DealLawyers.com Blog

We’ve blogged quite a bit over the years about Rep & Warranty Insurance, but that’s not the only type of transaction insurance available for buyers or sellers looking to lay-off some of the risk associated with their deals. A recent WTW report on 2023 market trends in transactional insurance reviews the state of the RWI market, but also addresses tax and contingent risk insurance. This excerpt highlights the increased use of contingent risk insurance in M&A transactions:

Standalone contingent risk policies, which do not have a nexus to an underlying M&A transaction or acquisition, remain the primary use case for contingent risk insurance. However, in 2023 we saw increased demand for contingent risk insurance, particularly AJI, arising from material exposures identified by buyers and sellers in M&A transactions.

In this context, contingent risk insurance is a cost-effective insurance solution to “ring-fence” exposures that are not otherwise covered by an RWI policy. We anticipate that the volume of “transaction-driven” contingent risk placements will grow in 2024 as more clients, particularly in the private equity space, become aware of contingent risk insurance and its use cases.

The report says that the primary use case for tax insurance in the M&A context is to address the risks associated with known tax liabilities identified by buyers during due diligence. These liabilities often are excluded under a traditional RWI policy, but tax insurance can be used to shift the risk of loss relating to these liabilities from either a buyer or a seller to an insurer.

– John Jenkins