Salvage

Written by Ziyad Bakkali

Reviewed by Daniel Mirkovic

Updated May 29, 2024 | Published May 28, 2024

Noun

Sal·vage | ˈsal-vij

Definition: Damaged property taken by an insurer after compensating the insured for their claimed loss.

“After Maria’s car was totaled in an accident, her insurance company declared it salvage and took ownership of the wreck.”

The important points

  • Salvage is the acquisition of damaged property by the insurer after reimbursing the insured for their claimed loss.
  • Salvage is not limited to just cars but can also include bicycles, furniture, artwork, jewelry, buildings, and machinery.
  • Insurers take salvage to recover some of the claim payout. They might sell the property, or dispose of it responsibly if it has no value.

What is salvage?

Salvage is the leftover value of a partially damaged or recovered lost item that the insurance company takes ownership of after paying an insured for the item (indemnifying them for the loss).

It’s a common misconception that salvage only applies to cars. It actually applies to any property covered by insurance that is damaged or lost. This includes bicycles, furniture, fancy jewelry, or even a prized piece of art. It can also apply to business property like machinery.

How does salvage work?

When an insurer acquires salvage, the first thing they’ll do is assess the extent of damage to the property. They’ll do this to determine if there is anything of value left that can be sold to recover a portion of the claim they’ve paid.

If the insurer determines the property has little-to-no commercial value, they’ll typically destroy or donate it. But this only happens in rare and extreme cases. Most of the time, if the damage is not extensive, insured property can be repaired or restored.

Salvage in home insurance

In home insurance, salvage often comes into play after a significant loss from an insured peril, such as fire or theft. Home insurance policies usually cover losses from these insured perils when they are sudden and accidental in nature. In some cases, if you’re lucky, there might still be parts of your property that are relatively undamaged, and that bear a chance to be repaired or restored.

Consider the following example of a stolen bike:

Example

One day, Sarah’s beloved bicycle was stolen from outside her house. Devastated by the loss, she immediately filed a claim with her insurance company and reported the theft to the police.

The insurer promptly processed her claim and paid Sarah the replacement cost of her stolen bike, with which she buys a new bike.

A few weeks later, Sarah received a surprising call from the police – her stolen bicycle had been recovered! Sarah advises her insurer, as it now holds legal ownership of the recovered bike (salvage). At this point, the insurer will usually offer the insured, Sarah in this case, the option to buy back her original bike at its fair market value. If Sarah doesn’t want the bike, the insurer would then try to sell the recovered bicycle at its fair market value to an interested buyer. The proceeds from this sale would help the insurer recoup some of the costs incurred from Sarah’s claim payout.

It’s important to keep in mind that insurance is a two-way street. While you do pay for coverage through your premiums, you also have a responsibility to protect your belongings. If a pipe unexpectedly bursts in your home and causes water to escape, it’s expected that you’ll take reasonable steps to minimize the mess. You should also take any action possible to prevent further water damage from occurring.

There’s a legal reason for this: the duty to mitigate is a statutory condition within most insurance policies. If you intentionally cause damage or neglect to prevent further damage to your house, your insurer might deny coverage for what could have been saved.

Salvage in car insurance

When it comes to car insurance, you might hear the term ‘salvage’ quite often.

Imagine you’re in a major car accident and your car is mangled. You file an insurance claim, hoping your insurer will fix it or reimburse you for the damages. But what if fixing it costs more than the car is actually worth?-

If the actual cash value (ACV) of your car is less than the cost to repair it, the insurance company will classify the car as a total loss. Why? For the insurer, it doesn’t make economical sense to fix your car if it’s just cheaper to buy a comparable one, based on year, make, model, and mileage. So instead, they’ll give you a cash settlement equal to the car’s ACV and take the car as salvage. After this, they might sell it for parts or write it off completely.

Luckily, not all accidents are total losses. Usually, the damage isn’t that serious. So, the insurer will repair the car because it makes sense for them financially.

What is a salvage title?

A salvage title means a car has been wrecked, flooded, or otherwise damaged so badly, that it’s unsafe to drive. It’s essentially a kind of label that says “Hey, this isn’t your average used car — it’s been through something major and needs significant repairs.”

Most insurance companies have business agreements with scrapyards and auctioneers who specialize in buying salvage titles. These buyers know the market — they’ve seen plenty of beat-up cars before. They’ll place a bid on your car (or its parts) based on what similar salvage inventory has sold for recently.

A private individual, like yourself, can also buy a salvage title. The only catch is, you can’t legally drive it, even if it seems driveable until it is fixed and certified as safe to drive again. To achieve this, you’ll need to change the car’s title from salvage to rebuilt.

To get a rebuilt title, you’ll need to:

  1. Take the car to a mechanic or auto shop to fix the damage.
  2. Pass a safety inspection by a government-approved inspector or facility. In Canada, these are called Designated Inspection Facilities, or Vehicle Inspection Stations.

Once you clear these hurdles, you’ll have one more thing to consider: insurance.

Normally, insurance companies don’t insure salvage title cars. Its value is already so low that it’s not worth insuring. A rebuilt title on the other hand can be insured, but you’ll likely have to pay higher premiums.

It’s important to note that while repairs can address many issues, it doesn’t guarantee that all problems are gone. Sometimes, there might be minor defects or worn-out parts that even the best mechanic might miss at first glance. These little issues might not seem like a big deal right now, but they could end up causing problems or even become a safety hazard later on. So, if you’re thinking about buying a salvage title car, be sure to factor these risks into your decision.

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.

About the expert: Daniel Mirkovic

A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.

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