Business deals regarding mergers and acquisitions are becoming more commonly sealed
In the dynamic world of Mergers and Acquisitions (M&A), the use of insurance solutions has become increasingly prevalent, especially in Europe and Italy. These insurance policies, known as Tax & Litigation insurance, offer significant benefits to both buyers and sellers, providing protection against financial losses related to tax inaccuracies, breaches of warranties, and contingent liabilities.
Tax Risk Insurance
One such policy, Tax Risk Insurance, covers specific identified tax liabilities in transactions. It protects against potential taxes, interest, penalties, and gross-ups, providing clarity that facilitates both buyer and seller confidence by limiting unexpected tax exposures post-deal.
Warranty & Indemnity (W&I) Insurance
Another common policy is the Warranty & Indemnity (W&I) Insurance, also known as Representation & Warranties Insurance. This type of insurance protects against breaches of contractual warranties and representations made by sellers, including those relating to tax covenants. By reducing negotiation friction and enabling clean exit strategies for sellers, it is especially useful in competitive auctions or where sellers want to limit post-closing liability.
Contingent Risk Insurance
Contingent Risk Insurance isolates known contingent liabilities, including tax-related contingent risks, thus clarifying which party bears which risk.
Benefits in the European/Italian Context
These insurance types play a crucial role in ring-fencing tax risks and providing certainty about liabilities, which is vital given the complex, cross-border nature of many European and Italian M&A deals. They help mitigate cross-border complexities, support buyer and seller confidence, facilitate deal closure and valuation, and integrate advisory services.
In the Italian market, Tax & Litigation insurance policies help streamline negotiations, reduce post-closing disputes over tax and warranty issues, and provide a clearer allocation of risk between parties. This is critical to managing the layers of legal and tax complexity typical in the region.
It is worth noting that these policies are more suitable for risks with a low probability of occurrence but high exposure. They can also be used outside the M&A context to optimize the income statement, balance sheet, and cash flow statement of the company.
Andrea Foti, EMEA Chief Commercial Officer M&A of Aon, explains that companies use insurance to protect themselves and mitigate potential liabilities in M&A operations. Litigation policies, for instance, cover legal dispute risks and are underutilized in the Italian market compared to other European countries.
In conclusion, the growth of the Tax & Litigation insurance market follows that of warranty and indemnity policies. As M&A deals continue to become more complex, these insurance solutions will likely become even more essential tools for managing known risks that frequently emerge during due diligence.
The Tax Risk Insurance covers specific identified tax liabilities in transactions, protecting against potential taxes, interest, penalties, and gross-ups, thereby providing clarity and limiting unexpected tax exposures post-deal.
In the Italian market, Tax & Litigation insurance policies help streamline negotiations, reduce post-closing disputes over tax and warranty issues, and provide a clearer allocation of risk between parties, which is crucial for managing the layers of legal and tax complexity typical in the region.
