Insurance payout

What it means

An insurance payout is what the insurer pays once an insured event is accepted. It is reduced by the excess and capped by the sum insured and the policy limits.

Property is indemnified either at replacement cost or at actual value after depreciation. Which applies is in the policy, and on older items the difference is substantial.

The payout can come from the company’s own policy or from the cover of whoever caused the damage, such as the at-fault driver’s motor third-party liability insurer. In that case no own excess applies and the own bonus is not affected, but the claim is proved against someone else’s insurer and settlement usually takes longer.

How it works in practice

In the books the payout is income of the period the entitlement arose, not of the month the money lands. If the close happens first, an accrual is booked.

The repair cost and the payout are not netted. The income statement therefore shows the real effect: what the repair cost and how much the insurer covered.

An insurance payout is not consideration for a supply of goods or services, so no VAT is due on it. A VAT payer deducts the VAT on the repair invoice in the normal way if the repair relates to the business. We explain to clients why the insurer pays a VAT payer the net amount.

What to watch out for

Where the vehicle or property is financed, the payout goes to the lender. The company pays for repairs from its own funds and settles with the insurer through the finance company.

A loss exceeding the payout received is not necessarily tax-deductible. The Income Tax Act recognises it only in defined cases, such as a natural disaster or an unknown perpetrator confirmed by the police. Without such confirmation, the gap between the net book value and the payout is disallowed for tax.