An insured distributed dividends from a Spanish entity to a Luxembourg parent entity and sought to rely on a double tax treaty to pay tax in Luxembourg. The insured tax risk arose if the dividends were instead deemed taxable in Spain. The policy was taken out to provide coverage in the event the Spanish Tax Authorities (STA) challenged the tax treatment of the distribution.
Tax Claim
In due course the STA initiated a tax audit, which the insured notified to insurers under the policy terms. The insured engaged with the audit and provided responses to the STA, all with the prior consent of insurers.
The STA duly assessed a liability for withholding tax, alleging that the parent lacked substance in Luxembourg. Insurers provided support for the first instance appeal, which was unsuccessful. Following this, and on the basis the insured was required to pay the alleged tax liability to continue its appeal, insurers paid an Advance Tax Payment to the insured in accordance with the policy terms.
The insured has now filed a second stage appeal in the Spanish Courts and insurers continue to pay defence costs, whilst awaiting a final determination.
Insight
Although early in its life cycle, the specific risk tax product is operating exactly as anticipated, with insurers supporting the dilligenced position by making payments of defence costs and advance tax payments.
References
6 All case studies in this report are hypothetical claim scenarios
based on aggregate factors that the Aon team has seen in practice. The
language of the actual representations in the applicable purchase agreement,
the specific facts of a claim and the coverage afforded by the policy
ultimately will determine the outcome of each scenario.
Scenario
After closing, the Buyer discovers that there are errors in the target company’s financials. These errors include: (1) failing to accrue for costs related to annual plant maintenance; (2) improperly recognizing certain revenue in the trailing twelve months (TTM) period; and (3) overstating the account receivables balance by not writing down impaired collectability risks.
Breach and claims process
The above issues comprise typical breaches of the financial statements representation in the acquisition agreement. The language of the financial statements representation and the standard applied therein (i.e., in accordance with GAAP, industry standard, consistent with past practices, etc.) will control the analysis and claims investigation. The claims process will involve the Insurer’s financial advisor reviewing the material provided by the client’s financial advisor/counsel and then following up with questions aimed at validating breach and the corresponding loss. The challenges that arise during financial statements claims vary greatly but often relate to disagreements over how the breach impacts the buyer’s valuation model, how similar situations may have impacted the purchase price during negotiations, materiality thresholds under GAAP, whether the breach impact is recurring and/or whether the loss valuation is reliant on estimates that were not repped to in the financial statements.
Outcome
Based on our experience, should the above scenario violate the accounting standards provided in the financial statements representation, we would expect the Insurer to recognize breach and loss. Further, we would anticipate that error one (failure to accrue for costs) and error two (improper revenue recognition) would result in more than dollar for dollar loss because those losses are recurring in nature. That recurring loss would likely be based on how the deal was valued. So, for instance, if the deal was valued on an EBITDA multiple then those verified loss amounts would be subject to the same calculation. For error three, we would anticipate that the insurer might take the position that these damages should be reimbursed on a dollar-for-dollar basis, claiming that they are not recurring in nature.
References
6 All case studies in this report are hypothetical claim scenarios
based on aggregate factors that the Aon team has seen in practice. The
language of the actual representations in the applicable purchase agreement,
the specific facts of a claim and the coverage afforded by the policy
ultimately will determine the outcome of each scenario.
Scenario
An insured acquired a target company with several material customers. Following completion, the insured became aware that one of the target’s key customers had in fact terminated its contract with the target prior to signing. The contract represented significant ongoing revenue for the target and was factored into the valuation methodology and the purchase price paid for the target.
The insured submitted its claim to the insurer and breach of the material contracts warranty was quickly established. The policy and SPA were subject to English law and loss was considered on a share-value basis. In order to quantify the loss suffered, both the insured and insurer appointed financial experts, who alongside the parties and their legal advisers considered contemporary evidence of the valuation methodology (which included a multiples basis), the recurring nature of loss given the length of the contract and how the issue would have been dealt with at the time of the transaction, had it been known. Following discussions between insured and insurer, steered by Aon, the parties reached a mutually agreeable commercial compromise and agreed to settle for an eight-figure sum.
Insight
Contemporary evidence of the valuation methodology used in a transaction can be key when advancing a claim with loss on a share value basis. Insurers and insureds will commonly instruct financial experts to consider the quantification of loss, and factors may include the recurring nature of the loss, to what extent the loss is of a type factored into the valuation methodology, how the issue would have been dealt with between the seller and a reasonable buyer had it been known at the time of the transaction as well as the value of the shares and purchase price.
References
6 All case studies in this report are hypothetical claim scenarios
based on aggregate factors that the Aon team has seen in practice. The
language of the actual representations in the applicable purchase agreement,
the specific facts of a claim and the coverage afforded by the policy
ultimately will determine the outcome of each scenario.
Scenario
Post-completion, the insured discovered that there was a third party demand against the target, which was in litigation and where the litigation warranty was considered breached.
