What is Salvage and Subrogation?

Salvage and subrogation are two important concepts in the property and casualty insurance industry. They give insurers ways to recover part of the costs of claims they have paid out to policyholders. Understanding how salvage and subrogation work can provide insights into insurance company finances and operations.

What is Salvage?

In insurance, salvage refers to the recovery of value from damaged property that has been insured.

For example, if a car is totaled in an accident and declared a total loss by the insurer, the insurance company will pay the policyholder the actual cash value of the vehicle. This is usually the market value just before the accident occurred.

The insurer then takes possession of the damaged car. The insurer can sell the salvage vehicle or usable parts and components to auto salvage yards. Any money received from the sale of the salvaged car is called salvage recovery.

Some key points about salvage in insurance:

• Salvage represents recovered value from insured property that is damaged or destroyed.

• The insurer takes ownership of the property after settling a total loss claim with the policyholder.

• The insurer sells the salvaged property and keeps the proceeds.

• Salvage recovery offsets a portion of the claim payment made to the insured.

Salvage recovery applies primarily to first-party property insurance claims, such as auto, home, or business policies. It is generally not relevant to third-party liability claims.

What is Subrogation?

Subrogation gives insurers the right to legally pursue third parties responsible for losses paid by the insurer. It aims to make the liable party pay for the damage they caused.

For example, if another driver causes an accident that injures you, your health insurer pays your medical bills. With subrogation, the insurer can take legal action against the negligent driver to recover the claim costs.

Here are some key subrogation features:

• It involves the insurer pursuing compensation from negligent third-parties after paying a claim.

• The insurer is “subrogated” to the rights of the insured to sue the at-fault party.

• Subrogation attempts to make the liable party pay for the losses they caused.

• Amounts recovered offset the claims expenditures by the insurer.

Subrogation mainly applies to liability insurance lines like auto, homeowners, commercial general liability, and medical payments. The insurer exercising subrogation rights is limited to the amount paid to the insured.

Salvage vs. Subrogation

While salvage and subrogation both allow insurers to recoup claim costs, some important differences exist:

• Property vs. liability claims – Salvage relates to recovery of value from damaged property in first-party insurance claims. Subrogation deals with the legal pursuit of third parties responsible for liability claims.

• Tangible asset vs. legal claim – Salvage involves taking possession of and selling a tangible damaged asset. Subrogation is pursuing a legal claim against a liable party.

• Insurer ownership vs. legal substitution – With salvage, the insurer takes ownership of the property. With subrogation, the insurer is subrogated to the policyholder’s right to take legal action.

• Settlement finality – Salvage recovery is part of settling the first-party claim with the insured. Subrogation often involves lengthy litigation before resolution.

• Salvage = insurer recovery from taking ownership of damaged insured property

• Subrogation = insurer recovery by pursuing legal action against liable third parties

Why Do Insurers Pursue Salvage and Subrogation?

Salvage and subrogation help insurers lower net claim costs and claims loss ratios. This benefits insurers in several ways:

• Reduce claims payments – By recovering part of claims through salvage/subrogation, insurers reduce their overall claims expenditures.

• Lower loss ratios – Lower net claims help improve underwriting profitability by reducing the insurer’s loss ratio.

• Enhance underwriting results – Improved loss experience contributes to better underwriting and operating profits.

• Minimize premium increases – Keeping claims costs down through salvage/subrogation helps limit future premium increases.

• Offset inflation – Recovery of claim costs aids insurers in periods of claims cost inflation.

Salvage and subrogation act as risk management tools for insurers. They provide ways for insurers to manage claims expenses, enhance underwriting performance, and maintain pricing competitiveness.

Salvage and Subrogation Process

How do insurers actually obtain salvage and subrogation recoveries after paying claims? Here is a general overview:

Salvage Process

• Insurer declares insured property (e.g. car, home) a total loss after a covered event.

• Insurer settles first-party claim by paying the insured the value of the damaged property.

• Insurer takes legal ownership of the damaged property.

• Damaged property is sold at salvage auctions or to parts salvors.

• Insurer receives salvage proceeds and allocates them to the claim file.

Subrogation Process

• Insurer pays claim to policyholder for losses caused by a negligent third party.

• Insurer’s legal team investigates fault and liability.

• At-fault third party and their insurer are notified of subrogation claim.

• Negotiation/litigation is used to resolve claim if needed.

• At-fault party or their insurer eventually reimburses the insurer’s losses.

• Recovered funds are allocated to the appropriate claim file.

Salvage and subrogation involve distinct processes, but both offset portions of claims paid out by insurers.

Key Statistics on Salvage and Subrogation

Salvage and subrogation represent significant recoveries for insurers each year:

• In 2021, over $51 billion was recovered by insurers through salvage/subrogation for auto physical damage, commercial auto liability, and personal auto liability claims.

• Salvage accounts for the majority of recovery, with over $31 billion recovered for auto physical damage claims in 2021.

• At the industry level, salvage represents about 20% of net claims paid for auto physical damage coverage.

• Subrogation typically accounts for 1-2% of net claims paid for most auto liability coverages.

• Auto lines generate the largest salvage and subrogation recoveries, but other major sources include workers compensation and property insurance.

Though amounts vary by insurer and line of business, salvage and subrogation collectively help recover billions for the insurance industry every year.

Salvage and Subrogation – Additional Insights

Here are some other notable points about salvage and subrogation in insurance:

• Most insurers actively pursue salvage and subrogation to help control claims costs and improve underwriting results. However, practices and prioritization vary by company.

• Larger insurers tend to have dedicated salvage/subrogation units and more resources to pursue maximum recoveries.

• State regulations may limit or prohibit the use of subrogation for certain types of policies or claims.

• Insurers can outsource salvage and subrogation functions to third party administrators (TPAs) that specialize in recoveries.

• New technology like advanced claims software has helped improve efficiency and speed of salvage/subrogation processes.

• Insurance policies specify the insurer’s rights to salvage and subrogation. Policy language can impact the extent of actual recovery.

Conclusion

Though they operate differently, salvage and subrogation both allow insurers to recover portions of claims already paid out. These concepts are important because they represent significant cost savings that benefit insurers and policyholders. Understanding how insurers pursue salvage and subrogation also provides insights into insurance company incentives, operations, and financial results.