While transferability has made it much easier for clean energy developers and manufacturers to monetize their tax credits, tax credit buyers and sellers still need to understand common transaction risks and the tools available to manage them. Tax credit insurance has become a major lever of risk mitigation.
Tax credit insurance is designed to protect buyers from financial loss if the Internal Revenue Service (IRS) challenges a tax credit such that the tax credit is ultimately reduced or eliminated. The tax credit seller typically procures and pays for insurance, while buyers will closely examine the policy's coverage, exclusions, and claims process and understand how those provisions interact with the tax credit transfer agreement (TCTA).
Unlike other lines of commercial insurance, tax credit insurance is bespoke, and the landscape is evolving quickly. Transparency, alignment, and standardization are necessary to facilitate market growth and efficiency. We've collected and defined key terminology that market participants should understand to confidently negotiate insurance policies.
For more on how tax credit insurance works, download our guide to the tax credit insurance market.
Actual knowledge: Conscious awareness by a specific individual (e.g., chief financial officer) of facts that would invalidate the tax treatment.
Advance tax payments: Payments made proactively to preserve appeal rights or pursue refund litigation when under dispute.
Adverse resolution: Final determination by a court or settlement (with insurer consent) that disallows the tax benefit.
Applicable credit period/year: The time window during which the project must meet the tax credit eligibility criteria.
Breach-based policy: A policy structure where coverage only applies if the loss is caused by a breach of a representation made in the policy.
Bring-down: A requirement that certain representations and warranties must be reconfirmed or updated at later stages of the transaction, typically just prior to a staged funding or when increasing the limit of liability.
Broker commission: Fee paid to the insurance broker, disclosed in the premium schedule.
Change in law: A post-policy change in tax law or regulation that affects the validity of the covered tax treatment.
Claim: A trigger event — such as an IRS notice or audit — that disputes the validity of the covered tax treatment.
Claim notice: Formal written notification to the insurer when a claim or potential claim arises.
Covered tax (or covered tax liability): The potential liability if the IRS rejects the covered tax treatment — includes disallowed credits, interest, and penalties.
Covered tax treatment: The specific tax position the policy protects — such as eligibility of investment tax credits (ITCs) / production tax credits (PTCs) under §§45, 45X, or 48 — and how it's expected to be interpreted by tax authorities.
Defense or contest costs: Legal and advisory costs incurred to contest a tax authority's challenge.
Exclusions: Specific risks not covered (e.g., fraud, known risks, change in law, inconsistent filings).
Final determination: What counts as a final resolution of the tax issue (e.g., settlement, court ruling, statute expiration, and sometimes, filing of a tax return reflecting recapture).
Gross-up: Extra payment to cover taxes incurred on the indemnity payment, ensuring the net benefit to the insured equals the expected credit.
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Insured loss: The sum of covered tax, contest/defense costs, and gross-up (i.e., on tax indemnity payments), minus any tax benefits still retained.
Insured parties: Entities and affiliates protected by the policy.
Knowledge qualifiers: Limits on liability for misstatements, usually only if someone had "actual knowledge."
Limit of liability: The maximum amount the insurer will pay under the policy.
No-fault policy: A policy structure where coverage applies to any loss of the covered tax treatment, without requiring proof that a representation was breached.
Order of recovery: The sequence in which the buyer must seek recovery from insurance versus the seller under the tax credit transfer agreement. Defines whether the buyer must exhaust insurance remedies before pursuing the seller for indemnity.
Recapture: The IRS's ability to reclaim tax credits after the fact (e.g., five years under §50).
Representation letters: Signed letters by buyer/seller confirming facts the insurer relied on.
Retention: Like a deductible — the amount the insured must pay before the insurer's obligations kick in. Often applies only to contest costs.
Staged closing: A transaction structure where the buyer's purchase of tax credits and corresponding funding occurs in multiple phases over time, rather than in a single closing.
Step-up coverage: Additional coverage purchased for credit amounts that exceed the base value of the transferred credits — often to cover basis step-ups or bonus adders. Typically capped by insurers (commonly at 20–50% above base value).
Subrogation: Insurer's right to recover from a third party after paying out a claim.
Surplus lines status: Indicates the policy is issued by a non-admitted carrier — not subject to state insurance regulation or backed by state guaranty funds.
Tax credit transfer agreement (TCTA): The legal agreement documenting the sale of credits between seller and buyer.
Underwriting representative: Party acting on behalf of the insurer to adjust claims and handle underwriting decisions.
For more on how tax credit insurance works, including an annotated sample policy, download our full guide to the tax credit insurance market.
