Tax liability insurance
Policy covering the risk that an identified tax position is challenged by the authorities, common in M&A deals.
Tax liability insurance covers the financial risk that a specific, identified tax position is challenged by the authorities, leading to a reassessment, penalties and interest. It typically applies to a known uncertainty: a defensible but unguaranteed tax treatment, an exemption regime whose application is debatable, a restructuring with an uncertain tax outcome. Often used in mergers and acquisitions to neutralize a tax risk that would block the deal, it falls under transactional underwriting alongside warranties insurance and contingency insurance. For the insurer, the challenge is to assess the probability of success of a precise legal position, relying on tax opinions and litigation-risk analysis rather than a statistical approach. The policy transfers a binary, idiosyncratic risk, turning a legal uncertainty into a certain, bounded cost.
Textbook case: before selling a company, a reassessment risk on a contested tax credit can be transferred to an insurer through a tax liability policy, unblocking the deal.
tax liability insurance, tax insurance, tax risk insurance
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