Considering that they'd basically be buying a brand-new Kobo for the library if they damage it, I'd hope people would be slightly more careful. Or maybe they'd just regret it more thoroughly if they did damage it.
Of course the real problem would be getting money from reluctant replacers without resorting to the expense of a collections agency.
One of the library systems in my region has been loaning out Kindles under much the same terms since mid-2010. It seems to be working out for them, though there's an
incredibly long hold line-up on the things.
You can currently also try out Kobos and Sonys in-library there and hopefully they start loaning some out, if only for variety's sake.
One of the real benefits I can see to having a bunch of library Kobos even loaded up with just free public domain books is that every book becomes a "large print" book. Great for seniors, especially those who want to read more obscure classics that might not have made it to paper Large Print editions.