(June 2019)
This valuation endorsement is all about taxes. All distilled spirits, wines, rectified products, and beer are subject to a number of federal, state, and local taxes and custom duties. Many of these taxes are paid in advance and are fully refunded after a loss. Because the taxes will be refunded, the limit of insurance should not include the value of taxes.
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Example: Marco Fine Wines has an inventory of alcoholic beverages valued at $350,000. This value includes $50,000 in prepaid taxes. Because these taxes will be refunded when the product is destroyed, the inventory’s insurable value is $300,000. |
The refunded taxes rule has one exception. If the alcoholic beverages are stolen, the insured does not receive a refund because the alcohol will probably be sold and consumed. If the limit of insurance does not include the taxes, and the beverages are stolen, the insured will be underinsured. This presents a problem. If the insured purchases a limit that does not include a value for taxes, there is potentially both a tax loss and a coinsurance penalty for being underinsured when theft is the cause of loss. On the other hand, if the insured purchases a limit that includes the taxes, the insured is over-insured for all causes of loss except theft. The solution to this problem is CP 99 10–Alcoholic Beverages Tax Exclusion.
This endorsement's first paragraph states that coverage does not apply to the value of United States Government Internal Revenue taxes, custom duties, and refundable state and local taxes already paid or determined. This exclusion applies to the taxes on distilled spirits, wines, rectified products, and beer. Because these taxes are excluded, they are not considered when establishing the value of the covered property.
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Example: Marco Fine Wine purchases a $300,000 limit and enters that limit on the declarations. |
The second paragraph states that coverage does apply to the value of the taxes and custom duties if theft is a covered cause of loss and a theft loss occurs. The tax amount must be included in the value of the covered property because these taxes are covered.
The limit with taxes is entered on the endorsement schedule. It is important to note that the value without taxes is on the declarations while the limit that applies only to theft is on the endorsement schedule.
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Example: Marco Fine Wine attaches CP 99 10 to its policy and schedules a limit of $350,000. |
The limit that does not
include taxes is used to rate all causes of loss except for theft. The theft
cause of loss is rated based on the appropriate theft relativity and the limit
that includes taxes.