A TDI-licensed company handles subrogation claims for insurance-carrier clients — pursuing recovery from responsible third parties or third-party carriers, without doing the actual claims adjustment or appraisal work itself, and earning a contingency fee only upon recovery. The company read Rule 3.355's insurance-services definition and concluded it doesn't apply to this kind of subrogation recovery work. Is that right?

Plain-English summary

A company licensed by the Texas Department of Insurance handles subrogation claims on behalf of insurance-carrier clients: when an insurer pays out a loss, this company pursues recovery from the party actually responsible, or files claims with a third-party carrier for reimbursement. The company doesn't adjust claims (unless the insurer specifically approves) and doesn't perform appraisals (those happen before the company gets involved) — it earns a contingency fee only once recovery is actually made. Reading Rule 3.355's insurance-services definition, the company concluded its subrogation recovery work fell outside the rule and asked the Comptroller to confirm.

The Comptroller disagreed. Rule 3.355(a)(5) defines "insurance claims adjustment or claims processing" broadly, as "any activities to supervise, handle, investigate, pay, settle, or adjust claims or losses" — and filing claims with a third-party carrier for reimbursement on a client's behalf fits within that definition (or, alternatively, within Rule 3.355(a)(3)'s definition of an "insurance investigation," evaluating eligibility for the payment of benefits). Because the company's services pertain to an actual policy of insurance — either the client's own policy or a third-party carrier's policy — and are performed for a contingency fee on behalf of an insurance carrier, Rule 3.355(b) makes them taxable insurance services. Rule 3.355(g) further requires anyone performing insurance services to obtain a sales tax permit and charge sales tax on the total amount charged. The Comptroller also noted enclosing prior precedent: an edited ruling finding subrogation services taxable in a different context, and an administrative hearing decision finding that certain registered-nurse-performed claims-adjusting activities were similarly taxable.

What this means for you

Subrogation recovery companies and similar third-party claims-recovery businesses

Don't assume that NOT doing the claims adjustment or appraisal yourself keeps you outside Rule 3.355's insurance-services definition. The rule's definitions are broad enough to sweep in claims-recovery, investigation, and reimbursement-filing activities performed on an insurer's behalf, even on a pure contingency-fee basis.

Businesses licensed by the Texas Department of Insurance providing ancillary claims services

TDI licensing and Comptroller sales-tax treatment are separate questions — being a licensed, narrowly-scoped service provider under insurance regulation doesn't exempt you from Rule 3.355(g)'s sales tax permit and collection requirements if your activities fall within the rule's broad definitions.

Accountants and tax professionals advising insurance-services clients

This letter is a useful precedent for the scope of Rule 3.355(a)(3) and (a)(5): activities as narrow as filing third-party reimbursement claims on a contingency basis, without adjusting or appraising anything directly, can still be taxable insurance services if they pertain to a policy of insurance and are performed for compensation.

Common questions

Q: My company only recovers money on insurers' behalf and doesn't adjust claims directly — are we still providing a taxable insurance service?
A: Likely yes, per this letter — filing claims with third parties for reimbursement, or investigating for eligibility purposes, on behalf of an insurance carrier still falls within Rule 3.355's broad claims-adjustment/processing and investigation definitions.

Q: Does it matter that we're paid on a pure contingency basis, only when recovery succeeds?
A: No — the fee structure (contingency vs. flat fee) doesn't take the service outside Rule 3.355(b)'s taxability, as long as the service pertains to a policy of insurance and is performed for compensation.

Q: Do we need a sales tax permit for this kind of work?
A: Yes — Rule 3.355(g) requires a sales tax permit and collection of sales tax on the total charge for taxable insurance services.

Q: Can I rely on this letter for my own subrogation or claims-recovery business?
A: No. It's based on the facts presented, and the letter notes the opinion may change on additional or different facts.

Citations and references

• 34 Tex. Admin. Code Rule 3.355(a)(3) (insurance investigation)
• 34 Tex. Admin. Code Rule 3.355(a)(5) (insurance claims adjustment/claims processing)
• 34 Tex. Admin. Code Rule 3.355(b) (taxability of insurance services performed for compensation pertaining to a policy)
• 34 Tex. Admin. Code Rule 3.355(g) (sales tax permit and collection requirement)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803288L

Original ruling text

March 31, 1998

Dear Mr. **:

Thank you for your recent letter concerning the taxability of subrogation
services as an insurance service as defined in Rule 3.355.

Your reading of the rule led you to the conclusion that the rule does not
pertain to your business.

Your company is licensed by the Texas Department of Insurance (TDI) and your
clients are insurance carriers. Your company handles subrogation claims on
behalf of the insurers. The insurers seek recovery from the responsible party
for the loss.

Your company does not adjust the claims unless the insurer gives the approval.
Your company does not do the appraisals, this is done prior to your receiving
the claim. You do, on the other hand, file claims with a third party carrier
for reimbursement for your client. Your recovery of this claim is either from
the responsible party for the loss or from a third party carrier. Once
recovery has been made then your company receives a fee based on a contingency
from your client.

Response: Rule 3.355(a)(5 concerning insurance services defines insurance
claims adjustment or claims processing as "any activities to supervise, handle,
investigate, pay, settle, or adjust claims or losses." (Emphasis added.) Rule
3.355(a)(3) defines an insurance investigation as "any activity performed to
evaluate an individual's eligibility or qualifications for insurance coverage,
or for the payment of benefits, or any other similar activity."

Rule 3.355(b) taxes insurance services as defined in section (a)(1) through (6)
when the services are performed for monetary fees or compensation on behalf of
an insurance carrier, its insured or policyholder or others if the services
pertain to a policy of insurance.

Because your company handles claims on behalf of insurers and sometimes files
claims with third party carriers for reimbursement for your clients, the
services are taxable as either insurance claims adjustment or claims processing
or as an insurance investigation.

The services your company performs pertain to a policy of insurance; either the
policy issued by your client's insurance customers or to the policy issued by a
third party carrier to its insured. Rule 3.355(g) requires persons performing
insurance services to get a sales tax permit and to charge sales tax on the
total amount charge for the service.

I am enclosing edited documents in which subrogation services were determined
to be a taxable security service based on the facts presented. I am also
enclosing an administrative hearing in which the administrative law judge held
that certain services performed by registered nurses were taxable insurance
claims adjusting services.

I am sending you a sales tax application packet and pertinent rules under
separate cover.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683 if you have any questions or need more information. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division