Resisted Claims are Deductible by Life Insurance Companies

(Co-authored with Peter H. Winslow)

It is well settled that an insurance company, which is not taxed as a life insurance company for federal income tax purposes, is entitled to deduct resisted claims as part of its reserves for losses incurred. Rev. Rul. 70-643, 1970-2 C.B. 141. Resisted claims are those losses reported to an insurance company for which the company either denies liability or contests the amount of its liability for the loss. Resisted claims on casualty and accident and health policies are deductible subject to discounting under I.R.C. § 846. Resisted claims on life insurance policies, as a practical matter, are deductible in the full amount reported on the annual statement by a non-life insurance company, even though it may be unlikely that the company will pay all of the claims. This is because the reasonableness of the losses incurred deduction is tested on an aggregate basis and the IRS is not authorized to disallow a deduction for the portion of resisted claims the company does not expect to pay without first establishing that the aggregate deduction for all losses incurred is outside a reasonable range. Rev. Proc. 75-56, 1975-2 C.B. 596.

For life insurance companies, the treatment of resisted claims is more complicated. For casualty-type resisted claims, including claims on accident and health insurance contracts, the same general rules applicable to non-life companies apply to life companies, i.e., resisted claims are included in full in losses incurred and are deductible on a discounted basis under § 846. Rev. Rul. 72-432, 1972-2 C. B. 400. However, controversies frequently arise on audit with respect to resisted death claims arising under life insurance contracts.