The salvage business in non-life insurance is what we might call the tail-end of the insurance cycle. Salvage refers to the damaged property an insurer takes over to reduce its loss after paying a claim. Insurers receive salvage right over property on which they have paid claims, such as badly damaged cars. If the insured retains the damaged property, the salvage value or scrap value will be subtracted from any loss settlement. It is the insured’s decision whether or not to surrender the damaged property to the insurance company. The insured may decide to retain the property for sentimental reasons. The insurance company will only take damaged goods for salvage if it will reduce their total loss payout.
Salvage is common in motor vehicle insurance, aircraft insurance, and other property insurance such as fire where unburned structures and items are bought and sold, in a “fire sale,” as junk and later recycled for its remaining value. Damaged properties may be considered useless to its owners but may be of some value to others. Salvage is also relevant in property or inventory damaged by flood, earthquake, tornado or hurricane.
Usually, a decision has to be made whether the property can be considered as “totaled” or written-off and no longer economically feasible to be repaired. This decision belongs to the insurer. Once the property is considered totaled, the property owner receives compensation up to the policy limits, and the salvage—the damaged property—becomes the property of the insurer who can then sell it at a salvage auction or sales. On a much smaller scale, salvage is nonetheless an income stream for non-life insurers.
In the salvage auction or sales, typically in the Philippines, the damaged property is sold at 25 percent of the market value of the property in good condition. Buyers of salvage properties are typically individuals and not companies. They are referred to as professional salvage dealers or salvors.
In marine insurance, a specific provision in Section 149 provides: “If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment.” In maritime practice, however, salvage has a second meaning, which refers to “services awarded to a third party to save maritime property from peril at sea” and in which salvage charges will be incurred. An example of salvage
service is towing a severely damaged hull to the nearest port.
A property is considered no longer economically feasible to be repaired if: a) the sum needed to repair the property is equal to the insured value of the property; b) the repair costs are so high that, when added to the salvage value, they equal the sum for which the property has been insured; and c) the cost of repair work exceeds 70 percent of the property’s insured value.The property may also be considered as unrepairable because it would be unsafe to repair it. A dispute between the insurer and a vehicle owner may ensue where the insurer insists that a vehicle can still be repaired and refuses to write-off the vehicle contrary to the car owner’s desire. A car owner may believe that the vehicle is no longer safe to be used. In such a case, compelling the insurer to write-off the vehicle may be difficult.
****
Dennis B. Funa is the current insurance commissioner. Funa was appointed by President Duterte as the new insurance commissioner in December 2016. E-mail: dennisfuna@yahoo.com.
