Jargon & Myths put to rest
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. 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. - side note: this is the uk view for salvage and relates to travel insurance, fire insurance, etc. However, there is one credit insurance company that takes a different view, they offset any salvage monies received to the oldest part of the debt, this does (99 percent of the time) work in your favour.
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).
Due Care and Prudence - Credit insurance is very much an intangible product in that it is not about picking the tab up at the end of the day but is there to help you trade upwards with confidence in the knowledge that should a customer go belly up on you that your cash flow will be protected and it is there to help you try and avoid any bad debts - some people look at credit insurance as an investment and that they should get some money out of it to justify the premiums, but what of fire insurance, do you want a fire every year to justify the premiums? So the insurer enlists "Due Care and Prudence" and would expect you to take every care to avoid a bad debt as though you were not insured, if you take this stance, then you could reasonably expect the insurer to pay out should you hit a problem - the relationship between you and the insurer is one of trust.
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