In the world of insurance and asset-heavy industries, all eyes are typically on big-ticket items — policy claims, premium collection, and operational risk. But lurking in the shadows is a low-profile, high-impact problem that's quietly draining value from balance sheets: salvage fraud.
While not as sensational as staged collisions or inflated invoices, salvage fraud is often systemic and undetected, especially in businesses that deal with high volumes of returns, damaged goods, or warranty claims.
What Is Salvage Fraud?
Salvage fraud occurs when damaged, returned, or written-off items — which still hold residual value — are misappropriated by the very people entrusted with disposing of them. These items are supposed to be sold, auctioned, or destroyed, but instead, they may be diverted, undervalued, or sold off informally for personal gain.
This isn't limited to the insurance industry. It affects:
- Retailers dealing with high-volume returns
- Manufacturers handling warranty parts
- Construction and auto industries with equipment write-offs
- Logistics firms responsible for damaged inventory
Real Example: A Car Quietly Written Off
In one investigation, our team was engaged by the head office of a major auto dealership chain. A customer had returned a vehicle twice, citing minor defects. Instead of undergoing a proper evaluation or being repaired for resale, the car found its way into the customer service department, where it was quietly written off the books.
Despite being in almost perfect condition, it disappeared from inventory without a trace — no auction, no resale, no recovery. Because it was "damaged" and outside the core business focus, no one followed up. And no value was reclaimed.
The "Destroy to Dispose" Loophole
In many industries, parts and products that are returned under warranty or recall are required to be destroyed. This is often done to prevent damaged, outdated, or brand-sensitive items from entering the resale market at a discount — something manufacturers want to avoid to protect brand integrity and pricing power.
But here's the problem: When a company expects the item to be destroyed — not sold — and has already budgeted for disposal costs, it becomes even easier for internal actors to write off the item and quietly divert it.
If no one expects revenue from a destroyed item, there's no red flag when nothing is received. That's the loophole.
The Typical Scheme
Here's how salvage fraud often plays out:
- An item is returned or deemed unfit for regular sale.
- A manager or staff member marks it for destruction or disposal.
- Instead, the item is sold privately, often to a friend or contact.
- Because no proceeds were expected anyway, no questions are asked.
Over time, this creates a low-risk, high-reward opportunity for fraud, especially when oversight is weak or nonexistent.
Why This Matters
Each case might seem minor, but over time, the cumulative losses can be substantial. Even worse, salvage fraud creates a culture of dishonesty and entitlement — and it often spreads if left unchecked.
Organizations face:
- Undocumented financial losses
- Inventory and audit discrepancies
- Reputational damage if the fraud is exposed
- Legal risk if regulatory or tax reporting is affected
How to Prevent Salvage Fraud
- Track salvage value – Keep records even for items marked for destruction.
- Implement clear chain-of-custody protocols – No single person should control the disposal process.
- Audit salvage and disposal activities – Especially those showing zero revenue.
- Use third-party disposal or auction services – With transparent records and verification.
- Educate staff – Make clear that "damaged" or "returned" does not mean "valueless" or "free to take."
Final Thought
Salvage fraud thrives in blind spots. Whether it's a slightly damaged vehicle, a batch of electronics returned under warranty, or parts earmarked for destruction — if it has value, it carries risk.
It's time for insurers, manufacturers, and retailers to rethink how they handle salvage. Those items written off the books may be more valuable — and more vulnerable — than anyone realizes.
Fraud doesn't always wear a mask. Sometimes, it just wears a company badge and walks out the side door with a "worthless" return.
