Short-term insurance and salvage – what

you and your clients need to know

Masthead + Follow
Risk management for financial services providers to thrive in an ever-
changing regulatory world
Published Jun 14, 2023

If a claimed item is found damaged beyond repair by the insurer and the insurer has
indemnified the policyholder, the policyholder can’t hold onto the item or simply give
it away or sell it. The item belongs to the insurer who has the right to salvage the
remains of the damaged item. We explain how salvage works in the short-term
insurance environment.

Did you explain to the policyholder why they can’t keep the item?

It all comes down to the basic principle of indemnity. The insurer agrees to indemnify
the policyholder when an insured event happens which means placing the policyholder
in the same financial position following the claim as what the policyholder was prior to
the claim; not in a better or worse position.

As soon as the insurer indemnifies the policyholder, the ownership of the salvage
transfers to the insurer. Insurers have various commercial arrangements in place to
obtain the best price for salvaged goods. The recovery of salvaged goods is an
essential part of mitigating claims costs by insurers which ultimately contributes to the
containment of premium increases.

What should happen if the policyholder is not fully indemnified?

Items covered under a short-term insurance policy is generally covered for their
replacement or retail value, unless otherwise specified in the policy contract. However,
the claims pay-out is always limited to the sum insured.

So, what happens if the policyholder is underinsured, i.e. when the value of the item is
materially higher than the sum insured?

The policyholder becomes his own insurer for the portion of the underinsured loss and
will therefore not be fully indemnified. Consequently, the policyholder should be
entitled to the same portion of the salvage amount.

How should you advise a policyholder if their claim is rejected?

Upon receipt of a rejection letter, the policyholder should immediately enquire about
the salvage that is the subject of the claim unless the information is provided in the
rejection letter. Usually, the insurers will grant a grace period for the policyholder to
remove the salvage before storage fees are charged. The policyholder should therefore
act without delay and make a best effort attempt to get the highest recovery amount
for the salvaged item. Often, this can be done by making use of the insurer’s salvage
dealer or auctioneer, and this will also prevent towing and storage fees in the case of
motor vehicles.

Should the claim rejection be overturned later, the policyholder would be able to show
that he acted with due care in mitigating the loss.

Why would an insurer want a salvage item that has no commercial value?

The reason is simple: fraud prevention. Many of these items find their way back into
the market to be comprehensively insured yet again even though they have no
commercial value, waiting to be claimed for a short while later. Insurers generally have
these items destroyed.

How do insurers decide that a claimed item is beyond repair?

There are a number of reasons why. Firstly, the item might be found to be a write-off
which means it is not safe to repair or the item might be uneconomical to repair, which
means it will cost more for the insurer to repair the item than to pay for the item as a
total loss.

When it comes to vehicles, the insurers will use a guideline such as the cost of repairs
and the value of the salvage. So, say the value of the salvage is 30% of the value of the
vehicle and the repair costs exceed 70%, the vehicle would be uneconomical to repair.

Can a policyholder keep the salvage under certain circumstances?

Insurers are generally committed through their commercial agreements with their
salvage dealers and auctioneers to supply all total loss items to them with no
exceptions. This is to make these agreements economically viable for the salvage
dealers and/or auctioneers as these parties need to take the good with the bad. What
does that mean? One item might have zero value where another could have a decent
value.

There is no harm in the policyholder approaching the insurer requesting to purchase

the salvage. The insurers will generally refer the policyholder to their salvage dealer or
auctioneer.

Some insurers might allow a cash-in-lieu payment, where the value of the salvage will
be deducted from the settlement, in circumstances where the vehicle is a very old
model and is only a total loss because of expensive part prices. In these circumstances,
policyholders might be able to source second-hand parts at much cheaper prices and
repair the vehicles themselves. However, there is no obligation on the insurer to do
this, and as mentioned, the insurer’s commercial agreements might prevent such a
decision.

The Code of Motor Salvage

A Code of Motor Salvage have been agreed to between the South African Insurance
Association (SAIA), the Banking Association South Africa (BASA), and the National
Motor Financing Association (NMFA). This code is also supported by Business Against
Crime SA (BACSA), the South African Police Service (SAPS) and the South African
Insurance Crime Bureau (SAICB).

The purpose of the Code on Salvage (Code) between the short-term insurance and
banking industries; and specifically, the SAIA and its members, the BASA and its
members, as well as the NMFA and its members; is to establish a common approach
when dealing with motor salvage. The goal is to assist in combating motor vehicle
crime and specifically the cloning of motor vehicles to the benefit of all role players
and ultimately the South African public. In addition, the Code also aims to ensure that
consumers are treated fairly regarding the processes followed and decisions made
related to accident damaged and/or stolen recovered vehicles.

Insurers and banks have a moral duty to the consumers to safeguard them from
unscrupulous operators who are selling and or putting back in use unfit and unsafe
motor vehicles, which should have been deregistered, as code 2 motor vehicles.

It is a relief that vehicles that cannot be repaired safely will be permanently demolished
and will not be allowed back on the roads in terms of the Code.

The Code can be accessed here on the SAIA website.

Should a vehicle be written off, the policyholder will be required to sign deregistration
forms and should as vehicle be uneconomical to repair the policyholder will be
required to sign transfer of ownership forms.

Finance Agreements

Should a vehicle be found to be a total loss, the policyholder will be required to

provide the insurer with a settlement letter from the finance institution. The insurer is
obliged to settle the credit provider to the extent of their insurable interest.

Second-Hand Goods Act 2009

Upon entering into commercial agreements with salvage dealers, insurers will, as part
of their due diligence, ensure that the salvage dealers are registered in terms of the
Second-Hand Goods Act (the Act).

The Act regulates the business of dealers in second-hand goods and pawn brokers. It
aims to prevent consumers from being conned, but – more importantly – to combat
trade in stolen goods. The Act falls under the authority of the Minister of Police, and
every person who carries on a business dealing in second-hand goods must be
registered with the National Commissioner of the SAPS. It is a criminal offence not to
do so.

Upon registration, the National Commissioner will issue a certificate, authorising the
dealer to carry on business. The certificate will specify the classes of goods, the
premises and any other conditions of the authorisation. A dealer must keep a register
in which certain particulars regarding every acquisition or disposal of second-hand
goods is recorded.

In conclusion, it is evident that when it comes to claim salvage, the important

considerations for an advisor should always be providing clear information upfront,
policyholder safety, combatting fraud and mitigating claims costs.

Subscribe here to receive more articles like this from Masthead.

Like Comment Share 19

To view or add a comment, sign in

More articles by this author

How amendments to the Boosting corporate Client retention 101: How

Trust Property Control Ac… transparency: Beneficial… build lasting customer…
Dec 6, 2023 Nov 8, 2023 Oct 20, 2023
Insights from the community

Commercial Real Estate

How can you protect your clients from liability and risk with common lease clauses?