In a corporate liability claim, the most disputed point is rarely the legal basis – far more often it is whether the amount of the loss is net or gross. The injured party arrives with a gross quote, the insurer offers net, and the company that caused the damage stands in between, not knowing who is right. The answer is made up of three layers: the invoice rule of the insurance legislation, the Civil Code's prohibition on profiting from a loss, and case law. This article puts these three layers in order so that you know what to expect in a claim.
- Under Section 123 of the Insurance Act (Bit.), the insurer may reimburse the VAT on a repair only on the basis of an invoice that shows the VAT or from which it can be calculated – without an invoice, the net amount is due.
- For a company claimant entitled to deduct VAT, the majority view in case law is that VAT is not an element of the loss: the claimant recovers it through the tax system, and receiving it in the compensation as well would amount to profiting from the loss – case law is not entirely uniform, however, which is why insurers ask for a VAT declaration.
- The Kúria (Hungary's Supreme Court) expected gross payment where the policy conditions themselves promised a theoretical reinstatement amount – this belongs to the world of first-party property insurance, not liability claims settlement.
The invoice rule: Bit. Section 123
Section 123 of Act LXXXVIII of 2014 on insurance activities (the Insurance Act, Bit.) states that, for a service subject to VAT that is needed to restore the condition before the damaging event – material, repair and reinstatement costs – the insurer may undertake to pay, or pay, an amount equal to the VAT only on the basis of an invoice that shows the amount of VAT or from which it can be calculated. The rule has been in force since 2009, and its aim was to curb repairs without invoices. Its practical consequence is simple: if the injured party does not have the repair done, or has it done but does not present an invoice, the insurer pays the net amount of the calculated repair cost; if the invoice is submitted later, the VAT portion can typically be settled afterwards. For compulsory motor third-party liability insurance (MTPL), Section 32/A(2) of the MTPL Act (Gfbt.) lays down the same rule separately. The article on the steps of claims settlement shows where this appears in the course of the settlement.
A claimant who reclaims VAT: VAT is not a loss
If the injured party is VAT-registered and can deduct the VAT on the repair invoice, the VAT does not remain a cost for them: they recover it through the tax system. Under Section 6:522(3) of the Hungarian Civil Code (Ptk.), compensation must be reduced by the financial advantage the injured party gains from the damage – this is the prohibition on profiting from a loss. From this, case law derives that an injured party entitled to deduction can claim the net amount; according to an analysis in the journal Kártérítési és Biztosítási Jog (Compensation and Insurance Law), in several cases involving company claimants the courts started from the premise that the VAT is recovered from the state budget. This is why the insurer asks the injured party for a VAT declaration at the start of claims settlement. There is also an intermediate case: for services used to operate a passenger car, Section 124(4) of the VAT Act (Áfa tv.) makes half of the VAT non-deductible – in such cases insurers typically reimburse the non-deductible part of the VAT. The details are tax-law questions and are worth discussing with an accountant.
What did the Kúria say, and what does it not apply to?
The frequently cited Kúria decision (Pfv.V.20.993/2020/6.) was made in a home insurance case: the policy conditions promised reimbursement of the reinstatement cost calculated at new value, not of the cost actually incurred. According to the Kúria, Bit. Section 123 cannot be applied in such a case, because the insurer undertook to pay an amount with which the reinstatement can actually be carried out – and that can only be a gross amount. This is therefore a question of first-party property insurance and of the wording of the contract. In liability claims settlement, the injured party is not the insurer's contracting party but a third party: their claim rests on the compensation rules of the Civil Code, and the insurer pays according to the invoice rule of the Bit. In the absence of an invoice, earlier case law held in several cases that the net amount was to be reimbursed; the assessment, however, depends on the circumstances of the case – for example whether the injured party is a private individual or VAT-registered – and cannot be regarded as entirely uniform. The fundamental difference between your own loss and damage you cause to others is explained in the watershed article.
What does this mean for the company that caused the damage?
Three typical situations arise. If the injured party is a company entitled to deduct VAT, the insurer pays net, and because of the prohibition on profiting from a loss the injured party typically cannot successfully claim the difference from you either. If the injured party is a private individual or an organisation not entitled to deduction and has the repair done with an invoice, the insurer reimburses the gross amount on the invoice within the limits of the policy conditions. If the injured party does not have the repair done and has no invoice, the insurer offers net; the injured party may try to claim the difference directly from the party that caused the damage, and the assessment of this may end up in court. In that case, do not take on anything extra without the insurer's knowledge: liability insurance conditions typically make acknowledging the claim and reaching a settlement subject to the insurer's consent – this is covered in the article on settlements. Damage caused with vehicles is a separate world: there the rules of MTPL and the Gfbt. apply, and the dividing line is described in the article on where liability insurance ends and MTPL begins.
Three typical misunderstandings
The first: “the insurer swallows the VAT”. No – if the injured party is entitled to deduction, they get the VAT back through the tax system; the insurer simply does not pay it twice. The second: “without an invoice it pays nothing”. No – it reimburses the net amount even without an invoice; the invoice is needed only for the VAT portion, and it can also be provided later. The third: “the gross quote is the loss itself”. No – the quote is evidence of the extent of the loss; the actual amount of the loss is determined by the cost of reinstatement together with the injured party's tax position. These misunderstandings cause most of the tension between the injured party and the party that caused the damage, even though in all three cases the insurer's settlement follows the same statutory logic.
What should you do in practice?
When a claim comes in, ask for the injured party's quote or invoice itemised as net, VAT and gross, and clarify whether the injured party is VAT-registered – the insurer will ask for this too. Report the claim on the insurer's claims line, and do not try to close a dispute about the calculation of the loss with promises of your own. As a broker, I help where I can with putting together the declarations and the documents requested, and with interpreting a stuck or contradictory position; deciding in place of the insurer and bargaining with the injured party is not my role. If the dispute about the amount paid is not resolved, the route is the Financial Arbitration Board (PBT) or the courts – the MNB (Hungary's central bank and financial supervisor) does not decide individual claims disputes.
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Sources
- Insurance Act (Bit.) – Act LXXXVIII of 2014, Section 123 (njt.hu)
- Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:522 (njt.hu)
- MTPL Act (Gfbt.) – Act LXII of 2009, Section 32/A (njt.hu)
- VAT Act (Áfa tv.) – Act CXXVII of 2007, Section 124 (njt.hu)
- GMT Legal – Gross or net: when must the insurer reimburse the VAT content of reinstatement costs?
- Kártérítési és Biztosítási Jog – VAT as an element of loss and the prohibition on profiting from a loss in case law
- Kártérítési és Biztosítási Jog – How the prohibition on profiting from a loss applies where VAT is reclaimable
- Signal Iduna – VAT rule for claims settlement without an invoice
