Tax liability insurance is designed to address a very specific circumstance rather than provide general coverage. This can often be more deal critical, as tax has a large impact on the upside of any transaction.

Tax liability insurance protects a taxpayer against the failure of a tax position in connection with a transaction, reorganization, accounting treatment, investment, or other type of taxable event.

Specifically, it covers a taxpayer’s losses if the applicable taxing authority deems they have a greater tax liability than what you’ve claimed. Tax liability insurance can cover a particular transaction, such as an investment in renewable energy, or the tax treatment of a non transactional situation, such as restructuring.

The amount of risk the policyholder retains can depend on the standard of the opinion provided to the potential insured by their tax specialist.

Often, requests for insurance have been driven by new legislation which lacks clarity, precedent or guidance, new case law creating uncertainty, or even growing tax authority aggression.

Furthermore, exchanges of tax rulings/information has motivated taxpayers to seek protection against the increased risk of challenge.