Salvage or scrap refers to the amount for which an asset can be sold at the end of its useful life or after it is damaged beyond repair. This comes into play during the claims process of many property insurance policies - but only when the claim is payable as per the policy terms & conditions. Let’s examine this in detail below.
Insurance is designed to provide individuals and businesses with a monetary pay-out in the event of any loss or damage to their insured property during the policy period. Assets like vehicles, plant and machinery, buildings, cargo, etc. can be insured against a number of risks such as fire, collision, natural calamities, malicious damage, etc.
In the event of a loss to such property, the insurance company sends a claims adjuster or surveyor to ascertain the degree and value of damage. It is during this claims process that the concept of Salvage comes into the picture.
The loss ascertained by the insurance company’s claims team can either be :
- Partial loss - When the property is partially damaged (the actual loss/damage to the property is less than the maximum Sum Insured), and the property can be brought back to its previous condition with the help of necessary repairs; or
- Total Loss - When the property is completely damaged and there is no scope of any repairs, the only option available is replacing the old property with a new equivalent property
- Constructive Total Loss - This is a peculiar situation which arises in quite a few claims, wherein the property is damaged and can still be repaired, however the quantum of damages is such that the actual repair cost far exceeds the maximum sum insured of that property in the policy. In such a case, replacement of damaged property with a new similar property becomes more cost effective
In the event of a total loss to the asset, the insurance company pays the appropriate loss settlement to the insured and then takes ownership of the remaining damaged property- known as salvage or scrap. Many insurance policies come with a condition specifying the insurance company’s right to ask the claimant to send damaged items to it upon request. Usually the amount of salvage mutually ascertained and agreed between the insurance company, the policyholder and the surveyor, is deducted from the payable claim amount.
The insurance company’s primary goal through securing the salvage of an asset is to sell it in parts and thereby offset its own loss (which it incurred while settling the insured’s claim).
This practice is most commonly observed in Motor Insurance claims. Once the claim settlement is paid, the insurance company takes possession of the badly damaged vehicle and sends it to an auction facility or sells it for parts.
Other assets like machinery, household contents, business stock, marine cargo, etc. can also be salvaged by insurers under their respective property insurance policies.
An insurance company can exercise its salvage right for any kind of property, including electronic devices, office contents, etc. under any insurance policy. If they recognise a commercial value to an item that forms part of the insurance policy, they will consider its salvage potential.