To successfully execute a multifaceted business transaction, the parties involved need to go over previous issues pertaining to tax exposures and tax indemnities. To be specific, when the interested parties are preparing for an acquisition or merger, they need to cover all their bases, including tax liability. A property defined tax liability insurance policy is one of the basic requirements to successfully close any of these complex transactions. Hauser Insurance, one of the leading experts in this field, recently released a few insights into the function of tax liability insurance when conducting multifaceted business deals.
Primary role of Tax Insurance
A tax liability insurance is supplemental to a seller’s indemnity in case of potential tax exposure. This insurance policy mimics the role of a warranty, representation, and indemnity insurance policy. The difference comes in where the RWI insurance coverage doesn’t include all known risks. According to Hauser Insurance, having a well-defined tax liability cover can target sections where your RWI policy ceases.
Additional M and A Transaction Usage
The RWI coverage is mostly used when it comes to M and A transactions. However, you can use tax liability coverage to protect yourself from tax-related issues.
Offset or Replacement Function
Hauser Insurance suggests this coverage can be used to offset the need for a purchase price adjustment, seller special indemnity, or even escrow. This means a buyer can only use an escrow when it comes to a known tax exposure for the retention amount paid for the tax liability insurance.
Strategic Pre-Transaction Purchase
Before a merger or acquisition, the seller can use this coverage to provide their prospect with an appealing bid scenario.
Policy Use in non- M&A Transactions
Out of the M&A transaction parameters, this coverage can be used with respect to internal tax restructuring.
Covers both loss and retention
This coverage is designed to protect the insured against losses related to taxes, tax interests, and tax penalties. It can also be used to cover contest expenses.