Abandonment and Salvage

What Is Abandonment and Salvage?

Abandonment and salvage describes the forfeiture of property and the ensuing claim over that property by a second party. Salvage and abandonment clauses are most commonly found in marine insurance contracts.

Understanding Abandonment and Salvage

Abandonment and salvage is a term that can surface fairly frequently in insurance contracts. When such a clause is present, it indicates that the insurer has the ability to rightfully claim an insured asset or piece of property that has been destroyed and subsequently abandoned by its owners.

For the insurer to salvage the item, the owner must first express an intent of abandonment in writing. Once that process is complete, the insurance company could choose to take full possession of the damaged property after paying out its insured value to the policyholder.

The selling value of the property can surpass the amount paid out on the claim, so salvage rights are sometimes legally contested by several parties.

Examples of Abandonment and Salvage

In marine insurance, the insured has the right to abandon the property subject to acceptance by the insurer. If acceptance is granted, the insurer pays a total loss, usually the maximum settlement possible according to the terms of the insurance policy, then takes over the salvage as owner, regardless of any amount received from its subsequent sale.

Non-marine policies usually prohibit abandonment by the insured and the claiming of total loss. However, the insurers may waive this condition in appropriate circumstances, if merited. For example, if a vessel sinks and is deemed too expensive to reclaim, it may be declared abandoned. The insurer could then claim ownership and salvage rights to the sunken ship. 

Alternatively, cargo on a vessel may be damaged by insured peril, such as lightning or being washed overboard, resulting in a total loss of the cargo. The insured files the claim, and the insurer settles the claim for the total loss.

The insured must transfer all rights, ownership, and interest of the damaged cargo to the insurer, after which the insurer becomes the owner of the damaged remaining cargo, which is known as salvage. The process of transferring rights of the damaged asset or property is called subrogation.

Special Considerations

In cases of partial loss and salvage, the insured can claim only the amount of the loss or damage sustained, meaning they cannot abandon the property and claim full value.

If the insured surrenders the remains of the property and the insurer also agrees to accept the salvage, the claim would be paid in full and the insurer would become the owner of the salvage. In cases of clear-cut total losses, insurance would pay in full, so the insurer is entitled to the benefit of the salvage.

With an underinsured total loss, the insured would not be fully covered. They would be entitled to salvage, but only to the extent that the loss payment plus the value of salvage does not exceed the full loss or actual indemnity.

In the case of full coverage, on the other hand, the loss would be paid in full. The insurers become the absolute owners of the salvage, if any, and the total sale proceeds belong to them, even though the proceeds might be more than the amount of the claim paid.