Tax Liability Insurance

Tax Liability

Tax Liability Insurance protects private equity firms, strategic investors, or other entities or individuals should a tax position fail to qualify for its intended tax treatment.

Tax Insurance has a long history, making its debut in the U.S. in the late 90s as part of the introduction of other transactional liability coverages such as Representations & Warranties. While R&W enjoyed explosive growth through the last decade’s robust M&A market, tax took longer to establish its foothold. Ultimately, the use of tax insurance to support renewable energy transactions increased its popularity, with billions of dollars in tax limits deployed in support of renewable transactions. Today, it is an established market with over 20 carriers providing coverage with an estimated $1 billion in capacity available for any single transaction.

Very simply, tax coverage provides protection to taxpayers (i.e., the Named Insured) should a tax position fail to qualify for its intended tax treatment. Coverage is available for corporations, trusts, partnerships, and, increasingly, individuals. Historically, coverage was mainly utilized in the context of “one-off” corporate issues; however, the market has now matured to cover a broader array of risks associated with ongoing tax audits and controversies, ensuring the accuracy of a corporation’s ongoing tax returns, and, in the context of personal tax planning. The coverage provides certainty to planned tax consequences. This is a powerful tool every taxpayer should consider.