David Taylor, Divisional Director of Financial & Professional Lines at Amwins Global Risks talks to Ben Furtick, Senior Tax Insurance Underwriter at Certa Insurance Partners about how tax insurance can eliminate or significantly reduce exposure to identified tax risks.

What sorts of risks can tax insurance cover?

Ben: Tax insurance can provide coverage for one or more identified risks of tax liability arising to an insured. Identified tax risks frequently arise in due diligence on M&A transactions.

Who are Certa?

Ben: Certa Insurance Partners is an independent specialist underwriting agency and Lloyd's Coverholder providing bespoke tax insurance globally.

How much limit can Certa Insure?

Ben: Certa can offer limits of more than $65 million for a tax insurance policy for a US insured.

How are tax insurance policies structured?

Ben: As tax insurance covers specifically identified tax risks, the covered loss can be clearly defined from the point of an offer of coverage terms. Insured loss includes identified tax liability in addition to interest, insurable penalties, and defense costs after issuance of an assessment from a tax authority. The limited exclusions from coverage include fraud/material misrepresentation, change of law, voluntarily disclosing the insured issue to a tax authority, and settlement of a tax assessment without insurer consent.

Doesn’t Representation & Warranty (R&W) insurance cover tax losses?

Ben: Identified tax risks are almost always excluded from R&W insurance coverage. A tax insurance policy can bridge the gap in coverage for identified low to medium risk tax issues.

How is tax insurance used in the context of an M&A transaction?

Ben: Both buyers and sellers can have many possible uses for tax insurance. Some examples of effective uses of tax insurance include:

  • Backing a specific tax indemnity under a purchase agreement to allow clean seller exit
  • Replacing or significantly reducing a cash escrow amount
  • Making a purchase offer more competitive by using insurance in place of a price chip
  • Eliminating or reducing the timing impact of seeking a PLR/tax authority ruling

What are some examples of identified tax liabilities which can be insured?

Ben: Many low to medium risk identified tax issues can be insured. Some common examples of insured issued in the context of M&A transactions include:

  • S Corporation status qualification
  • Tax-free treatment of certain mergers/reorganizations
  •  Nature of payments and deductibility
  •  Application of anti-avoidance rules
  •  Availability of net operating losses (NOLs)
  •  REIT status qualification/prohibited transaction taxes

What makes a tax risk insurable?

Ben: Identified tax risks at which a taxpayer’s advisers are at least at a more likely than not level of comfort (e.g. low to medium risk issues) can be insured. Pricing is a function of the technical strength of a taxpayer’s risk, the type of tax risk being insured, and the likelihood of tax authority challenge.

Can tax insurance be useful in business as usual arrangements?

Ben: The flexibility of tax liability insurance to provide coverage for one or more specifically identified potential tax liabilities means tax insurance can be an effective risk management tool in structuring or financing business operations, capital release and managing payment flows.

Examples of insurable risks (depending on their facts and circumstances) include creation of a permanent establishment, tax treatment of financing as debt or equity, tax characterisation of payment flows, and application of withholding tax.

Can non-US tax risks be insured?

Ben: Yes. At Certa, we have underwritten policies to cover potential tax liabilities which could arise in more than 30 different jurisdictions. Our underwriting team consists of US and UK qualified lawyers and accountants, and we partner with a global network of tax lawyers and accountants to underwrite tax risks in other jurisdictions.

What is the cost of tax insurance?

Ben: Tax insurance pricing is offered on the basis of a one-time premium of 2 – 7% of the insured limit for a policy period which covers a tax authority’s statute of limitations (generally 7 years or shorter). A small retention for defense costs in the event of tax authority challenge may apply.

Tax insurance minimum premiums vary by type of insured risk but are generally in the range of $120,000 - $150,000.

You can find out more about Certa insurance here.