, but it is 2% to 4% higher than most I’ve seen);

b. Included a provision on the front of the rental contract which gave the customer the option to decline the damage waiver, rather than “accept or decline” (the Complaint portrays the “decline-only” format as a “universally condemned” practice; incorrectly in my opinion, as this practice is, in fact, quite common in the equipment rental industry);

c. Included an extensive damage waiver provision on the reverse side of the rental contract, and even provided a separate “Loss Damage Waiver Guide” together with the customer’s written acknowledgment of its receipt (most rental operators do the former, but few provide a “Guide”);

d. Required customers to maintain $1 million worth of “insurance” ($1 million worth of insurance is usually applied to “liability” insurance — which would not cover “equipment damage” like that covered by a Damage Waiver; the insurance that would be required to cover the same type of damage would be “property damage or inland marine” insurance, typically at, or as close as possible to, fair market value/replacement cost);

e. Included a long (10 items) list of exclusions in the terms of the Damage Waiver;

f. Included a Damage Waiver deductible of the larger of $500 or double the 4-week rental charge (without indicating how this might apply to smaller equipment and/or tools); and

g. Included terms printed in very small (fine) print on the reverse side of the rental contract, as is the case with virtually all single-page (8.5” x 11”) equipment rental contracts.

None of these stands out as being particularly unusual, or for that matter, unfair (though the Damage Waiver fee and the deductible do seem high) in my opinion. But, the overall impression created when these carefully drafted contract provisions are combined with the additional allegations made in the Complaint, some by ex-HERC employees (who may or may not be disgruntled), is less flattering. For instance, one ex-employee stated the Damage Waiver “did not provide any meaningful coverage.” Another said he/she “never saw any instances when the LDW [Damage Waiver] actually provided coverage” (in apparent support of the Complaint’s allegation that “Hertz Equipment has a corporate policy of construing the exclusions in the LDW to exclude all incidents of damage and effectively negate coverage,. . .”) [emphasis added].

Complicating matters, the Complaint also alleges that HERC:

(A) Failed to provide a copy of the rental contract to its customers until after the rental was completed, thereby cutting off their opportunity to review the Damage Waiver terms in advance;

(B) Failed to independently disclose the existence of the Damage Waiver charge to its customers;

(C) Failed to independently inform its customers that the Damage Waiver was optional;

(D) Failed to include the Damage Waiver fee as a separate line item charge on its rental contract;

(E) Included “sale of loss damage waivers” as a primary source of “revenues” in its 2005 SEC (10-K/A) filing (“revenues” are of course, different from “profits,” but the distinction may be less obvious to some jurors);

(F) Automatically charged the Damage Waiver fee even to customers who maintained the required insurance certificates on file with HERC;

(G) Made even customers who purchased the Damage Waiver responsible for “FUEL, FLATS, DAMAGE [emphasis added] AND CLEANUP FEES”; and

(H) Charged customers for a separate “Environmental Recovery Fee” not supported by any cost data or apparent efforts by HERC to protect the environment.

These allegations, coupled with the ex-employees’ statements (if true), would likely make it considerably more difficult for HERC to defend itself, and perhaps its Damage Waiver program, in this suit.

For our purposes, however, the plaintiffs’ allegations probably reveal more about how Damage Waiver programs are administered, than about the fundamental validity and/or fairness of Damage Waiver programs. Car rental companies, for example, have been offering damage waivers for years, and speaking for myself and for those I’ve discussed it with, most people seem to feel they offer considerable value.

Focusing, then, on the means of administering a Damage Waiver program seems the most reasonable course, as I believe the Damage Waiver concept is, itself, probably not at risk of being deemed unlawful. I also believe most rental operators would say Damage Waiver programs generate significant revenues used primarily for repairing and/or replacing damaged equipment, while also enabling them to avoid disputes over repair costs when a customer does damage a piece of equipment, and inevitably, objects to paying for the necessary repairs.

