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.