Transactional Risk solutions explained
Deal-enabling, value-protecting solutions for M&A / corporate finance activity
Over the last decade TR products have become essential tools for dealmakers. TR is now a well-established, multi-billion dollar, dynamic, international insurance class.
TR products help to preserve asset value, and unblock difficult, high stakes negotiations. They are increasingly low cost and user-friendly. The claims data is compelling – TR insurance responds when required.
The core insurance products
| 1. | Warranty and Indemnity / Representations and Warranties Insurance |
| When to use it
During M&A transactions, of almost any size or structure. What it covers Issues that ‘fall through the cracks’ during seller disclosure and due diligence. If unexpected liabilities are discovered post completion, and the buyer has overpaid for the business acquired, the policy steps in to cover the reduced value of your investment. The key trigger for the policy to respond is a breach of a seller warranty or tax indemnity. Key benefits Facilitates a clean exit for the seller, without escrow arrangements. It enables the seller to distribute funds in full. Fast recourse for buyer – an alternative to facing to multi-year litigation, against a seller that may have low covenant strength. Enhances a bid, especially during competitive auction processes. Smoother commercial negotiations for both sides. |
| 2. | Tax Liability Insurance |
| When to use it
Whenever your in-house Tax team or external tax advisors identify low/medium probability (but high potential quantum) contingent tax risks. While mostly used in an M&A context, tax insurance frequently features in (re-)financings, restructuring and insolvency proceedings, company migrations and day-to-day balance sheet management. What it covers A future scenario whereby a tax authority identifies a specific, ‘grey’ tax position being taken. They investigate further, disagree with your tax analysis as to the correct interpretation of the applicable tax legislation / guidance / case law, and decide to bring proceedings, potentially leading to a large, unexpected tax bill. Tax insurance covers the amount of additional tax payable, as well as interest, penalties and defence costs. Almost all types of tax can be insured, so long as the risk boils down to a genuine question of interpretation. It does not cover (or promote) tax evasion practices. Key benefits In an M&A context, tax insurance is used as an alternative to a purchase price chip, specific tax indemnity or escrow arrangement. It is a tool to resolve material risk allocation issues holding up negotiations. Ring-fencing contingent tax liabilities can help to facilitate the release of tied-up capital. It creates certainty for stakeholders, including financiers. |
| 3. | Legal Contingent Risk Insurance (Litigation Buy-out) |
| When to use it
Whenever you are faced with ambiguous law, regulation or contract interpretation, and the possibility of an adverse outcome in court or arbitration. The product works best for low probability, but high worst-case impact ‘legal interpretation’ risks. It can be used for potential/hypothetical, threatened, or live litigation. It is usually for (potential) defendants. What it covers It is similar to tax liability insurance, but for highly bespoke, non-tax legal issues. Usually it covers the worst-case financial consequences of a future potential adverse court decision or arbitration award. Common use cases: judicial reviews / permit challenges against new infrastructure projects, contractual disputes, or regulatory uncertainty. Key benefits Manage contingent legal risks holding up the release of funds A solution to appease stakeholders with a low tolerance for risk, e.g. lenders, in-house counsel, and investment committees, so that they can get comfortable green lighting a project. For active litigation, legal contingent risk insurance can be used to ‘bank’ a favourable judgment, that may be overturned on appeal. It is often a good solution for complex cases, with no natural home in other insurance lines. |
We can also help you with
- End of Fund Life
- Intellectual Property Infringement
- Defective/ambiguous/missing title (to shares or real estate)
- Carbon Credit Non-Delivery
- Insurance Due Diligence