A new insurance trend is quickly gaining steam in the mergers and acquisitions (M&A) market. While transaction liability insurance is common, and representations and warranties (R&W) insurance is standard practice, more and more dealmakers today are starting to use a specialty insurance product to protect against known tax liabilities. Tax liability insurance has been around for over 10 years, but awareness of the product has only increased recently, with the arrival of multiple brokers and insurers into the market. It is linked to R&W insurance and is often secured in the context of an M&A transaction. Scott Harty (pictured), partner in Alston & Bird’s Federal & International Tax Group, explained: “Tax liability insurance transfers a known, but uncertain, tax risk from a company’s balance sheet to an insurance company. It is typically asked for ahead of an M&A transaction by a sophisticated seller and during an M&A transaction by a buyer following due diligence, or by a seller who is being asked to give a specific indemnity. ” Read next: M&A in insurance distribution continues to soar to record heights The vast majority of tax liability insurance is purchased in the context of an M&A transaction or an investment. However, the product can also be used by a company at any time outside of a transaction, even if a company is under live audit. Typical buyers of tax liability insurance include private equity funds, as well as corporations and private sellers. There’s 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 restructurings. The most common exposures that insureds wish to transfer in the market today include tax credits for renewable energy, real estate investment trust (REIT) risk, and S corporation risk.
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