A Closer Look at Tax Insurance

Tax Insurance

As a follow-up to our blog post addressing the disconnect between reps & warranties policies and identified tax exposures in a transaction, a recently published Bloomberg article discusses the rapid growth and acceptance of tax insurance.  While most tax insurance programs involve some sort of transaction, they do not need to be tied to M&A.

Similar to R&W, the product has been nurtured into a more mature state by the large brokers.   However, the underwriting process and policy form is clearly distinguishable from that in R&W Insurance. Whereas R&W Insurance seeks to cover a broad array of representations, for unknown risk, tax insurance seeks to cover a precise tax risk (or set of risks) that have been identified by the Insured’s tax professionals. Hence, the balance between “full solution” and “seeking broader than needed” coverage is the goal so that the Insured has the best chance of obtaining the coverage and on the best terms.  This typically requires significant involvement with the insured’s advisors to properly identify and describe the tax issues to be insured and to address substantive questions raised by insurers in the underwriting process, with input from experienced brokers who can assist in providing examples where a similar breadth of coverage was insured, its pricing, and its memorialization in policy drafting. Also, because there are fewer market participants in tax insurance, when compared to R&W insurance, relationships with carriers is paramount for getting submissions reviewed, quoted, and insured.

Despite the significant numbers quoted in the article, the programs placed were only the tip of the iceberg. There is good reason to believe that tax insurance can and will grow and surpass the R&W market.

For further information or questions, please contact Jonathan Legge at 646-572-9360 or via email at jlegge@vanbridge.com