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.
Corporate insureds generate more notifications and higher average W&I settlements, while total payments remain slightly higher for non‑corporate sponsors due to their larger share of policies placed.
Corporates see an average settlement of over $3.5m, whilst non-corporate clients are typically receiving c. $2m.
Overall, non-corporate clients still enjoy a greater proportion of paid claims, despite fewer notifications made.
Although our client base is slightly weighted toward non‑corporate clients (i.e. financial sponsors), corporates overwhelmingly drive greater claims activity. W&I policies benefitting corporate insureds see higher activation (proportion of notifications), higher value claims made, and a larger average settlement than their non-corporate counterparts. However, in aggregate, total payments to non-corporates still outweigh payments made to corporate clients, albeit by only a small margin, attributed to the greater number of policies placed by sponsors.
The underlying organizational architecture may explain this divergence. Post‑closing integration processes can further surface warranty breaches as acquired businesses are absorbed, and many corporate deal theses are framed around integration and synergy delivery rather than standalone asset growth. Taken together, these features may increase the likelihood that issues are detected, connected to the policy, and pursued through a structured claims process.
By contrast, discussions with certain financial sponsor clients suggest that W&I is often viewed primarily as a tool for truly adverse scenarios rather than a lever for incremental value recovery. The internal set‑up in larger funds can further dampen claims activity: investment teams and value‑creation/portfolio teams may not be in regular dialogue, and there may be no central insurance function at the GP mirroring that of a large corporate. In such an environment, specific warranty breaches are less likely to be identified, escalated, and translated into a coherent insurance claim, and the absence of a central owner might make the process fragmented. It is, therefore, only the larger claims which are likely to draw management time.
In prior years, we observed that a significant share of initial claimed losses clustered in the £/$100–500m deal band. This year, a more granular cut of the data reveals an even tighter focal point: the £/$250–500m bracket.. For insurers, this coincides with one of the most competitively priced segments of the W&I market. It naturally prompts the question: why is this specific deal segment generating such a disproportionate volume of claimed loss?
One explanation may lie in the competitive dynamics around deals of this size. With premiums at or near historic lows for a sustained period, insurers have increasingly been compelled to compete on breadth of cover rather than rate alone, including the expansion of tipping, dropping, and nil retention structures. A combination of wider scope for claim and the absence of financial friction at the retention layer will inevitably be reflected in the claims data.
At the upper end of the spectrum, the increased notification activity on transactions above £/$1bn appears more straightforwardly a function of scale: the larger the enterprise, the greater the likelihood that an unknown pre-completion liability will crystallise into a meaningful loss. Anecdotally, our broking team observed more auction processes at this part of the market, squeezing timetables, limiting diligence, and increasing the competitive pressure on buyers to take a view on issues considered less material. That said, this is a risk characteristic that the insurance market has traditionally recognised and priced for, with structures and premiums calibrated to reflect that elevated baseline of exposure.
Figure 33: Claims by deal size
Figure 34: Notification rate by deal size
Chapter 2.5
EMEA
Tax
Tax insurance is moving through audit cycles, with more notified matters progressing from enquiry to assessment and providing early evidence of how cover responds in practice.
