Salvage: Dealing with Damaged Inventory After a Loss

ADJUSTING TODAY

Who’s Salvage Is This Anyway?

After a loss occurs it is the insured’s decision whether or not to surrender their damaged property to the insurance company for salvage. Likewise, an insured cannot force their insurance company to take the salvage. The insurance company will only take damaged goods for salvage if it will reduce their total loss payout. Regardless of whether the insured chooses to retain their dam- aged goods or turn it over to the insurance company as salvage, the value established for the damaged goods will be applied in the claim adjustment.

The insured may know their market for the liquidation of salvageable goods better than the insurance company’s salvor. An example would be a fire-damaged commercial sewing machine. A salvor may have several buyers for such damaged items and may be able to sell the machine for $10,000 to be used as spare parts. Thus at that moment the agreed salvage value of the sewing machine is $10,000 less handling charges and sales commissions.

However, the insured may consider the dam- aged machine as valuable spare parts as well and estimate the value of such to be more than the $10,000 as offered by the salvage dealer. In this case the insured could choose to retain the damaged sewing machine. The insurance claim payment would then be reduced by the $10,000 agreed salvage value as projected by the insurance company.

“Fire Sale” Considerations and Case Studies

A high-end, high-priced store (any kind of stock) has to take its “image” into consider- ation. One pricey boutique lost their clean, high-class business due to a fire sale. Their reg- ular customers stayed away and did not return on re-opening, as they perceived the boutique to be a “discount liquidator.” What took six years to build was lost in a 30-day fire sale.

Another example involves an appliance store in a small town. The salvor strongly suggested they remove the salvage and sell it to someone in the salvage selling business. The owner kept the salvage and held a fire sale, and made good money. The problem came when he re-opened for normal business. Business had slowed dramatically because high numbers of people in the small town took advantage of the fire sale and obtained their new appliance. Appliances typically last over 10 years and the owner had just “flooded his own market” with discount goods. Because of the small popula- tion, fewer people needed new appliances for years afterward.

A furniture store had scattered water damage to different areas of the showroom from a dam- aged roof from a storm. The salvor warned the owner about a “Storm Sale” but he thought it would be a good promotional event to increase business. The problem came when he was offering 50% discounts on only the one dam- aged piece of a set. The retail customer wanted the same 50% discount on whole five-piece furniture sets. It was also difficult to convince the customer that only parts of the store were damaged. The whole stock became suspect to customers.

Good practice following a commercial loss is to take pictures of the entire rebuilding process to display to your customers. Take pictures of the salvage dealer loading trucks. Take pictures of the empty store with all damaged stock removed. Take pictures of the contractors rebuilding the damaged areas. Take pictures of the new merchandise arriving in clean, factory sealed boxes. Then put up an “A” board at the front entrance to your store showing the rebuilding process. This helps rebuild the confidence of your customer base.

In some cases it may be necessary for the insured to sell their own goods rather than having the inventory removed for salvage.

A good example would be an insured that has a unique stock in a seasonal business. A swim- suit has a greater value to a retailer at a beach resort in the Caribbean in the winter than in the summer. Thus, a swimsuit retailer in the high season may not want slightly damaged inventory removed as salvage, as it would put them out of business until they could restock the store. It may be in the best interest of the retailer to keep the inventory and remain open for business, albeit holding a “fire sale.” Along with retaining a customer flow, this also allows insureds to hold on to key employees and lessen the possibility of being forced out of business by a competitor.

There was an actual case where a retailer salvaged their inventory only to find it in a competitor’s store holding a “distressed merchandise sale” down the block. Even if the damaged goods are sold at a loss by an insured sometimes it may be a better business decision not to salvage the damaged inventory.

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