September 1998 Issue


A new insurance product is now available that covers the exposure to companies for tax positions set forth in opinions from tax advisors. The product is available through J&H Marsh & McLennan and MLW Services, Inc. According to J&H Marsh & McLennan, the coverage is designed to remove the uncertainty associated with possible tax consequences of many business transactions and provide companies with the flexibility they need to proceed with investments and other initiatives without waiting for an official ruling from the IRS. Presumably the insurance will be of interest in merger-and-acquisition situations where tax consequences become extremely important to both buyers and sellers.

According to Andrew Marks, president of MLW Services, Inc., the coverage is transaction-oriented. A company, considering an investment or similar transaction, obtains a tax opinion from an accounting or law firm. If an insured business doesn't receive the tax benefits from the transaction as contemplated in the tax opinion, or in the tax years specified, the insurer will indemnify the business for the tax loss up to the face amount of the policy. According to J&H Marsh & McLennan, the policies can be structured to cover opinions relating to, or potential liabilities associated with, corporate sales, purchases, spin-offs, and restructuring, as well as to hybrid securities and foreign transactions.

The policies can cover taxes payable on insurance proceeds, as well as interest, penalties, and state, local, or foreign taxes triggered by a Federal tax adjustment. In addition, the policies can provide coverage for expenses related to resolving disputes with the IRS, including the cost of litigation.

Tax advisors should realize, however, that the policies contain a subrogation clause, which presumably means the insurer could proceed against the issuer of the opinion if it felt the opinion was defective in some way. *

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