Generally speaking, we don’t like taxes or for that matter, tax questions. Who does? But we’ve recently seem a number of issues concerning the inclusion of taxes in automobile total loss claim settlements. Looking at market conduct exams, we can easily see at least 16 states that have cited companies for failing to include or properly calculate tax on their automobile claim payments in recent years (AZ, CT, CA, CO, IL, KY, MD, NE, NJ, NV, OH, OK, PA, VA, WA, and WI).
Arizona has a regulation that requires taxes to be included in claims payments (R20-6-801) and is one of the states that has recently criticized carriers for failing to pay the appropriate tax on automobile total losses (November 2010 – the examiners identified 21 first/third party total loss settlements in which the Company failed to pay appropriate tax in an apparent violation of A.A.C. R20-6-801(H)(1)). As it turns out, Arizona isn’t alone in using an unfair claim settlement practice citation when requiring payment of taxes in claims payment and evaluating companies’ compliance during exams. In fact, in some states the word “tax” isn’t even in the citation that the state relies upon for the criticism. In Maryland, a company can be cited under Insurance Code sections 27-303 and 27-304 for refusing to pay tax on an automobile claim for an “arbitrary or capricious reason based on all available information” (June 2009 – Company failed to pay or under paid 474 claimants the applicable fee or tax; February 2006 – Company failed to pay sales tax in the settlement of a total loss claim). Companies that don’t include tax in auto claims can be cited under Insurance Code 38.2-510 in Virginia for “not attempting in good faith to make prompt, fair and equitable settlements of claims in which liability has become reasonably clear” (April 2009 – examiners found 10 instances where the company failed to promptly reimburse sales tax, tag and title fees; October and November 2008 – companies failed to pay the proper sales tax on third party total loss settlements). Wisconsin has a similar requirement, Regulation 6.11, where a company is required to “attempt in good faith to effectuate fair and equitable settlement of claims submitted in which liability has become reasonably clear” (Company did not include sales tax when replacing a covered vehicle following a total loss).
A majority of other states will tell you whether or not taxes (and title and registration fees) are to be included on automobile losses. For example, in Georgia, a company that uses a “cash equivalent” or “replacement vehicle” method for settling a total loss is told that taxes must be included (Regulation 120-2-52-.06). Connecticut requires sales tax to be included when settling a claim on a constructive total loss and the insurance company takes title to the vehicle (Insurance Code 38a-816. But that is not true in every state. Some states like South Dakota have no formal guidance but do have a policy of requiring state sales tax of 4% to be included on the total loss (not to mention the possible municipal and tribal taxes that could also be added). Others still, like DE, DC, ID, LA, MA, MI, MT, NH, NM, NC, NE, TX and WY, are silent on the issue of whether or not sales tax must be included when settling claims on automobile total losses.
What are some of the things you can do to avoid market conduct issues or scenarios like the cases above?
- Know your state’s statutes and regulations, especially the unfair claim practices acts
- Be aware of the market conduct examinations that bring this kind of issue to light
- Have a policy and procedure in place for the handling of taxes in the payment of claims
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