The year 2020 has obviously been a different year than usual because of Covid-19. Whereas at the beginning of the year the number of transactions was still rising rapidly, from March 2020 during the first corona wave the brakes went out. Later in the year, there was clearly another up-lift in insured transactions that continued into the second corona wave. This growth was particularly led by the large number of deals in ICT-related sectors.

W&I insurance has evolved significantly with the increasing growth and competition of the number of insurers and brokers. This trend is characterized by further premium reductions and expansions in policy coverage, with some exclusions from the recent past redirected to additional policy expansions.

Complementing the above S&I review, we are also seeing innovative developments in the area of specific insurance that is increasingly being used during M&A transactions, namely Tax Liability Insurance (TLI) and Contingent Legal Risk Insurance (CLR).

What is the thrust of this Tax Liability Insurance?

There has been a significant increase in the number of companies seeking tax-specific insurance during an M&A transaction. A wide range of companies, private equity funds, banks, administrators and trustees use a TLI, particularly in those cases where tax due diligence has identified a specific tax issue but the parties cannot agree on who should bear the liability for the potential risk. The financial exposure to tax that is on-risk is often large in the context of other, non-tax liabilities of the target group identified during tax due diligence. TLI is also often used in pre- or post-sale matters; such as reorganizations, restructurings, intragroup transactions and refinancing of group debt.

Unlike W&I insurance that provides coverage only for so-called “unknown issues,” the TLI is deployed for “known issues” and thus used alongside W&I insurance to smooth an identified tax deal breaker. In addition, the TLI also gives parties greater certainty in an uncertain fiscal environment with tighter supervision by tax authorities and increasing legislative complexity.

Another innovative trend is the development of Contingent Legal Risk Insurance

Contingent legal risks can, and often will, arise in the context of M&A transactions. During an M&A transaction, the CLRI can be used in conjunction with S&I insurance to eliminate potential losses arising from an identified legal risk (which is excluded under S&I coverage) in negotiations. However, a CLRI can also be used for legal risks that arise outside the context of an M&A transaction.

For CLRI insurance, the risk must be qualified by a legal opinion from a reputable law firm with expertise in the subject. The legal opinion should set forth the following:

1. Factual background of risk;
2. Analysis of applicable laws and/or regulations;
3. Details regarding the potential loss that may be incurred if the risk materializes;
4. Clear quantification of risk versus probability of occurrence.

These trends show that even in difficult economic times, innovative developments in the M&A insurance market continue with growing demand for new deal facilitators.