Accounting for Insurance Policy Claims
It is not unusual for banks to have insurance claims of various types from time to time. A relevant question that follows is when to record the claim as an asset, and how much to record. To answer the question, we will first look at the basic accounting rules then work through some examples.
Loss Recovery or Gain Contingency?
To identify the proper accounting treatment, first we need to determine if the insurance policy claim represents a loss recovery or gain contingency. These terms are defined as follows:
- Loss recovery– related to recovery of a loss when the recovery is less than or equal to the amount of the loss recognized in the financial statements.
- Gain contingency– recovery of a loss not yet recognized in the financial statements or an amount in excess of the loss recognized in the financial statements.
In order to record a loss recovery, it need only be established that collection of the claim is both probable and estimable. Example: new bank ATM is destroyed by marijuana impaired driver. Bank would submit a claim for the value of the ATM, less the deductible and book a receivable for the net amount. Assuming that insurance is in place, the loss event is covered and the insurance company has the capacity to pay the claim, the bank would record the claim receivable in the same period as the casualty loss.
If the insurance company denies the claim, there is a rebuttable presumption that collection of the claim is no longer probable. The bank can overcome this rebuttable presumption if it brings suit against the insurance company and its outside legal counsel provides a supported, written opinion that explicitly states that the bank will probably prevail in its litigation against the insurer. The bank would also have to demonstrate the insurer has the financial capacity to pay.
For a gain contingency to be recognized, all contingencies must be resolved and payment of the claim must be assured. Example: fully depreciated ATM is destroyed by marijuana impaired driver. Bank has casualty insurance in place to cover replacement value. Bank files claim, but insurance company will not settle until they verify replacement value. Under this scenario, the bank would not recognize the claim until the insurance company has agreed on the settlement amount.
Current regulatory guidance states that because of the uncertainties surrounding insurance coverage of bonding claims, it is generally inappropriate for such claims to be recognized before a settlement offer is received from the insurer.
Banks generally carry their investment in life insurance contracts at the cash surrender value, and will recognize the additional death benefit value upon the death of the insured.
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