Insurance Company Ordered to Pay Compensation Plus VAT - International Law Office

Facts

The parties in a recent case(1) entered into an insurance contract to insure a company car leased by the plaintiff, a Hungarian business association. The insurance contract contained a clause on theft risk. The insurance event occurred in 1997, when the insured car was stolen. The police investigation was closed with no success.

As the parties were unable to agree on the amount of compensation payable to the plaintiff, the business association initiated court proceedings in order to establish the amount payable by the insurance company.

Decision

At first instance, the court ordered the insurance company to pay the plaintiff the market value of the vehicle at the time of the insurance event - Ft3.2 million - plus incidental costs. The court of second instance amended this judgment and ordered the insurance company to pay not only the value of the vehicle at the time of the insurance event, but also value added tax (VAT) on the value of the vehicle (Ft4.1 million in total).

The insurance company submitted a petition for the review of the second instance judgment to the Supreme Court, requesting that the second instance judgment be overruled and the first instance judgment approved. In its petition, the insurance company emphasized that the insurance contract obliged it to pay the vehicle's market value to the plaintiff. It also argued that since the plaintiff was entitled to redeem VAT, the payment of VAT by the insurance company would breach a general legal principle - the prohibition against benefiting from a loss - as the plaintiff would thus obtain the VAT from both the insurance company and the tax authority.

The Supreme Court rejected the insurance company's petition for review and affirmed the second instance judgment. It ruled that the rights and obligations of the plaintiff (as a business association) arising from the tax administration relationships governed by public law did not affect the insurance relationship between the parties governed by civil law. It pointed out that while the tax laws established certain obligations for the plaintiff, the same regulations also made a VAT refund available to the plaintiff. The Supreme Court held that these rights and obligations were irrelevant to the performance of an agreement entered into under civil law, and could not result in advantages or disadvantages for any of the parties.

For further information on this topic please contact Gerhard Lang at Hengeler Mueller's Frankfurt office by telephone (+49 69 170 950) or by fax (+49 69 725 773) or by email (gerhard.lang@hengeler.com). Alternatively, contact Gábor Horvath at Hengeler Mueller's Budapest office by telephone (+36 1 385 3927) or by fax (+36 1 372 7659) or by email (hmbp@hengeler.com).

Endnotes

(1) Supreme Court Resolution Pfv.VIII.22.247/2000/3.