The role of personal property and salvage in commercial claims adjusting.
By Rick Charles
Property that retains some residual value after being partially damaged by an insured peril such as a fire or other covered risk is determined to be salvage. It is the property in which an insurance company secures an ownership interest as a result of paying a claim for total loss or damage based on its true value in an undamaged state or before the loss occurred. Sometimes the damaged property is sold as salvage in order to determine the amount of the loss sustained by that property.
Salvage value is the amount for which an asset can be sold at the end of its useful life. In insurance circles, the term commonly refers to the scrap value of damaged property. In property insurance, salvage value is subtracted from any loss settlement if the insured retains the damaged property. In extra-expense coverage, the salvage value of property purchased for temporary use while repairs are made is deducted when determining the amount of loss recovery.
As a background, the term “salvor” is applied to a person or organization that is an expert in saving, protecting, inventorying, reconditioning, and selling damaged property. Salvors rarely are used for homeowners’ losses; they are most frequently used for commercial property losses.
There are four classifications of personal property covered by commercial insurance policies for actual cash value:
- Residential personal property is valued at the replacement cost for new property at the time of loss, less depreciation. Its price in the secondhand market (e.g., used furniture and clothing stores) is not the test of its value.
- Business personal property in use is allocated to commercial usage.
- Business personal property in the hands of merchants is allocated to commercial usage.
- Business personal property in the hands of a manufacturer is allocated to commercial usage.
The courts generally have been consistent in ruling that the actual cash value of personal property is the cost to replace the item with new property at the time of the loss, less reasonable depreciation such as deterioration (wear and tear) and obsolescence (change in style or function). A value determined in the secondhand market is immaterial, and it is doubtful that such evidence would be admissible. Value varies based on a number of factors.
For instance, the value of household articles that cannot be replaced, such as antiques and works of art, is what they could be sold for at the time of loss. The value, therefore, is a matter of expert opinion. Some examples of property types that produce most of the valuation problems include statuary antiques, oil paintings, engravings, rare books, tailor-made clothing, furs, jewelry, and coin and stamp collections.
Another example includes items of extraordinary value, which generally do not depreciate. These include items exhibiting unusually high-quality workmanship or those that contain precious metals such as silver, gold, or platinum. Other specialty items included in this category are collections of crystal, fine art, silverware, and antiques. The adjuster must be aware that there is a great variety of opinion as to what constitutes its value. For example, U.S. Customs and Border Protection states that an object must be 100 years old before it can be classified as an antique, and the value must be established by a qualified appraiser.
Sentimental value, however, is not a factor in determining the amount of a loss. A loss caused by the destruction, damage, or theft of a family photo, heirloom, or keepsake must be based on the loss of its intrinsic value, apart from any sentimental value it may hold for the insured.
Slower depreciating articles include those made of moderately durable materials, such as common metals, wood, or high-grade plastics. Moderately depreciating articles include nondurable materials such as wicker, leather, most plastics, and furs. Finally, those items composed of less durable material and those affected by changes in style and fashion will depreciate at a much higher rate. Certain style changes in clothing have the effect of lowering the value of an item dramatically, despite the fact that the article itself may not have been worn excessively.
It is important to remember that an article retains a residual value for as long as it remains in useful condition. This is usually a minimum monetary value based on current market demand for such items, except in the case of heirlooms or articles that have a recognized or historical value.
There are several things that an adjuster needs to know about salvage and salvage services. The role of a salvor is to assist in reaching an equitable settlement, minimize the loss, and realize a maximum salvage return. No two losses are the same in terms of the variety of possessions or value, and there is an extraordinary range of contents with good and bad salvage return value. Caskets, wedding dresses, and surgical supplies are examples of expensive merchandise with very low salvage value.
Following are guidelines for adjusters on how to consider and manage salvage situations:
- Almost any item of furniture, equipment, machinery, or stock of merchandise will deteriorate with time unless some action is taken to preserve and protect the property as soon as possible following the loss. A salvor can recommend alternate ways of performing this task.
- An inventory of the damaged and undamaged contents is necessary. Either you or a salvor should verify any inventory already prepared by the insured. If the insured has not prepared an inventory, a salvor can cooperate with the insured in the preparation of a joint inventory.
- In large losses, the adjuster needs to explain to the insured that, while it is one of his duties to protect the property from further damage, the policy will not pay more than its limit for the total of the personal property loss and the expenses incurred to protect the property from further damage.
- Take depreciation whenever the property is obsolete, out of style, out of season, worn, or damaged—even if the insured has replacement cost coverage.
- Ask to leave the salvage with the insured. Remember, it should be worth more to the insured than the salvor, so attempt to get a better deal than the estimated return percentage from the salvor. If the insured refuses to keep the salvage and the salvor must take it, make sure the salvor has a salvage agreement signed by the insured before property is moved.
In summary, always address protecting the property from further damage with the insured and recommend the use of a salvor to the insurer and to the insured. Protection priorities should be set based on the value of the personal property at risk. The salvor should verify any inventory already prepared or create a joint inventory with the insured. Also, be sure to have the salvor conduct an inventory of both damaged and undamaged items. For this last activity, a camera or video camera can provide the best representation of the inventory’s physical condition.
Additionally, consider whether the inventory can be reduced from a retail valuation to cost if replacement companies are being used. Also determine if there is a possibility of a volume or cash discount in the settlement and whether that discount is offered by the replacement source. Always be sure to take depreciation whenever the items are obsolete, out of style, worn, or damaged. The adjuster should attempt to leave the items with the insured to obtain the likely best return. Otherwise, the adjuster must confirm that a salvage agreement has been executed before the salvor ultimately takes over the damaged property.