Salvage

What is salvage in insurance?

Salvage is whatever is still worth something after insured property has been damaged or destroyed. A car written off after an accident still has value as scrap and spare parts. Fire-damaged stock may sell at a discount. Replaced parts removed during a repair have scrap value. Because general insurance follows the principle of indemnity, the insured should be put back in the position they were in before the loss, not better. So either the salvage value is deducted from the claim and the insured keeps the damaged item, or the insurer pays the full loss and takes the salvage.

In marine insurance, "salvage" also has an older meaning: the reward paid to someone who saves a ship or cargo at sea. That is a separate concept from the salvage value discussed here.

How salvage works in Indian claims

Assessment. The surveyor and loss assessor values the salvage as part of the survey. IRDAI's Master Circular on General Insurance Business, 2024 describes salvage as the amount the damaged asset will fetch in the open market, which is deducted from the claim amount. Retail products must say in the policy and Customer Information Sheet how salvage, depreciation, under-insurance and deductibles affect the settlement.

Motor partial loss. The same circular says a retail customer should not be burdened with disposing of salvage in a partial loss. The policyholder is paid the claim, and collecting the salvage, such as replaced parts, is the insurer's job.

Motor total loss. Each insurer's Product Management Committee sets the criteria for treating a vehicle as a total loss or constructive total loss (CTL), and publishes them. Many insurers keep the test from the erstwhile India Motor Tariff: a CTL when the cost of retrieval and repair exceeds 75% of the IDV. When a vehicle is a write-off, the master circular requires the insurer to offer the policyholder the option to keep the wreck and take a "cash loss" settlement: the IDV less the assessed salvage value, based on competitive quotes, including any quote the policyholder brings. Otherwise the insurer pays the IDV (less deductibles) and takes the wreck.

After a total loss. On a cash loss settlement the insurer can cancel the own damage cover from the date of damage. It can cancel the third party cover only after the policyholder either cancels the wreck's registration or shows a separate third party policy covering it.

Policyholder duties. Insurers' citizens' charters list preservation of salvage among the policyholder's duties after a loss, alongside prompt intimation, an FIR where needed and keeping records for verification. Disposing of damaged goods before the survey can reduce or complicate the claim.

Salvage example

A car has an IDV of ₹6,00,000. After a flood, the repair estimate is ₹5,10,000, which is 85% of IDV, so the insurer declares a CTL. Competitive quotes put the wreck at ₹1,20,000. The policy has a compulsory deductible of ₹2,000.

The cash loss option makes sense if the owner can sell the wreck for more than ₹1,20,000 or wants to keep it. Either way, the total value to the owner is about the same if the salvage estimate is fair.

What salvage means for distribution

• Explain it before a claim, not after. Many motor complaints come from customers who did not know that a CTL is settled on IDV, not on the invoice price, and that salvage may be deducted. The IDV conversation at sale and renewal is the right time.
• Return to invoice and zero depreciation covers interact with salvage. Brokers and dealers selling add-ons should know how each insurer settles a CTL with these covers, and say so plainly.
• Insist on competitive salvage quotes. On a cash loss, a low salvage value increases the deduction. The circular allows the policyholder to bring their own quote, and a broker or dealer can help get one.
• Commercial clients must protect salvage. For fire and stock losses, advise clients to separate and store damaged goods, not dispose of them, until the surveyor has seen them.
• Do not let channels buy wrecks cheaply. Dealers, garages or MISPs buying salvage from their own customers at low prices is a conflict of interest that insurers and customers should watch for.