Coverage
The first category of enhancement affects the scope of coverage offered under the insurance policy. These are important enhancements because they refer to large topics or items affecting the target company that may or may not fall under the coverage of the policy.
| Enhancement | Explanation |
|---|---|
| Affirmative tax coverage | This enhancement asks insurers to offer explicitly affirmed coverage on a number of identified tax issues. These issues will be listed in the tax due diligence prepared by the buyer and the insurer therefore takes a punt on these issues not actually materialising into a claim under the policy. If there is a claim, the policy will have to pay out. As a result, insurers will generally only affirmatively cover items classified as low risk by their tax advisers and they will charge an additional premium per issue which can be very large. |
| Bribery and corruption | Insurers are often asked whether they will exclude bribery and corruption. This is a contentious area of coverage and therefore insurers and brokers like to agree on this early. Generally, W&I insurers will only exclude bribery and corruption where the target operates in high risk jurisdictions such as Russia where bribery might be more prevalent. What is classed as a high risk jurisdiction generally depends on the jurisdiction’s position on the corruptions perceptions index. |
| No transfer pricing exclusion | Transfer pricing is a tax matter that relates to possible tax payable on internal transactions. Transfer pricing is very contentious since it is usually seen as tax avoidance and therefore often looked upon negatively by tax authorities. Insurers are often asked whether they can remove any exclusion they might have for transfer pricing. This is because a lot of insurers have default/standard exclusions for transfer pricing. It is possible for insurers to remove their transfer pricing exclusions if the due diligence shows that it is not going to be a risk. For example, for simple real estate transactions, transfer pricing is not relevant. |
| Indirect/consequential/multiplied damages covered | Indirect, consequential and multiplied damages are all indirect losses that can be argued arise from a direct loss. For example, the target’s warehouse burning down is a direct loss but the lack of sales as a result of reduced stock levels is an indirect loss. Insurers are frequently asked to cover these types of loss - or at least remove any applicable exclusion - which is high risk since there could be more claims and/or bigger claims as a result. Insurers will often “stay silent” which means there is no affirmative coverage or exclusion on these types of loss. However, insurers will only do this where the acquisition agreement is also “silent” and doesn’t affirmatively cover these types of loss. |