The insured submitted its claim to the insurer but did not provide any information or seek the insurer’s consent with regards to significant defence costs being incurred. Aon reminded the insured of the need to involve the insurer in its defence strategy, and the insured settled the third party litigation with the insurer’s involvement and consent to settlement.
Following settlement a discussion followed between insured and insurer on defence costs cover, and Aon assisted the insured in successfully claiming some of its defence costs from the insurer.
Insight
With third party demands it is important for insureds to be aware of insurers’ rights regarding settlement and prior written consent to defence costs, to ensure compliance with policy terms and to avoid curtailing the insured’s own claim.
References
6 All case studies in this report are hypothetical claim scenarios
based on aggregate factors that the Aon team has seen in practice. The
language of the actual representations in the applicable purchase agreement,
the specific facts of a claim and the coverage afforded by the policy
ultimately will determine the outcome of each scenario.
Scenario
An insured submitted its claim notice directly to the insurer without first consulting its broker, who it copied in when submitting the notice. In its drafting of the claim notice, the insured had set out the relevant warranties considered to be breached but only as those warranties were covered under the SPA, not reflecting the seller knowledge scrapes which the insured had purchased as part of its cover under the policy.
Claims Process
Following receipt of the claim notice, the insurer raised various requests for information, including the seller’s knowledge of the issue. Aon flagged to the insured that they were not required to demonstrate seller knowledge as a result of the knowledge scrape enhancement provided under the policy, and assisted the insured in preparing its responses to the RFIs, including setting out that seller knowledge was not required. Breach of warranties was established.
Insight
The policy is the contract agreed between insured and insurer, and should be considered as the first source for the bases of warranties covered, both in relation to scrapes and also in relation to warranty qualifiers.
References
6 All case studies in this report are hypothetical claim scenarios
based on aggregate factors that the Aon team has seen in practice. The
language of the actual representations in the applicable purchase agreement,
the specific facts of a claim and the coverage afforded by the policy
ultimately will determine the outcome of each scenario.
Analyzes tax insurance claim activity, emerging trends in energy tax credit coverage, and the payment experience showing how tax insurance can respond to contest costs, settlements, and assessed liabilities.
Tax insurance continues to demonstrate value to insureds and insurers as a low frequency proposition with a possibility of more significant severity. Aon clients have made notifications that include both general audit notifications and notifications that rise to the level of a claim on 7.3% of issued policies, which is in-line with expectations of audit rates across the insured book. Aon North America clients have recovered over $350 million on Aon tax insurance policies.
Unlike coverage for unknown tax risks under R&W insurance policies, a tax insurance policy allows for the transfer of a known or identified tax risk, where the position is defensible, but the outcome of a potential future audit is unknown. Tax insurance is utilized in connection with an M&A transaction or investment in renewable energy, or to achieve other risk management goals in connection with tax planning.
Due to the long-tail nature of tax contests, as well as the high percentage of the total book placed in the last seven- to ten-years, Aon has experienced a meaningful increase in claims activity on tax insurance placements in recent years. However, Figure 21 shows that only 7.3% of all Aon issued tax insurance policies have experienced a notification of some kind, which include notices of general audit and other non-specific inquiries, as well as notifications that rise to the definition of a claim under the policy.
A 7.3% notification rate is generally in-line with expectations of current Internal Revenue Service (IRS) audit rates during the placement periods, which have been steadily declining and are reaching historical lows.7 4.1% of policies have received a notification that has risen to the level of a formal claim, typically upon receipt of a formal assessment and initiation of a tax authority contest. Within that 4.1% subset of claims, 2.5% are active and only 1.6% of all tax policies placed since 2014 have resulted in payments in an aggregate amount of ~$350 million.
Figure 21. Aon Data: Tax Policy Status (2014-2025)
Policies with claim activity (7.3% total)
68.7%
On Risk, No Activity
No claim notices or notifications received, with time outstanding within policy term
3.2%
Notification
Can include: Notice of a general audit, non-specific inquiries by IRS or other relevant tax authorities
2.5%
Claim
Can include: Notice of a proposed adjustment, request for extension of statute of limitations, IRS administrative appeals, active settlement conversations, Tax Court or active litigation
** Contest costs typically reimbursed periodically during this stage, above the retention
1.6%
Final Paid Determination
Can include: Final determination with payment of contest costs only, final determination with formal assessment of tax/interest/penalties, formal and final settlement agreement
24%
Off Risk, No Activity
Lapse of policy term without any claim notices or notifications
Tax Claims Frequency
Furthermore, as shown in Figure 22, insurers report experiencing a modest increase in claim frequency across their tax books. While 50% of insurers state that they are receiving the same number of claims as in prior years, 41% are experiencing an increase in claim frequency—compared to only 9% who are experiencing a decrease in claims frequency. It should be noted, however, that of the 41% experiencing higher claims frequency, 33% are seeing only a slight increase, while just 8% report a significant increase. Moreover, each individual insurer’s historic claim experience is going to influence whether a “slight” versus “significant” increase is reported. Overall, an increase in the number of claims is to be expected as the use of tax insurance becomes more prevalent, the existing policies in place mature and we see how the variance in the types of risks being underwritten and the size of the policies being placed lead to different types of claims.
