April 8, 2010

When an insured is a tax-exempt entity or has a certificate of sales tax exemption, and a claim is paid on repairs to insured buildings or contents, is the insurer obligated to include sales tax in the claim settlement? Proceeding under the assumption that the tax is assessed for materials only and the tax is charged on the basis of a sale of those materials to the insured who is the contractor’s customer, if the insured is not obligated to pay tax it would seem that making the insurer pay the tax in settlement of loss could constitute unjust enrichment of the insured. What do you think?

Wisconsin Subscriber

Insurance is a contract of indemnity. Therefore, if an insurer is reimbursing a tax-exempt entity for damage repairs, the insurer should only indemnify the insured. If the claimant did not pay sales tax on the repair costs then the insurer should not include taxes in the reimbursement amount. However, if the insurer is paying for the repairs directly, the tax exempt status probably does not transfer to the insurer.

Since this is a tax question we recommend that you consult a tax attorney or accountant for any additional help.

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