Are Insurance Bad Faith Recoveries Taxable?
Robert W. Wood
Robert W. Wood is a tax lawyer with www.WoodLLP.com, and the author of numerous tax books, including Taxation of Damage Awards & Settlement Payments (www.TaxInstitute.com). This discussion is not intended as legal advice.
Are insurance bad faith litigation recoveries taxable? The annoying answer is: it depends. This is because, although damage awards and insurance proceeds are generally considered "gross income" for tax purposes, the Internal Revenue Code ("IRC") provides an exception for damages received "on account of personal physical injuries or physical sickness" and for amounts received "through accident or health insurance … for personal injuries or sickness."1 As discussed in this article, determining whether a particular bad faith recovery qualifies under one of these exceptions can be tricky.
Bad Faith Litigation Claims