What is Salvage Value in Marine Insurance?

Marine insurance is a financial tool that compensates a shipper or cargo owner in case of an unfortunate loss or damage. This compensation or assistance requires the policy providers to calculate multiple elements, like the total loss, scrap value, total goods in cargo, cargo valuation, salvage value, and more.

So, what is marine insurance salvage value?

When cargo or a ship is declared damaged, the policy providers calculate salvage value, i.e., the estimated cost of the residual assets. This estimated residual value of the cargo is called the salvage price or value.

The amount can be recovered by selling the remaining parts, goods, materials, or assets. The evaluation of the residue is necessary to calculate the payable claim amount.

There are various salvage value calculators online that help you with the calculation after your shipwreck and damage. However, you need to know the primary formula required to calculate salvage value.

Salvage value in insurance is the amount of money the insurance providers get compensated after selling the parts of a disrupted vessel or goods present in it to an interested buyer. Once you understand the basic elements of marine insurance claim calculation, you can comprehend the calculation of salvage charges.

The policy providers get professional help from salvage yards while calculating the salvage estimated cost. The insurance company and salvage yards considers the following factors to calculate this:

• Initial value of the product

• The age of the product to calculate depreciation

• The cost of repair and restoration (if any)

• Current market value of the product

Salvage value = Initial value - (depreciation X life in years)

Once this amount is compared to the market value, the insurance company can make a reasonable offer for the payable amount on the claim you raised. Let us discuss an example and then some factors that affect the calculation of salvage price or the cargo.

A vessel is damaged due to a tornado that hit the Indian ocean. Luckily, the owner of the ship had purchased a marine cargo insurance policy and got the chance to save her financial stability. The owner raises a claim to the insurance company.

The company will take possession of the ship and send a surveyor to calculate the salvage price, among other values. The surveyor calculates the value after considering factors like age, depreciation, market price, and location of the vessel.

Some parts of the vessel and goods present in it are completely destroyed, while others are repairworthy. The surveyor takes notes and calculates the salvage value.

The surveyor will deduct the salvage charges from the claim amount submitted by the ship owner and finalise the remainder as the payable amount from the company’s side.

Age and Condition of the Asset

If the surveyor knows the product's age, it becomes easy to calculate its depreciation. If the product is new and sturdy, it can be repaired and restored. However, if it is old and in bad condition due to sea peril, it needs to be sold.

The items that are slightly or partially damaged have a substantial value. However, completely damaged and old vessel parts and goods hold no significance in salvage charges and their calculation.

Magnitude of Damage

A lot depends on the severity of the damage done to the parts and goods in the vessel. If we presume that the goods and vessel parts recovery is easily possible, it is considered valuable. The assets that are disrupted beyond recovery and repair are sold to the buyers at minimal rates and, hence, have little to no place in the salvage price calculation.

Market and Present Prices

Economic fluctuations, be it inflation-deflation or demand-supply, can significantly affect the salvage value. The salvage products are sold in the general market at the salvage yard. The economic factors affect the market value and hence, also the salvage estimated cost.

Location of the Cargo

Due to the hazard levels and possibility of encountering risks at certain locations, the location of the shipwreck influences the salvage charges. Wrecks in remote and hazardous areas incur higher recovery and repair expenses that reduce the net salvage value.

Like any other business, your export-import business also needs protection. All you need is an excellent insurance provider and good business insurance in India to safeguard all the elements your business consists of.

Salvage value holds substantial importance in marine insurance claims and the company’s liability towards the policyholder. After disruption or wreckage of the vessel, the repairs, compensation, and re-shipping consumes the business’s funds, pushing it in a further loss-making situation. Our Tata AIG marine cargo insurance offers the much needed financial respite in such cases.

Can salvage value in marine insurance be zero?

Yes. After a ship or cargo loss, if the surveyor only finds damaged and depreciated assets, assets that have been used for more than 5 years, the salvage value can be calculated as zero.

What are the types of losses on a maritime trade?

Various types of losses can lead to a shipwreck or loss, including actual total loss, constructive total loss, particular average loss, and general average loss.

What happens when a ship or cargo is declared a total loss?

When a ship or cargo is declared to be totally wrecked and damaged, the salvage value of the ship or cargo is deducted from the sum insured, and that is how the insurance company calculates the payable amount of policy.