Ending a putative class action, the United States Court of Appeals for the Fifth Circuit examined policy language and two statutes to hold that an insurer does not owe sales tax on top of an actual cash value payment. The citation is Taylor v. Root Ins. Co., 2024 U.S. App. LEXIS 18240 (5th Cir. July 24, 2024).

The policyholder’s contract provided:

Limit of liability

A. Our limit of liability for loss will be the lesser of the:

1. Actual cash value of the stolen or damaged property less the deductible; or

2. Amount necessary to repair or replace the property with other property of like kind and quality less the deductible.

. . . .

Payment of loss

We may pay for loss in money or repair or replace the damaged or stolen property. We may, at our expense, return any stolen property to:

1. You; or

2. The address shown in this policy.

If we return stolen property we will pay for any damage resulting from the theft. We may keep all or part of the property at an agreed or appraised value.

If we pay for loss in money, our payment will include the applicable sales tax for the damaged or stolen property. We may settle any loss with you or the owner or lienholder of the property.

Emphasis added.

The insurer determined that the policyholder sustained a total loss to her hail-damaged vehicle. The insurer paid $22,750 to the policyholder in exchange for her vehicle’s title, but did not pay sales tax. The policyholder sued, alleging breach of contract and violation of Texas Insurance Code Chapter 542, Prompt Payment of Claims. The policyholder asserted that she was owed 6.25% sales tax pursuant to Texas Tax Code §152.021 which states: “A tax is imposed on every retail sale of every motor vehicle sold in this state. . . . The tax rate is 6 1/4 percent of the total consideration.”

The Court rejected the allegations and held:

The plain language of the policy requires Root to pay only the “applicable sales tax,” and there is no sales tax applicable here. The Texas Tax Code imposes a 6.25 percent tax “on every retail sale” of a motor vehicle, id., but a total-loss settlement “is not considered a sale” under Texas law, 34 Tex. Admin. Code § 3.62. Taylor identifies no other sales tax that could apply. Additionally, Root satisfied its obligation to pay Taylor the actual cash value of the vehicle. We so hold because, as Taylor concedes and as this court recently held, actual cash value, which is the equivalent of “fair market value[,] does not include the taxes and fees payable to purchase a replacement vehicle” under Texas law.

Thus, the Court determined that the insurer did not breach the contract because the insurer was not required to pay the policyholder sales tax in addition to ACV. Because the insurer did not owe sales tax, the Court held that the insurer could not be liable for violation of Texas Insurance Code Chapter 542.

Taylor is somewhat limited in its application because the Court’s holding depends on statutes governing automobiles, rather than real property. However, courts may well be guided by this holding on other contexts.