Tax insurance policies typically include a seven- to ten-year period in which to make a claim. Aon data shows that the time from policy inception to a notice of a claim or pre-claim notice of a general audit is 26 months on average, while the median is 22 months. Last year we noted that, due to expanded insurer risk appetite to cover risks following the commencement of an audit, we expected to report more claims at or near the policy inception date. So far, we have seen the average time to notice tax claims drop four months from the 28-month average reported last year.
Figure 22. Insurer Survey Results: Change in Tax Notifications over last 3 years compared to prior 3 years
Energy Tax Credits
Policies insuring energy tax credits have been a significant driver of growth across the tax insurance market. The volume of energy tax credit policies that Aon has placed is approximately double that of other Tax policies including M&A and non-M&A. While there have been concerns expressed that energy tax credit insurance could present a systemic risk by prompting tax authorities to pursue broad challenges to insured structures, and we have not seen tax authorities take this type of approach nor do we believe that this would result in more successful challenges to the insured tax position.
As noted above, 4.1% of all Aon placed tax policies have had a claim and, of those, 43% relate to renewable energy tax credit policies. While some of these claims have already been paid, most remain active. Given the long-tail nature of these contests, the loss data is still in its infancy, and over time, the percentage of claims resulting in a payment is expected to climb. However, as an exception, recapture risk is not long-tail in nature, stepping down 20% annually, providing insurers certainty with respect to this risk earlier in the policy period.
Due to the complexity of the underlying agreements and structure of tax credit risks, there are multiple avenues for a challenge from a taxing authority. According to the Insurer Survey results in Figure 23, insurers have seen claims arise from audits of six different types of parties: (1) the project company/Holdco; (2) the project developer/sponsor; (3) the tax equity investor; (4) the tax credit seller; (5) the project company/Holdco as the tax credit seller; and (6) the tax credit buyer. Moreover, the party most frequently audited varies, as Figure 23 shows that four different parties are named by insurers as the top party audited on their claims.
Figure 23. Insurer Survey Results: Top Party Audited on Energy Tax Credits Claims (2019-2025)
Payments
Since last year’s study, our team has resolved tax insurance claims resulting in seven, eight, and nine-figure payments to our clients. These payments varied from reimbursements for contest costs, reimbursement for settlements reached with the tax authorities, as well as payments to cover amounts the tax authorities successfully asserted were due. For tax insurance policies placed between 2016 and 2025, responding insurers reported that, on average, 58% of claim payments were below $1 million; 10% of claim payments were between $1 million and $10 million; 12% of claim payments were between $10 million and $20 million; while 20% were greater than $20 million. By comparison, as shown in Figure 24, Aon’s data shows that only 23% of all claim payments were below $1 million, 23% of claim payments were between $1 million and $10 million; 16% of claim payments were between $10 million and $20 million; while 38% were greater than $20 million. This discrepancy could be attributed to the Aon team’s long history in tax insurance (before many others started placing tax insurance policies), as well as the size of the tax insurance policies that Aon has placed, which has increased over the years. In addition, these are nascent data sets as tax claims have only recently begun to resolve. We will continue to monitor payment trends as the claims history continues to evolve and mature.
Over the past few years, our team has gained extensive and invaluable knowledge in facilitating the resolution of tax insurance claims. Insurers continue to be responsive, cooperative, and have timely responded to approval requests throughout the audit process. The approach with the insureds generally has been collaborative, as the insureds, insurers, and their counsel often view the tax claim as a partnership in defense of the covered tax position. In situations where Aon clients have recovered assessed amounts under tax insurance policies, insurers appropriately covered the tax loss, interest, penalties, contest costs, and made our clients whole via the gross-up mechanism in the policies. In particular, the significance of the non-tax losses (including interest, contest costs, and gross-up component) in tax policies has been clear. Indeed, in certain circumstances, it has comprised a significant portion of the total amount paid out to the insured, and as such, these costs should be taken into consideration when deciding the amount of insurance that will be purchased. The running interest component and the changing tax rates applicable to gross-up costs can also create different complexities throughout the claim process, incentivizing creative solutions or the exploration of settlement with the taxing authorities in certain discrete situations. Aon has assisted clients in navigating these situations and worked with insurers to deliver meaningful protections and recoveries to clients. In all, this has led to over $350 million recovered under tax insurance policies for Aon clients. Given the low claim rate and number of large payments, tax claims continue to present a low frequency proposition with the possibility of more significant severity.
Reviews the evolving performance of litigation risk and legal position insurance and highlights where insurers are still finding attractive opportunities and how these products can help clients ringfence defined legal exposures in transactions.
