Deal Point: A large private entity is in the process of negotiating the purchase of a public company, which merged into its parent as part of its bankruptcy plan of reorganization. The prospective purchaser is concerned about a potential tax issue relating to the public company's emergence from bankruptcy. The public company has an indemnity from its former parent in the form of a tax agreement relating to certain tax matters relating to tax periods on or before the date of the reorganization. Although the tax indemnity is not exactly enpointe, the target company and their tax counsel are confident that the tax treatment taken will be accepted if audited by the taxing authorities and that the indemnity will be found to apply to this tax issue. The economic significance of a potential tax liability which may be assumed by the potential acquired entity if the tax treatment is successfully challenged and the indemnity does not hold up causes the potential purchaser to be unwilling to complete the transaction in the absence of certainty regarding this exposure. While the potential acquirer is confident the former parent is obligated to indemnify it under the terms of the tax agreement, it does not feel that the indemnity as worded provides it with the absolute certainty it requires.

Transactional Insurance Solution: A Tax Issue Insurance Policy is purchased to indemnify the purchaser in the event that it does not receive the expected tax treatment with respect to the tax matter at issue, and the scope of the tax agreement from the former parent is held not to require indemnity of the purchaser for failure to receive this expected tax treatment as a successor in interest to the public company.