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Salvage
- is the money (cash, cheques, credit notes, etc) received after the account has been frozen due to it's age or due to known problems with your customer. The issue you need to be aware of is that (and again each insurer is different) if you do not have a sufficient credit limit to cover the debt, you may find that the salvage monies are split "Pro-Rata" between you and the insurer, (see further down for an example).
Where did the Salvage clause come from? -
Salvage came from a court case in the 1930's when a timber yard went up in flames - or rather half of it and they were
under-insured and only had the equavalent of half the yard covered. The argument put forward by the timber company was
that the insurance company should pay out the full policy entitlement (timber worth £60k, policy worth £30k
fire damaged £30k therefore they were covered), however, the insurer refused to pay on the basis that they were
covering £30k of timber and he still had £30k of timber - in a nutshell - whose is to say what went up in
smoke - the insured timber or the uninsured timber and how do you differentiate? The judge therefore concluded that
the timber that was left should be split between the two parties 50/50 - "PRO RATA" (had the timber yard had £45k
of cover then it would have been 75/25 in favour of the timber co) and the salvage clause was born.
Pro-Rata example - debt £30k Credit limit £25k monies recovered £10k - you work out what proportion
of the debt was covered and then apply that percentage to any money recovered so in this case 25k div by 30k equals 83
percent so of the 10k recover, 83 percent would go to the insurer, let try another - debt 30k credit limit 15k monies
recovered 15k so, 15k div by 30k equals 50 percent apply this to the money recoved - in this case half and therefore 7,500
would be allocated against the insured debt and 7,500 against the unisured debt (and opening a new account and continuing to
trading on cash - without the consent of the insurer any such trading and money subsequently received is considered to be
salvage money) at the end of the day the insurer is not looking for ways to get out of paying the debt, they are just taking
a fair and reasonable approach, you can't expect them to bail you out if you have not taken "due care and prudence" to
mitigate the debt.
So at the end of the day it is important to either have a credit limit to cover the debt or keep the account within
the credit limit or at least be aware of the risk you run. (Not all salvage clauses run this way - one insurer runs a first
in first out approach, although this doesn't always run in the favour of the policyholder - it can be very much case by case
if you want specific examples and more information, please get in contact).