Tax Insurance

Tax Insurance Market: Quick Facts

• 15 markets with at least $50 million of capacity
• 20 markets able to participate in any program
• $1.5 billion of total capacity on any U.S. tax program

Tax Insurance For M&A Transactions

Tax insurance can be used to reduce or eliminate the risk of historic tax positions taken by the target entity, as well as tax issues arising from the transaction itself. Tax insurance removes the identified tax risk from a deal by transferring it to the insurer, providing certainty and flexibility.

Not R&W Insurance

While known tax issues are excluded from coverage under a traditional representation and warranty (“R&W”) insurance policy, tax insurance complements a R&W insurance policy by providing coverage for such tax issues. Tax insurance can be used as a competitive tool by either the buyer or seller as part of the M&A process. It may be purchased by the buyer to make its bid more competitive or by the seller as part of its preparation for sale (thus, removing the tax issue from negotiations with bidders).

Benefits

• Facilitates deal negotiations by reducing or eliminating the need for tax indemnities and escrows for identified tax issues
• Facilitates financing and investment decision-making
• Enables a clean exit by eliminating a long-tail contingent exposure
• Provides purchase-price certainty by removing an identified tax exposure
• Secures future tax benefits to be realized from the transaction
• Offers liquidity and avoids the negative cash flow arising from a tax liability

Insurance Tax Risks

There are three areas of insurable risks in M&A transactions where tax insurance can be utilized. First, tax insurance can be used to reduce or eliminate the tax risk related to historic tax positions taken by the target on the seller’s watch (e.g., debt v. equity treatment, deduction v. capitalization of expenses, or transfer pricing ). Second, tax insurance can be used to address tax issues arising from the transaction itself (e.g., any pre-closing restructuring, treatment of the transaction as a tax-free reorganization, or availability of a tax basis step-up). Third, tax insurance can be used to insure the historic tax treatment of the target entity itself (e.g., S corporation status, REIT status, or MLP status).