American Family Mutual Insurance Company (American Family Mutual), the third largest homeowner insurance company in Arizona, underpaid more than 5,000 Arizona homeowner insurance claims arising from last year’s winter storm (January 2010) and hail storm (October 2010), according to an investigation conducted by the Arizona Department of Insurance (ADOI).
Through a required self-audit, American Family Mutual discovered they had underpaid claims by $1,145,200.52 and sent claim adjustment checks to the affected claimants, plus an additional $45,456.59 in interest.
The average claim adjustment was $116, but the additional payments reached as high as $4,778.
In December 2010, an Arizona roofing contractor contacted ADOI to report that American Family Mutual failed to include the Arizona Transaction Privilege Tax in its settlement of his client’s homeowner’s insurance claim.
Upon investigation, the ADOI confirmed that American Family Mutual was underpaying property damage claims by including sales tax rather than the requisite Arizona Transaction Privilege Tax.
American Family Mutual explained that the errors occurred in claims processed by its temporary Catastrophic Adjusting Team that the company utilized to handle those losses.
The ADOI directed American Family Mutual to perform a self-audit of the 2010 claims to determine if the company underpaid any other claims.
American Family Mutual recently completed the audit and identified 5,377 claims in 13 Arizona counties in which they needed to recalculate the tax. The bulk of the claims were in Maricopa county (5,142), with the second and third highest claims in Pima county (76) and Pinal county (54).
Arizona’s insurance claims settlement laws require insurers to determine and pay the appropriate type and amount of all taxes associated with the cost of repairing damage to a home or building.
Specifically, in Arizona, building contractors must pay a Transaction Privilege Tax to the Arizona Department of Revenue and contractors generally include this tax as part of their invoice for repair work to building owners.
Since this tax is part of the cost of repairing a home or building, insurers must necessarily include and pay this amount in an insurance company’s equitable claim payment.
American Family Mutual confirmed that it will implement procedures to ensure that its adjusters, including those brought in from out-of-state to handle catastrophic losses, are fully trained to calculate and pay the correct Arizona taxes owed on all claims.
Further, the company agreed to pay the correct settlement amount, plus interest, on any other claims where the company determines it paid the taxes incorrectly.
Source: Arizona Department of Insurance
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