4 ADJUSTINGTODAY.COM A brands and labels endorsement could stipulate that no items bearing certain brands and labels can be sold in second-hand or salvage markets. Alternatively, the endorsements can cover the costs of removing or obscuring labels so the goods can be sold as salvage while limiting the impact on the brand. How Low Can You Go? The equation on page 3 should clarify for insureds a fact that may seem counter-intuitive: It is generally in the insured’s interest to establish the lowest reasonable salvage value for property. Pride of ownership or confdence in their market savvy shouldn’t blind insureds to this reality. If a commercial insured retains property for salvage, the lower the estimated salvage value, the less the salvage debit — and the greater the insurance payment. If an insured ends up earning more than expected on the salvage sale, the insured may have to reimburse the insurer for a share of the loss payment, but the insured is still guaranteed a certain amount of recovery. On the other hand, when policyholders retain property for salvage, insurance companies have an interest in pursuing the highest reasonable salvage value for that property; this increases their salvage debits and reduces their payouts, while insureds retain the market risk for selling the salvage. Not to fear, however. These competing incentives are not a formula for contention, as both parties have countervailing incentives not to seek too high or too low a value for salvage. For purposes of estimating loss development and reserve requirements, insurers must avoid overestimating the value of salvaged property. To do so could not only lead to adverse loss development and inadequate reserves, but also to bad-faith claims were it ever determined that diferent estimates of the same property values were used for diferent purposes. Similarly, insureds cannot “lowball” their salvage estimates excessively without, at some point, driving down the value of all damaged property and reducing their insurance loss recovery. How Much Coverage? The basic principles concerning salvage work well enough — as long as the amount of applicable insurance (the “limit” on the policy declarations) meets or exceeds the total amount of a loss. Things get complicated when the applicable limit is less than the amount of the loss. In that case, the parties have to decide if and how to allocate the value of salvage between the share of the loss that is covered under the limit and the remaining loss that is uninsured. Among other factors, that determination will rely upon varying laws governing loss settlement in diferent jurisdictions. The topic is hotly contested between those who believe insurers have a right to salvage for any property they have covered, and those who believe salvage rights reside exclusively with insureds unless and until they are made whole. Three Basic Approaches To illustrate, suppose there is a $100,000 loss to property that is insured for $75,000, and the parties agree that the damaged goods have a salvage value of $25,000. For purpose of simplicity, we will presume there is no deductible or coinsurance requirement. Depending on the applicable law and the wording of a policy, there are three potential approaches to settling the claim: • The insurer pays the full $75,000 limit and assumes all of the salvage, leaving the insured with a fnal loss of $25,000.
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