Tax legal responsibility insurance coverage gaining steam within the M&A market


Scott Harty (pictured), a partner in Alston & Bird’s Federal & International Tax Group, said, “Tax liability transfers a known but uncertain tax risk from a company’s balance sheet to an insurance company. It is usually requested before an M&A transaction by an experienced seller and during an M&A transaction by a buyer after careful consideration or by a seller who is asked for certain compensation. “

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The vast majority of tax liability insurance is taken out as part of an M&A transaction or investment. However, the product can also be used by a company at any time outside of a transaction, even if a company is subject to live testing. Typical buyers of tax liability insurance are private equity funds as well as corporations and private sellers.

There is a “very broad list of tax risks” that can be insured, said Harty, who focuses his practice on complex domestic and cross-border commercial transactions, including taxable and tax-free mergers and acquisitions, joint ventures and corporate restructuring. Some of the most common risks insured people want to transfer in the marketplace today include renewable energy tax credits, real estate investment trust (REIT) risk, and S corporation risk.

Before tax insurance became a viable option, companies protected themselves against these known tax liabilities primarily through purchase price adjustments, fiduciary transactions, repayments, restructuring transactions (whenever possible) or self-insurance.

With increasing awareness of tax insurance, insurance brokers can help differentiate their clients in the marketplace. Harty told the insurance business, “Good tax risk is generally one that is backed by an opinion or well-reasoned memorandum with a level of comfort that is more than likely.

“Risks that are more legal than factual also create attractive risks. Brokers can help clients prepare good submissions by doing the preliminary work thoroughly and presenting a strong package to the market. This would include tax advice to the insured and the relevant documentation. “

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Harty represents clients in domestic and international tax disputes, including administrative reviews and appeals to the Internal Revenue Service, as well as in negotiating and resolving taxes and civil penalties. When asked whether the increasingly global or cross-border nature of M&A activity is driving the growth of the tax debt market because dealmakers have to navigate multiple tax environments, he replied, “To a certain extent, yes. Tax insurance is global and risks related to foreign jurisdictions can be insured. The rewards can vary significantly depending on the jurisdiction.

“The main growth driver is market awareness. R&W insurance has established itself in the market, and tax insurance is also gaining increasing acceptance. “

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