Claims & Salvage
How losses are distributed and salvage rights work for underwriters
TL;DR: Claims are charged first to the specific underwriter attached to the policy, not socialized across the whole pool. Salvage follows the actual payout split: underwriter-funded loss to the syndicate, private reinsurance salvage to the hook, protocol-funded salvage to the backstop.
How Losses Are Distributed
For intent-backed policies, LayerCover does not spread the first loss across every LP in the pool. The claim is charged to the policy's named underwriter first. The protocol then sources liquidity in a fixed order and only uses protocol-wide funds if the underwriter-backed liquidity is insufficient.
What this means in practice:
- Your first-loss exposure is capped by the capital actually attributed to your syndicate / underwriter position.
- A private reinsurer is only involved when the policy was minted with a non-zero
reinsuredPortion. - Backstop and treasury are fallback liquidity, not proof that the hook actually paid.
- If every layer is exhausted, the claimant can be partially paid now and claim the remainder later as debt.
For the exact live funding order, fee treatment, and debt path, see Payout Waterfall.
Salvage Rights
When a claim is paid, the protocol receives distressed assets from the policyholder (e.g., depegged USDC, exploited vault shares). These are then routed according to who economically funded the payout.
What Are Salvage Rights?
- Tokenized claims on distressed assets held by the protocol
- Tradeable on secondary markets - sell to distressed debt funds or speculators
- Recoverable - if the underlying asset recovers value, you benefit
Who Receives Salvage?
- If the payout was funded by the underwriter, that salvage is assigned to the syndicate / underwriter side.
- If a private reinsurance hook actually funded part of the payout, that matching share of salvage is assigned to the hook.
- If the payout was substituted by the backstop or treasury, that salvage is assigned to the protocol side.
- If no immediate payout happened at all, salvage is routed entirely to the backstop side while the claimant keeps an outstanding claim debt balance.
Recovery Scenario
| Outcome | You Receive |
|---|---|
| Asset never recovers ($0) | Salvage rights are worthless - your loss is final |
| Partial recovery (e.g. $0.60/$1) | You can redeem salvage for recovered value |
| Full recovery ($1/$1) | You recoup most or all of your loss |
Example: You suffered a $20K loss backing a depegged stablecoin. The stablecoin later re-pegs. Your salvage rights are now worth ~$20K - effectively making you whole (minus opportunity cost).
Trading Salvage
Can't wait for recovery? Salvage rights are transferable, so you can:
- Sell on secondary markets - Distressed debt funds buy salvage at a discount (e.g., $0.20–$0.50 on the dollar)
- Hold for upside - Wait for potential recovery
- Transfer - Move to another wallet or entity
Claim Outcomes
After claim execution, one of three things happens:
- Fully paid: claimant receives the whole net payout in the same transaction.
- Partially paid: claimant receives what was available and the remainder becomes outstanding claim debt.
- Reinsurance shortfall substituted: claimant is paid, but the hook now owes backstop, treasury, and sometimes the syndicate if they substituted for the hook.
Private reinsurance reduces your economic exposure only if the hook actually funds its share or is backed by enforceable collateral. Otherwise the protocol can substitute temporarily and book a receivable against the hook.