Chapter 5: North America: Tax Insurance Claims

Unlike the tax coverage for unknown tax risks that is provided under R&W insurance policies, this section discusses Aon’s claim experience on tax insurance policies for specific known or identified tax exposures of risk related to a known tax exposure. Due to the extended nature of tax contests, as well as the large volume of programs placed in the last seven years, Aon is beginning to observe increased claims activity on tax insurance placements, primarily on those incepted prior to 2022. On average, the time from policy inception to a notice of a claim or pre-claim notice of a general audit is 28 months, while most policies include a seven- to ten-year period in which to make a claim. However, due to expanding insurer risk appetite and increased number of policies placed after commencement of an audit, this average has declined. The frequency of notifications on tax insurance policies is shown in Figures 31 and 32.

While tax insurance is a mature global product, this section will focus on North American tax data. In the Insurer Survey, responding insurers reported that 42% of the notices received with respect to tax insurance policies placed between 2016 and Q3 2024 related to a pre-claim notice of a general audit, whereas 49% have involved review of a covered tax position amounting to a formal claim (see Figure 33). Additionally, responding insurers stated that overall notification frequency on tax insurance policies placed between 2015 and Q3 2024 is 13% (see Figure 32), with 67% reporting that the number of claims filed since 2021 is about the same and 25% reporting that notices have increased compared with previous years (2016–2020).

Figure 31
Aon Data: Claim Frequency 2015–2024 on North American Tax Policies

Figure 32
Insurer Survey Results: Tax Claim Frequency 2015–Q3 2024

Since last year’s study, we have seen both claims where a settlement was reached and claims where the tax authority successfully asserted that a tax was due, resulting in payments to Aon clients.

For tax insurance policies placed between 2016 and 2024, responding insurers reported that on average, 69% of all claim payments above the retention have been below $1 million; 25% of claim payments have been between $1 million and $10 million; and 6% of claim payments have been greater than $10 million (see Figure 34). Overall, from this experience we can conclude that our clients are being reimbursed for valid claims for both contest costs and assessed amounts, and successfully negotiating tax authority settlements with insurer contribution where appropriate.

More than two-thirds of claims made on Aon tax insurance policies placed in North America remain active and are negotiating settlement or resolution. These placements are still working through the audit, appeals, or tax court litigation process and insurers are paying contest costs in connection with these active matters. Approximately 46% of Aon tax insurance claims on placements made from 2016 to 2024 relate to renewable energy tax credit transactions, which is slightly lower than the number of placements in this space compared with our overall book. While some of these claims have now resulted in a payment, the majority remain active and under appeal. It is our expectation that over time, as the tax contests progress, the percentage of claims resulting in a payment and total amounts paid will climb.

With another year of experience and some significant tax claims working toward resolution, we have seen insurers continue to be responsive and cooperative. Insurers have timely responded to policy timelines for review and consent during the audit and claim process. Their approach has been collaborative, as the insurers typically view the tax claim as a partnership in the defense of the covered tax position with the insureds and their counsel. To date, every claim made under an Aon tax policy either is active, has been paid, was settled within the retention, or resulted in no tax owed to the tax authority.

Figure 33
Insurer Survey Results: Current Status of Tax Insurance Notifications

Figure 34
Insurer Survey Results: Tax Insurance Payment Sizes