> I've never heard of an insurance company offering to pay your deductible and rental but not pay for the repairs. They are ultimately liable for the repairs.

Sounds like that's why they're offering.

It's cheaper for them to pay a $500 deductible and allow OP's insurance to cover the balance, than to pay for the repairs minus the deductible.

It sure does sound like the other driver's insurance company is encouraging OP to commit insurance fraud.