If you hire a car you might not realise that the insurance you’re offered usually has a large excess – which can add up to hundreds of pounds.

You’ve booked the holiday, bought the flight and managed to track down a hire car at a reasonable price. What could possibly go wrong? Well, if you’re not careful you could end up with a massive bill if you have an accident and you haven't taken out excess liability insurance. Many car hire insurance policies impose an excess of several hundred pounds, so you could be seriously out of pocket. And while you can take out extra insurance to cover this when you sign up, it can cost £10 a day or more. But if you shop around for excess liability insurance you can get a much better deal.

What your car hire insurance covers
The insurance you get when you hire a car will normally cover you in a similar way to a comprehensive car insurance policy would do in the UK. However, there are some differences:

• It normally has a large excess; typically of several hundred pounds but it can be as much as £1,000 or more.

• It doesn’t generally cover damage to the roof, tyres, window and undercarriage of the car.

Don’t even think about hiring a car without taking care of the excess on the insurance policy unless you’re happy to pay a hefty bill should the worst happen. A couple of years ago when I was working as a TV reporter, I interviewed one unhappy customer who had been charged several hundred pounds because he hadn’t taken out excess liability insurance and his car’s roof suffered a minor scratch. Be warned!

SAVVY TIP: Some car hire companies’ contracts allow them to take a payment from your plastic card that’s only returned once they’ve checked the car over and made sure it’s been returned in pristine condition. If you pay by credit card, you can dispute the transaction. New rules introduced in November, (I’ve covered these new rules for bank customers elsewhere on the website) mean that if there is a disputed transaction on your account, your bank should refund it speedily.

How to save money
Shop around for excess liability insurance in advance so you don’t have to sign up to the policy you’re offered by the car rental company. This will be several times more expensive than one you can buy on the open market. Sites to try include:

• Icarhireinsurance.com: this website sells both single trip and annual excess liability insurance policies. Its daily excess liability rate for Europe starts at £2.99, while annual policies for Europe start at £39.99.

SAVVY TIP: If you buy an annual policy you can add car club insurance for an extra £19.99 a year, compared to over £150 charged by one of the leading car club companies. Excess liability cover for car hire also covers up to nine named drivers.

• Insurance4carhire.com: you can buy single trip insurance at £4.75 a day or an annual European policy from £49.00.

SAVVY TIP: Annual policies provide cover for up to seven additional drivers named on the rental agreement, although you’ll pay more for drivers are aged 75 or over or if you’re planning a holiday longer than 31 days.

• Insuremycarhire.com: Prices start at £4.50 a day for local or short term hires and £49 a year for an annual European policy.

SAVVY HELP: Jill Fletcher, a director with insurance brokers WB Baxter, is one of SavvyWoman's panel of experts. Why not ask Jill a question about travel-related insurance by clicking here?