December 16, 2019

The Rise of M&A Tax Liability Insurance

This recent Woodruff Sawyer report covers a variety of developments on the transactional insurance front.  Here’s an excerpt addressing tax liability insurance, which is becoming increasingly popular:

Tax liability insurance, or TOL, protects a taxpayer against the failure of a tax position in connection with a transaction, reorganization, accounting treatment, investment, or other type of taxable event. Specifically, it covers your loss if the IRS or other applicable taxing authority deems you have a greater tax liability than what you’ve claimed. Tax liability insurance can cover a particular transaction, such as an investment in renewable energy, or the tax treatment of a spin-off, for example.

Other areas of exposure that can be addressed include S corp status disputes, the target’s historic tax positions, sales & use taxes, and the preservation of NOLs and other tax attributes. Why are these  policies becoming more prevalent? I have no doubt that there’s an appetite for this coverage among buyers, but since it takes two to tango, it’s no surprise that the memo suggests that another big reason is that insurers see an opportunity to make some serious bank on them:

As R&W insurance has become standard in the majority of middle market transactions, insurance companies are continuing to expand their appetites in underwriting risks associated with complex mergers and acquisitions. If there is enough of an exposure where an insurer can adequately quantify the risk and assess a profitable premium versus losses, new products are developed. In the case of tax liability, the risk tends to be lower given the amount of due diligence required to underwrite a policy, and several R&W insurers are beginning to see their competitors profiting off of these policies.

John Jenkins