The insurer can recover value on damaged goods through the use of salvage. John Ball goes through the checklist

Disposal of damaged goods is an important part of mitigating insurers' losses. But it is important that those handling claims go through a checklist if they want to obtain the best arrangement for both the insured and the insurance company.

Claims handlers will have to work with policyholders to agree a course of action that achieves the best realisation that is satisfactory to both parties. Any salvage realisation should be set against the agreed loss as a credit to the claim. The salvage realisation is deducted before application of average, co-insurance or any excess. For a VAT-registered trader, the realisation net of VAT is credited to the claim.

However, before considering disposal to salvage dealers, it is worth considering other actions that could mitigate the loss.

Not acceptable
Some examples of how goods no longer regarded as acceptable to the policyholder might be handled are as follows:

Cleaning. Chemical deodorisation to remove the smell of smoke and professional cleaning may restore fire-damaged goods to a condition approaching that prior to the loss. It is, however, essential that prompt action is taken. Anything made of ferrous metal will begin to corrode within a few hours of a fire. Other property will also deteriorate if not treated quickly. The goods may still have to be sold as substandard with their provenance disclosed, but the realisation should be higher than if they have not been treated. The policyholder may even then be willing to sell them, suitably marked, for an agreed discount, through his usual outlets.

Trimming. Goods sold by the piece in standard sizes should be trimmed to the next smaller size if only partly damaged around the edges or at the ends and the remainder sold at full value.

Repacking. Sometimes, stock is so well packed that while its packing is damaged, the product itself may be undamaged by the fire or other peril. If so, it can be repacked, producing prime merchandise which can then be sold in the usual way. You should, however, take care to ensure that repacking, which may require working out of sequence and enhanced costs as a result, does not exceed the sound value of the stock.

Sale by public auction. There is no reason why you should not dispose of the goods yourself through an auction. In this way you can be certain of obtaining the market value, which may be higher than the offer from a salvage dealer.

Damage allowance. Probably the best return is achieved by negotiating a realistic damage allowance with the policyholder, leaving the goods with him to dispose of through his normal outlets in the usual way. Skilled negotiation may be required. Many policyholders will be reluctant, especially if the sale of damaged goods may be thought likely to damage the market for their normal undamaged goods.

Salvage dealer as agent. If you are dealing with particularly unusual items where the value may be difficult to ascertain, instead of asking a salvage dealer to bid for the goods, there is no reason why you should not ask him to act as agent in return for a negotiated commission.

Should you decide to dispose of goods through a salvage dealer, you must ensure that the terms on which the goods are passed to him are clear between all the parties. It would be sensible to do this in writing.

The opportunity should then be taken to incorporate any special conditions that may be relevant, for example de-labelling of goods.

Do not accept referential bids. A referential bid is one where the dealer will offer, for example, £100 more than any other bid received. You are much more likely to receive realistic bids if each dealer has to consider the true value of the goods.

Written confirmation
You should take care to ensure there is full agreement of the policyholder for the disposal of the goods. If there is any doubt, obtain confirmation in writing. This will also give the opportunity of establishing whether conditions such as de-labelling will apply.

De-labelling can create problems. In particular, under the Food and Drugs Acts, foodstuffs must be properly labelled. If the manufacturer's label is removed and, in so doing, the list of ingredients is also destroyed, an offence will be committed if those goods are then sold.

Care must also be taken in connection with pharmaceuticals (includes many things like harmless cough mixtures) as this merchandise comes within the scope of the Pharmacy and Poisons Act 1933. Such merchandise may be sold only by registered pharmacies under the supervision of a pharmacist.

When selling goods, always make sure payment has been received before the goods are released. Always make the salvage dealer responsible for insurance of the salvage goods, if in his possession prior to the sale being completed.

There may be occasions when a policyholder will not, under any circumstances, permit stock to be released on to the open market. This may occur when goods are unique to the policyholder and easily recognisable even if de-labelled.

In such cases, it may be appropriate to establish an independent assessment of the salvage value of the stock. This can best be achieved by approaching a reputable salvage dealer and asking for a notional bid. A fee for the time involved would have to be negotiated.

Question 1
A claim has been agreed at £1,000, subject to a salvage realisation of £300 and a reduction of 50% due to underinsurance. Will you pay:

a. £500
b. £350
c. £200.

Question 2
In respect of a VAT-registered trader you seek tenders for the disposal of salvage. Which should you accept?

a. £1,150 including VAT
b. £1,150 plus VAT
c. £100 more than the highest other bid received.

Question 3
Your policyholder insists that his own-brand goods, which are slightly damaged, should not be sold by others and he refuses to sell them himself. How can you establish a salvage realisation?

a. Insist that you have the right under the policy to take possession and sell the goods for the insurer's benefit
b. Seek a notional valuation from a salvage dealer for a fee
c. Remind the insured he cannot abandon goods to the insurer and insist he sell them.

John Ball is a past president of the Chartered Institute of Loss Adjusters and an examiner and director of the Society of Claims Technicians (SCT). He is also author of the study manual for the SCT's Practical Claims Handling and Property Claims exam, which has just been published.

For more details about SCT, call 0207 337 9960.

This CPD page is edited by RW Associates, specialists in training, competence and compliance.

Email ruy.lopez@rwassociates.softnet.co.uk.

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