| Article | July 2023 | «Tax W&I Insurance in Spanish M&A transactions: an increasingly popular solution» |


In the world of mergers and acquisitions (M&A), managing risks is of utmost importance. One significant area of concern is tax liabilities and potential tax exposures that may arise post-transaction and which have been detected in the course of the due diligence. To mitigate these risks, many parties involved in M&A transactions are turning to transactional risk insurance, including Representations and Warranties Insurance (“W&I”). In the following lines, we will dive into the key aspects of W&I Insurance, focusing on Tax W&I Insurance, its benefits and its relevance within the Spanish M&A landscape.

W&I Insurance originated in the United States in the 1980s and was initially developed as a solution to address concerns of buyers in M&A transactions regarding the accuracy and completeness of the seller’s representations and warranties.

In the traditional M&A process, the buyer relies on the seller’s representations and warranties regarding the target company’s financial, business and operational status. These representations and warranties serve as assurances or guarantees provided by the seller. If any of these representations and warranties turn out to be inaccurate or breached once the deal is completed, the buyer may face financial losses or liabilities. To mitigate this risk, W&I Insurance was introduced. W&I Insurance allows the buyer to transfer the risk of potential breaches of representations and warranties to an insurance policy; if a breach occurs, the buyer can make a claim on the insurance policy -rather than to the seller- to seek financial compensation for any resulting damages.

In the Spanish M&A market, W&I Insurance has gained popularity in the past few years as a risk management tool and has further developed into contingent risk insurance and tax insurance (“Tax W&I Insurance”). Tax W&I Insurance is bringing more and more deals to successful completion each year by transferring deal risk to the insurance sector.

What is Tax W&I Insurance?

Tax W&I Insurance is a specialized form of W&I Insurance designed to provide protection to buyers and sellers against potential tax liabilities or exposures to tax liabilities of the target entity. It is typically utilized in M&A deals to cover any damages resulting from tax issues that were either unknown or undisclosed during the negotiation and due diligence phases.

Prior to the advent of Tax W&I Insurance, tax risks in M&A transactions have been typically addressed through indemnity provisions or other contractual arrangements, such as escrow agreements, earn-out structures or third-party expert opinions.

Tax W&I Insurance is now used to bridge gaps in knowledge, valuation disagreements, or uncertainties related to tax matters as well as a tool aimed at providing a “fast track” to the closing of the relevant transaction. By engaging a Tax W&I Insurance, the buyer transfers the risk of potential tax-related issues to the insurance policy, thus enhancing deal certainty and protecting the buyer’s financial position.

How Does Tax W&I Insurance work?

Tax W&I Insurance operates by transferring the risk of tax exposures from the parties involved in an M&A transaction to an insurance provider. The policy typically covers a specific period, extending beyond the completion of the transaction. In case a tax liability arises during the policy period, the insured party can make a claim to the insurer to cover the damages incurred, subject to the terms and conditions of the policy.

From a Spanish law standpoint, the Tax W&I insurance policy does not function as a true “guarantee” -understood as the contractual remedy designed to ensure compliance with a party’s undertaking-, but rather as a mechanism that substitutes, in whole or in part, the “contractual” indemnity liability of the seller -based on the acquisition agreement- for an “insurance” indemnity offered by the insurance provider, on the basis of the insurance policy.

Given the nature of the Spanish M&A market, Tax W&I Insurance products are usually agreed as large risk insurance policies for the purposes of the Spanish Law 50/1980, of 8 October, on Insurance Contracts (i.e. the policyholder exceeds the limits of at least two of the following three criteria: (i) total balance sheet assets: EUR 6,200,000; (ii) net amount of business volume: EUR 12,800,000; and (iii) average number of employees during the year: 250 employees) and regulate the parties’ agreement with respect to the issues and liabilities covered therein pursuant to Section 1,255 of the Spanish Civil Code.

Benefits of Tax W&I Insurance

During the past few years, the engagement of Tax W&I policies has grown exponentially in jurisdictions with a combination of aggressive tax regulations / audit proceedings and a reliable Court system, with well-established case law. In this scenario, Tax W&I Insurance provides the following benefits:

  • Risk mitigation: Tax W&I Insurance helps mitigate the risks associated with unknown or undisclosed tax liabilities, providing financial protection to both buyers and sellers, allowing parties to proceed with the deal more confidently, knowing that they have coverage in case tax issues emerge post-transaction.
  • Enhanced negotiation power: having Tax W&I Insurance can enhance a seller’s negotiating position, as it can provide potential buyers with additional comfort regarding tax exposures. This, in turn, may result in smoother negotiations and potentially higher valuations.
  • Preservation of relationships: Tax W&I Insurance can help preserve relationships between the parties involved in the transaction. In the event of a post-transaction tax issue, the insured party can seek coverage from the insurer rather than pursuing claims against the other party. This helps maintain goodwill and prevents potential disputes. Tax W&I Insurance also facilitates the buyer’s relationship with the management team of the target company in those transactions in which said management team grants the “business” representations and guarantees in favour of the buyer, as the engagement of the policy will prevent the buyer from having to claim the management team for any breaches.
  • Tailored Coverage: Tax W&I Insurance can be tailored to the specific transaction needs, allowing buyers to customize coverage based on their risk profile, deal size, and tax-related concerns.
  • Financing: Tax W&I Insurance can favor the buyer’s financing by assigning the buyer’s rights under the policy to the financing entities.

