Theresa,
When driving in Austria, you'll need to buy the Austrian Highway Tax Vignette, as being caught without it can result in huge fines (often payable on the spot). According to Wikpedia, "A €240 fine with an additional obligatory payment of a substitute toll are charged to travelers without a valid vignette, and unpaid fines lead to penalties between €300 and €3,000. Furthermore, the vehicle may be confiscated from foreigners to guarantee payment of the penalty."
For driving in Italy, each driver listed on the rental form must have the compulsory International Driver's Permit, which is used in conjunction with your home D.L. These are valid for one year, and easily obtained at any CAA/AAA office (two Passport-sized photos required, which may be provided by the issuing office). Failure to produce an IDP if requested can result in fines on the spot!
You'll also need to avoid the dreaded Zona Traffico Limitato areas that are becoming increasingly prevalent in many Italian towns & cities especially Florence, which is almost saturated with automated ZTL cameras. EACH PASS through one of the automated Cameras will result in a €100+ ticket, which you won't know about until several months after you return home! This website provides more information - http://www.slowtrav.com/italy/driving/traffic_cameras_speeding.htm
Regarding your insurance question, you might check the Car Rental guide at www.gemut.com as there's a section there on Italy. You could also phone Gemut on their toll free number or send an E-mail. As I recall, it's compulsory in Italy to buy at least part of the CDW from the rental firm, but I can't remember the details.