BMS: We understand that it is often challenging for tax liability insurance (TLI) solutions to be found for matters under audit or in litigation (Active Matters). Would you agree?
AMB: Whilst Active Matters have an elevated risk rating as compared to those matters that are not under audit, this does not mean that TLI solutions are not available for them. We have in fact provided TLI solutions for Active Matters for many years, often allowing M&A transactions to go ahead where otherwise, the allocation of the risk between the transaction parties would have been a dealbreaker.
Provided that certain favourable factors are present, TLI solutions can be available for Active Matters. Given the elevated risk rating of an Active Matter, the commercial terms for a TLI solution will be different from those for a risk that is not under audit. As such, the challenge with obtaining a TLI solution for an Active Matter is making sure that the right favourable factors are present.
BMS: What are the favourable factors that you look for when considering whether to offer TLI terms for an Active Matter?
AMB: Given the inherent uncertainty of litigation, for us to consider cover for an Active Matter, we would need to be comfortable that there are strong legal, technical, and factual defences available against the tax charge falling on the insured taxpayer.
We will want to make sure that the documentary and witness evidence strongly supports the taxpayer’s position, that the Active Matter has been appropriately managed to date and that the insured taxpayer has been appropriately advised and has followed that advice.
We will also want to consider a number of soft factors, such as the compliance history of the taxpayer and its relationship with the tax authority, the public opinion of the taxpayer, as well as jurisdictional aspects such as the strength of the rule of law and associated political risk.
BMS: When you are presented with a request for TLI terms for an Active Matter, are there any particular aspects that automatically mean that it falls outside of your risk appetite?
AMB: There are certain jurisdictions which would automatically fall outside of our risk appetite, and others that need to be considered on a case-by-case basis. Also, we would not look to provide cover for any so-called ‘detection’ risks – i.e. if the relevant issue is discovered by a tax authority, no defence against the corresponding tax liability would be available to the taxpayer. If there have been any allegations of fraud or tax avoidance, that would fall outside our risk appetite. Equally, if there have already been adverse judgments against the taxpayer (in addition to the initial tax assessment by the tax authority), we would have very limited appetite for such a risk. We would only look to provide cover for risks associated with transactions that have proper business and commercial purposes, and we would not cover any structured or egregious tax planning.
BMS: The additional context as to what might take a tax risk outside of your appetite is helpful. Our experience is that Active Matters, by their very nature, have complex fact patterns and so it is always worth speaking to a broker about potential insurance options, even if you’re unsure as to whether insurance might be available.
BMS: Does there need to be an active M&A transaction for an Active Matter to be insured?
AMB: Unlike W&I insurance, a TLI solution does not need to be tied to an M&A transaction. TLI solutions for Active Matters are available outside of a transaction context, but it is helpful to understand the commercial driver for the insurance request – why is a TLI solution now being sought?
BMS: How are audits and litigation matters handled once a policy has been issued?
AMB: If we issue a TLI solution for an Active Matter, we want to make sure that we have suitable rights of association over the conduct of the underlying audit or litigation to put forward the best arguments and protect the interests of both the insurers and the insured.
Given the significant alignment of interests between the insured and the insurers in an Active Matter, the conduct of a dispute is generally a very collaborative process where we ensure we provide our input in a timely fashion. We can call upon our significant in-house claims expertise and our specialist advisors – their input often adds value to how the underlying audit or litigation is handled, to the benefit of both the insured and the insurers.
BMS: Thank you for this. It is very interesting to hear that there is definite appetite for Active Matters in the TLI market and that where TLI is used for an Active Matter, an insurer’s claims handling experience can actually augment the defence process in respect of the audit or litigation. We look forward to seeing this aspect of the market growing as awareness of the product increases.
Jessica Bradley
Associate director, BMS Group
E: jessica.bradley@bmsgroup.com