Structuring the Tax W&I Policy. Indemnification limits

It is important for insured parties to understand the indemnification limits and consider them carefully when procuring Tax W&I Insurance. The parties’ legal advisors must work with the insurance broker and underwriter to structure the insurance coverage in a way that aligns with the specific tax risks identified.

The indemnification limits are typically negotiated during the underwriting process. These limits can vary based on several factors, such as the size and complexity of the transaction, the level of tax risk involved and the specific requirements of the parties involved.

In some cases, a Tax W&I Insurance policy may have a single overall indemnification limit, covering all potential tax exposures. Alternatively, separate limits can be established for specific tax risks or categories of tax liabilities. Separate limits can provide more clarity and ensure that coverage is tailored to the specific tax risks identified during the due diligence process.

Furthermore, the indemnification limits can also apply either on an aggregate basis or on an individual loss basis. With an aggregate limit, the maximum payout is limited to the overall limit for all covered damages during the policy period. In contrast, an individual loss limit sets a maximum amount that the insurer will pay for each individual covered loss.

The parties should negotiate a reasonable deductible (i.e. the amount of loss or liability that the insured party must bear before the insurance coverage kicks in) under the Tax W&I Insurance, which should be set at a reasonable level to ensure that smaller claims do not become a burden.

In addition to the above considerations, the following practical issues are of interest when negotiating the policy’s indemnification limit:

  • Tax W&I Policies usually include within the coverage the defence costs, which erode the indemnity limit of the policy.
  • In buyer’s Tax W&I Policies, the compensation paid by the insurer to the buyer cannot be considered, in general, as a reduction in the purchase price and, therefore, will be subject to taxation by the buyer, as the case may be. This circumstance requires agreeing with the underwriter that the compensation to be paid to the buyer is grossed-up in the amount corresponding to any taxes that the buyer might have to pay for the receipt of said compensation, as the case may be.
  • Finally, in the Spanish M&A market, insurers usually apply a minimum floor price to the premium (which in W&I policies ranges usually between EUR 50,000 and EUR 70,000, for a coverage from EUR 5 to 7 million), which will be applicable regardless of the compensation limit agreed in the policy.

The insured party and its legal advisors must review the Tax W&I Policy’s limits and carefully evaluate and tailor these to the specific needs and risk profile of the transaction to ensure adequate coverage and protection.

The role of the Insurance Broker

The insured parties typically engage the service of an insurance broker to gather and provide the necessary information to the insurance company for assessing the tax risk of the M&A transaction. The insurance broker acts as a valuable intermediary between the insured parties and the insurers, providing expertise, market insights and support throughout the underwriting process.

The insurance broker will engage with various insurance providers on behalf of the insured parties, obtaining multiple quotes, comparing policy terms and negotiating a coverage that aligns with the specific needs and risk profile of the M&A transaction.

Based on the information gathered by the insurance broker, the parties can make an informed decision regarding the choice of insurance provider.

The insurance broker may also assist with the underwriter’s due diligence process, working closely with the parties and their advisors to identify the potential tax risks and exposures, helping to address any gaps or concerns before the underwriting stage.

Throughout the policy period, the insurance broker remains a point of contact for the insured party.

Underwriting process

Insurance providers undertake a thorough underwriting process to assess the risk associated with a transaction before issuing a policy. This may involve detailed confirmatory due diligence, including reviewing tax positions (and the tax opinions gathered by the insured party), compliance history, and potential exposures.

The underwriter may seek further clarification or request additional information during the underwriting review process. They may engage in negotiations with the insured party or their advisors to determine the appropriate policy terms, conditions, and coverage scope.

Once the underwriting process is complete, the underwriter shall prepare the policy documentation. The Tax W&I Insurance policy outlines the coverage limits, deductibles, exclusions and any other specific provisions relevant to the insured risk.

Upon agreement of both parties on the Tax W&I Insurance policy, the insured party is then required to pay the premium and execute the policy.

Given that the underwriting process may vary depending on the insurance provider and the specific requirements of each transaction, insurance brokers and legal advisors play a significant role in facilitating the underwriting process and ensuring that the policy meets the needs and objectives of the insured party.


Tax W&I Insurance has become an increasingly popular tool in the Spanish M&A market, providing a valuable risk management strategy for both buyers and sellers. In particular, in the past few years, Tax W&I Insurance has consolidated as the most used buyer’s remedy towards a “clean exit”.

The market for Tax W&I Insurance is highly competitive and has seen the arrival of new players and insurance companies into the Spanish market, offering new products and increasing competition; these new players have had a key role in promoting the use of Tax W&I Insurance and educating market participants about its advantages.

Given the specialised nature of this rapidly growing market, it is key that underwriters work closely with insurance brokers and legal advisors (in light of the required in-depth and detailed understanding of the complex issues at hand) in order to assess, underwrite and provide the appropriate coverage under Spanish law for these tax-related risks.

Jose M. Llanos Alperi and Jorge del Castillo are partners of the Corporate M&A and Tax practices of Cases & Lacambra.

Article published by Lexology.com on 12th July.