Representations and Warranties Insurance is a specialized policy used in M&A transactions to cover certain financial losses arising when statements made by a seller in the purchase agreement turn out to be inaccurate. Those statements may address matters such as financial condition, contracts, compliance, taxes, customers, or other business facts. In most transactions, the buyer purchases the policy and becomes the insured party. The policy is designed primarily for unknown risks discovered after closing, not issues already identified during diligence. In practice, RWI can provide buyers with added protection while allowing sellers to limit some post-closing indemnification obligations today.
Most policies are purchased by the buyer, although seller-side policies can also be used. The buyer works with a specialty broker, selects an insurer, and completes an underwriting process built around the purchase agreement and diligence materials. If a covered breach is discovered after closing, the buyer submits a claim under the policy and provides supporting documentation. The insurer then evaluates whether the loss falls within coverage, subject to the policy’s retention, limits, exclusions, and survival period. This form of M&A insurance usually becomes effective when the transaction closes.
RWI has become much more common because the market has matured. More insurers now compete for transactions, pricing has declined from earlier levels, and underwriting has become faster and more standardized. Buyers can gain broader protection while sellers can often reduce escrow, shorten survival periods, and limit post-closing exposure. That can make bids more attractive and reduce time spent negotiating indemnification terms. In middle-market transactions, these benefits have made RWI a practical deal tool rather than a specialty product reserved for the largest transactions, especially as carrier capacity has expanded.
RWI generally does not cover known breaches or risks already identified during due diligence M&A. Policies may also exclude purchase price adjustments, certain pension liabilities, specific environmental exposures, transfer pricing issues, interim breaches, and fraudulent misrepresentation. Exclusions vary by deal, and underwriting can create additional carve-outs based on what the insurer learns. That is why buyers cannot rely on the policy as a replacement for thorough diligence. Strong legal, tax, operational, and Financial Due Diligence remain important because weak diligence can reduce insurer interest, narrow coverage, or increase pricing.
With RWI in place, buyers and sellers can negotiate a smaller seller indemnity package. Sellers may reduce traditional escrow M&A requirements, lower liability caps, shorten survival periods, or achieve a “clean walk-away.” Buyers gain a separate source of recovery for covered breaches. The policy does not eliminate every negotiation because exclusions, fraud, purchase price adjustments, and uncovered risks still matter. In a Business Carve-Out, this can be especially important because the parties must clearly define which liabilities remain with the seller and which transfer with the business.
How long does RWI coverage typically last after a deal closes?
A typical RWI policy provides about three years of coverage for non-fundamental representations and six to seven years for fundamental and tax representations, including certain tax-related employee-benefit representations. Exact coverage periods are negotiated and can vary by transaction, insurer, and representation type.
How is the RWI premium calculated and who pays it?
RWI premiums vary based on policy limits, transaction risk, retention, underwriting, and market conditions. Premiums commonly range from 2.5% to 4% of coverage. The buyer typically pays, but the parties can negotiate how the cost is allocated.
Can RWI be used in deals below $20 million in transaction value?
Yes. RWI can be available for transactions below $20 million, although availability varies by insurer and deal. For smaller transactions, minimum premiums, underwriting costs, deal complexity, and coverage needs can affect whether the insurance is cost-effective.
What happens if the seller commits fraud? Does RWI still pay out?
Fraud is treated differently from an ordinary covered breach. Coverage depends on the policy’s terms and the parties involved. Seller fraud is generally excluded from the insurer’s waiver of subrogation, allowing the insurer to seek recovery from the seller.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Vijay Vaswani, partner and leader of Bennett Thrasher’s Mergers & Acquisitions Transaction Advisory practice, or call us at 770.396.2200.
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