Insuring tax matters under investigation or dispute

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Generally, tax matters either subject to an ongoing dispute resolution process, or under investigation by relevant authorities, are falsely assumed uninsurable.

While not all tax risks under investigation or subject to dispute will be insurable, a significant portion are. Insurers will consider several factors before deciding whether to offer cover.

This bulletin provides guidance on the insurability of tax risks under investigation or dispute, the terms of such insurance cover, and the expected costs.

Appetite of insurers

Insurers generally have a healthy appetite for tax risks which are under a general, or even targeted tax investigation - with many similar risks commonly insured. However, appetite for insuring tax matters under dispute is more restricted. For example, some insurers may wish to see a judgment in favour of the taxpayer in a court of first instance, before considering insuring the outcome of any appeal proceedings. Other insurers adopt a more flexible approach.

Notably, tax risks where authorities issue a negative assessment, without the taxpayer already having had an opportunity to successfully challenge it in dispute resolutions proceedings, have difficulty gaining interest from insurers.

From a jurisdictional perspective, appetite for insuring tax controversies within Western European or North American countries appears strong. This is due to these regions possessing more favourable conditions regarding the rule of law, availability of advisors, and lack of political interference.

Insurers’ requirements

When deliberating whether to insure tax risks under investigation or dispute, insurers would typically like to see an undisputed fact pattern, detailed analysis of the tax risk, loss calculation, and strong precedent for the adopted tax treatment. Essentially, insurers want to be satisfied there is a strong defence file and/or judgment in place.

Coverage of tax insurance policies

Conventionally, a specific tax insurance policy should cover the base tax exposure, interest, penalties, defence costs, gross-up, and liability for any advance tax payments required for disputing resolution proceedings.

However, scenarios with tax policies covering tax matters under investigation or dispute are typically different. Since challenges are likely or in progress, defence costs are typically not covered by the policy - as this is already being incurred. Similarly, coverage for advance tax payments is also usually unavailable.

Cost and retention considerations

For tax risks under investigation, the risk of challenge is much higher. The subsequent impact on cost sees the premium rate typically range between 3.5% and 15% of the insurance limit. Similarly, retentions may also be higher than normal.

Due to the challenge by the relevant authority, the risk profile for tax matters under dispute is significantly higher. Consequently, pricing in such scenarios would range between 5% and 30% of the insurance limit.

Next steps

Recent years have witnessed tremendous evolution within tax insurance. It has become an effective tool to manage tax risks, and increasingly, in matters being either investigated or disputed.

Marsh has significant experience in successfully placing such policies - for tax risks both under investigation or dispute.

If you would like to find out more about the topics raised in this article, please reach out to your Marsh representative.

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Insuring tax matters under investigation or dispute

Appetite of insurers

Insurers’ requirements

Coverage of tax insurance policies

Cost and retention considerations

Next steps

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Insuring tax matters under investigation or dispute

Appetite of insurers

Insurers’ requirements

Coverage of tax insurance policies

Cost and retention considerations

Next steps

Related insights

Transactional risk insurance 2023: Year in review

Tax insurance: De-risking the refinancing of portfolio companies

Cyber in M & A series

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