Mark McTigue
Managing Director, Tax Insurance Specialist, US
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United States
While more organizations are purchasing tax liability insurance to ring-fence identified tax risks during a merger or acquisition (M&A), there is limited awareness of the benefits of this type of coverage outside of a transaction. However, when used correctly, tax liability insurance can help create value and remove uncertainty.
Tax liability insurance typically covers the tax charges associated with an M&A transaction, as well as interest, penalties, advisor fees, and any relevant gross-up up to the chosen limit of liability in the policy. It may be an efficient solution when a tax risk is estimated to be in excess of US$1 million and has been deemed by a reputable tax advisor to pose a low or low-to-medium risk.
There are currently more than 15 insurers globally focusing on tax risks alone, providing the capacity and appetite needed to insure a broad array of tax risks. The market remains competitive, with premiums generally between 1% and 6% of the limit insured. The premium level is typically determined by a number of issues, including the risk level, size, jurisdiction, and complexity of the risk. Depending on the complexity of the underlying tax risk, a tax liability insurance policy can generally be put in place within two to three weeks.
A wide range of tax risks can be insured, and there may even be appetite for risks already under audit or in litigation, although premiums will typically be adjusted to reflect this additional risk. While a tax liability insurance generally provides coverage for historic tax risks, it is becoming increasingly common to also insure future tax risks.
Tax liability insurance was developed to help M&A parties to de-risk known issues not typically covered by a representation and warranty (R&W)/warranty and indemnity (W&I) insurance policy. Tax liability insurance helps sellers achieve a “clean exit” and provides buyers with appropriate deal protection. This type of coverage is most commonly used in a deal context.
Although buyers are the most frequent users of tax liability insurance to mitigate potential tax risks, sellers may raise this option early in negotiations to strengthen the deal and minimize the risk of price chipping or contractual protection being sought by buyers.
Tax liability insurance may be used to facilitate efficient M&A in a number of ways, including:
Tax liability insurance can be utilized outside of an M&A context, including:
Whether it’s being used as part of an M&A transaction or to address an ongoing business risk, tax liability insurance can be a powerful tool to create value and reduce uncertainty related to an organization’s tax risks.
For more information on how Marsh’s team of specialists can help you identify whether tax liability insurance is right for you and to help you find a tailored insurance solution for your business, contact your Marsh representative.
Managing Director, Tax Insurance Specialist, US
United States
Managing Director, Tax Insurance Specialist, US
Senior Vice President, Tax Insurance Specialist
Senior Vice President, Tax Insurance Specialist