With that in mind, the allegations contained in the HERC Complaint provide some valuable information regarding how best to create and administer your own Damage Waiver program, while avoiding (to the extent possible) HERC-type lawsuits. Following are my recommendations for achieving that result:

1. Provide a complete copy (front and back) of the rental contract to each customer upon commencement of the rental, if possible;
   
   
2. When charging a Damage Waiver fee, include a separate line item for that charge on the front of the rental contract;
   
   
3. At least until the Hertz Case is decided, use an “accept or decline” format for Damage Waivers on the front of your rental contract, and have customers initial “accept” if and when they purchase the Damage Waiver (again, “decline-only” formats are by far the most widely used, but until the Hertz Case is resolved, it will be impossible to tell whether they are going to yield legal exposure);
   
   
4. Include the following language: “DAMAGE WAIVER IS OPTIONAL” on both the front and reverse sides of your rental contract;
   
   
5. Include a Damage Waiver provision on the reverse side of your rental contract and/or in a separate Addendum (see below) that is worded simply and includes as little “legalese” as possible;
   
   
6. Include only the exceptions and exclusions your rental operation really requires (i.e., make sure the Damage Waiver actually does offer value to the customer);
   
   
7. Use print large enough to be read relatively easily, and include the following language at the bottom of your rental contract: “A LARGER-FONT VERSION OF THESE TERMS AND CONDITIONS IS AVAILABLE UPON REQUEST” (and, of course, make larger-font versions available at the rental counter);
   
   
8. Provide a separate Damage Waiver Addendum or “Guide” to each of your customers who purchase damage waiver (if repeat customers typically purchase Damage Waiver, have them execute a single “Extended Damage Waiver” Agreement);
   
   
9. Place a placard on the rental counter (or hang it within easy view of the rental counter) that reads: “Damage Waiver is Optional and May Be Declined”;
   
10. Limit deductibles such that they provide your customers with a reasonable financial incentive to refrain from abusing your equipment without eliminating coverage altogether (e.g., a 10% deductible / 90% coverage provision can offer more flexibility than a set dollar amount);
    
    
11. Teach your counter employees the value of Damage Waiver and make certain they are able to communicate that value (in terms of time and cost savings) to your customers without calling it “insurance” (you don’t want to get caught in a regulatory snare regarding the sale of insurance);
    
    
12. Maintain a consistent policy (and communicate it clearly to your employees) regarding how your Damage Waiver program is administered, and clearly identify the types of equipment and damage it covers (and does not cover).

Conclusion

The legal landscape is changing, in some industries more than others. Regardless of whether HERC wins or loses, I believe the Hertz Case will have a substantial impact on the way Damage Waivers are handled by rental operators (and perceived by the public) in the future, not all of which is bad. But, as is the case with so many things, the well-prepared will stand to gain yet another competitive advantage (by, for example, avoiding the lawsuits others will be forced to spend time and money defending), while the unprepared will likely suffer the additional burden and expense. The opportunity to prepare exists now. I would, therefore, recommend reviewing your Damage Waiver provision with your attorney and making the necessary changes before the next round of lawsuits based on the Hertz Case commences. rer

[1] MIGUEL V. PRO and DAVIS LANDSCAPE, LTD., a Pennsylvania corporation, and, individually and on behalf of all others similarly situated, Plaintiffs, v. HERTZ EQUIPMENT RENTAL CORPORATION, a Delaware corporation, Defendant. No. 2:06-CV-3830 (DMC), in the United States District Court for the District of New Jersey.

James R. Waite, Esq., is a rental industry attorney and former General Counsel at RentX Industries, Inc. He has prepared hundreds of rental contracts for rental companies throughout the United States. He wrote the book published by the American Rental Association on rental contracts, and has authored numerous articles on the rental industry throughout 20 years of legal practice devoted almost entirely to the rental industry. He can be contacted directly at (866) 582-2586 or www.wwlegal.net.