If you have recently received a settlement after pursuing a bad faith insurance claim case, you might have heard rumors that you need to pay taxes on the money you received. Sadly, there is some truth to this. However, there is no easy yes or no answer when it comes to whether or not you, specifically, might need to pay.
One reason for this is that there are two ways to fight for your bad faith settlement. The American Bar Association identifies these as contract claims and tort. Also at the root of the problem is the main issue that led to the bad faith claim.
The difference between contract claims and tort
When it comes to bad faith insurance claims, tort claims tend to address how the insurance company treated the individual and operational decisions made regarding that person’s claim. Meanwhile, contract claims tend to relate to specifics of the insurance policy that the person had with their carrier or how someone else’s insurance policy should have applied to them.
What cases might become taxable
Your settlement might become tax-free if the reason for the claim is that the insurance company caused you harm, such as physical injury or sickness. At first glance, this might seem like an impossibility, but an insurance company refusing to pay for treatment or delaying the process might have caused existing illnesses to worsen.
In this case, you might then get the opportunity to exclude the settlement from your gross income. Note that money received for sickness or personal injuries is usually excludable.
This is a very complex area of taxation and law. Working with a financial advisor or accountant might help you to make a safe decision about whether to pay taxes on the amount you received for your settlement.