Salvage: Dealing with Damaged Inventory After a Loss

ADJUSTING TODAY

Every Situation is Different

The case of the $90,000 oil painting

In the world and business of fine arts, perfection is paramount. The word salvage can have irreparable effects on not only the artist’s particular work but also their career in general. Salvage can mean not perfect and that can mean a “loss in value” to the owner of the painting. Reputable art dealers usually must insure an artist’s painting whether the gallery owns the work or the artist.

Several years ago there was a claim involv- ing an oil painting on canvas at a pres- tigious New York art gallery/dealer. The painting was valued at $90,000, which was the dealer’s selling price. The insurance policy covered the gallery inventory at full selling price. When the dealer received the painting it was in pristine condition having never had any prior damage.

Even in the most prestigious of art museums or galleries, accidents happen. The painting was leaning against a wall in the public area of the gallery waiting to be hung on display when one of the employees noticed a 2” x 2” right angle tear in the canvas. The cause and the responsible party were mysteries.

An art restorer was hired to first determine the repair cost to stitch up the canvas and retouch the painting. The artist in this case was not interested in repairing his painting. The restorer estimated the cost to repair the painting at $2,000. This was not much, considering the estimated 70% loss in value ($63,000) as a result of the tear. The repair cost and loss in value were covered by the in- surance policy and included in the insured’s claim. The underwriter’s total exposure for this claim was $65,000.

Although the painting was restorable, the re- stored painting was considered to be a “total loss” to the art gallery. The gallery was paid $90,000 for the painting (the insured value), and the insurance company took possession and ownership of the painting as “salvage.”

At the time of this claim a well-known New York City auction house was preparing an auction of similar works of art. The paint- ing was entered in the auction and was sold for $60,000.00 net of sales commissions. So here’s the math on this “salvage” operation:

Insurance company pay out to gallery $90,000.00

Restoration cost $ 2,000.00

Total outlay $92,000.00

Net salvage return $60,000.00

Net loss to insurer $32,000.00

In this case the art dealer’s loss was $90,000 and they were completely indemnified by their insurance policy and were not forced to deal with distressed goods. Heads up handling of the insurance claim, knowledge of the art market at the time, and proper handling of “salvage” reduced the insur- ance company’s payout for this claim. The insurance company’s loss was reduced by over $30,000. Everyone was satisfied as it was a win–win situation.

Expertise in Salvage

Journey of Canned Food

Another example of expertise in liquidating salvage can be colorfully illustrated with a loss involving canned foods. As stated earlier, someone with little knowledge of the potential market for damaged cans of food may view that type of salvage as worthless. However, to an expert salvor or experienced policyholder, distressed canned goods may have a variety of options open to them to recapture some of the goods’ lost value.

For example, take a fire in a supermarket in the United States. Cans of food might smell like smoke, have some rust or most probably have been exposed to high temperatures. If the Food and Drug Administration (FDA), or your state, county or city agency health department condemns the stock it must be disposed of, with no option for salvage. The insured, insurance company, and salvors have nothing to say in that determination. However, if the agency issues an “Order of Embargo” the items can be salvaged but must be handled in accordance with the law as it pertains to the safe consumption guidelines. This means that the owner of the salvageable items has options for handling the food, but they must be supervised and/or approved by the embargoing agency. The handling of the damaged inventory now automatically becomes either a “salvage or debris removal operation.”

Considerations in this example may include:


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