Accounting For Insurance Claim Settlements

The method used to account for insurance claims is the "disposal method". Any asset subject to an insurance claim should be transferred to a "Disposal Account". Depreciation on the asset for the relevant period is calculated, and credited to the disposal account with the insurance settlement. The cost, less depreciation equals book value. Any settlement amounts over or under book value, will result in a loss or profit on disposal.

An insurance claim, wrongly entered as "income", can be adjusted by transferring the amount to the disposal account. After effecting these entries, the disposal account should balance to zero. Your new records would reveal, the loss or profit on claim (income statement), settlement in bank account, fixed assets less the stolen/lost asset, and a lower depreciation estimate for the year.

I acknowledge that this is your accountant's job, you however have a duty to provide accurate records. But how many businesses continue to pay, the same insurance premiums on the assets, since purchase date, when they, entitled to a lower premium, due to a lower asset value.(prior to any asset losses).

Also, a precarious asset situation in your books, might lead to problems in your tax affairs.
No business can afford a visit from the IRS. Did you know that tax authorities always commence auditing, your assets, before they move on to your income?

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Insurance Claims - Open a Claim Checking Account

Once the insurance company issues you the first check, go to your bank and open a separate account just for handling claims issues. When you receive the payments for the claim, deposit them in this account. ONLY use this account for the expenses of the claim. When the claim is completed, close the account.

Normally, when the insurance company issues advance payments against the ALE or Contents losses. the checks will be made payable just to you, because there's no mortgage on your contents. So, those checks can be deposited directly into your claim account.

DO NOT DEPOSIT THE SETTLEMENT CHECKS IN YOUR NORMAL CHECKING OR SAVINGS ACCOUNT. Keeping a separate account for insurance claim related expenditures makes it so much easier to keep good records.

When you ask for an advance against your Dwelling coverage, the insurance company will need to know the name and address of your mortgage company. They will issue the check jointly in your name and the name of the lender. They may send the check to you. If they do, the lender will likely require you to endorse the check and give the check to them. Then, they will set up a system of payments. To find out more about that system of payments, contact the Escrow Department of your Mortgage Company. Every lender is different. Find out what your lender plans to do by contacting them and asking them.

The same procedure will likely apply when the insurance company issues checks for repairs to the dwelling (or even a settlement for a car wreck). Anything you own that also has a lienholder or mortgage holder will be issued jointly in the name of the owner and the name of the lienholder. If you own your dwelling or vehicle free and clear, the insurance company will issue your settlement check only in the name of the owner.

ONLY USE THIS MONEY FOR THE CLAIM. Don't take a weekend vacation to Las Vegas with the money, or buy yourself that new motorcycle you've always wanted. However, there are circumstances in which you can use the money for whatever you like. You just won't collect all you should. Read Chapter 17, "Deduct This!"

There. I've said it in a number of different ways. Don't comingle your personal funds and your insurance settlement funds. Keep them entirely separate and you'll have a much more pleasant insurance claims experience.

Now, I'd like to offer you two special reports at no cost. One is "5 Things To Do When Shopping For Car Insurance," and the other is "5 Things To Avoid When Shopping For Car Insurance." Each one is a $9.95 value, but free to you when you sign up for my newsletter at the website address below.