Tax Risk Coverage A Dealmaker Say Brokers

If tax liability issues arise during merger or acquisition talks, there could be an insurance solution to surmount that hurdle, say insurance executives who deal with such products.

Paul Graziano, executive vice president of Aon's national industry and product group, explained that tax insurance is a tool for executives seeking to make acquisitions or mergers where tax uncertainties exist.

He said such coverage can also bring strategic advantages to a deal maker when the tax questions arise.

A discussion of the tax problem took place yesterday during on online seminar sponsored by Chicago-based Aon Corp.

Discussing the issue were Gary Blitz and Michael Schoenbach, managing directors for Aon Financial Solutions, and Jeffrey Cowhey, president of Ambridge Partners, LLC, a managing general agency with offices in New York City and Pennington, N.J.

The executives pointed out that there are some situations during the due diligence phase where questions may arise over a corporation's tax treatments. A resolution to the question may be pending from state, federal or international authorities. However, a final resolution to that question could be years in development.

Tax insurance is aimed at covering the potential liability to which a corporation might later be subject, they explained.

When there are questions over disclosure, tax insurance is differentiated from representative and warranty insurance because it deals with a specific question of which the client and insurer are aware. Only the resolution of the issue is incomplete.

“A lack of an opinion does not preclude us from writing the policy, but an opinion helps move the underwriting along,” noted Mr. Cowhey.

Mr. Blitz explained that clients often come to the brokers with an amount in mind and are often looking to insure not the full amount of potential loss but the worse case: catastrophic loss.

He added that current capacity in the market place is estimated to be around $200 to $250 million.

Mr. Cowhey said that determination of whether the risk can be underwritten can take a few days, and the process can be concluded within a matter of weeks.

Mr. Schoenbach pointed out that for most clients, it takes a few times using the product before they find a comfort level with it.

“The true benefit of this [for corporate negotiators] is to get through an impasse where it could be derailed over a tax issue,” said Mr. Blitz.

A replay of the seminar is online at

http://aon.com/webseminars/.